Insurance Law Hawaii

Fence Attached to Building Covered Under Dwelling Provisions

    The Texas Supreme Court determined that a damaged fence attached to the insureds' dwelling was covered under the dwelling provisions, not the "other structure" portion of the policy. Nassar v. Liberty Mutual Fire Ins. Co., 2017 Tex. LEXIS 113 (Tex. Jan. 27 ,2017).

     The insureds' owned six acres of property. Hurricane Ike caused significant damage to the property on September 13, 2008. The insureds submitted a claim to Liberty Mutual under their homeowners' policy. Liberty Mutual paid several claims, but disputes arose over the value of various items of damaged property, including the fencing on the property. The insured's fencing spanned over 4,000 linear feet, including a white picket fence at the northeast corner of the dwelling, an ornamental iron fence in front of the dwelling, numerous cross fences, garden fences, and a larger, perimeter fence. 

    The policy offered $247,200 in coverage under the dwelling provision and $24,720 in coverage under the "other structures" provision. The policy provided "dwelling" and "other structure" coverage as follows:

We cover:

1. the dwelling on the residence premises shown on the declarations page including structures attached to the dwelling.
2. other  structures on the residence premises set apart from the dwelling by clear space. This includes structures connected to the dwelling by only a fence, utility line or similar connection. 

    The undisputed value of the damage to the fencing was $58,665. Because Liberty Mutual considered the fencing to be an "other structure," it issued payment to the insureds for $20,090.61 under the "dwelling" coverage and a separate payment of only $24,720, or policy limits, for the fencing. 

    The insureds argued they were entitled to additional amounts under the dwelling provision for the damaged fence. Under the plain language of the provisions, the insureds argued, the fencing was attached to the house at four separate points and was a "structure attached to the dwelling." Liberty Mutual argued, on the other hand, that simply connecting 4,000 feet of fencing to the dwelling by four bolts did not attach the fencing to the dwelling. Further, the only logical reading of the policy provisions together meant that a fence could not operate to connect the dwelling to other structures; therefore, the fencing had to be an "other structure." 

    The insureds brought suit and cross motions for summary judgment were filed. The trial court granted Liberty Mutual's motion, deciding coverage for the fencing was as an "other structure" under subsection (2). The court of appeals affirmed.

    The Texas Supreme Court reversed the court of appeals. The court noted that the fencing was composed of parts purposefully joined together and fastened to the dwelling by bolts or cement. 

    In subsection (2), "other structures" were clearly identified as those structures on the residence premises that were "set apart by clear space." The policy then provided, "This includes structures connected to the dwelling by only a fence, utility line or similar connection." Liberty Mutual argued that this sentence identified a fence as a "connection" and not a "structure," and as a "connection," a fence was unable to attach "other structures" to the dwelling. Liberty Mutual then concluded that this interpretation prevented a fence from being part of the dwelling. 

    The supreme court disagreed. The second sentence of subsection (2) operated to prevent a fence attached to the dwelling from causing structures attached to the fence to be covered under subsection (1). In other words, the first sentence of subsection (2) identified what was to be covered, and the second sentence limited that coverage.

    It was up to a fact finder to determine whether all of the 4,000 feet of fencing constructed of different materials and spanning six acres was part of the "structure attached to the dwelling." 

    In conclusion, the insureds' interpretation of the policy was reasonable and Liberty Mutual's interpretation was unreasonable. The case was remanded to the trial court for further proceedings.

Insurer Must Defend and Indemnify Construction Defect Claims Under Iowa Law

    Applying Iowa law, the federal district court found that the insurer had to defend and indemnify construction defect claims for damage to property caused by the insured's subcontractors. Van Der Weide v. Cincinnati Ins., 2017 U.S. Dist. LEXIS 4469 (N.D. Iowa Jan. 12, 2017).

    Van Der Weide contracted with Bouma & Company, Inc. to construct a house in 1996. Before construction began, Bouma purchased a CGL policy and a separate umbrella policy from Cincinnati, which were in effect from January 30, 1996 to January 30, 1999. 

