Insurance Law Hawaii

Excess Carrier's Refusal to Approve Settlement or Take Over Defense Results in Bad Faith

    The Ninth Circuit found that under California law, the excess carrier acted in bad faith by refusing to either approve the underlying settlement or take over the defense. Teleflex Med. Inc., v. Nat'l Union Fire Ins. Co., 2017 U.S. App. LEXIS 4996 (9th Cir. March 21, 2017).

    The insured, LMA North America, Inc., distributed laryngeal mask airway products. In 2007, LMA brought a patent infringement suit against Ambu related to certain laryngeal masks. Ambu counterclaimed, demanding $28 million for trade disparagement and false advertising claims. Transcontinental Insurance Company (CNA), the primary carrier, agreed to defend LMA.

    In 2011, the parties mediated. CNA attended the mediation, but National Union, LMA's excess carrier, did not. LMA's counsel gave daily reports to update National Union on the mediation. A conditional settlement was reached under which Ambu would pay LMA $8.75 million for the patent claims while LMA would pay Ambu $4.75 million for the disparagement claims. The settlement was conditioned on LMA's ability to obtain approval from CNA and National Union.

    CNA committed its full $1 million limit, but National Union was reluctant to recognize that Ambu's counterclaims could invade its coverage layer. LMA continued to provide reports and justification to National Union for the settlement amount. LMA's defense counsel felt the risk of damages was substantially in excess of $10 million.

    Eventually, LMA finalized the settlement with Ambu and notified National Union. National Union advised that it would take over the defense of the underlying suit if LMA could "undo" the settlement. LMA responded that the executed settlement could not be undone.

    LMA then sued National Union for breach of contract and bad faith. National Union moved for summary judgment, arguing that it had the absolute right to veto the settlement under the excess policy's "no voluntary payments" and "no action" clauses. The policy provided that the insured could not voluntarily make a payment to settle without the consent of National Union. Further, the "no action" clause provided that "there will be no right of action against us unless. . . the amount you owe has been determined with our consent or by actual trial and final judgment."

    The district court denied National Union's summary judgment motion. The district court relied upon Diamond Heights Homeowners Assoc. v Nat' Am. Ins. Co., 227 Cal. App. 3d 563 (1991). There, the state court ruled that an "excess insurer may waive its rights under a no action clause if it rejects a reasonable settlement and at the same time fails to offer to undertake the defense." Thereafter, the case proceeded to trial and the jury found for LMA on both the breach of contract and bad faith claims, but decided not to award punitive damages.

    The Ninth Circuit affirmed. Although National Union argued that Diamond Heights was not the controlling case, the Ninth Circuit disagreed and believed the California Supreme Court would follow Diamond Heights. The court also disagreed with National Union's contention that LMA should have been required to prove its contract claim by clear and convincing evidence rather than the preponderance of evidence.

    

Negligent Failure to Respond to Settlement Offer Is Not Bad Faith

    The Ninth Circuit found that the insurer's negligent failure to respond to a settlement offer did not constitute bad faith. McDaniel v. Gov't Employees Ins. Co., 2017 U.S. App. LEXIS 4029 (9th Cir. March 7, 2017).

    McDaniel was the assignee of claims against GEICO assigned by the insured after settling a wrongful death suit. McDaniel alleged that GEICO unreasonably refused to accept a $100,000 policy limits offer. The case went to trial and a jury awarded McDaniel over $3 million against the insured.

    On August 7, 2009, McDaniel's attorney Steven Nichols extended a $100,000 policy limits settlement offer with a fifteen day acceptance deadline to GEICO's attorney Michael Griott. The parties subsequently agreed to extend the acceptance deadline to ten days following MacDaniel's service of responses to outstanding interrogatories, which Nichols hand-delivered to Griott on August 27, 2009. On September 1, 2009, Griott emailed GEICO claims adjuster Aldin Buenaventura with a letter attachment indicating that Nichols had submitted the requested interrogatories and, in bold and underlined text, that "[o]ur response to Plaintiff's policy limits demand is due on or before September 11, 2009."

    Buenaventura, however, did not read Griott's September 1, 2009 email or the attached letter. Buenaventura was therefore unaware that the interrogatory answers had been received and the deadline to accept the $100,000 settlement had begun to run. When Buenaventura attempted to accept the settlement offer on October 1, 2009, after receiving authorization from the GEICO home office that same day, he was unaware that the deadline for acceptance had already passed.

