Insurance Law Hawaii

Insurer Must Defend Subcontractor For Claims Alleging Faulty Workmanship

    Interpreting Florida law, the federal district court found that the insurer must defend the subcontractor for claims based upon faulty workmanship. S. Owners Ins. Co. v. Gallo Bldg. Servs., 2018 U.S. Dist. LEXIS 212961 (M.D. Fla. Dec. 18, 2018).

    Gallo Building Services entered a subcontract with KB Homes, developer, related to the construction of a condominium project. All of the work was subcontracted by KB Homes to subcontractors, suppliers and material men. After completion of the project, the Condominium Association found a number of alleged construction defects at the project. KB Homes notified the subcontractors and tendered its defense. The subcontractors rejected the tender. 

    KB Homes filed suit against Gallo and other subcontractors. Claims against Gallo included breach of contract, breach of express and implied warranty, negligence and indemnity. Specific allegations against Gallo included failing to install all necessary control joints, installing incorrect mid-wall flashing, installing stucco in direct contact with dissimilar materials, etc. 

    Southern Owners Insurance Company filed suit for declaratory judgment that it had no duty to defend or indemnify its insured, Gallo. Gallo was subsequently dissolved. A default judgment was entered against Gallo, but KB Homes moved to set the default judgment aside, which was granted. KB Homes then moved for summary judgment in favor of Gallo. 

    The court noted that under Florida law, there was no property damage if there was no damage beyond the faulty workmanship, unless the faulty workmanship damaged some otherwise nondefective component of the project. Here, the court found that the underlying complaint alleged physical injury to tangible property by claiming that, in addition to faulty workmanship, defects in Gallo's work caused damage to other building components, damage to other property, and property damage to the work of KB Homes and other subcontractors. 

    Nevertheless, Southern argued two exclusions barred coverage. The Your Work Exclusion excluded coverage for "property damage" to "[Gallo's] work arising out of it or any part of it and included in the 'products-completed operations hazard.'" The policy defined "your work" to included "work or operations performed by [Gallo] or on [Gallo's] behalf. The "products-completed operations hazard" meant Gallo's completed work. Southern argued that the alleged construction defects arouse out of Gallo's own work and the policy contained no subcontractor exception. Typically, a CGL policy included an exception to the Your Work Exclusion for work performed by the insured's subcontractor.

    Here, Gallo was a subcontractor responsible for a limited scope of work within the much larger general condominium project. The underlying complaint did not allege that Gallo's scope of work encompassed construction of the overall project. Rather, the underlying complaint alleged Gallo's limited scope of work. Further, the underlying complaint alleged that alleged defects "caused damage to other building components, damage to other property, loss of use, and required relocation of residents." Thus, damage beyond the scope of Gallo's work was alleged in the underlying complaint and the exclusion did not bar coverage.

    Southern also argued there was not duty to defend because the allegations in the underlying complaint fell within the Stucco Exclusion. This exclusion barred coverage for any suit for property damage which "is in any way related to or arising out of an exterior finishing system or exterior stucco application." KB Homes argued that Gallo performed multiple scopes of work unrelated to stucco or an exterior finishing system and the underlying complaint contained allegations entirely unrelated to the application of either exterior. Consequently, this exclusion did not apply, either.

    Finally, although Southern had a duty to defend, it was premature to determine whether there was a duty to indemnify because there had been no factual determination as to liability in the underlying case.

Insured May Recover Consequential Damages From Insurer’s Breach of Duty to Defend

   Answering a certified question, the Nevada Supreme Court determined that an insurer breaching its duty to defend may be liable for consequential damages caused to the insured. Century Sur. Co. c. Andrew, 2018 Nev. LEXIS 112 (Nev. Dec. 13, 2018). 

   Michael Vasquez struck a minor, causing significant brain injury. Vasquez used the truck for personal use as well as for his mobile auto detailing business, Blue Streak. Vasquez was covered by a personal auto policy issued by Progressive. The policy had a limit of $100,000. Blue Streak had a CGL policy with Century Surety Company with a policy limit of $1 million. 

    Century Surety conducted an investigation and determined that Vasquez was not driving in the course and scope of his employment at the time of the accident. Therefore, the accident was not covered under the CGL policy. Century Surety rejected Blue Streak's demand to settle the claim within the policy limits.