    Bouma used various subcontractors to build the home, including Elkato Masonry, which did the brick veneer and masonry work. The house was completed in February 1998 and Van Der Weide moved in during August 1998.

    After moving into the house, Van Der Weide observed a small amount of water ponding in the basement. This recurred periodically after rains. In 2010, Van Deer Weide noted the dry wall was peeling. He asked Bouma to remove the drywall between the windows. Doing so revealed significant water damages to the insulation, studs and sheeting. Experts were retained and found that defective masonry installation allowed water infiltration without any mechanism for the water to escape. As the investigation continued, it was discovered that the walls around the entire house had serious damage, requiring their removal and replacement. Van Der Weide contended that because of the construction defects, moisture infiltrated the masonry and started to cause damage soon after the masonry veneer was installed. 

    In March 2011, Van Der Weide sued Bouma, Elkato and others. Cincinnati rejected Bouma's tender, contending that the alleged defects were discovered after Cincinnati's policy period ended. Van Der Weide and Bouma entered an agreement for covenant not to execute and stipulation for entry of judgment. Bouma confessed judgment in Van Der Weide's favor in the amount of $2,000,000. Bouma assigned to Van Der Weide all claims against Cincinnati.

    Van Der Weide then filed this coverage action against Cincinnati. Cincinnati argued there was no "occurrence" during its policy period and that various policy exclusions applied. 

    The court first found that Cincinnati was on notice of an "occurrence." The time of occurrence was when the claimant sustained damage, not when the act or omission causing the damage took place. The allegations in Van Der Weide's pleadings in the underlying case did not put Cincinnati on notice of an alleged occurrence during the policy period. The underlying complaint alleged that minor water leakage started to occur prior to 2010. But in email messages in April and May 2014, Bouma's counsel notified Cincinnati that experts would testify that the damage began shortly after substantial completion, during the policy period. Even after receiving this information Cincinnati refused to defend. 

    The court found that by no later than May 5, 2014, Cincinnati was on notice: (a) that Van Der Weide alleged defective performance by Bouman's subcontractor which caused damage during the policy period and (b) that expert testimony would be presented at trial to support the allegation. Therefore, Cincinnati became aware, while the underlying case was pending, of a potential occurrence that would trigger an obligation to indemnify Bouma.

    The court next considered the "your work" exclusion. The exclusion did not apply if the "damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor." Thus, to the extent defective masonry work done by Bouma's subcontractor, Elkato, caused damage during the policy period, the "your work" exclusion was not applicable. 

    Nor did the exclusion for "damage to impaired property" apply here. This exclusion applied to the extent that the claim related to damages resulting from Bouma's work, but not to any damages related to subcontractor work. Because the property was physically injured and because the work Bouma performed could not be "impaired property," this exclusion did not apply. The exclusion addressed property that was not "your work" but incorporated "your work." Here, the record did not suggest that Elkato's masonry work incorporated Bouma's work. Therefore, this exclusion did not preclude the possibility that Cincinnati's policy provided coverage for Van Der Weide's claims against Bouma.

    Finally, Cincinnati had an obligation to indemnify Bouma for any covered damages that resulted from defective work performed by Bouma's subcontractors. Cincinnati did not, however, have a duty to indemnify Bouma for damages that resulted from work performed by Bouma itself. The summary judgment record was not sufficient to allow findings as to the extent of Cincinnati's indemnification obligations. 

Additional Insured Not Entitled to Indemnity Coverage For Damage Caused by Named Insured

    The additional insured unsuccessfully sought to recover damages to its building caused by the named insured. Brit UW, Ltd. v. Tripar, Inc., 2017 U.S. Dist. LEXIS 2462 (N.D. Ill. Jan. 6, 2017).

    Davis Russell Real Estate and Management LLC hired Tripar, Inc., a general contractor, to renovate a 12-unit apartment building. The entire roof was to be replaced by a roofing subcontractor. Davis Russell drafted a Professional Services Agreement (PSA) that governed the project. Tripar was to obtain a CGL policy and provide a certificate of insurance evidencing the coverage. Davis Russell was to be named as an additional insured.