    After securing the $3 million dollar judgment and assignment from the insured, McDaniel sued GEICO for bad faith. The district court granted McDaniel's motion for summary judgment.

    The Ninth Circuit reversed. To establish a breach of the implied duty to settle, two elements had to be met. First, the third party must have made a reasonable offer to settle the claims against the insured for an amount within the policy limits. Second, the insurer must have unreasonably failed to accept an otherwise reasonable offer within the time specified by the third party for acceptance. No reasonable jury could conclude that GEICO's failure to accept the settlement offer on or before the September 6, 2009 deadline was unreasonable. Instead, the facts conclusively established that GEICO both wanted and attempted to accept McDaniel's settlement offer, but failed to discover the September 6, 2009 deadline because of Buenaventura's negligence.

    Consequently, the judgment was vacated and the district court was directed to enter judgment in favor of GEICO.

Assignment of Construction Defect Claims Not Covered

    Assignment of insurance proceeds as part of a settlement against the subcontractor for faulty workmanship was not covered under the CGL policy in accordance with Illinois law. Allied Prop. & Cas. Ins Co v. Metro North Condominium Assoc., 2017 U.S. App. LEXIS 4107 (7th Cir. March 8, 2017).

    Metro North Condominium Association hired a developer to build a condominium. The developer used CSC Glass to install the building's windows. CSC installed the windows defectively, causing the building to sustain significant water damage following a rain storm.

    Metro North sued the developer, who turned out to be insolvent. Metro North amended its complaint to add a claim against CSC for breach of the implied warranty of habitability. Metro North eventually dismissed its lawsuit in exchange for an assignment of CSC's policy with Allied and payment of any right to $700,000 worth of insurance coverage. The settlement specified that it was not intended to compensate Metro North for the cost of repairing or replacing CSC's defectively installed windows, but rather for the damage to the remaining parts of Metro North's condominium. 

    Allied's policy had several "your work" exclusions barring coverage for damage to the particular part of the relevant property worked on by CSC, or for the costs of repairing or replacing CSC's own defective work. Further, Exclusion 2.b excluded coverage for damages arising from "contractual liability," that is, damages that CSC became obligated to pay "by reason of the assumption of liability in a contract or agreement." This exclusion applied only if CSC would not have been liable "in the absence of the contract or agreement."

    Allied brought a declaratory judgment lawsuit against Metro North and the parties filed cross-motions for summary judgment. Allied's motion was granted, determining that the settlement damages were not covered under Allied's policy. Metro North appealed.

    The Seventh Circuit affirmed. The breach of the implied warranty of habitability was the only legal theory in play at the time of the settlement, but that theory did not allow for the recovery of damages covered by the policy. The measure of damages for a breach of the implied warranty of habitability was the cost of repairing the defective conditions, here the defectively installed windows. Illinois courts, however, had concluded that CGL policies like Allied's did not cover the cost of repairing the insured's defectively completed work.

    Even if CSC assumed liability for damages to other parts of the building besides the windows themselves, coverage for those damages would be precluded under Exclusion 2.b, since the liability would then have arisen contractually from the settlement agreement.

Consent Judgment Not Binding On Insurer Who is Not a Party to Proceeding

    The West Virginia Supreme Court of Appeals determined that a pre-trial settlement, including a consent judgment against a non-party insurer and an assignment of rights under the policy, was invalid. Penn-America Ins. Co. v. Osborne, 2017 W. Va. LEXIS 119 (W.Va. March 1, 2017). 

    Beecher Osborne injured his leg in a timbering accident while working for H&H Logging Company on land owned by Heartwood Forestland Fund and leased by Allegheny Wood Products, Inc. Osborne sued H&H, Allegheny, and Heartwood, all of whom denied liability. H&H tendered its defense  to Penn America for Mr. Osborne's deliberate intent claim. Penn-America denied the request, determining that the deliberate intent claim was excluded under its policy. H&H then retained defense counsel at its own expense. Liberty Mutual Insurance defended Allegheny and Heartwood. 

