Insurance Law Hawaii

COVID-19, Business Interruption Claim Survives Motion to Dismiss

    The federal district court in Virginia denied the insurer's motion to dismiss the insured's claim for losses due to COVID-19. Elegant Massage, LLC v. State Farm Mut. Auto. Ins. Co., 2020 U.S. Dist. LEXIS 231935 (E.D. Va. Dec. 9, 2020).

    Elegant Massage owned and operated its business providing therapeutic massages. Due to local and state orders that limited occupancy to 50% and required six feet between workstations for spas, Elegant voluntarily closed its operations on March 16, 2020, and remained closed through May 15, 2020. Elegant suffered a complete loss of income after closing on March 16, 2020. 

    Elegant had an all risk commercial property policy with State Farm. Elegant's claim for business losses was denied by State Farm because Elegant had voluntarily closed its business when there was no civil order to do so and there was no known damage to the business space resulting from COVID-19.

    Elegant sued. On State Farm's motion to dismiss, the issue was whether the closure was a fortuitous loss which caused a "direct physical loss" to Elegant's commercial property. The court found that the phrase "direct physical loss" had been subject to a spectrum of interpretations in Virginia on a case-by-case basis, ranging from direct tangible destruction of the covered property to impacts from intangible noxious gasses or toxic air particles that made he property uninhabitable or dangerous to use. After surveying various cases, the court found that while the spa was not structurally damaged, it was plausible that Elegant experienced a direct physical loss when the property was deemed uninhabitable, inaccessible and dangerous to use by the orders because of the high risk for spread of COVID-19. Therefore, Elegant submitted a good faith plausible claim to State Farm for a "direct physical loss'"covered by the policy. 

    The Civil Authority Coverage did not apply, however, because Elegant had not shown a causal link between any physically damaged or dangerous surrounding properties proximate to the insured property and a civil authority prohibiting Elegant from accessing or using their property. 

    The policy included a Virus Exclusion, to which the court next turned. Loss caused by fungi, virus or bacteria was excluded whether other causes acted concurrently or in any sequence with the excluded event to produce the loss.The court found that the Virus Exclusion did not apply here and that the anti-concurrent theory had not been established as law in Virginia.

    To be enforceable, the insurer had to draft the language of an exclusion that plainly and clearly set forth any limitation or coverage to the insured. The exclusion here particularly dealt with the "growth, proliferation, spread or presence" of "virus, bacteria or other microorganism" just as it applied to "fungi or wet or dry rot." The language supported the interpretation that the Virus Exclusion applied where a virus had spread throughout the property. There had to be a direct connection between the exclusion and the claimed loss endnote and not a tenuous connection anywhere in the chain of causation. In other words, although the Virus Exclusion did require that the virus was the cause of the loss, the connection had to be the immediate cause in the chain. Here, Elegant alleged that the local and state orders were the sole cause of the loss. Therefore, State Farm filed to meet its burden to show that the Virus Exclusion applied to Elegant's claim. 

Adding Negligent and Fraudulent Misrepresentation Claims in Amended Complaint against Broker Upheld

    The court approved the magistrate's decision granting a motion to amend the complaint against the broker for negligent misrepresentation and negligent misrepresentation. Ashford Locke Builders v. GM Contrs. Plus Corp., 2020 U.S. Dist. LEXIS 196646 (E.D. N. Y. Oct. 22, 2020). 

    The broker challenged the amended complaint, arguing that plaintiffs had not stated a cause of action for negligent or fraudulent misrepresentation because the broker did not make any misrepresentations to plaintiff nor did plaintiff plausibly allege justifiable reliance. For the negligent misrepresentation claim, the magistrate judge found that (i) the plaintiff had plausibly alleged that the broker was negligent in failing to obtain workers' compensation coverage, (ii) the plaintiff justifiably relied on the Certificate of Insurance, believing it covered workers' compensation, and (iii) it was reasonably foreseeable that the plaintiff would suffer injury. These allegations were sufficient at the pleading stage.

    The magistrate judge also found that plaintiff plausibly alleged fraudulent misrepresentation. The plaintiff alleged that it had a special relationship with the broker, that the broker intentionally provided misleading information regarding insurance coverage, and that the plaintiff reasonably relied on that information. These allegations were also sufficient at the pleading stage. 

    Finally, the broker objected to the magistrate's conclusion that "the plaintiff was entitled to damages that were in excess of the coverage the policy would have provided had coverage been procured" for its claims of negligent and fraudulent misrepresentation. For alleged tortious conduct, New Jersey law allowed damages in excess of the policy coverage if the plaintiff established negligent or fraudulent misrepresentation. 

