Insurance Law Hawaii

Civil Authority Claim Based on COVID-19 Dismissed

    A California federal district court dismissed the insured restaurant's civil authority claim after being ordered to close due to COVID-19. 10E, LLC v. Travelers Indemnity Co. of Connecticut, et al., 2020 U.S. Dist. LEXIS 156827 (C.D. Calif. Aug. 28, 2020).  The decision is here. 

    Public health restrictions prohibited in-person dining at plaintiff's restaurant, limiting its business to takeout and delivery. Plaintiff sought compensation for lost business and other costs of the disruption under Business Income and Extra Expense Coverage. The policy covered losses and expenses "caused by action of civil authority that prohibits access to the described premises." Further, "[t]he civil authority action must be due to direct physical loss of or damage to property." Finally, the policy included a virus exclusion that applied to actions of civil authority. 

    Plaintiff sued, alleging that it was entitled to coverage because public health restrictions prohibited access to its restaurant. The restrictions caused "physical damage" by labelling of the insured property as non-essential and preventing the ordinary intended use of the property. Plaintiff also alleged that the virus exclusion did not include exclusion for a viral pandemic. 

    Travelers filed a motion to dismiss. The court agreed that Plaintiff did not plausibly allege that it suffered "direct physical loss of or damage to property" as required for civil authority coverage. Under California law, losses from inability to sue property did not amount to "direct physical loss of or damage to property" within the ordinary meaning of that phrase. Physical loss or damage occurred only when property underwent a distinct, demonstrable, physical alteration. Detrimental economic impact did not suffice. Labeling the property as non-essential did not physically alter any of Plaintiff's property. Further, Plaintiff did not allege that the virus infected or stayed on surfaces of its insured property. Whatever physical alteration the virus caused to property in general, nothing in the complaint plausibly supported an inference that the virus physically altered conditions for Plaintiff's restaurant 

    Plaintiff attempted to circumvent the plain language of the policy by emphasising its disjunctive phrasing - "direct physical loss of or damage to property." Plaintiff, however, did not allege that it was permanently dispossessed of any insured property. Instead, Plaintiff remained in possession of its dining room and restaurant. 

    Therefore, the motion to dismiss was granted. Plaintiff was allowed 14 days to amend its complaint. 

Failure to Plead Physical Loss or Damage Leads to Dismissal of COVID-19 Claim

    The insured's claim for business interruption losses due to COVID-19 was dismissed for failure to plead direct physical loss of or damage to property. Malaube LLC v. Greenwich Ins. Co., 2020 U.S. Dist. LEXIS 156027 (S.D. Fla. Aug 26, 2020).

    The insured restaurant had to suspend operations when local and state orders closed all onsite dining due to COVID-19. The insured submitted a claim for business interruption losses to its carrier. Greenwich denied the claim because the insured did not experience any physical loss or damage to the insured property. The insured sued. 

    Greenwich moved to dismiss the complaint because it only provided coverage for actual loss of business income if a direct physical loss or damage to the property caused a suspension to the insured's operations. There were no allegations that the insured property ever suffered a direct physical loss or damage. The insured equated the closure of its indoor dining to a physical loss because the business could no longer operate for its intended purpose.

    The court compared the allegations here to those made by the insured in Studio 417, Inc. v. Cincinnati Ins. Co., 2020 U.S. Dist. LEXIS 147600 (W.D. Mo. Aug 12, 2020) [prior post is here]. There, the court denied the insurer's motion to dismiss because the insureds' alleged that COVID-19 was a highly contagious virus that was physically present in viral fluid particles and deposited on surfaces and objects. In contrast, here there was no allegation that COVID-19 was physically present on the premises. 

    Other provisions in the policy supported the same interpretation. The Business Income and Extra Expense provisions provided for coverage for an insured's operations during a "period of restoration." A period of restoration was defined to end after the property was repaired or replaced. The words "repair" and "replace" contemplated physical damage to the insured premises as opposed to loss of use of it. 

    Therefore, Greenwich's motion to dismiss was granted. The insured, however, was given leave to amend its complaint.

 

 

Court Denies Remand of COVID-19 Case

    The federal district court rejected a challenge to its diversity jurisdiction and rejected the insured's attempt to remand the COVID-19 claims back to state court. Vandelay Hospitality Group LP v. Cincinnati Ins. Co., 2020 U.S. Dist. LEXIS 149196 (N.D. Tex. Aug. 18, 2020).