    Allegheny and Heartwood filed a motion for leave to file a third-party complaint for declaratory relief against Penn-America for failing to provide them a defense. By contract, H&H had agreed to defend and indemnify Allegheny and Heartwood for suits arising form the contract. The motion was never heard and the third-party complaint was never filed. Further, neither Allegheny, Heartwood, nor Osborne actually tendered to Penn-America on behalf of Allegheny and Heartwood.

    Without notice to Penn-America, Osborne, Allegheny and Heartwood stipulated to a settlement with the following facts: (1) Penn-America breached its policy by failing to provide a defense to Allegheny or Heartwood related to Osborne's claims; (2) due to the breach, Allegheny and Heartwood suffered damages because they were compelled to pay for their own defense; (3) Allegheny and Heartwood had to mitigate the claims asserted by Osborne by entering a pre-trial settlement agreement to preserve and protect their assets; and (4) Allegheny and Heartwood tried to resolve coverage issues by filing a third-party complaint for declaratory relief against Penn-America. Further, Allegheny and Heartwood consented to a $1,000,000 judgment for Mr. Osborne's injury, and they agreed to assign to Mr. Osborne any claims they had against Penn-America for failing to provide them a defense. In return, Osborne agreed not to execute on the $1,000,000 judgment against Allegheny and Heartwood. Instead, Osborne would collect the judgment from Penn-America by asserting his assigned claims. 

    Osborne then sued Penn-America. Penn-America answered by noting it had not been contacted about the lawsuit or settlement after denying a defense to H&H. Penn-America sought to challenge the reasonableness of the $1,000,,000 consent judgment, but the trial court prevented any review of the medical records or other evidence that would demonstrate the severity of Osborne's injury. The trial court entered summary judgment in Osborne's favor, finding that Penn-America was liable for the $1,000,000 consent judgment.

    The West Virginia Supreme Court of Appeals found the pre-trial settlement agreement unenforceable against Penn-America and the assignment of claims was void. Penn-America was not a party to the Osborne lawsuit against Allegheny and Heartwood, and was never given notice of the parties' negotiations for the pre-trial agreement. Further, the record was bare of any facts supporting $1,000,000 settlement as a fair and reasonable valuation of Osborne's lawsuit against Allegheny and Heartwood. To make matters worse, the trial court prohibited Penn-America from conducting discovery on the extent of Osborne's injury or his medical expenses. Therefore, Penn-America was not bound by the consent judgment.

    The settlement agreement made no mention of the fact that Allegheny and Heartwood were being defended and were provided with coverage by Liberty Mutual in Osborne's suit. Recovery on an assigned insurance bad faith claim could not be made upon an untrue factual basis. Osborne's recovery on the assigned claims would be based on a falsehood, i.e., that due to Penn-America's breach, Allegheny and Heartwood were without coverage and the $1,000,000 consent judgment was necessary to protect their assets.

    Finally, evidence of fraud and collusion were present. A $1,000,000 valuation of a lawsuit for Osborne's injury leg, without any cited evidence regarding permanency of the injury, permanent disability, severity, medical expenses, etc., did not reflect serious negotiation on damages. Therefore, the assignment was void and the trial court erred in failing to grant summary judgment to Penn-America. 

    

Hawaii Appeals Court Reverses Summary Judgment Determintion Of No Duty To Defend

    The Hawaii Intermediate Court of Appeals (ICA) vacated the circuit court's granting of summary judgment to the insurer after determining there was no duty to defend. National Interstate Ins. Co., Inc. v. Cornelio, 2017 Haw. Ct. App. LEXIS 128 (Haw. Ct. App. March 31, 2017).

     Tiare Franco was killed when a truck driven by Savio Reinhardt went over a cliff. The truck was insured by National Interstate Insurance Company (NIIC) under a policy issued to William Cornelio. The truck was owned by Cornelio's ex-wife, Reinette Kama. Reinhardt was Kama's boyfriend.

    "Insured" was defined in the policy as follows: "1. You are an insured for any covered auto.  2. Anyone else is an insured while using a covered auto you own, hire or borrow with a reasonable belief that such insured is entitled to do so . . ."  Reinhardt typically used the car more than Kama.

    In her deposition, Kama testified that she allowed Reinhardt to use the truck on the night of the accident to run some errands. He phoned about midnight, stating he was going to stop at his family land to check on another car and then would be right back. She responded, "Whatever," and went back to sleep. The accident occurred later the evening.