    The minor's parents sued Vasquez and Blue Streak, alleging that Vasquez was driving in the course and scope of his employment at the time of the accident. Century Surety refused to defend. Vasquez, Blue Streak and the minor's parents settled, agreeing that the minor's parents would not execute on any judgment against Vasquez and Blue Streak and Blue Streak would assign its rights against Century Surety. In addition, Progressive agreed to tender Vasquez's $100,000 policy limit. The minor's parents then secured a default judgment for $18,050,183 against Blue Streak and Vasquez. The factual findings stated that Vasquez negligently injued the minor and that he was working in the course and scope of his employment with Blue Streak at the time, making Blue Streak also liable. 

    The minor's parents then sued Century Surety in federal district court. The court found that Century Surety did not act in bad faith, but it did breach its duty to defend Blue Streak. The court determined that Blue Streak was entitled to recover consequential damages that exceeded the policy limit for Century Surety's breach of its duty to defend. Bad faith was not required to impose liability on the insurer in excess of the policy limit. 

    The federal district court then certified a question to the Nevada Supreme Court, asking whether the liability of an insurer that breaches its duty to defend, but has not acted in bad faith, is capped at the policy limit or whether the insurer is liable for all losses consequential to the insurer's breach.

    The Nevada Supreme Court noted that the majority view was that where there was no opportunity to compromise the claim and the only wrongful act of the insurer was the refusal to defend, the liability of the insurer was limited to the amount of the policy plus attorneys fees and costs.

    In contrast, the minority held that damages for a breach of the duty to defend were not automatically limited to the amount of the policy; instead, the damages awarded depended on the facts of each case. The objective was to have the insurer pay damages necessary to put the insured in the same position he would have been in had the insurer fulfilled the policy. Damages that may naturally flow from an insurer's breach included: (1) the amount of the judgment or settlement against the insured plus interest (even in excess of the policy limits); (2) costs and attorney fees incurred by the insured in defending the suit; and (3) any additional costs that the insured could show naturally resulted from the breach. 

    The court concluded that the minority view was the better approach. An insured could recover any damages consequential to the insurer's breach of its duty to defend. An insurer's liability for the breach of the duty to defend was not capped at the policy limits, even in the absence of bad faith.

"Occurrence" Viewed From Eyes of Insured

    The court determined that a young girl's suicide prompted by the insured's text messages constituted an occurrence under the homeowner's policy. State Farm Fire and Cas. Co. v. Motta, 2018 U.S. Dist. LEXIS 208472 (E.D. Pa. Dec. 11, 2018).

    High school student Zach Trimbur harassed and cyberbullied classmate Julia Morath. When the boy's parents, Walter Trimbur and Stephanie Moota, were informed, they assured school administrators they would supervise, discipline and control their son. Yet, the boy continued his conduct. The boy was suspended by the school, but still continued his cyberbullying after his suspension. Julia subsequently committed suicide.

    The Moraths sued Zach and his parents, alleging negligence, wrongful death, and survival. Stephanie Motta sought coverage under her homeowners policy with State Farm. State Farm defended under a reservation of rights.

    State Farm filed suit for a declaratory judgment that it had no duty to defend or indemnify the Trimbur boy in the underlying case. State Farm argued the suicide did not arise from an "occurrence" because the cyberbullying was non-accidental. The court determined there was an "occurrence" and State Farm had to provide a defense for Zach. 

    The underlying complaint alleged that Zach's actions were wanton and willful. State Farm argued that Zach intentionally cyberbullied and harassed Julia Morath, meaning there was no "accident" to trigger the policy. Zach countered by arguing that intentional acts can have unintended consequences, and Pennsylvania courts considered whether an insured could have reasonably foreseen the resulting injury. Julia Morath's death by suicide was an extraordinary intervening event unforeseeable to him. 

    The court noted that when properly focused on the entire occurrence, the fact that Julia Morath, not Zach Trimbur, inflicted the only alleged bodily injury was material. Further, the Moraths alleged a negligence theory against Zach. Though the underlying complaint used the words "harassment," "bulling," and "intentional," the Moraths alleged not a single intentional tort against Zach.

    Viewing these events from Zach's perspective, the court could not conclusively find death by suicide was foreseeable from his cyberbullying. From the boy's perspective, his classmate's death by suicide was an accident. Therefore, State Farm had a duty to defend.