    Vandelay purchased a commercial property policy from Cincinnati through Swingle Collins, its registered broker, and its employee, Baron Cass. The policy was "all risk" and purported to insure three of Vandelay's restaurants for, amoung other things, direct physical loss and loss incurred due to business interruptions.

    Vandelay had to close its restaurants in March 2020 when state and local officials issued emergency orders limiting dine-in restaurants to take-out service due to COVID-19. Vandelay closed its three restaurants and submitted a claim to Cincinnati. The claim was denied. Vandelay sued Cincinnati and Cass in state court for breach of contract and for a declaratory judgment that the policy covered the claimed losses. Vandelay amended its petition to join Swingle Collins.

    Cincinnati removed the case based on diversity jurisdiction, contending Cass and Swingle Collins were fraudulently joined. Cincinnati was an Ohio corporation. Vandelay, Cass and Swingle Collins were all citizens of Texas.

    A declaratory judgment was appropriate only if (1) a justiciable controversy existed and (2) the controversy would be resolved by the declaration sought. Duplicative relief could not be sought in a declaratory judgment action.

    Vandelay sought a declaration that the forced closures of its restaurants denied access to the premises and was covered under the policy. Further, Vandelay sustained "direct physical loss to property" because of COVID-19 and the related state and local orders. Finally, Vandelay wanted to establish that the lost business income it sustained was due to the necessary suspension of operations.

    Each of the declarations sought would be resolved in the context of Vandelay's breach of contract action. Therefore, the declaratory relief sought would add nothing to the action in that the request mirrored Vandelay's claims and duplicated its own claim for breach of contract.  Because the court's adjudication of the breach of contract claim would determine whether there was coverage and thereby determine all parties' rights under the policy and any claims arising out of its formation, the declaratory judgment claims were duplicative and unavailable as a matter of law. 

    Consequently, defendants met their burden of demonstrating that there was no reasonable basis for predicting that Vandelay might be entitled to a declaratory judgment in state court. There was no reasonable basis for recovery against Swingle Collins and Cass, so Vandelay's motion for remand was denied. 

Texas Federal District Court Dismisses COVID-19 Claim

    Judge Ezra, formerly on the bench in Hawaii, dismissed a COVID-19 claim pursued by a Texas policy holder. Diesel Barbershop, LLC v. State Farm Lloyds, 2020 U.S. Dist. LEXIS 147276 (W.D. Texas Aug. 13, 2020).

    Local and state officials in Texas issued shutdown orders in March 2020 due to the spread of the cornavirus. All non-essential businesses, including the insureds' barbershop businesses, were ordered closed from April 2, 2020 until April 30, 2020. The insureds submitted a claim for business interruption and civil authority coverage to their carrier, State Farm. The claim was denied based on the policy's exclusion for loss caused by enforcement of ordinance or law, virus, and consequential losses. For Civil Authority coverage, State Farm contended the policy required that there by physical damage within one mile of the described property and that the damage be the result of a Covered Cause of Loss, which, State Farm asserted, a virus was not. 

    The insureds sued and State Farm moved to dismiss. The court noted cases in which courts had found physical loss even without tangible destruction to the covered property. Yet, the court found that the line of cases requiring tangible injury to property were more persuasive. Therefore, the court found that the insureds failed to plead a direct physical loss.

    Further, the virus exclusion barred the insureds' claim. The lead-in language for the virus exclusion included an anti-concurrent causation clause (ACC clause) which stated State Firm did not insure for a loss regardless of "whether other causes acted concurrently or in any sequence within the excluded event to produce the loss." 

    The court found that the insureds pleaded that COVID-19 was the reason for the shutdown orders being issued and the underlying cause of the alleged losses. While the orders forced the properties to close to protect public health, the orders only came about sequentially as a result of the COVID-19 virus spreading rapidly throughout the community. The presence of COVID-19 was the primary root cause of the insureds' businesses temporarily closing. Therefore, the ACC clause excluded coverage for the losses the insureds incurred in complying with the orders.

    The court also found that the Civil Authority provision was not triggered. The events caused the Virus Exclusion to apply such that the insureds failed to alleged a legally cognizable "Covered Cause of Loss."

