Insurance Law Hawaii

"Decay" Found Ambiguous in Collapse Case

    The federal district court granted, in part, the insured's motion for summary judgment seeking coverage for a collapse of a church's ceiling. Derbyshire Baptist Church v. Church Mut. Ins. Co., 2020 U.S. Distl LEXIS 113346 (E.D. Va. June 29, 2020).

    A large portion of the sanctuary ceiling of the insured's church collapsed. A claim was filed with the insurer. The insurer hired a forensic engineer who found the collapse was caused by the disconnection of wire support hangers from the wood roof beams. Further, "the redistribution of load on the hangers resulted in a progressive failure of the hangers and their supported components." Based on these findings, the insurer denied coverage. 

    The policy excluded coverage for collapse, but in the Additional Coverage portion of the policy, collapse caused by "decay that is hidden from view" was covered. The court pondered the meaning of "decay," which was not defined in the policy. 

    The court interpreted the term "decay" by considering the meaning of the policy as a whole. More than one construction was possible. "Decay" first appeared in the policy as an exclusion, where decay and deterioration were excluded. Elsewhere, "Wet Rot" was excluded. "Decay" could be read as distinct from "deterioration," as they were both enumerated in the same provision of the policy. The drafter would not have included both terms if they had identical meanings. On the other hand, "decay" must have a distinct meaning from "rot," which suggested that "decay" had a broad definition, one that did not merely encompass the decomposition of organic material. These two competing constructions of decay were equally possible. 

    The insurer contended that the collapse was due to deterioration, not decay. The inspection  found "the initial failure resulted from withdrawal of the nails as a result of thermal expansion and contraction of the wood roof beams due to changes in temperature and humidity." Such a failure did not clearly support the insurer's position that the wood beams were "defective," as this characteristic of wood beams could be "defect" or "decay." 

    Therefore,, the term "decay" was, at least, ambiguous, and the court held in favor of the insured. The court denied the insured's motion in so far as it sought a determination that the insurer acted in bad faith in denying coverage because there was a good faith dispute on whether "decay" existed." 

 

Michigan Finds Coverage for Subcontractor's Faulty Work

    The Michigan Supreme Court held that under a CGL policy, an "accident" may include unintentional subcontractor work that damages the insured's work product. Skanska USA Building Inc. v. M.A.P. Mechanical Contractors, Inc., et al., 2020 Mich. LEXIS 1194 (Mich. June 29, 2020).

    Skanska USA Building Inc. was the construction manager on a renovation project for a medical centre. The heatng and cooling portion of the project was subcontracted to M.A.P. Mechanical Contractors, Inc. (MAP). MAP installed a steam builder and piping for the heating system. The installation included several expansion joints. After completion, Skanska learned that MAP had installed some of the expansion joints backward. This caused significant damage to concrete, steel and the heating system. The medical center sent a demand letter to Skanska, who send a demand letter to MAP. Skanska did the repairs and replacement of the damaged property. Skanska then submitted a claim of $1.4 million for its work to Amerisure Insurance Company. The claim was denied. 

    Skanska sued Amerisure. The trial court rejected Amerisure's motion for summary judgment which argued MAP's defective construction was not a covered "occurrence." The Court of Appeals reversed and ordered that summary judgment be granted to Amerisure. The court reasoned that there was no "occurrence" because the only damage was to the insured's own work product. 

    The Michigan Supreme Court reversed the Court of Appeals. Under Michigan law, an "accident" was "an undefined contingency, a casualty, a happening by chance, something out of the usual course of things, unusual, fortuitous, not anticipated and not naturally to be expected." Generally, faulty work by a subcontractor could fall within the plain meaning of most of these terms. The accident happened by chance, was outside the usual course of things, and was neither anticipated nor naturally expected. 

    The policy as a whole confirmed this interpretation. The policy contained an exclusion precluding coverage for an insured's own work product, but it contained an exception for work performed by a subcontractor on the insured's behalf. If faulty workmanship by a subcontractor could never constitute an "accident" and therefore never be an "occurrence" triggering coverage in the first place, the subcontractor exception would be nugatory. Therefore, given the plain meaning of the word "accident," faulty subcontractor work that was unintended by the insured could constitute an "accident" under a CGL policy. 

