Insurance Law Hawaii

Endorsements Do Not Exclude Coverage for Wrongful Death Claim

    The insurer's motion for summary judgment, attempting to bar coverage under two endorsements for a wrongful death suit, was denied. Essex Ins. Co. v. FD Event Co., LLC, 2017 U.S. Dist. LEXIS 124400 (C.D. Calif. July 25, 2017).

    FD Event owned an amusement attraction known as Free Drop, which was operated at county fairs and festivals. Participants paid an admission fee to FD Event in order to jump from a scaffold structure onto an inflatable airbag below.

    FD Event had a policy with Essex. When securing the policy, FD Event understood that there was no coverage for amusement devices, inflatables, rides or animals. 28th Event, who ran the San Bernardino County Fair, was an additional insured on the policy. 

    During the fair, Sabrina Gordon fell from the scaffold structure, missed the inflatable airbag, and suffered fatal injuries. The Gordon Claimants sued FD Event, 28th District and others for negligent design, construction, and supervision of the FreeDrop. Essex agreed to defend FD Event and 28th District, subject to a reservation of rights. 

    Essex then sued for a judicial determination that it had no duty to defend or indemnify. It relied on two endorsements, an "Amusement Liability Endorsement" and a "Special Events and Spectator Liability Exclusions Endorsement." The Amusement Liability Endorsement stated "this insurance does not apply to 'bodily injury' . . . arising out of . . . [t]he operation, maintenance, use, or existence of any ride, machinery, equipment . . . not scheduled on the declarations page of this policy."

    Essex maintained that the policy was issued with the Amusement Liability Endorsement, but a policy subpoenaed by the Gordon Claimants from a broker did not include the endorsement. An issue of fact therefore existed, preventing summary judgment on this endorsement.

    Subsection (c) of the Special Events and Spectator Liability Exclusions Endorsement provided there was "no coverage for bodily injury 'arising out of' participating in an 'exhibition,' 'show,' 'performance' or 'other special event.'" Subsection (e) barred coverage for "bodily injury sustained by any . . . person, while in an activity area, such as, but not limited to: an arena, chute, corral, pit area, race track, set up area, show area, state, staging area, or similar place of activity." Essex contended that because the FreeDrop consisted of a metal scaffold structure next to an inflatable airbag, the scaffold structure constituted an "activity area" under Clause (c).

   The court concluded that Clause (c) was not reasonably susceptible to the interpretation proposed by Essex. Essex sought to convert the FreeDrop from a fair attraction into a show or performance because the FreeDrop occurred in plain view of other fair attendees. But Sabrina Gordon engaged in an individual activity, the purpose of which was to experience a free fall from a chosen height. While other fair attendees could watch individuals atop the FreeDrop, the purpose of the FreeDrop was not specifically for spectators; rather it was to profit from individuals seeking to have a free fall experience.  

    Clause (e), standing alone, was broad. It would bar coverage for any bodily injury occurring in "an activity area" which was defined by a non-exhaustive list of examples. But Clause (e) could not stand alone. Instead, it had to be interpreted within the context of the entire endorsements exclusion. The court determined that "activity area," as defined in Clause (e), referred to activity areas associated with events, and encompassed the locations where participants and spectators would be subject to risk of bodily injury while at such events. They would include horseraces in a chute, corral staging area or race track; theatrical performances or exhibitions of goods in a set up area, stage or show area.

    Therefore, coverage was not barred by either Clause (c) or Clause(e) of the Special Events and Spectator Liability Exclusions Endorsement. The interpretations offered by Essex were unreasonable in light of the greater context of the exclusions endorsement, as well as the language of the provision itself. 

 

 

Insured's Testimony On Expectation of Coverage Deemed Harmless

    Affirming the district court, the Third Circuit found that the insured's testimony that she expected her loss to be covered was harmless. Gordon v .Allstate Prop. & Cas. Ins. Co., 2017 U.S. App. LEXIS 13507 (3rd Cir. July 26, 2017).

    After a storm, portions of the stone facade of the insured's home collapsed. Allstate denied coverage because her policy was limited to "sudden and accident physical loss to the property" caused by a named peril, including windstorm. Allstate contended that the damage to the home was caused by neglect, not the storm.

    The insured sued. Allstate filed a motion in limine seeking to prevent the insured from testifying about her reasonable expectations of coverage. The district court denied the motion. At trial, the insured testified that when applying for coverage, she told the insurance agent that "I wanted to be covered." The jury returned a verdict for the insured, finding that she had proved by a preponderance of the evidence that the collapse of the exterior wall was a sudden and accidental physical loss caused by a windstorm as covered under her policy. 