Complaint Against Life Insurance Agent Survives Motion to Dismiss

    The plaintiff's suit against her agent for allegedly misleading her regarding certain investment strategies for proceeds of a life insurance policy and fees survived the agent's motion to dismiss. Waldemar v. Golden, 2018 U.S. Dist. LEXIS 204801 (M.D. Fla. Dec. 4, 2018).

    The facts were based upon the allegations in the complaint. Golden, the agent, sold a life insurance policy to plaintiff's husband. After her husband's death, Golden contacted plaintiff and offer his services to handle the investment of the $426,000 life insurance proceeds. Golden gained control of the life insurance proceeds and the money in plaintiff's IRA account. Golden had plaintiff sign an agreement without explaining his $395 per hour fee plus disbursements for any time spent on the matter. 

    When Golden took control of the accounts, the contained $426,319, plus interest from the insurance proceeds and $79,266.34 from the IRA. Plaintiff instructed that the funds were not to be traded until further notice. Nevertheless, Golden started trading the funds and reduced the account by almost $200,000. Golden had charged here $50,000 in fees up to that point. 

    Plaintiff sued and Golden moved to dismiss. Golden argued, among other things, that plaintiff's allegations that she gave oral instructions while the agreement required written instructions. 

    Plaintiff's claims for fraudulent inducement and common law fraud was sufficient. The agreement said Golden would act according to plaintiff's instructions and investment objections which was false in light of what transactions followed. Plaintiff sufficiently stated a claim for breach of fiduciary duty and for negligence. 

    The breach of contract claim was also adequately pled. While Golden was correct in noting that generally oral modifications to written agreements were unenforceable if proscribed by the written agreement, there were exceptions to the rule where, for example, there was detrimental reliance. The agreement obligated Golden to act in plaintiff's best interests, in a matter consistent with her investment objectives and instructions, in good faith, and compliance with applicable laws and regulations. Golden breached these obligations and plaintiff suffered damages as a result. 

Insured Proves Collapse, but Fails to Establish Any Value for Loss

    While the insured was able to carry his burden to show the collapse of a roof, he failed to establish damages under the policy. Iannucci v. Allstate Ins. Co., 2018 U.S. Dist. LEXIS 203687 (N.D. N.Y. Dec. 3, 2018). 

    In 2005, the insured purchased a parcel of land together with a three-story building constructed in 1870. No one resided in the building at the time of purchase or afterward. The building was not well maintained and all utilities were shut off. No work was done on the building between 2005 and 2014. Between 2011 and 2014, the Fire Department issued multiple zoning/ordinance violation notices ordering the insured to make various improvements to the building and property. A notice issued in October 2013 stated that "the roof on your house needs to be replaced." Before any work was done on the roof, however, it collapsed during a snowstorm on February 21, 2014. 

    The insured's all-risk policy excluded loss caused by such things as enforcement of building codes, failure to preserve property, wear and tear, aging, and faulty, inadequate or defective maintenance. The policy covered collapse, however, for "(a) the entire collapse of a covered building structure; (b) the entire collapse of part of a covered building structure; and (c) direct physical loss to covered property caused by (a) or (b)." The collapse had to be "sudden and accidental" and caused by, among other things, weight of snow which collected on a roof.

    On March 5, 2013, the fire department issued a violation notice directing the insured to demolish the building because the roof had collapsed. The City's file indicated that the roof's collapse had been caused by the accumulation of snow. The insured notified Allstate. A claims adjuster visited the property and photographed extensive damage to the building. Allstate denied the claim based upon an expert's report that the cause of the roof collapse was the lack of adequate and timely maintenance. Allstate cited several additional exclusions, including enforcement of building codes, failure to preserve property, wear and tear, and inadequate maintenance in denying the claim. 

    The insured sued and a bench trial was conducted. The court found that the collapse of the roof was sudden, but the "entire collapse" of the building was not. The insured therefore failed to prove that the loss of the building structure was within coverage under the policy, even if the collapse of the roof was covered. 

    The policy stated it did "not cover loss to covered property . . . when :(a) there are two or more causes of loss to the covered property; and (b) the predominant cause(s) of loss is (are) excluded" from coverage. Here, the evidence did not show that any cause was predominant to the weight of snow in directly bringing about the collapse of the roof. Instead, the preponderance of the evidence indicated that the most direct and obvious cause of the collapse of the roof was the weight of the snow. Allstate failed to prove that any of the other causes, such as inadequate maintenance - considered separately or together - predominated over the weight of the snow as the efficient cause of the collapse. 