    The context and history of CGL policies supported the court's conclusion that an "accident" could include damage to an insured's own work product. In 1986, the ISO added the policy language on a subcontractor's faulty work. It adopted changes to expand coverage to include some of the business risks that were previously excluded, specifically damage caused by a subcontractor's faulty workmanship (with no carveout based on whose property was damaged). The 1986 reformation of the scope of coverage under the CGL policies underscored a plain reading of "accident" - that faulty subcontractor work may fall within the policy's coverage. 

 

Sinking Floor Does Not Meet Strict Definition of Collapse

    The court determined that the sinking of the insured's floor caused by termites and rot deterioration did not meet the homeowners policy's definition of collapse. Stewart v. Metro. Lloyds Ins. Co., 2020 U.S. Dist. LEXIS 111527 (S.D. Tex. June 24, 2020).

    Beatrice Stewart, the homeowner, heard a loud bang one night as she lay in bed. The next day, she found that the floor near her bathroom and hallway had sunk and the house was sitting lower. She admitted the house never completely fell down. Upon investigation, Lloyds found that rot in the floor joists and subfloor decking were caused by a combination of termite damage and exposure to moisture. Lloyds denied the claim. 

    Stewart sued. Lloyds argued the policy required an "entire collapse" of the building or any part of a building, which did not occur here. The policy defined "collapse" as "an abrupt falling down or caving in of a building or any part of a building." The record did not show that any part of Stewart's floor caved in.

    Nor did the undisputed evidence show an "entire" collapse. At oral argument, Steward argued that the word "entire" applied only to the collapse of a building but not to the collapse of part of a building. The court found this was an unreasonable interpretation. The word "entire" modified "collapse," which applied to the phrase "of a building or any part of a building." The policy covered damage caused by collapse to "any part of a building" only when there had been an entire collapse. 

    The evidence showed that part of the floor sank and some floor joists underneath the house broke or cracked; some walls were not plumb with the floor and had cracks; and some doors were off their hinges. This damage was similar to sinking and cracking that was not an entire collapse. Therefore, Lloyds' motion for summary judgment was granted.

Gross Negligence May Constitute an Occurrence

    The Iowa Supreme Court reversed the trial court and held that alleged acts of gross negligence may constitute an occurrence. T.H.E. Insurance Co. v. Glen, 2020 Iowa LEXIS 64 (Iowa June 5, 2020).

    Stephen Booher was a seasonal employee at Adventureland Amusement Park. He had been recently employed as a loading assistant on the Raging River ride. Stephen Glen was the ride operator of the Raging River. Booher allegedly suffered fatal injuries when he was jerked of his feet and fell onto the moving belt of the ride. Plaintiffs, Booher's estate, alleged Glen had been grossly negligent by among other things, failing to check the ride before starting it, starting the ride without knowing whether Booher was ready, causing Booher to topple on the ride's exposed conveyor belts, failure to watch the ride for the entirety of its operation, etc.

   When the estate sued, Adventureland tendered to its insurer, T.H.E. Insurance Company (THE). THE filed a declaratory judgment action, alleging that the allegations of gross negligence did not amount to an "accident" and caused an "expected" injury under the CGL policy. The parties cross-moved for summary judgment. The lower court granted summary judgment to THE. 

    On appeal, the Iowa Supreme Court considered whether the gross negligence claim brought by the Booher estate was covered. Gross negligence was defined by Iowa statute as an act "amounting to wanton neglect for the safety of another." Based upon Iowa case law, it was possible that a factfinder could determine that a co-employee acted without intent to harm. Further, one could act with the expectation that an injury was more likely than not, but not with the expectation that the injury was highly likely or substantially certain to result. Therefore, some, but not all, acts of gross negligence could be accidents.

    At this early stage of the proceeding, the court was unable say there was no possibility that the Booher estate could not convince a factfinder that it had a claim that amounted to gross negligence but was within the scope of coverage under the CGL policy. 