    Tripar's insurance broker prepared a certificate of insurance reflecting that a CGL policy was issued to Tripar by Brit UW, Ltd. But the certificate clearly stated that it was not issued by the insurer and that it did not alter coverage. The certificate of insurance further stated that it conferred no rights upon the holder.

    Tripar was working on the roof of the apartment building. In anticipation of rain, it covered the roof with weighted tarps. The weights were ineffective and blew off, exposing the building to water damage. Tripar failed to complete the roof, causing further deterioration to the roof and damage to the hallways, ceilings, and walls of the building.

    Davis Russell sent an email to Tripar's insurance broker to notify it of the damage caused by Tripar. Several months later, the broker notified Brit of Davis Russell's claim against Tripar.

    Davis Russell sued Tripar. Tripar did not notify Brit. The complaint alleged that Tripar negligently failed to complete the roof when the weather permitted and left the roof incomplete.

    Davis Russell eventually was successful on an unopposed motion for summary judgment for $265,625.29 in damages, plus $14,076.17 in attorneys fees. Brit subsequently learned that Tripar did not report the underlying action to its broker because it hoped to resolve the lawsuit without involving the insurer. Davis Russell did not report the underlying action to Tripar because it considered the lawsuit to be a contractual issue separate from the insurance claim and did not know that an additional insured could file a claim directly. Therefore, Brit did not learn of the underlying action until more than 18 months after it was filed and nearly six months after summary judgment was granted.

    Brit filed a complaint for a declaratory judgment against Tripar and Davis Russell to establish it had no duty to indemnify Tripar for damages awarded to Davis Russell.

    Davis Russell's underlying complaint did not allege property damage under the policy. Property damage did not include breach of contract claims because such claims were not the result of fortuitous events. Further, there was no occurrence. In addition, Brit was not notified of the underlying lawsuit as required by the Tripar policy. Brit was prejudiced because it denied the opportunity to defend its insured in the underlying action.

    Davis Russell argued that even if Brit was entitled to judgment against Tripar, it did not foreclose recovery by Davis Russell for damages occurring from the "occurrences." But Davis Russell failed to prove that its loss was the result of an occurrence. Water damage was the natural and ordinary consequence of improperly securing a roof against impending rain. The alleged damage was therefore not the result of an occurrence.

    Further, Davis Russell's counterclaim sought recovery for structural damage alone. To qualify as an occurrence, there had to be damage to other materials not furnished by the insured.

    Finally, an exclusion for property damage to "property you own rent, or occupy" applied. Because Davis Russell owned the property, any damage it sustained would not be covered under the CGL policy.

    

Insurer Cannot Escape Indemnity Obligations Through Cut-And-Paste Reservation of Rights

    The South Carolina Supreme Court found that the Special Referee correctly determined that the insurer failed to reserve the right to contest coverage of actual damages and punitive damages under the CGL policies. Harleysville Group Ins. v. Heritage Communities, Inc., 2017 S.C. LEXIS 8 (S.C. Jan. 11, 2017).

    Two developments, the Riverwalk and Magnolia North, were constructed between 1997 and 2000 by Heritage. After construction and sale of the units, the purchasers became aware of construction problems, including building code violations, structural deficiencies, and significant water-intrusion problems. In 2003, the property owners' associations (POAs) filed suit to recover damages for repairs to their homes.

    During the construction period, Heritage maintained several liability policies with Harleysville with per-occurrence limits between $3 and $4 million on primary policies and between $9 and $13 million on the excess liability policies. Harleysville agreed to defend. Harleysville attempted to reserve rights by making generic statements of potential non-coverage coupled with furnishing most of the Heritage entities with copies (through a cut-and-paste method) of the policies.

    At the outset of each trial, Harleysville's counsel for Heritage conceded liability, and in both trials, the trial court directed a verdict for the POA on the negligent construction cause of action. The only contested issue in each trail was the nature and extent of the damages resulting from the admitted negligent construction. In the Magnolia North case, the jury returned a general verdict for $6.5 million in tender damages and $2 million in punitive damages. In the Riverwalk suit, the jury returned a general verdict of $4,250,000 in actual damages and $250,000 in punitive damages in favor of the POA.