Insurer's In-House Counsel's Involvement in Coverage Decision Opens Door to Discovery

    The Mississippi Supreme Court held that the insurer must produce written communications from and make available for deposition the in-house counsel who orchestrated the denial of coverage. Travelers Pro. Cas. Co. of Am. v. 100 Renaissance, LLC, 2020 Miss. LEXIS 409 (Miss. Oct. 29, 2020). 

    An unidentified driver struck a flagpole owned by the insured Renaissance, causing $2,134 in damages. Renaissance filed a claim with Travelers for uninsured-motorist coverage. The Travelers' claims handler, Charlene Duncan, determined there was no coverage because the flagpole was not a covered auto. Before corresponding with the insured, Duncan sought legal advice from Travelers' in-house counsel, Jim Harris. 

    Renaissance sued Travelers for coverage and bad faith. Renaissance then took Duncan's deposition and asked that she explain both the denial letter and the reasons Travelers denied the claim. Duncan repeatedly said she did not know the basis of the denial and that she had consulted with Harris. 

    Travelers  later paid  for the damage to the flagpole, but Renaissance continue to litigate its bad faith claim. Travelers moved for summary judgment. Renaissance asked for a continuance to conduct additional discovery, including the production of emails between Duncan and Harris and the deposition of Harris. The court ordered that the emails be produced for in camera review. The court then found that Travelers had waived the attorney-client privilege as it related to Harris. The court ordered that the emails be produced and Harris be deposed. Travelers filed an interlocutory appeal. 

    The Mississippi Supreme Court affirmed. The attorney-client privilege did not apply. Although Duncan signed the denial letter, it was prepared by someone else, most likely Harris. If so, Harris did not act as legal counsel by giving advice to Duncan to include in the denial letter. Instead, the denial letter contained Harris's reasons to deny the claim. 

    Travelers was ordered to produce the written communications between Duncan and Harris and to produce Harris for a deposition to discover his knowledge about Travelers' basis for denial of the claim. 

    

No Coverage for Collapse of Building

    Damage to a building caused by the break of a water pipe was not a collapse under the policy. Naabani Twin Stars v. Travelers Cos., 2020 U.S. Dist. LEXIS 196443 (D. N. M. Oct. 22, 2020).

    An underground water line ruptured on plaintiffs property This caused a collapse under the adjacent parking lot, which in turn caused land beneath the building go change positions and damage the building. A geotechnical consultant concluded that a material change in the site conditions occurred as a direct result of the rupture of the water pipe in the parking lot, and that those changes directly affected the settlement of the building.

    Travelers denied coverage for the damage. Travelers concluded that the building settlement was the result of subsurface movement, which invoked the earth movement exclusion. Travelers inspection concluded that the building was not in a state of collapse. The policy defined collapse as "an abrupt falling down or caving in of a building or structure, or any part of a building or structure, with the result that the building, or part of the building, cannot be occupied for its intended purpose."

    Plaintiff sued and Travelers moved for summary judgment. 

    The court found that the definition of "collapse" was clear and unambiguous. The court could not find any evidence to show that plaintiffs' building suffered a "collapse" as defined by the policy. The damage to the building fell squarely within the definition's exclusion, which did not cover standing buildings with "cracking, bulging, sagging, bending, leaning, settling, shrinkage, or expansion." Plaintiff did not identify any evidence of the building "falling down or caving in."  Instead, plaintiff contended the building was in danger of falling down or caving in. 

    Plaintiff also argued that the efficient proximate cause of the damage was the ruptured water pipe. But the policy's anti-concurrent causation clause displaced any benefit Plaintiffs might receive from the efficient proximate cause doctrine. To find otherwise would be to rewrite the policy. 

    Finally, the earth movement exclusion was applicable. The provision barred coverage for "loss caused directly or indirectly by any earth movement, whether natural or man-made, including  . . . earth sinking, rising or shifting, including soil conditions which cause settling. . ." Here the evidence was clear that the damage was caused by shifting soil, itself caused by the underground water movement. 

    Travelers' motion for summary judgment was granted. 

Ninth Circuit Affirms Denial of Coverage in Wrongful Death Action

    The Ninth Circuit affirmed the district court's granting of summary judgment to the insurer, agreeing there was no coverage for the defendant in a wrongful death action. National Fire & Marine Ins. Co. v. Hampton, 2020 U.S. App. 33215 (9th Cir. Oct 21, 2020).