Court Stays Coverage Action Filed under Declaratory Judgment Act

    The federal district court, district of Hawaii, stayed the coverage action to allow the underlying state court action to proceed, United States Fire Ins. Co. v. Prieto, 2020 U.S. Dist. LEXIS 106676 (D. Haw. June 18, 2020).

    In the underlying action, Aerica Cates sued defendant Prieto and the State of Hawaii in state court for Prieto's sexual abuse of the couples' daughter during unsupervised visits. Cates accused the State of failing to take appropriate action following the pediatrician's reports of abuse and forcing the daugther to resume visitation with Prieto. Cates asserted claims of assault and battery, intentional infliction of emotional distress, negligent infliction of emotional distress and negligence against Prieto. The state filed a cross-claim against Prieto, asserting that any injuries sustained by Cates were the result of Prieto's wrongful acts and/or omissions.

    Prieto tendered the defense to his Homeowners carrier, United States Fire. US Fire agreed to defend under a reservation of rights, but then filed an action in federal district court for a declaratory judgment that it owed no duty to defend or indemnify. US Fire filed a motion for summary judgment. Prieto argued the court should decline to exercise jurisdiction.

    Under the Declaratory Judgment Act, the court had discretion whether to exercise its jurisdiction based on the factors enumerated in Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491 (1942). Under the first factor, needless determination of state law, the court agreed the underlying liability action was a parallel state proceeding because the state and federal actions arose from the same factual circumstances. US Fire's duty to defend turned on whether allegations asserted in the state court action rose any possibility of coverage under the policy and its duty to indemnify rested on factual determinations made in the state court action. The existence of a parallel state action weighed strongly in favor of declining jurisdiction. 

    The court also agreed that, while it was capable of deciding the issues presented, proceeding with a declaratory judgment could result in the unnecessary determination of state law. Even if a federal declaratory judgment action did not present an open question of state law requiring resolution by a state court, it was not an abuse of discretion to decline jurisdiction. Finally, there was no compelling federal interest in this diversity case. Therefore, the first Brillhart factor of needless determination of state law weight in favor of dismissal. 

    The second factor, forum shopping, was neutral. Because diversity jurisdiction provided a basis to bring suit in federal court, US Fire did not engage in forum shopping. 

    The third factor, duplicative litigation, weighed in favor of declining jurisdiction. Additionally, adjudicating this action could potentially lead to inconsistent results, as coverage and related factual determinations here might affect the underlying proceedings. 

    Therefore, the Brillhart factors weighed in favor of declining to exercise jurisdiction. However, the court elected to stay, rather than dismiss, the case. 

    

Insured's Lack of Knowledge of Tenant's Growing Marijuana Means Coverage Afforded for Fire Loss

    The California Court of Appeals reversed the trial court's grant of summary judgment to the insurer regarding a claim for fire loss. Mosley v. Pacific Sec. Ins, Co., 2020 Cal. App LEXIS (Cal. Ct. App, May 26, 2020).

    The Mosleys rented their property to Pedro Lopez. Six months later, the property was damaged by fire. Lopez had tapped a main power line into the attic to power his energy-intensive marijuana growing operation. The illegal power line caused the fire.    

    Pacific Specialty Insurance Company (PSIC) insured the property under an HO-3 Standard Homeowners policy. Paragraph E of the policy provided,

We do not insure for loss resulting from any manufacturing, product or operation, engaged in:

1. The growing of plants; or
2. The manufacture, production, operation or processing of chemical, biological, animal or plant materials. 

    PSIC denied coverage for the loss, determining it was excluded from coverage under Paragraph E. The loss resulted from Lopez's growing marijuana. The Mosleys sued PSIC for breach of contract. The parties filed cross-motions for summary judgment. The trial court denied the Mosleys' motion, granted PSIC's motion, and entered judgment for PSIC.

    On appeal, it was undisputed that the fire that damaged the property "result[ed] from" Lopez's re-wiring the property's electrical system in order to power his marijuana growing operation. But the parties disputed whether this meant the damage "result[ed] from "the growing of plants."