    The Third Circuit determined there was no error in allowing the insured's testimony. Even if the testimony should have been excluded under Pennsylvania law, errors in the admission of the evidence was harmless and did not constitute grounds for a new trial. Any error was harmless because the insured presented sufficient evidence to support the jury's determination that the collapse of the home was a "sudden and accidental physical loss caused by a windstorm." The insured presented expert testimony from an engineer who opined that the collapse was a sudden, catastrophic event and that "the wind damage was the final nail in the coffin that caused the collapse."  

    Because the insured presented ample evidence to support the determination that the loss was caused by a windstorm - and therefore was covered by the policy - it was highly probable that the jury would have reached that same result even without the insured's reasonable expectation testimony. 

    

No Coverage for Co-Restaurant Owners Who Are Not Named In Policy

    The Federal District Court denied two plaintiffs' claims for breach of the policy and for bad faith because they were not insureds under the policy. Tu v. Dongbu Ins. Co., 2017 U.S. Dist. LEXIS 115200 (N.D. Calif. July 24, 2017).

    Dongbu, a Hawaii insurance company, issued a two-year policy to Plaintiff Ken Tu for his business. He was the only named insured under the policy. 

    The waste system at Plaintiffs' restaurant failed, causing fumes to impact neighboring tenants and waste to contaminate the underlying soil. Plaintiffs were forced to close the restaurant. A claim was tendered for damage and repair, loss of business income, and other insured losses. Dongbu denied coverage.

    Plaintiffs sued for breach of contract and bad faith. Dongbu moved to dismiss Plaintiffs Sonnie and Eric Tu because they failed to state claims for either breach of contract or breach of the covenant of good faith and fair dealing. The motion was granted.

    Sonnie and Eric Tu were not parties to the policy, so there was no contract between them and Dongbu. Therefore, these Plaintiffs did not have a breach of contract claim.

    The duty of good faith and fair dealing arose from and existed solely because of the contractual relationship between the parties. Because there was no contract, the covenant of good faith and fair dealing did not apply. 

Coverage for Cyber Attack

    The federal district court determined there was coverage for losses sustained by the insured due to a cyber attack. Medidata Solutions, Inc. v. Federal Ins. Co., 2017 U.S. Dist. LEXIS 122210 (S.D. N.Y. July 21, 2017). 

    Medidata provided cloud-based services to scientists conducting research in clinical trials. Medidata email addresses consisted of an employee's first initial and last name followed by the domain name "mdsol.com." Email messages sent to Medidata employees were routed through Google computer servers. Google systems processed and stored the email messages. During processing, Google compared an incoming email address with Medidata employee profiles in order to find a match. If a match was found, Gmail displayed the sender's full name, email address, and picture in the "From" field of the message. After processing, the emails were displayed in the Medidata employee's email account. 

    In 2014, Medidata notified its finance department of the company's short-term business plans which included a possible acquisition. Medidata instructed the finance personnel to assist with the anticipated significant transactions on an urgent basis. Alicia Evans was responsible for processing all of Medidata's travel and entertainment expenses. On September 16, 2014, Evans received an email purportedly sent from Medidata's president stating that Medidata was close to finalizing an acquisition, and that an attorney named Michael Meyer would contact Evans.

    On that same day, Evans received a phone call from Meyer, who demanded that Evans process a wire transfer for him. Evan's explained that she needed an email from Medidata's president requesting the wire transfer. Evans then received an email purportedly from Medidata's president approving the wire transfer. The email contained the president's email address in the "from" field and a picture next to his name. Evans then processed a wire transfer of $4,770,226.00 to a bank account provided by Meyer. 

    When Meyer requested a second wire transfer two days later, Evans sought approval from the president. Medidata's president said he had not requested the wire transfer. Medidata then realized it had been defrauded. An investigation revealed that an unknown actor altered the emails that were sent to Evans to appear as though they were sent by the Medidata president.

    Medidata had a $5,000,000 insurance policy with Federal called "Federal Executive Protection." The policy contained a "Crime Coverage Section" addressing loss caused by various criminal acts, including Forgery Coverage Insuring, Computer Fraud Coverage, and Funds Transfer Fraud Coverage. Federal denied Medidata's claim for the loss. Medidata sued and the parties filed cross-motions for summary judgment.

    The court found, as a matter of law, that the unambiguous language of the Computer Fraud clause provided coverage for the theft from Medidata. Under the policy, a computer violation occurred upon the "fraudulent" (a) entry of Data into or detection of Data from a Computer System or (b) change to Data elements or program logic of a Computer System, which is kept in machine readable format."