    The family of Franco (Franco Parties) filed suit against Reinhardt for negligence, gross negligence, and/or recklessness. NIIC assigned a lawyer to defend Reinhardt. Ten months later, NIIC filed an action for declaratory judgment that it had no duty to defend Reinhardt in the wrongful death case. The Franco parties were allowed to intervene.

    NIIC moved for summary judgment, arguing that its policy restricted coverage to "permitted drivers who had a 'reasonable belief' they were entitled to use the insured vehicle." NIIC asserted that at the time of the accident, Reinhardt could not have had a reasonable belief that he was entitled to use the truck because Kama had authorized only limited use that evening. The circuit court granted NIIC's motion.

    The ICA reversed. In seeking summary judgment on its duty to defend, NIIC had the burden of proving that there was no genuine issue of material fact with respect to whether a possibility of coverage existed. In other words, NIIC had the burden of proving that there was no genuine issue of material fact as to whether it was entitled to operate the truck when the accident occurred.

    Reinhardt was the primary user of the truck. Viewed in the light most favorable to the Franco Parties, this evidence supported the inference that prior to the accident, Reinhardt generally had Kama's implied permission to use the truck for his own personal purposes. The Franco Parties presented evidence that Kama and Reinhardt were in a romantic relationship. Prior to the accident, Kama had given Reinhardt implied permission to routinely use the truck for his own personal needs. On the night of the accident, Kama gave Reinhardt permission to use the truck for particular purposes, and then subsequently responded "Whatever" when Reinhardt said he would make further use of the car before returning the truck. Therefore, the Franco parties presented sufficient evidence to raise genuine issues of material fact regarding whether Reinhardt reasonably believed he was entitled to operate the truck at the time of the fatal accident.

    The circuit court's decision was vacated and the matter remanded for further proceedings.

    Thanks to Damon Key blogging colleague Mark Murakami, www.hawaiioceanlaw.com, for flagging this case.

Insurer's Motion to Dismiss Complaint for Failure to Cover Collapse Fails

    The insurer was unsuccessful in moving to dismiss the property owner's complaint that was filed after coverage for collapse of basement walls was denied. Cyr v. CCAA Fire & Cas. Ins. Co., 2017 U.S. Dist. LEXIS 39387 (D. Conn. March 20, 2017). 

    The Cyrs began observing cracking patterns in the basement wall of their home. A structural engineer inspected the wall and determined that the cracks were due to a chemical reaction in the concrete that would ultimately render the walls unstable. The Cyrs made a claim with CCAA under their homeowner's policy. The insureds contended that the progressive deterioration of the concrete in the basement walls was a collapse under the policy. 

    The claim was denied. The Cyrs sued for breach of contract, bad faith and violations of the Connecticut Unfair Insurance Practices Act (CUIPA) and Unfair Trade Practices Act (CUTPA). To support the bad faith claim, the Cyrs alleged that CCAA was aware of numerous claims in Connecticut regarding deteriorating concrete. CCAA was also aware of the problem through its participation in the Insurance Services Office, Inc. (ISO), which distributed information on the concrete problem. The Cyrs further alleged that CCAA attempted to deny coverage based on other purported exclusions, despite provisions within the policy that provided coverage for chemical reaction and collapse, for which there was no chemical reaction exclusion. 

    The Cyrs alleged that CCAA attempted to exploit their lack of sophistication by denying coverage on the basis of inapplicable provisions of the policy without regard to other provisions which afforded coverage for the specific event for which coverage was sought. Plaintiffs also claimed that CCAA violated the CUIPA because it regularly used the information obtained from the ISO to deny claims covered by its policies. Finally, the Cyrs alleged that despite specific chemical reaction and collapse provisions in its own policy which would afford coverage, CCAA attempted to deceive the policyholders into believing that the policy did not provide coverage.

    The court found that such allegations were sufficient to survive a motion to dismiss. 

Attorney Allowed to Withdraw When Insolvent Insurer No Longer Pays for Defense

    The magistrate recommended that the attorney's motion to withdraw from further representation of the insured be granted when the insurer was liquidated and no longer paying for defense costs. U.S. v. Estate of Lillian Wiesner, 2017 U.S. Dist. LEXIS 38257 (E.D. N. Y March 15, 2017).