    Harleysville then filed the present declaratory judgment actions to determine what portion of the judgments would be covered under the policies. Harleysville contended it had no duty to defend. Alternatively, Harleysville sought a determination on what portion of the general verdicts constituted covered damages. Harleysville argued it could only be responsible for that portion of the damages occurring during the period of time its policies provided coverage.

    The matter was referred to a Special Referee, who held an evidentiary hearing in December 2011. The Special Referee found that the costs to remove and replace the faulty workmanship were not covered. But he held that it would be improper and purely speculative to attempt to allocate the juries' general verdicts between covered and non-covered damages. Therefore, the Special Referee ordered the full amount of the actual damages in the construction defect suits would be subject to Harleysville's duty to indemnify in proportion with its time on the risk. The Special Referee calculated Harleysville's pro rata portion of the progressive damages based on Harleysville's time on the risk. Lastly, the Special Referee found punitive damages were covered and that no policy exclusion applied to preclude coverage.

    On appeal, the Supreme Court agreed with the Special Referee that the generic denials of coverage coupled with furnishing the insured with a verbatim recitation of all or most of the policy provisions (through a cut-and-paste method) was not sufficient. By having a duty to defend, the insurer gained the advantage of exclusive control over the litigation. It would be unreasonable to permit the insurer to not disclose potential bases for denying coverage. Here, despite policy references in the reservation of rights letters, there was no discussion of Harleysville's position as to the various provisions or explanation of its reasons for relying thereon. Because Harleysville did not effectively reserve the right to contest coverage, it was unnecessary for the court to address claims of error regarding various policy exclusions.

    Harleysville argued it was not responsible for an award of punitive damages which indicated the jury found that Heritage's wrongdoing and the results therefrom were not accidental. The court disagreed. The policy did not unambiguously exclude punitive damages. Because policy language was construed in favor of the insured to include punitive damages, the court affirmed the Special Referee's finding that punitive damages were covered.

    The court turned next to the Special Referee's allocation determinations for Harleysville's time on the risk. Harleysville contended the actual damages awarded for loss of use in the Riverwalk case should be deemed progressive in nature and, thus, included in the amount subject to allocation based on Harleysville's time on the risk. The court agreed and modified the Special Referee's Riverwalk calculation slightly to include allocation of the actual damages resulting from loss of use.

    Harleysville further argued that punitive damages, like actual damages, were subject to allocation based on time on the risk. The court disagreed under the circumstances presented here and affirmed. The POAs presented evidence that despite knowledge of the ongoing construction problems, Heritage deliberately targeted its sales efforts toward elderly, out-of-state residents and marketed its condominiums on the basis of quality and luxurious amenities, such as swimming pools and tennis courts, that were never constructed. The POAs contended that this evidence demonstrated Heritage willfully and repeatedly sold improperly constructed condominiums to innocent purchasers and that such conduct justified the imposition of punitive damages.

    The Special Referee rejected Harleysville's argument that punitive damages were likewise subject to time on the risk allocation, observing that the formula only applied to damages that were deemed progressive. Although the court was not creating a bright-line rule that punitive damages could never be subject to allocation based on time on the risk, the evidence here demonstrated that all of Heritage's reprehensible acts that justified the punitive damages took place entirely during the period of time Harleysville's policies were effective. Therefore, the Special Referee did not err in finding punitive damages were not subject to reduction based on the time on the risk multiplier in these cases.

Duty to Defend Requires Payments Under Policy's Supplemental Payments Provision

    The California Court of Appeal determined there was no duty to indemnify and the insured had to reimburse the insurer's contribution to a settlement. Nevertheless, there was a duty to defend, meaning the insured did not have to reimburse amounts it was entitled to under the supplemental payments provision. Navigators Specialty Ins. Co. v. Moorefield Constr., 2016 Cal. App. LEXIS 1132 (Cal. Ct. App. Dec. 27, 2016).

    Moorefield was the general contractor for a shopping center project to be developed by DBO Development No. 28 (DBO). The project included the construction of a 30,055-square-foot building to by used as a Best Buy store. In January 2002, DBO entered a 15-year lease with Best Buy. 