    California courts broadly interpreted the term "resulting from" in a policy. The appellate court determined there was a "minimal causal connection" between Lopez's growing marijuana, the fire and the resulting loss. Therefore, the loss resulted from an operation engaged in the growing of plants, which Paragraph E excluded from coverage. 

    The Mosleys argued that, even if Paragraph E excluded the loss, the policy was void because it provided less coverage than Insurance Code section 2070 provided. Under section 2070, policies had to be at least as broad and favorable to the insured as that provided in section 2071, Section 2017 stated that an "insurer shall not be liable for loss occurring . . . while the hazard is increased by any means within the control or knowledge of the insured." The trial court found that PSIC was not liable for the loss because Lopez's marijuana growing operation, as well as the electrical alterations he made to the property increased a hazard "within the control or knowledge" of the Mosleys. 

    An insured increased a hazard "within its control" only if the insured was aware of the hazard or reasonably could have discovered it through exercising ordinary care. No authority suggested that a landlord-insured was strictly liable for a hazard created by the insured's tenant even if the insured was unaware of the hazard. 

    It was undisputed that the Mosleys did not know about Lopez's marijuana growing operation or his altering the property's electrical system. Whether Lopez's conduct was "within the control" of the Mosleys was a fact issue for the jury to decide because the record was silent as to what, if anything, the Mosleys reasonably could have done to prevent or discover Lopez's marijuana growing operation.

    To the extent PSIC's interpretation of the policy rendered the Mosleys strictly liable for Lopez's conduct, the policy was void under section 2071. By holding the Mosleys responsible for the damage Lopez caused, irrespective of the Mosleys' knowledge of his conduct or their responsibility for it, the policy subjected the Mosleys to increased liability - and less favorable coverage that was not "substantially equivalent" to coverage provided under section 2071. The trial court's order granting summary judgment to PSIC was reversed and the order denying the Mosleys' motion for summary judgment was affirmed. 

    The court's holding that the phrase "results from" requires only a minimal causal connection" may become beneficial to policy holders in COVID-19 claims. The causal connection between the coronavirus (a covered cause) and business interruption losses arguably exists. The coronavirus is the cause of the insured's physical loss or damage and the resulting business interruption loss. 

Request for Stay Denied in Dispute Over Coverage for Volcano Damage

    Although there were concurrent state and federal proceedings regarding the insureds' claims for damage caused by Kilauea Volcano, the federal district court refused to dismiss or stay the federal action. Aqulina v Certain Underwriters at Lloyd's Syndicate #2003, 465 F. Supp. 3d 1066 (D. Haw. 2020).

    Plaintiffs held homeowner's policies from Lloyd's that were brokered and underwritten by various defendants. Coverage from the May 2018 eruption of Kilauea Volcano was denied based upon an exclusion precluding coverage for lava-related damage. 

    Plaintiffs sued Lloyds and various brokers in federal court, alleging that defendants had engaged in a deceptive scheme to defraud plaintiffs and deprive them of meaningful coverage. Lawsuits were also filed in state court, with plaintiffs arguing their losses were covered by their policies and that defendants wrongfully relied solely on the lava exclusion to deny claims. 

    Defendant Retail Brokers, one of the brokers, moved to dismiss or in the alternative stay the federal court proceedings under the Colorado River abstention doctrine. See Colorado River Water Conservation Dist. v. United States, 424 U.S. 800 (1976). To utilize the abstention doctrine, Retail Brokers had to show "exceptional circumstances" under an eight part test.

    The court determined that Retail Brokers failed to show "exceptional circumstances" to suggest piecemeal litigation would be problematic if the court retained jurisdiction. The court agreed with plaintiffs that the federal and state-court actions raised different issues and that the state-court action would not answer the central questions in this case. The state action addressed allegations of coverage under the policies, while the federal case involved issues regarding the procurement of the policies. While state law controlled, the federal court was fully capable of deciding claims of unfair and deceptive acts and negligence. 

    The only facts that weighed in favor of a stay were the minor inconvenience of the federal action where the federal court was located on Oahu and defendants were located on the Big Island, the fact that plaintiffs filed both parallel actions, and the similarities between the state and federal lawsuits. On balance, these factors did not establish "exception circumstances" required for the Colorado River deference. Neither dismissal nor a stay was warranted. 

