Insurance Law Hawaii

Insurer's Judgment on the Pleadings Based Upon Expected Injury Exclusion Reversed

    The appellate court reversed the trial court's granting of a judgment on the pleadings based upon the expected injury exclusion in a homeowner's policy. Allstate Indemn. Co. v. Contreras, 2018 Ill. App. LEXIS 170964 (Ill. Ct. App. July 20, 2018).

    Alejandra Contreras owned Jasmine's Day Care. Her husband, Adan Contreras, was not an employee of the Day Care. Alejandra and Adan had a homeowner's policy which provided day care liability coverage through an endorsement. 

    Jane Doe's children, Janie Doe and Janet Doe, were enrolled in the Day Care. Jane sued the Day Care and Alejandra, alleging Adan had abused Janie and Janet. Jane's complaint alleged that as the owner and operator of the Day Care, Alejandra was obligated to supervise Janie and Janet while they were under her care. The complaint alleged Alejandra was negligent in failing to provide adequate supervision and allowing her husband to be alone with Janie and Janet. 

    Allstate filed a complaint for declaratory judgment against Alejandra, Adan, the Day Care, and Jane. The policy excluded "bodily injury intended by, or which may reasonably be expected to result from intentional or criminal acts or omissions of any insured person." Allstate argued that the injuries that Janie and Janet suffered did not arise out of an accident but were instead the reasonably expected result of the repeated sexual abuse by Adan.

    Allstate filed a motion for judgment on the pleadings. The court agreed there was no duty to defend based upon the "expected injury" exclusion and granted the motion.

    On appeal, Jane argued that she did not name Adan as a defendant in the underlying action. It was necessary to distinguish between Adan's intentional acts and the independent negligent acts of the Day Care and Alejandra. The court considered whether Adan's intent to injury Janie and Janet precluded coverage for his co-insureds, the Day Care and Alejandra, where they were allegedly negligent for failing to prevent the sexual abuse. 

    The court decided that under Illinois law, it could not simply impute Adan's intentional conduct to the Day Care and Alejandra for purposes of the "expected injury" exclusion. Allstate argued that Jane would be required to plead and prove in the underlying case more specific facts, including Adan's intent to harm her daughters, and this would preclude coverage for the Day Care and Alejandra. 

    But the absence of any specific factual allegations in the underlying complaint that would trigger the "expected injury" exclusion with respect to the Day Care or Alejandra meant that Allstate did not meet its burden of demonstrating that it owed no duty to defend. Accordingly, Allstate was not entitled to judgment on the pleadings.

Verdict In Favor Of Insured Homeowner Reversed For Improper Jury Instructions

    The appellate court reversed the jury verdict in favor of the homeowners based upon improper instructions purporting to impose a duty to adjust the claim and how to construe a contract. Citizens Prop. Ins. Corp. v Mendoza, 2018 Fla. App. LEXIS 9497 (Fla. Ct. App. July 5, 2018).

    The insureds incurred water damage to their home caused by a water heater leak. After a claim was filed, the insurer sent an adjuster to investigate the claim. The insurer denied the claim due to an exclusion for constant or repeated seepage or leakage.

    At trial, the insurer offered testimony that the leak was a continued and repeated seepage of water over a long period of time, which was excluded under the policy, and not a sudden and accidental discharge of water, which would have been covered. 

    Over the insurer's objection, the trial judge instructed the jury regarding the insurer's "duty to adjust" the claim. This included the following:

•     Every adjuster shall adjust or investigate every claim, damage or loss.
•     Ethical rules provided that an adjuster shall not approach investigations, adjustments, and settlements in a manner prejudicial to the insured.
•     Ethical rules also required that the adjuster to make truthful and unbiased reports of the facts after making a complete investigation.

    The insureds complained about the way the adjuster denied the claim, asserting that it was a violation of the ethical responsibilities. The verdict form posed this question to the jury: "Did [the insurer] properly exclude the claim from coverage under the policy?" The jury answered no and awarded $22,000 in damages.