    DBO and Moorefield entered into an owner-contractor agreement for the Best Buy store which was to be completed by August 22, 2003. The plans and specifications for the Best Buy building called for the installation of an interior concrete floor slab. Then both vinyl composition tile and carpet tile would be placed on top of the concrete slab. 

    Unfortunately, the carpet tiles had a polyvinyl cholride backing that did not permit breathing. Moisture in the concrete slab caused the glue used to adhere the carpet tiles to the slab to turn to liquid. Testing showed that the moisture vapor emissions for the concrete slab were far above an acceptable level. Another four to eight months of drying time was necessary for the concrete slab to cure sufficiently so that the moisture vapor emission level would be acceptable. 

    Nevertheless, Moorefield's project manager felt there was low risk to no risk that flooring would fail if laid on a concrete slap with the existing high moisture vapor emissions. Going ahead with the project was discussed with DBO and Best Buy. Both DBO and Best Buy directed the project manager to have the flooring installed. The decision was based on a cost-benefit analysis. It would be cheaper to install the flooring immediately so that the Best Buy store would be open for holiday shopping and deal with flooring problems later.

    Of course, the floor failed. As early as the grand opening, Best Buy noticed carpet tiles not sticking to the floor. The edges of the carpet tiles curled, moisture and adhesive oozed through the edges, staining appeared at the edges, and odors were detected. Best Buy eventually repaired the floor repairs and withheld $377,404 in monthly rent from JSL Properties, LLC, the owner of the building.

    JSL sued Moorefield and DBO to recover the amounts withheld by Best Buy. DBO filed a cross-complaint against Moorefield. Moorefield tendered to its insurer, Navigators Specialty Insurance Company, which defended under a reservation of rights. The suit eventually settled for $1.3 million. Navigators contributed its $1 million policy limits.

    Navigators then filed suit against Moorefield seeking a declaration it had no duty to defend or to indemnify. The trial court ruled in favor of Navigators and awarded judgment for $1 million plus $68,274 in interest.

    The California Court of Appeals found there was no duty to indemnify. Moorefield acted deliberately in installing the carpet tiles on the concrete slab. Moorefield knew that the moisture vapor emission rate was too high to install the tiles, but did so anyway. Hence, there was no accident. Moorefield argued that installing the carpet tiles was an occurrence because the flooring damage was caused by moisture vapor emission from the concrete slab over a period of years. But Moorefield had engaged in an intentional act that produced property damage.

    However, the supplementary payments provision applied to some portion of the $1 million paid by Navigators toward settlement. The provision stated, "with respect to any claim . . . or any 'suit' against an insured we defend," Navigators would pay "[a]ll costs taxed against the insured." Moorefield argued that this provision required Navigators to pay that portion of the settlement attributable to attorney fees and costs of the suit. Attorney fees, when authorized by contract, were allowable as costs of suit. The attorney fees incurred by JSL and DBO would have been an item of costs falling within the supplementary payments provision. JSL sought attorney fees based on a provision in the construction contract, the rights under which had been assigned to JSL. Moorefield's liability to JSL for attorney fees would be a cost of suit and not damages.

    The Court of Appeals determined that Navigators had a duty to defend Moorefield and therefore had an obligation to pay attorney fees and costs of the suit under the supplementary payments provision. The ultimate determination by the trial court that the loss was caused by a non-covered occurrence did not mean that JSL's lawsuit never presented any potential for coverage. Although the leading candidate was always moisture in the slab, there was a possibility that roof leaks or a design defect were the cause of the damage.

    Therefore, the decision below was affirmed insofar as it declared that Navigators had no duty to indemnify. In all other respects, the judgment was reversed and remanded.

Water Backup Payment Satisfies Insurer's Obligation to Cover for Rain Damage

    The insured's attempt to secure additional coverage beyond a $10,000 payment for water damage after a rain storm damaged the interior of its building failed. Bible World Christian Ctr. v. Colony Insurance Co, 2016 U.S. Dist. LEXIS 175766 (M.D La. Dec. 20, 2016).