    Therefore, the insured carried his burden to prove coverage for collapse of the roof. Nevertheless, the insured failed to establish the value of his loss under the policy. The insured failed to provide any evidence regarding the value of the roof or from which to infer its value, e.g., the market value of the building before and after the collapse or the cost of replacing the roof with one of like kind or quality. Allstate, on the other hand, established that the roof was worthless. Accordingly, the insured was not entitled to damages for the loss of the roof. 

Damon Key Team Argues Bad Faith Case Before Hawaii Supreme Court

    Our Damon Key team argued a bad faith case before the Hawaii Supreme Court today, Adams v. Hawaii Medical Service Association, SCWC-15-0000396.

    Pictured below: Joanna Zigler, Rafael del Castillo, Tred Eyerly and Robert Thomas.

Labor Costs Not Excluded From Depreciation When Determining Actual Cash Value

    The court dismissed a class action suit against State Farm which sought to establish that a calculation of actual cash value (ACV) in a homeowners policy could not depreciate the cost of labor. Cranfield v. State Farm Fire & Cas. Co., 2018 U.S. Dist. LEXIS 199618 (N.D. Ohio Nov. 26, 2018)

    Cranfield submitted a claim to State Farm after his home was damaged by a storm. An adjuster inspected the damage and an estimate for repair was sent to Cranfield. The total cost to repair the damage, the replacement cost value, was $4,044.86. State Farm calculated the depreciation amount to be $1,348.57. With the deductible, State Farm sent a net ACV of $842.29 to Cranfield. 

    The policy had a two-step loss settlement provision under which State Farm paid the ACV at the time of loss. Only the ACV was paid until the actual repair was made. Once the repair was completed, State Farm would pay the additional amount that the policy holder actually spent. Cranfield filed a class action suit, challenging the manner which State Farm calculated ACV. He argued that including labor along with materials in the depreciation calculation resulted in an ACV payment that was less than he was contractually entitled. 

    The court disagreed. As used in the policy, ACV was not ambiguous. Black's defined "ACV" as "replacement costs minus normal depreciation" or fair market value. There was nothing in the policy to indicate that the intent of the parties was to limit the definition of ACV to exclude labor from depreciation. The policy did not separately insure the labor and building materials, but the sum total of these parts. Accordingly, the term ACV was unambiguous and State Farm's inclusion of labor in depreciation did not breach the policy. 

Non-compliance With Endorsement Means No Indemnity Coverage

    The insured's failure to verify that subcontractors had CGL policies and to provide a contract stating that the subcontractors would indemnify the insured as required by the policy's endorsement meant there was no coverage for the insured. Cincinnati Spec. Underwriters Ins. Co. v. Milionis Constr., Inc., 2018 U.S. Dist. LEXIS 199658 (E.D. Wash. Nov. 26, 2018). 

    The homeowners filed suit against Milionis, the general contractor for construction of a home. The underlying suit alleged that Milionis breached the parties' agreement by leaving the home unfinished. Cincinnati defended Milionis under a reservation of rights.

    Cincinnati filed for a declaratory judgment while the underlying action was still pending, seeking a declaration that it had no duty to defend or indemnify Milionis. Cincinnati's initial motion for summary judgment arguing that it had no duty to defend was rejected by the court. In a renewed motion after the underlying action was concluded, ?Cincinnati sought a determination that there was no duty to indemnify. 

    The policy issued by Cincinnati had an endorsement requiring Milionis to: (1) obtain a formal written contract with subcontractors verifying that they had valid CGL insurance; (2) obtain a formal written contract stating that the subcontractors agreed "to defend, indemnify and hold Milionis harmless from any and all liability;" and (3) verify in the contract that the subcontractors had named Milionis as an additional insured on their CGL policy. 

    On the construction project, Milionis had subcontractors perform all the work. Milionis never sent Cincinnati any subcontractor contracts or proof of Milionis's additional insured status as required by the endorsement. 

    The underlying facts established that there was an occurrence and property damage. But Milionis did not dispute that it did not meet the conditions precedent to coverage - obtaining subcontractor contracts and being named as an additional insured on the subcontractors' liability policies. This was prejudicial to Cincinnati. Milionis's noncompliance with the endorsement left it with no contractual indemnification claims that it would have asserted to compel the subcontractors to contribute to the Milionis's defense or settlement. Moreover, it deprived Milionis of the ability to have direct contractual rights to a defense and coverage from the subcontractors' insurers. Consequently, Cincinnati was left with no other insurers and parties to share in the costs of defending and indemnifying Milionis. 