Insurer Must Defend Allegations of Negligent Infliction of Emotional Distress

    The federal district court, District of Hawaii, found the insurer had a duty to defend allegations which included a claim for negligent infliction of emotional distress. AIG Prop. Cas. Co. v. Judgment, 2020 U.S. District. LEXIS 143485 (D. Haw. Aug. 11, 2020).  

    The underlying complaint alleged that plaintiff Mrs. Ross entered a private dressing area of the clothing store to try on clothes she considered purchasing. Neil Anenberg wanted to try on a shirt, and attempted to enter the dressing area where Ross was located. The underlying complaint alleged that Anenberg engaged in assaultive conduct by rummaging, feeling and grabbing the curtain attempting to make physical contact with Ross. A store employee then showed Anenberg another dressing room. After trying on the shirt, however, Anenberg passed by Ross' dressing room, placed his cell phone beneath the curtain, and took photos of Ross while she was changing clothes. A store video captured the events described in the underlying complaint. 

    Ross sued, alleging, among other things, Negligent Infliction of Emotional Distress (NIED). In discovery, Ross stated she tried to make a joke with Anenberg, telling him she "didn't want to spoil his breakfast."

    Anenberg tendered his defense to AIG, who had issued him a homeowner's policy. AIG accepted the defense under a reservation of rights and filed suit for a declaratory judgment. AIG moved for summary judgment that it had no duty to defend. The primary focus was two exclusions in the policy: the intentional act or expected injury exclusion and the sexual molestation/misconduct exclusion.

    The court noted that under Hawaii law, AIG had to establish it was impossible for Anenberg to be found liable to Ross for any claim requiring indemnification from AIG. The court agreed with Anenberg that it was at least possible for a fact finder to find Anenberg liable for negligently inflicting damages that were not caused "intentionally' or that were not "expected" within the meaning of the exclusion. 

    The exclusion barred coverage for acts that were "intended to result in, or would be expected by a reasonable person," suggesting an objective standard. But it was possible that Anonberg would not have expected to harm Ross (at least in the time frame before he changed his shirt). 

    The policy also excluded coverage for personal injury arising out of "social molestation, misconduct or harassment," or "sexual physical or mental abuse." The policy did not define these terms. It was possible Anenberg committed other torts (e.g., NIED)l that would not constitute "sexual molestation, misconduct, or harassment," and thus would not be excluded from coverage.

    Therefore, AIG had a duty to defend. 

    

 

    

Business Risk Exclusions Dismissed in Summary Judgment Motion

    While the court denied summary judgment on whether the alleged damage was due to faulty workmanship and not covered, it granted summary judgment for dismissal of several business risk exclusions the insurer asserted against the developer. United Specialty Ins. Co. v. Dorn Homes, 2020 U.S. Dist. LEXIS 138431 (D. Ariz. Aug. 4, 2020). 

    Dorn, a residential home developer, developed a 350 single family residential home division. Dorn did not perform the actual construction, but contracted with various subcontractors. 

    After completion, Dorn began to receive complaints from homeowners about interior damage to some of the homes. Inspections showed interior cracking, wall separation and foundation movement. Dorn ultimately installed an unvented foam insulated roof system to address these issues. Therefore, it did not repair the faulty workmanship of its subcontractors because it would not have been efficient or as effective. Dorn paid for the repairs to the 87 homes at issue.

    Dorn sought reimbursement from its insurer, United. United notified Dorn that the costs of replacing the insulation was likely not considered as property damage under the policy.

    Dorn filed for declaratory relief. Both parties moved for summary judgment. The court first considered whether there was an occurrence under the policy.

    Under Arizona law, faulty workmanship that caused damage to other property could equate to property damage. Although faulty workmanship was not covered, damage to other property caused by or resulting from the defect could be covered.

    Here, the court found there were genuine issues of material fact as to whether Dorn's attic remediation issues were for the purpose of repairing faulty workmanship itself, or to damage resulting from the faulty workmanship. Further, there were genuine issues of material fact regarding the extent of preventative measures. Summary judgment on these issues was denied to both parties.

    Dorn also argued that the court should find that subcontractor faulty workmanship standing alone constituted an occurrence. Dorn argued that Exclusion L, the "your work" exclusion, demonstrated that subcontractor faulty workmanship was covered. The exclusion barred coverage for "property damage to 'your work' arising out of it or any part of it and included in the 'products-completed operations hazard.'" The exclusion did not apply "if the damaged work or the work out of which the damage arose was performed on your behalf by a subcontractor." The court again declined to be the first to apply Arizona law and hold that faulty subcontractor work, standing alone, constituted an occurrence.