    The interior of Bible World's building was damaged by water that leaked in from the roof after a heavy rain storm. Bible World's officials met with Robert Chandler, an employee of Omni Insurance Group, the day after the rain event. Chandler had assisted Bible World in procuring its commercial property policy with Colony Insurance Company. Chandler told Bible World to fix the property and that its costs would be covered under the policy. Bible World spent $79,876.81 in repairs.

    Colony issued a $10,000 payment to Bible World for sewer and water backup coverage contained in the Gold-Pak Endorsement of the policy. The vendor who performed the repairs sued Bible World. Colony was sued under a third party demand filed by Bible World.

    Bible World and Colony hired experts who agreed on two major issues. First, there were no physical holes or other damage to the roof from the rain event. Second, they agreed that the damage to the interior of the property was caused by water that overflowed at the gutter and entered the interior of the building through openings in the ceiling that were part of the original design of the building.

    Colony's expert further opined that the gutter overflowed because of clogged downspouts caused by improper maintenance. He found that the gutter overflowed because fourteen of the twenty-one downspouts were blocked. Bible World's experts agreed that there may have been leaves plugging the drains but that these plugs would not have been significant enough to cause the overflow. Instead, a number of factors combined may have resulted in the backup of water including extensive rain, street flooding, sewage backup and other related problems.

    Colony moved for summary judgment. The court first found that Chandler was not an agent who could bind Colony. There was no reasonable inference that an agency relationship existed between Chandler and Colony. Chandler was a broker employed by Omni Insurance. His role was to act as a liaison between insurance companies, like Colony, and potential insureds. Chandler worked with approximately fifty different companies. Further, Colony had no control over Chandler.

    Secondly, Colony satisfied its obligations under the policy. The policy excluded coverage for damages to an interior of a building caused by rain unless the rain entered through an opening created by damage to the building. Another section of the policy excluded coverage for damages from water that overflowed from a sewer or drain. Third, the Gold-Pak Endorsement brought back coverage for damages from water that overflowed from a drain for damages totaling up to $10,000.

    Colony argued that in order for rain damage to be covered, the rainwater must have entered through an exterior opening created by damage to the property. Here, water did not enter through exterior damage to the building. Second, the policy did not cover for damages caused by a defective or poorly maintained roof drainage system. Bible World disagreed with Colony's interpretation, but offered little analysis.

    The court found that there were two main causes of the damages: the rain and the failure of the downspouts to drain properly. Assuming that the rain was the cause of the loss, the court fund that Colony did not owe Bible Work anything. Alternatively, assuming that the cause of the damages was the failure to drain, the court found that, at most, Colony owed Bible Work $10,000, which had already been paid.

    Therefore, the court granted Colony's motion for summary judgment.

 

    

Hawaii Legislature Considers Parametric Insurance for Hurricane Risk

    In SB 799, the Hawaii state legislature proposes creating a parametric risk transfer facility which would move hurricane risk into the private market with insurance and reinsurance carriers.

    The bill explains that parametric, or index-based, insurance solutions settle claims on the characteristics of a disaster, as opposed to the loss sustained from the disaster. The bill further explains that unlike traditional insurance, parametric solutions do not require lengthy loss adjustment processes, instead enabling rapid disbursement of payouts to maximize liquidity and allow for flexibility in the use of the proceeds. The trigger for parametric insurance coverage for a natural disaster could be based on the maximum wind speed of the hurricane as it passes through a specific covered area, such as maximum winds of ninety-six miles per hour or higher.

    The legislature finds that total losses from a storm making landfall near Waikiki with the same force as Hurricane Iniki could cost twenty to forty billion dollars in direct economic losses. Although some property losses would be covered by personal insurance, the vast majority of losses would fall on the State and counties, and thus, the taxpayers. A parametric insurance transfer could move residual risk off the State's budget and onto the private sector.

    A parametric disaster insurance special fund would be created under the bill. Appropriations from the legislature to fund the program would be required. Money in the parametric disaster special fund would be used to purchase parametric disaster insurance for the State. The Act would establish a three-year parametric disaster insurance pilot program. Currently, the bill has passed the first reading.