    The United States sued the Estate of Lillian Weisner, John P. Maffei and 0.25 Acres of Land to recover damages under CERCLA. The New York State Liquidation Bureau (NYLB) retained London Fischer LLP to defend John Maffei pursuant to an insurance policy issued by The Home Insurance Company, which was insolvent.

    The Estate owned the property, which included a two-story building that had housed a dry-cleaning facility for many years. Executeam Corp. executed two master leases for a 51-year period beginning in 1967. John Maffei was the president and sole shareholder of Executeam. In 1968, Executeam subleased the property to Stanton Cleaners, Inc. The sublease was later assigned to John Maffei in 1983. Thereafter, the master leases were also assigned to John Maffei in 1987.

    In 2003, the EPA filed a CERCLA lien against the property and against John Maffei's leasehold interest. The Home insured the property but was declared insolvent on June 13, 2003. The NYLB became the ancillary receiver of the insurer and retained the law firm of London Fischer to represent John Maffei pursuant to the policy issued by the Home.

    The parties eventually entered a Consent Judgment on August 17, 2012. The court entered the Consent Judgment, retained jurisdiction, and closed the case.

    There was no further activity in the case until June 22, 2016, when the government filed a request for a pre-motion conference before moving to enforce the Consent Judgment. The government explained that the defendants had not made payment under the provisions of the Consent Judgment and were incurring significant penalties. London Fisher filed a response letter and argued that neither the Home nor the NYLB had any obligation to defend or indemnify John Maffei. Further, London Fischer was no longer authorized to represent John Maffei. London Fischer subsequently filed a motion to withdraw as attorney for Jon Maffei.

    In the motion to withdraw, London Fischer argued that it had been notified that the Home was disclaiming coverage for any allegations arising from John Maffei's alleged violation of the Consent Judgment and that London Fischer was no longer authorized to represent John Maffei. The Home was the only source of funding for legal fees and non-payment of fees was a valid basis for the court to grant the motion to withdraw. In response, the government argued that the prosecution of the suit would likely be disrupted by the withdrawal of counsel since London Fischer was the firm that negotiated  the terms of the Consent Judgment on behalf of John Maffei.

    The court found little guidance in case law from either the Second Circuit or the state of New York, but the authority it did find favored London Fischer. Further, the Consent Judgment specifically noted that the Home was not obligated to defend or indemnify the defendants if they failed to comply with the Consent Judgment. At the time the Consent Judgment and settlement agreement were entered, the Home was in liquidation. NYLB had reviewed the policies at issue and determined that there was no coverage for the purported violations of the Consent Judgment.

    In response to the government's argument that granting the motion to withdraw would delay the enforcement proceeding and therefore prejudice the government, the court noted that the case was not on the verge of trial because the the matter had concluded in 2012 with the entry of judgment. Permitting withdrawal at this juncture would not undermine the court's efforts to resolve the government's anticipated motion to enforce the Consent Judgment.

    Therefore, the magistrate recommended that the motion to withdraw be granted.

Ninth Circuit Finds No Coverage for Construction Defects Under California Law

    The Ninth Circuit, applying California law, affirmed the district court's decision finding there was no coverage for construction defects. Archer W. Contractors v. Nat'l Union Fire Ins. Co., 2017 U.S. App. LEXIS 3796 (9th Cir. March 2, 2017).

    Archer Western Contractors (AWC) was the general contractor for the San Diego County Water Authority's emergency water storage project. The pump house and turbine generators suffered property damage. The damage flowed from AWC's allegedly defective work on the property.

    After settling a construction defect lawsuit brought against it by the Water Authority, AWC filed this case against National Union for failing to indemnity portions of the settlement agreement.

    The district court granted summary judgment to National Union based upon two exclusions. Exclusion e (5) precluded coverage for property damage to "that particular part of real property on which [the contractor]  . . . [is] performing operations, if the Property Damage arises out of those operation." Exclusion e (6) barred coverage for property damage to "that particular part of any property that must be restored, repaired or replaced because [the contractor's] Work was incorrectly performed on it."

    California courts had consistently adopted broad interpretations of the phrases "that particular part" and "arises out of" when applied to the general contractor. California courts had construed "that particular part" to encompass the entire project on which a general contractor was performing operations. Therefore, the district court properly determined that the two exclusions precluded coverage and appropriately granted summary judgment to National Union.