    The central fact issue for the jury was whether the insureds' loss fell under the repeated seepage or leakage exclusion of the policy. If so, there was no coverage. If not, there was coverage. The jury instructions and the insureds' arguments at trial meant that the jury could have decided the case solely because the adjuster did not "do a good job" regardless of whether the incident fell within the policy exclusion. The instructions focused on whether the adjuster "properly investigated" or "properly adjusted" the claim and addressed a code of ethics. While such considerations may be appropriate in a bad faith case, they were inappropriate in a simple breach of contract action.

    Accordingly, the case was reversed and remanded for a new trial on the breach of contract claim. 

Implied Contract Survives Motion to Dismiss in Subrogation Action

    The defendant's motion to dismiss an implied contract claim in a subrogation action was denied. Cumis Ins. Soc'y v. Count, 2018 U.S. Dist. LEXIS 118380 (D. Haw. July 16, 2018).

    Cumis issued a fidelity bond to Kauai Government Employee's Federal Credit Union (KGE). The bond provided coverage of losses incurred as a result of fraudulent acts by specified individuals. A Senior Loan Manager employed by KGE, Vallatini, allegedly committed fraudulent acts between 2008 and 2014 in approving loans for various members of the Credit Union. Cumis had to make payments under the fidelity bond. According to Cumis' complaint, Vallatini misrepresented that various members were qualified borrowers when they were not. 

    Vallatini moved to dismiss Count III of the complaint, breach of implied contract. He argued Count III failed to state a claim for breach of implied contract. Cumis argued that each of the misrepresentations made by Vallatini to the Credit Union constituted a failure to perform under the implied contract. 

    The Federal District Court for the District of Hawaii found that Cumis adequately stated a claim for breach of an implied contract. Vallatini had an implied obligation, as a condition of his continued employment with KGE, that he would comply with company policy regarding approval of loans to borrowers and selling repossessed vehicles to the highest bidder. KGE performed under the implied-in-fact contract, while Vallatini, allegedly, did not. Therefore, Count III sufficiently stated a breach of implied contract claim. 

    Vallatini also argued that Cumis' implied-in-fact contract allegations were insufficient in the at-will employment context because the complaint did not allege any qualifying statements of actions by either party that would modify the relationship between KGE and Vallatini from an employment-at-will relationship to something more. The court disagreed. Vallatini's employment relationship with KGE was subject to his implied promise to comply with company policy regarding approval of loans to borrowers and selling repossessed vehicles to the highest bidder. 

    Vallatini alternatively argued that even if an implied contract existed wherein he agreed not to misrepresent information to KGE, the remedy for any alleged breach of an implied employment contract was termination. He provided no legal authority for this argument, however. Instead, the non-breaching party would seek to recover its compensatory damages for actual losses sustained as a result of Vallatini's alleged breach. The claimed losses sustained by Cumis and its insured, KGE, were reasonably foreseeable damages that flowed from the type of breach attributed to Vallatini. 

Denial of Claim for Computer Fraud Overturned by Sixth Circuit

    The Sixth Circuit, overturning the district court's award of summary judgment to the insurer, reversed and remanded denial of the claim for computer fraud. Am. Tooling Center, Inc. v. Travelers Cas. and Sur. Co of Am., 895 F.3d 455 (6th Cir. 2018).

    American Tooling Center (ATC) produced stamping dies for the automotive industry. The company outsourced some of its manufacturing orders. Shanghai YiFeng Automotive Die Manufacture Co., Ltd. (YiFeng) was one of ATC's vendors, located in China. To be paid, YiFeng emailed ATC invoices. ATC then went through a multi-step process before wiring money to YiFeng. 

    To initiate a wire transfer, ATC's Treasurer, Gary Gizinski, signed into a banking portal using software on his computer. He manually entered the payee's name, banking information, and the amount to be wired. ATC's Assistant Comptroller then logged into the banking portal using his computer to approve the payment. 