    The fraud had occurred by way of email spoofing. The thief constructed messages in Internet Message Format (IMF) which was like a physical letter containing a return address. The IMF message was transmitted to Gmail in an electronic envelope called a Simple Mail Transfer Protocol (SMTP). Much like a physical envelope, the SMTP Envelope contained a recipient and a return address. To mask the true origin of the spoofed emails, the thief embedded a computer code. The code caused the SMTP Envelope and the IMF Letter to display different email addresses in the "From" field. The spoofed emails showed the thief's true email address in the SMTP "From" field, and Medidata's president's email address in the IMF "From" field. When Gmail received the spoofed emails, the system compared the address in the IMF "From" field with a list of contacts and populated Medidata's president's name and picture. The recipients of the Gmail messages only saw the information in the IMF "from" field. Medidata demonstrated that a thief fraudulently entered and changed data in its computer system. The losses were a direct cause of a computer violation. 

    There was also coverage under the policy's Funds Transfer Fraud provision, which was defined as "fraudulent electronic . . . instructions . . . purportedly issued by an Organization, and issued to a financial institution directing such institution to transfer, pay or deliver Money or Securities from any account maintained by such Organization without such Organization's knowledge or consent." The fact that the accounts payable employee willingly pressed the send button on the bank transfer did not transform the bank wire into a valid transaction. Instead, the validity of the wire transfer depended upon several high level employees' knowledge and consent which was only obtained by trick. 

    Finally, the theft did not trigger coverage under the Forgery clause because the policy required a "direct loss resulting from Forgery or alteration of a Financial instrument committed by a Third Party." Even if the emails contained a forgery, the absence of a financial instrument proved fatal to Medidata's claim for coverage under this provision. 

    Nevertheless, Medidata's motion for summary judgment was granted while Federal's motion for summary judgment was denied. 

 

 

Collapse of Improperly Built Deck Not An Occurrence

    The court found that the insured's faulty construction of an outside deck did not arise from an occurrence. Employers Mut. Cas. Co. v. West, 2017 U.S. Dist. LEXIS 113951 (N.D. Miss. July 21, 2017). 

    D.L. Action Construction Company (DLA) constructed multifamily dwellings. They were sued by the homeowners after a deck collapsed at one of the dwellings. Also sued was the subcontractor, Littrell Construction, who installed the deck. The homeowners alleged that Littrell knew that college students would be residing in the units and that the decks would be heavily used. The decks were attached to the building structure using only nails instead of bolts.

    On November 22, 2014, the deck collapsed, causing everyone standing on the deck to fall onto cars parked below. Regarding injuries sustained in the fall, the homeowners claimed against Littrell for negligence, breach of warranty, misrepresentation, fraud, fraudulent concealment, and wanton, gross, and/or intentional conduct. DLA cross-claimed against Littrell, seeking indemnification.

    Employers Mutual denied coverage because there was no occurrence. The court granted summary judgment to Employers Mutual. In his deposition, Jason Littrell testified that the method he used to fasten the deck, using nails secured into oriented strand board, would not be an appropriate method of fastening a deck used for live loads. Further, he testified that he knew people would use the deck. 

    Bodily injury or property damage, expected or intended from the standpoint of the insured, could not be the result of an accident. The result of improperly constructing the deck was the failure and collapse of the deck, which were will within Littrell's foresight and anticipation. Consequently, there was no occurrence and Employers Mutual had no duty to defend or indemnity. 

    

 

Rescission of Policy for Mispresentation in Application Reversed

    The California Court of Appeal reversed the trial court's issuance of summary judgment to the insurer, finding that the insured did not make misrepresentations when applying for a policy to cover rental property. Duarte v. Pacific Spec. Ins. Co., 13 Cal. App. 5th 45 (2017).

    Duarte rented his house to Jennifer Pleasants. Duarte gave her a 45-day notice to quit in February 2012, but she did not leave. Two months later, Duarte applied for landlord-tenant coverage with Pacific. The application was submitted electronically and Pacific issued a policy to Durate the same day. 

    In June 2012, Pleasants filed a lawsuit against Duarte, alleging ten causes of action arising from habitability defects which began in 2009. The suit claimed Pleasants had notified Duarte about the defects, she had suffered emotional distress and physical injury, and over paid rent, and had out-of-pocket expenses.