    The court next turned to the exclusions raised by United. Exclusions J(5) and J (6) provided that the policy did to apply to property damage to:

(5) That particular part of real property on which you or any contractors or subcontractors  working directly or indirectly on your behalf are performing operations, if the "property damage" arises out of those operations; or 

(6) That particular part or property that must be restored, repaired, or replaced because "your work" was incorrectly performed on it.

The parties agreed that these exclusions only applied to claims arising from ongoing operations. Dorn agued that the exclusions did not apply because all of the underlying losses or damages arose after construction on each affected residence was completed. The court agreed and granted summary judgment on these exclusions to Dorn.

    Under Exclusion K, the policy did not apply to property damage to "'your product' arising out of it or any part of it." "Your product" meant "any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by You." Dorn argued it developed real property and improvements or fixtures that because part of that real property, so the exclusion did not apply, The court agreed and granted Dorn summary judgment on this issued.

    Exclusion M stated the insured did not apply to:

"Property damage" to "impaired property" or property that has not been physically insured, arising out of

(1) A defect, deficiency, inadequacy or dangerous conditions in "your product" or 'your work;" or

(2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.

This exclusion does not apply to loss of use of other property arising out of sudden and accidental physical injury to "your product" or "your work" after it has been put to its intended use.

 Impaired property was "tangible property, other than 'your product' or 'your work" that cannot be used or is less useful because it incorporates 'your product' or 'your work' that is . . . defective, deficient, inadequate or dangerous . . ."

    This exclusion was commonly called the "impaired property" exclusion and was designed to prevent the insured from claiming economic losses resulting from the insured's work or work product. The court agreed with other courts that the exclusion was ambiguous and confusing.

    Nevertheless, Exclusion M applied where the insured's work was incorporated into other property and that other property is not able to be used because of a defect in the insured's work. To apply here, Exclusion M would require property damage, caused by Dorn's work to impaired property or property that had not been physically injured.  United had not presented a genuine issued of material fact that a similar circumstance exited in this case. Mere allegation and speculation did not create a factual dispute for purposes of summary judgment. Accordingly, Dorn was entitled to summary judgment on Exclusion M. 

 

 

Eleventh Circuit Vacates District Court Decision Finding No Duty to Defend Faulty Workmanship Claims

    The Eleventh Circuit vacated the district court's grant of summary judgment to the insurer finding there was no duty to defend. Southern-Owners Ins. Co. v. Mac Contractors of Florida, LLC, 2020 U.S. App. LEXIS 23918 (11th Cir. July 29, 2020). 

    Mac Contractors entered into a contract with homeowners to serve as general contractor for the construction of a custom residence. Problems arose during construction and Mac eventually led the job site before completing the project. The home owners sued, alleging that Mac and its subcontractors had left the residence "replete with construction defects." Damages were sought for having to repair and remediate all defective work performed by Mac. 

    Mac tendered under its CGL policy to its insurer, Southern-Owners. A defense was granted, but later withdrawn when Southern-Owners filed suit seeking a declaration that it owed no duty to defend or indemnify Mac. On cross-motions for summary judgment, the district court found in favor of Southern-Owners based on the exclusion for "Damage to Your Work." The Eleventh Circuit vacated on appeal, concluding that the underlying complaint could fairly be construed to allege damages that fell outside of the exclusion. 

    On remand, the district court again granted summary judgment to Southern-Owners, this time concluding that the underlying complaint did not allege "property damage" within the meaning of the policy. The court reasoned that the underlying complaint did not allege any damage beyond the faulty workmanship or defective for, which did not qualify as "property damage" under Florida law. 

    Under Florida law, there was a distinction between "a claim for the costs of repairing or removing defective work, which was not a claim for 'property damage,' and a claim for the costs of repairing damage caused by the defective work, which was a claim for 'property damage.'" United States Fire Ins. Co. v. J.S.U.B., Inc., 979 So.2d 871, 889 (Fla. 2007). Thus, faulty workmanship or defective work that damaged the otherwise non-defective completed project caused "physical injury to tangible property" within the plain meaning of the definition in the policy. But if there was no damage beyond the faulty workmanship or defective work, then there could be no resulting "property damage."