    On March 18, 2015, after following these steps, Gizinski emailed YiFeng requesting it provide ATC all outstanding invoices. The email was intercepted by an unidentified third party. This third party then began a correspondence with Gizinski about the outstanding invoices. On March 27, 2015, the impersonator emailed Gizinski and claimed that, due to an audit, ATC should wire its payments to a different account. ATC had no process for verifying the changed information. Consequently, Gizinski wired the money to the new account. Two more fraudulent transfers were made. The total amount wired to the impostor was $834,000. When the real YiFeng demanded payment, ATC realized it had wired the money to an imposter. ATC paid YiFeng 50% of the outstanding debt, and agreed that the remaining 50% would be contingent on ATC's insurance claim.

    ATC sought recovery for its loss from Travelers, arguing that it fell within the "Computer Fraud" provision of its Wrap business insurance policy. Travelers denied the claim and ATC sued. The district court granted summary judgment to Travelers.

    The policy promised payment as follows:

      Computer Fraud

The Company will pay the Insured for direct loss of, or direct loss from damage to, Money, Securities and Other Property directly caused by Computer Fraud.

Travelers argued there was no "direct loss;" this was not a case of "Computer Fraud;" and the loss was not "directly caused by Computer Fraud." 

    The Sixth Circuit disagreed. Under Michigan law, a "direct" loss was one resulting from an "immediate or proximate cause, as distinct from remote or incidental causes."  ATC immediately lost is money when it transferred the money to the impersonator; there was no intervening event. 

    "Computer Fraud" was also involved. The impersonator sent ATC fraudulent emails using a computer and the emails fraudulently caused ATC to transfer the money to the impersonator. The policy did not require, as Travelers argued, that the fraud cause any computer to do anything. 

    Finally, ATC met its burden in showing that its direct loss was directly caused by the computer fraud. ATC suffered its loss immediately after the transfer, which marked the end of the "Computer Fraud" as defined in the policy.

    The exclusions advanced by Travelers did not apply. Exclusion R provided,

This Crime Policy will not apply to loss resulting directly or indirectly from the giving or surrendering of Money, Securities or Other Property in any exchange or purchase, whether or not fraudulent, with any other party not in collusion with an Employee.

 ATC correctly pointed out that it did not transfer the money to the impersonator in exchange for anything from the impersonator, and therefore the fraudulent transfer did not fall within this exclusion. 

    Exclusion G stated,

This Crime Policy will not apply to loss or damages resulting directly or indirectly from the input of Electronic Data by a natural person having the authority to enter the Insured's Computer System.

Here, Gizinski's manual entry of the impostor's banking details was not "Electronic Data." The fraudulent bank-routing instructions did not constitute "Electronic Data" as defined by Travelers' policy. 

Insurance Hurricane Preparedness for Commercial Businesses

    It has been an active hurricane season thus far for Hawaii, and there are still three months left in the season. To supplement our prior tips for homeowners in preparing to submit insurance claims after a storm [here], below are some additional tips for businesses.

• Have your insurance policy and other important papers (lease, mortgage, deeds, contracts, etc.) stored so they are accessible after the storm passes. Be familiar with what coverage your policy may provide for storm-related damage.
• Keep records of insured assets.
• Also, have documentation of pre-storm business income in the event a claim for business interruption coverage is pursued.
• Track post-storm costs incurred in protecting property and assets, and for making any repairs. 

    Other considerations:

• Your commercial property policy will likely cover wind damage, but not flood damage. Coverage for flood is typically provided under a separate policy. So it may be important when submitting a claim to distinguish wind damage from flood damage. 
• Business interruption coverage may cover more than the costs of having to close your business after a storm. There may be expenses that must be paid even if the business is closed, such as rent. Such expenses may be covered.
• Contingent Business Interruption Coverage covers a business that is not directly harmed by a storm, but suffers loss of a business relationship due to a storm. For example, the closing of a port or airport due to a storm may affect the profits of the shipping company or airlines.
• Ingress and Egress Coverage may be important if roads are closed or mass transportation is not operational, cutting off access to the business.