    In August 2012, Duarte tendered the defense of the suit to Pacific, which denied coverage. Duarte then sued Pacific for a declaratory judgment that Pacific must defend Duarte. Both parties filed motions for summary judgment. Pacific argued it had no obligations under the policy because Duarte had made misrepresentations when applying for the policy by not notifying Pacific of the prior dispute with Pleasants and not informing Pacific that Pleasants ran a business out of the home. The trial court granted Pacific's motion and ruled that Pacific was entitled to rescind the policy because Duarte made material misrepresentations in applying for the policy. 

    The court of appeal reversed. In his application Duarte answered "no" to question 4, 'has damage remained unrepaired from previous claim and/or pending claims, and/or known or potential (a) defects, (b) claim disputes, (c) property disputes and/or (d) lawsuits?" Duarte also answered "no" to question 9, "is there any type of business conducted on the premises"?

    The court found question 4 utterly ambiguous. The syntax of question 4 was garbled. The only verb was contained in the phrase "has damage remained unrepaired?" The subject of the verb was "damage." Therefore, the question was reasonably construed as simply asking whether damage has "remained unrepaired" from various past events, such as a "previous claim" or a property dispute or lawsuit. In other words, a logical way to read the inconsistently worded sentence was to tie everything back to the existence of unrepaired damage. 

    The court agreed with Duarte that the question was reasonably interpreted as asking whether the property had unrepaired damage associated in some with previous or pending claims, known or potential defects, known or potential claim disputes, known or potential property disputes, or known or potential lawsuits. Duarte understood the term "claim" to mean insurance claim. When he submitted the application, there was no unrepaired damage at the property from previous insurance claims.

    Regarding business being conducted on the property, Pleasants' father worked on motorcycles and occasionally sold refurbished motorcycles. Duarte thought the question referred to regular and ongoing business activity. Since there was no regular and ongoing business activity at the rental house when he applied for insurance, Pacific had not met its burden. 

    

Seventh Circuit Confirms Additional Insured's Coverage for Alleged Construction Defects

    The Seventh Circuit held that the underlying complaint alleged an occurrence by asserting that the painting subcontractor was negligent in causing damage to the building. Westfield Ins. Co. v. Nat'l Decorating Serv., Inc., 2017 U.S. App. LEXIS 12516 (7th Cir. July 13, 2017). 

    McHugh Construction, the general contractor for construction of a 24 story condominium building in Chicago, retained National Decorating Service, Inc. as a subcontractor to perform all of the painting work. This meant National Decorating would paint the exterior of the building with a protective coating that was a waterproof sealant. 

    After completion, the building's board of managers sued McHugh, National Decorating, and others for damages resulting from faulty workmanship. The third amended complaint alleged: (1)  significant cracking of the exterior concrete walls, interior walls, and ceilings; (2) significant leakage through the exterior concrete walls, balconies, and windows; (3) defects to the common elements of the building; and (4) damage to the interior ceilings, floors, interior painting, drywall, and furniture in the units. 

    Westfield was National Decorating's insurer. McHugh was an additional insured. The policy defined "occurrence" as an "accident, including continuous or repeated exposure to substantially the same general harmful conditions." 

    Both National Decorating and McHugh tendered to Westfield, who denied the tender. Westfield filed an action for declaratory judgment to determine its coverage obligations. The parties filed cross motions for summary judgment. The district court denied Westfield's motion and granted the defendants' motions. Therefore, it was determined Westfield had a duty to defend.

    On appeal, Westfield argued National Decorating's failure to apply a sufficiently thick coat of paint to the exterior of the building did not constitute an "accident" under the policy. Second, Westfield argued that because the damage was to the building itself, the damage was exempted from the policy's coverage.

    The Seventh Circuit disagreed that National Decorating's actions could not constitute an "occurrence" as a matter of law. Under Illinois law, negligently performed work or defective work could give rise to an "occurrence" under a CGL policy. This was especially true where, as here, the policy defined an "occurrence" to include not only an accident, but also "continuous or repeated exposure to conditions." Here, the underling complaint alleged that National Decorating was negligent. This was sufficient to satisfy the policy's occurrence requirement when determining whether there was a duty to defend.

    Further, damage to something other than the project itself did constitute an "occurrence." Here, the parties disputed what constituted the scope of the project. Westfield contended that the project was the entire building and because the damage alleged was to that building, it was excluded from the policy's scope. The defendants argued that the scope of the project was National Decorating, the Named Insured's, work. The court agreed with the defendants.

    National Decorating was responsible for painting the exterior of the building. The underlying complaint sought to recover for damages incurred to other portions of the building, not just the exterior, which was allegedly coated with an insufficient amount of paint. It would be illogical to conclude that the scope of the project for which National Decorating contracted was the entire building. 