    

Coronavirus Coverage Cases - Remands, Stays, and Actual Decision from Michigan

    Early decisions are starting to appear where insurers have denied coverage for business interruption after shut downs due to the coronavirus. Most of these early decisions address procedural issues, but a trial court in Michigan recently granted the insurer's motion to dismiss a claim for business interruption due to mandated closures.

    In ABC Daycare & Learning Ctr. v. W. Bend Mut. Ins. Co., 2020 U.S. Dist. LEXIS 11491 (E.D. Ky. June 20, 2020), ABC was ordered closed on March 18, 2020, by the Kentucky Secretary for Health and Family Services (Secretary). ABC filed a claim for business interruption coverage with West Bend, which was denied. The policy provided coverage for claims arising from communicable disease-related forced shutdowns if (1) the shutdown was ordered by local, stated or federal health officials, and (2) the shutdown was due to an outbreak of a communicable disease at the insured premises. 

    ABC sued in state court, adding the Secretary as a defendant. West Bend removed to federal court, arguing the Secretary was a nominal defendant. ABC sought remand. West Bend argued that the case solely concerned its alleged failure to pay the business interruption claim and the interpretation of the Secretary's order was only at issue to the extent it related to the enforcement of the policy. ABC contended the Secretary was an indispensable party because his authority to order all daycares to close would be challenged by West Bend, and the overall scope and interpretation of the order was central to the case. 

    The court agreed with ABC and ordered the case remanded to state court. ABC likely could not maintain a successful communicable disease-related business interruption claim unless a valid government order caused ABC to close.

    In the second recent case, the insured sought a stay of the suit seeking coverage for its business interruption losses due to COVID-19. After filing suit, a group of plaintiffs nationwide filed before the Judicial Panel on Multidistrict Litigation (JPML) seeking to consolidate actions filed against insurers for COVID-19 related losses. The Panel was scheduled to hear motions whether to consolidate the cases on July 30, 2020. The insured sought a stay until after a decision was made by the JPML. Meanwhile, the insurer had filed a motion to dismiss. On balance, the court found that a stay pending a decision by the JPML was warranted.

    There is no published written decision from the Michigan trial court's decision to dismiss the insured's business interruption claim, but it is available on You Tube. [here] In Gavrilides Management Company vs. Michigan Insurance Company, the complaint did not alleged direct physical loss of or damage to the property. The property still stood without any physical alteration. There was no allegation that coronavirus had entered the premise through either an employee or patron. Instead, the plaintiff alleged that the government closure orders caused the loss. The pleading did not establish coverage as a matter of law and the case was dismissed. 

COVID-19 Claim for Business Interruption Remanded to State Court

    Acknowledging there was not yet a body of case law developed by the state court, the federal district court remanded the claim. Dianoia's Eatery, LLC v. Motorists Mutual Ins. Co., Civil Action No. 20-706 (W.D. Pa. May 19, 2020).

    Dianoia's filed a complaint in state court against Motorists Mutual seeking a declaratory judgment for coverage for business interruption losses due to COVID-19 shut down orders. Motorists Mutual removed to federal district court. 

    The court remanded the case to state court for lack of subject matter jurisdiction by diversity. Alternatively, the court declined to exercise subject matter jurisdiction over the case under the Declaratory Judgment Act. 

    In diversity jurisdiction, Motorists Mutual had the burden to show complete diversity. Since plaintiff was a limited liability company, Motorists Mutual had to conduct a reasonable investigation to determine the citizenship of the LLC's members and at least aver that none of its members shared Motorists Mutual's Ohio citizenship. This was not performed by Motorists Mutual.

    Even if the court had diversity jurisdiction, it would decline to exercise its jurisdiction pursuant to the discretionary authority under the Declaratory Judgment Act. Where the state law was was uncertain or undetermined, the federal court should be reluctant to exercise its jurisdiction under the Declaratory Judgment Act. 

    Plaintiff's complaint raised novel coverage issues under Pennsylvania law which were best reserved for the state court to resolve in the first instance. Therefore, the case was remanded to the state court.