    Your policy may cover additional negative impacts created by a storm. A careful review and full understanding of the policy is important is order to maximize the recovery of insurance proceeds.

    

Insured's Jury Verdict Reversed After Improper Trial Tactics

    The appellate court reversed a jury verdict for the insured due to improper trial tactics by his attorney. Homeowners Choice Property and Cas. Ins. Co., Inc. v. Kuwas, 2018 Fla. Ct. App. LEXIS 9500 (Fla. Ct. App. July 5, 2018).

    The insured sued Homeowners Choice (HCI) alleging breach of contract due to a denial of coverage for property damage as a result of water loss. During the trial, HCI raised objections to various questions posed by the insured's counsel during the testimony of HCI's litigation manager, as well as various closing arguments made by the insured. The jury entered a verdict for the insured for a substantial sum. HCI appealed.

    HCI argued that a new trial was warranted because the insured presented his case in such a way as to improperly imply HCI's bad faith in the handling of the claim. The insured informed the jury that HCI was "playing the odds" in deciding to deny a claim "in the hope that the party who is seeking to be paid under a policy will not sue them." There were multiple instances during the examination of the litigation manager in which the insured use the phrase "playing the odd's" or some variation in reference to HCI. Reference to playing the odds was also made in the closing argument. 

    The court agreed with HCI that implications of bad faith should not form a basis to determine liability in a first party insurance coverage action. Specifically, the criticism of HCI's claims handling practices as a business practice, which was not based on matters in evidence, was improper. 

    The insured also made improper statements criticizing HCI's defenses. For example, the insured commented that the parties were "fighting like the dickens" while participating in depositions and litigating motions. These comments implied that the jury should punish HCI for defending itself. 

    Therefore, a new trial was warranted because the insured's comments in closing argument improperly denigrated HCI's defenses and were so highly prejudicial and inflammatory that HCI was denied a fair trial. 

Spoofing Attack Covered Under Policy's Computer Fraud Provision

    The Second Circuit affirmed the district court's finding of coverage for a cyber attack. Medidata Solutions Inc. v. Federal Ins. Co., 2018 U.S. App LEXIS 18376 (2nd Cir. July 6, 2018). The district court's decision is summarized in a prior post here. 

    Medidata sued Federal when coverage was denied for an email "spoofing" attack. Medidata contended the attack was covered by a computer fraud provision in its policy. The policy covered losses from any "entry of Data into" or "change to Data elements or program logic" of a computer system. Federal argued that the spoofing attack was not covered, because the policy instead applied to only hacking-type intrusions. 

    The Second Circuit agreed with the district court that the plain language of the policy covered the losses. While Medidata conceded that no hacking occurred, the criminals nonetheless crafted a computer-based attack that manipulated Medidata's email system. The spoofing code enabled the criminals to send messages that inaccurately appeared to come from a high-ranking member of Medidata's organization. The attack represented a fraudulent entry of data into the computer system, as the spoofing code was introduced into the email system. The attack also made a change to a data element, as the email system's appearance was altered by the spoofing code to misleadingly indicate the sender. Therefore, Medidata's losses were covered by the terms of the computer fraud provision. 

    Federal also argued that Medidata did not sustain a "direct loss" due to the spoofing attack. New York courts equated the phrase "direct loss" to proximate cause. The spoofing attack here was the proximate cause of Medidata's losses. The chain of events was initiated by the spoofed emails, and unfolded rapidly following their receipt. While the Medidata employees themselves had to take action to effectuate the transfer, their actions were not sufficient to sever the causal relationship between the spoofing attack and the losses incurred. 

   

Shooting Into Lake Constitutes Gross Negligence Under Indemnity Provision

    In deciding which tower of insurance was triggered, the Eighth Circuit had to determine whether the action of one insured's employee in shooting into the direction of a lake and hitting a young girl constituted gross negligence. Federal Ins. Co. v. Great Am. Ins. Co., 893 F. 3d 1098 (8th Cir. 2018).