    Westfield also argued that from a public policy perspective, finding that there was a duty to defend under a subcontractor's CGL policy would obviate the need for a general contractor or developer to carry its own coverage. The court was not impressed with this argument, noting that coverage would only be available for damage caused to the building as a result of an "occurrence" caused by the Named Insured's work. Therefore, the policy required a clear connection between the damage and the subcontractor's work. 

    Consequently, the district court's grant of summary judgment for the defendants was affirmed.

Expert's Opinions On Causation Leads Way To Summary Judgment For Insurer

    Although the insured claimed damages to her home was caused by vibrations from nearby construction, the court held she failed to overcome the insurer's expert's opinion that the damage resulted from excluded causes such as wear and tear, cracking and settling. King v. Am Family Ins., 2017 Ohio App. LEXIS 2565 (Ohio Ct. App. June 26, 2017).

    The insured had a homeowners policy with American Family. The insured sued American Family, alleging that damage to her home was caused by vibrations caused by construction equipment at a nearby high school. The damage included cracks, leaks and mold. 

    American Family moved for summary judgment, attaching an affidavit from a structural engineering consulting firm. The report outlined alleged damages, including cracks throughout the house, and opined that the areas of concern had been present and progressing for years. Some damaged areas were discolored and patched. Accordingly, the report concluded that the damages were not caused by vibrations from construction. 

    In her deposition, the insured admitted that some cracks in her home existed before the school project began but testified that other damage occurred during construction. Her opposition to the summary judgment motion included affidavits from neighbors who also felt the vibrations in their homes. The neighbors further stated that some of the damage to the insured's home had not been there before the school project commenced.

    American Family's motion for summary judgment was granted. The court found that the insured did not rebut the expert opinion that the damages were not caused by the vibrations/construction and that the insured's lay witnesses did not opine as to the cause of the damages.

    The appellate court affirmed. The insured failed to demonstrate that the cause of the damages she alleged was vibration. American Family's expert, on the other hand, presented evidence that provided detailed descriptions of the likely cause of each item of damage. Testimony that some cracks appeared during the time of the vibration/construction did not refute these conclusions. Under the facts of this case, the expert report supported a conclusion that the terms of the policy excluded coverage, especially given that expert testimony clarified the often complex causes of structural damage.

Ninth Circuit Confirms $14 Million Award for Bad Faith

    The Ninth Circuit affirmed the jury’s award of $14 million in damages after finding Allstate was in bad faith in refusing to settle the matter.  Madrigal v. Allstate Indem Co., 2017 U.S. App. LEXIS 10643 (9^th Cir. June 15, 2017).

    Madrigal was injured in an auto accident with Tang, Allstate’s Insured. Allstate refused Madrigal’s settlement offer although it was within policy limits.  Madrigal and Tang eventually sued Allstate for bad faith.  The jury determined Allstate had refused to settle in bad faith.  Allstate moved for judgment as a matter of law (JMOL) and a new trial.  Both motions were denied by the district court and Allstate appealed.

   Allstate also argued it was entitled to JMOL on the bad faith claim because it tendered the $100,000 policy limits twice to settle Madrigal’s demand in a timely fashion.  Whether an insurer acted unreasonably and thus in a bad faith, in rejecting a settlement demand, however, was a question of fact for the jury.  Here, the jury had substantial evidence from which it could reasonably find that Allstate’s initial response, a rejection and a counter-offer, was unreasonable because, by that date, Allstate’s claims adjuster had: (1) found a previously-unidentified witness who contradicted Mr. Tang’s version of events and placed responsibility for the accident on Mr. Tang; (2) received medical bills and information about Madrigal’s uninsured status that led the adjuster to believe Tang’s exposure could be well above the policy limits; and (3) declined to discuss or clarify potential compliance issues, even in writing as the demand letter allowed, with Madrigal’s attorney.

  Therefore, it was reasonable for the jury to conclude that when Allstate responded to Madrigal’s offer with a rejection and counter-offer, Allstate breached the implied covenant of good faith and fair dealing by refusing an offered settlement where the most reasonable manner of disposing of the claim was by accepting the settlement.

   Lastly, Allstate challenged the special verdict form which asked whether: (1) Madrigal made a reasonable settlement demand for an amount within policy limits; and (2) Allstate’s failure to accept Madrigal’s settlement demand was unreasonable.  These were the elements of bad faith refusal to settle liability under California law.  Therefore, the special verdict form, coupled with the jury instructions, fully and fairly presented to the jury the issues it was called upon to decide regarding Allstate’s bad faith liability.