    Cincinnati was therefore relieved of its duty to indemnify under the policy. 

Insured's Striking Multiple Vehicles Constitutes One Occurrence under Texas Law

    Reversing the district court, the Fifth Circuit found one occurrence after the insured's truck struck multiple vehicles. Evanston Ins. Co. v. Mid-Contenint Cas. Co., 2018 U.S. App. LEXIS 32722 (5th Cir. Nov. 19, 2018).

    An employee of Global Waste Services, LLC, Marlon Diggs, lost control of his Mack truck. At 11:04 a.m., the Mack truck hit a Dodge Ram. Three minutes later, the Mack truck struck a Ford F150. Two minutes after that, the Mack truck approached a toll plaza and caused the series of collisions which were at issue. 

    At 11:09 a.m., the Mack Truck struck a Honda Accord that was waiting in line at the toll plaza. The Mack truck pushed the Accord forward for more than 100 feet into the crash barrels separating two toll lanes, where the Accord came to rest. One passenger in the Accord was seriously injured. The Mack truck continued to travel through the automatic toll lane for 66 feet before striking a Dodge Charger. The Mack truck then struck a tollbooth, causing significant damage. The Mack truck continued pushing the Charger until it crashed into a retaining wall, pinning the Charger between the Mack truck and the wall. The driver of the Charger and Diggs both died. 

    Wrongful death cases were filed in state court against Global. The County made demands for the cleanup and repair of the toll plaza. All claims ultimately settled with contributions from Global's insurers. Mid-Continent insured Global under a commercial auto insurance policy with limits of $1 million per accident. Global had an excess liability policy from Evanston with a $5 million per-accident liability limit. Evanston paid over $5.6 million on various claims. Mid-Continent paid $1 million on one claim. 

    Evanston filed suit seeking reimbursement from Mid-Continent for a portion of the payments Evanston made on behalf of Global. Evanston also sought to recover the entirety of its defense costs. Evanston argued that Mid-Continent incorrectly construed all the collisions occurring after the Mack truck's impact with the Accord to be a single accident. Evanston argued that each separate impact between the Mack truck and another vehicle or object constituted a separate accident subject to separate liability limits. 

    The district court found that two accidents occurred. The collisions between the Mack truck and the Accord and between the Mack truck and the Dodge Charger were separate accidents because they occurred independently, and the former did not lead to the occurrence of the latter. The district court ordered that Mid-Continent, who only paid one million, should have paid $2,045,000 under the various settlements.  Therefore, Mid-Continent was ordered to pay Evanston $1,045,000 plus the costs of defense. 

    On appeal, the issue was whether the Mack truck's collisions near the toll plaza constituted one accident or multiple accidents under the language of Mid-Continent's policy. The policy defined "accident" to include "continuous or repeated exposure to the same conditions resulting in 'bodily injury' or 'property damage.'" Under the "Limit of Insurance" provision, the policy stated that "regardless of the number of covered autos, insureds, premiums paid, claims made or vehicles involved in the accident, the most Mid-Continent would pay for the total of all damages resulting from any one accident was the policy limit of one million dollars. 

    Under Texas law, the court applied the "cause" approach in interpreting the policy. In interpreting the meaning of an "occurrence, Texas courts focused on the events that caused the injuries and gave rise to the insured's liability, rather than on the number of injurious effects. Other jurisdictions adopted an "effects" approach in which each separate claim arising from the insured' negligence was considered a separate occurrence. 

    Under the cause test, the appropriate inquiry was whether there was one proximate, uninterrupted, and continuing cause which resulted in all of the injuries and damage. If so, then there was a single occurrence. If the chain of the proximate causation was broken by a pause in the negligent conduct or by some intervening cause, then there were multiple occurrences, even if the insured's negligent conduct which caused each of the injuries was the same kind of negligent conduct. 

    Here, the chain of causation remained unbroken. the ongoing negligence of the runaway Mack truck was the single "proximate, uninterrupted, and continuing cause" of all the collisions. The language of the policy provided that all injuries - no matter the number of vehicles involved or the number of claims made - arising from continuous or repeated exposure to substantially the same conditions were considered a single accident. The broad language of the policy had to be given effect. There was one accident under the policy.

    Therefore, the district court was reversed and judgment was rendered in favor of Mid-Continent.