    Whispering Lake Limited Partnership owned an apartment complex. Yarco Company, Inc. managed apartment complexes and contracted to do so for Whispering Lake. The contract between the two had cross indemnity provisions. Except for fraud, willful misconduct or gross negligence by Yarco, Whispering Lake was to hold harmless and defend Yarco against any claim against Yarco. On the other hand, Yarco was to hold harmless and defend Whispering Lake for any claim arising out of any fraud, gross negligence, or willful misconduct on the part of Yarco or any of its employees. 

    Whispering Lake and Yarco each acquired insurance policies covering commercial liability. Whispering Lake had a primary policy with Indian Harbor Insurance Company incurring $1 million in limits and an umbrella policy from Great American Insurance Company with $5 million in coverage. Yarco had a primary policy with Zurich with $1 million in coverage and an umbrella policy with Federal Insurance Company for $25 million in limits. 

    On Independence Day, Yarco's employee, Aaron Sullivan, worked at the apartment complex's pool as a "pool monitor." Sullivan had a handgun and celebrated Independence Day by shooting the hand gun. He also allowed others to shot the gun. He instructed others to shoot the gun away from the poll and in the general direction of a nearby lake. One of the bullets hit a young girl across the lake in the neck, shattering a cervical vertebra and damaging her spinal cord. The girl died the next day. 

    Sullivan was charged and pleaded guilty to Involuntary Manslaughter. A wrongful death suit was filed against Sullivan and Yarco. The insurers stepped in based upon their obligations to defend. The suit was settled and each of the insurers paid a part of the settlement, with each reserving rights against the others to litigate its respective obligations for the settlement.     

    Federal filed suit seeking a declaratory judgment determining the parties' obligations and any priority of coverage. The District Court granted motions for summary judgment in favor of Federal and Zurich. The court held that Great American was obligated to reimburse Federal and Zurich for amounts they contributed to the settlement because Sullivan was not grossly negligent. 

    On appeal, Great American argued that Sullivan's conduct qualified as "gross negligence" and that the indemnity clause exempted Whispering Lake from liability for claims arising out of gross negligence. Therefore, Great American argued, it did not have a duty to indemnify Zurich and Federal. 

    Neither of the indemnity clauses defined "gross negligence." Blacks Law Dictionary defined "criminal negligence" as "gross negligence so extreme that it is punishable as a crime." This definition described the incident here. Firing a handgun and allowing others to fire the gun, and encouraging them to shoot in the direction of the lake in a populated, residential area was grossly negligent. Sullivan's conviction, demonstrating "criminal negligence," further supported the court's conclusion that the conduct qualified as "gross negligence," as understood under the indemnity clause. Therefore, Whispering Lake did not have an obligation under the indemnity clause to indemnify Yarco or Sullivan for the settlement. 

    Still undecided was which entity was liable for the settlement. The District Court did not discuss whether the priority of coverage was governed by the insurance policies or the indemnity clause. Therefore, the case was remanded to the District Court to determine whether the insurers' priority of coverage was determined by the insurance policies terms or by the indemnity clause. 

    

Insurance Hurricane Preparedness

    With Hurricane Lane approaching Hawaii, here are some tips for being prepared to submit claims to your insurer or any loss caused by the storm.

•     Collect important papers, including your homeowners insurance policy so they are available after the storm.

•     Keep contact information for your insurer and agent available for use after the storm.

•     Inventory household items and save any receipts you may have for expensive purchases to assist in making any claim.

•     Photograph the interior and exterior of your home. This will assist in demonstrating the condition of the home before and after the storm.

•     Keep all receipts for any repairs that are made post-storm to support your claim.

•     Note: A homeowners or commercial property policy does not cover damage caused by flood. The federal government insures flood damage through policies that are administered by     private insurers. Wind damage caused by hurricane is covered if endorsed.

•     Your insurance adjuster may have recommendations for professional restoration and repairs.

    Most important, stay safe Hawaii.