    Here, the underlying complaint could be construed to create potential coverage under the policy. The complaint alleged that Mac used subcontractors for work on the residence and that the residence was "replete with construction defects" and various damage. It did not further allege which subcontractors performed which work or how the damage occurred. Given these ambiguities, the complaint's allegations were broad enough to allow Mac to prove that one subcontractor negligently damaged non-defective work performed by another subcontractor. If Mac could establish that at least some of the damage arose in this way, there would be damage apart from the work itself and therefore "property damage." Because there was a potential for coverage, the duty to defend was triggered. 

    The case was remanded for consideration of exclusions raised by Southern-Owners.

Remand Denied for COVID-19 Business Interruption Claim

    The district court refused to remand plaintiff's claim for business losses due to COVID-19 shut down orders. Mark's Engine Co. No. 28 Restaurant, LLC v. Traveler's Indem. Co. of Conn., 2020 US. District. LEXIS 132841 (C.D. Calif. July 27, 2020). 

    Plaintiff restaurant sued Traveler's in state court. Los Angele Mayor Eric Garcetti was also named as a defendant for his part in issuing the shut down orders. An Executive Order issued on March 15, 2020 directed all non-essential businesses to close. Plaintiff argued that this triggered its coverage because plaintiff was forced to close by order of Civil Authority. Further, the denial of coverage would not have occurred absent the mayor's order, the propriety of which was an significant issue that allegedly had to be resolved.

    Travelers removed the state proceeding to federal court. Travelers argued removal was proper because the only non-diverse defendant, the mayor, was fraudulently joined. Plaintiff moved to remand, contending the mayor was not fraudulently joined. 

    The court found that Travelers met its burden to show that the mayor was fraudulently joined. The cased turned on a contract between plaintiff and Travelers, and the mayor was not a party to the contract. Because the mayor, the only non-diverse defendant, was fraudulently joined, complete diversity of citizenship among the parties was present. The motion for remand was denied. 

Insured's Experts Excluded, But Insurer's Motion for Summary Judgment Denied

    Despite barring the insured's expert witnesses from testifying as to the cause of the loss, lay witnesses were still available, making the district court's award of summary judgment to the insurer improper. Greater Hall Temple Church of God v. Southern Mut. Church Ins. Co., 2020 U.S. App. LEXIS 21934 (11th Cir. July 15, 2020).

    Hurricane Matthew damaged the Greater Hall Temple Church of God's (Church) roof. Leaks occurred, causing water damage to the Church's interior. A claim was submitted to Southern Mutual. The policy did not cover loss caused by water. Nor did it cover loss to the interior of buildings unless the rain entered through openings made by a specified peril. An independent adjuster found that the damage was caused not by wind, but by pre-exisiting structural issues. Southern Mutual denied the claim. 

    The Church filed suit. Southern Mutual moved for summary judgment and also moved to strike three of the Church's expert witnesses. The district court agreed that none of the witnesses could qualify as experts. Two of the witnesses did not have the requisite experience nor had they used a sufficiently reliable methodology formulating their opinions. A third expert was barred because his expert opinion had not been timely disclosed. Thereafter, Southern Mutual's motion for summary judgment was granted because the Church had not provided admissible evidence that damage to the Church's roof was caused by Hurricane Matthew. 

    The Eleventh Circuit agreed that the district court properly found the witnesses could not qualify as experts. But had the district court properly found that the Church failed to produce sufficient evidence to survive summary judgment?

    The district court relied upon an unpublished Eleventh Circuit case stating the proving causation required expert testimony. But Georgia law controlled this case. Under Georgia law, expert testimony was not necessarily required to prove causation. An insured could satisfy its burden of proof with circumstantial lay testimony. 

    Although none of the Church's witnesses actually saw Hurricane Matthew cause the roof damage, the Church's proposed expert witnesses could provide enough circumstantial evidence for a jury to find that the hurricane did, in fact, cause the roof damage. One witness testified that when he saw the church after the storm, he noticed that "trees were uprooted and debris was everywhere." He also saw leaks in the church building that he had never seen before. Another witness noticed that the entire roof had shifted. 

    Taken together, this evidence furnished facts from which a logical conclusion could be drawn that Hurricane Matthew caused the damage to the roof of the church. Therefore, the district court erred in granting summary judgment to Southern Mutual. The policy did not preclude the Church's claim, and sufficient lay-witness evidence was demonstrated for a reasonable jury to find in its favor.