    The wrongful death compliant alleged, and the defendant doctor's plea agreement supported, that defendant wilfully violated federal controlled substances laws, and that this violation resulted in the death of Diana Hampton. The professional liability policy excluded coverage for "[a]ny loss arising from, or in connection with . . . any event, health care event, or managed care event when intertwined with, or inseparable from . . . any willful violation of any law . . ." Therefore, there was no coverage for willful violations of the law. The exclusion clearly applied to this case. There was no duty to defend because there was no potential for coverage.

    Defendant sought a Rule 56 (d) continuance in order to conduct further discovery, but this was denied by the district court. The Ninth Circuit affirmed this as well because the affidavit submitted by the Estate in support of is request sought discovery related only to defendant and Hampton's doctor-patient relationship and the cause of Hampton's death. It did not seek any information necessary to accurately interpret the terms of defendant's professional liability policy such that the discovery would preclude summary judgment. 

Insured's Claim for Cyber Coverage Rejected

        Having failed to adequately secure cyber coverage, the insured law firm's lawsuit was properly dismissed by the trial court on summary judgment. Johnson v. Smith Bros. Ins., LLC, 2020 Vt. Unpub. LEXIS 98 (Vt. Sept. 4, 2020).

        The law firm attended a CLE seminar presented by the Vermont Attorneys Title Insurance Corporation. Scott Garcia, an employee of Smith Brothers, an insurance agency, gave a presentation on professional liability insurance focusing on cybersecurity issues, including fraudulent scams. After the presentation, one of the law firms members spoke with Garcia and expressed an interest in securing a professional malpractice policy with cyber security coverage. Garcia said he would check the firm's current policy, but was confident he could provide better coverage. It was unclear whether the firm ever provided its current policy.

    A couple of weeks later, the firm submitted an online application for professional liability coverage through the Smith Brothers' website. The application neither referenced the conversation with Garcia nor specifically requested cybersecurity coverage. Smith Brothers then sent the policy covering a one-year period. The policy included  coverage for up to $10,000 for losses resulting from a network or security breach in the performance of professional services. A year later, the firm renewed the same policy.

    Thereafter, the law firm conducted a residential real estate closing, representing the buyers. At the closing, the law firm provided the sellers with a $100,744 check for the net proceeds of the sale. That same day, the law firm received an email purportedly from the sellers' attorney stating that the sellers wanted the buyers to stop payment on the check and instead wire wire the money to a bank in Texas. The law firm did so, but learned a few days later that the firm was the victim of a wire fraud scam. The sellers had never asked that payment be stopped on the check nor that the funds be wired to a bank in Texas. 

    The law firm sought coverage under its policy. The claim was initially denied, but then the insurer paid $50,000 as part of a settlement of the sellers' lawsuit against the law firm. 

    The law firm sued Smith Brothers and Garcia for breach of contract and negligent misrepresentation. The trial court granted defendants summary judgment. 

    The Supreme Court affirmed. The negligent misrepresentation claim failed because no reasonable factfinder could conclude that the law firm reasonably relied on Garcia's representation at the CLE seminar to mean that the firm would be provided with some unidentified level of cybersecurity coverage in any policy that they applied for a month later on Smith Brothers' website without any request for such coverage.

    As for their breach of contract claim, the law firm made no showing that a contract was formed between the parties at the CLE seminar. The casual conversation with Garcia, which was nothing more than a preliminary informational discussion, did not amount to a contract to procure insurance. 

Washington State Court Rejects Insurer's Motion to Dismiss COVID-19 Claim

    A Washington state trial court denied the insurer's motion to dismiss the insured's business interruption and civil authority claims arising from COVID-19. Hill and Stout PLLC v. Mutual of Enumclaw Ins. Co., No. 20-2-0725-1 (Wash. Super. Ct. Nov. 13, 2020).  The case is here.

    Plaintiff Hill and Stout PLLC (H&S) was a dental practice with offices in two locations. H&S had a Business Owner's policy with Mutual covering equipment and supplies used in the business. The policy required H&S to show that a loss of income was related to "direct physical loss of or damage to" the covered property. 

    On March 19, 2020, government orders prohibited medical professionals, including dentists, from performing non-emergency routine procedures due to the coranavirus. No COVID-19 was detected at H&S's offices. H&S submitted a claim to Mutual for business interruption and civil authority coverage, but the claim was denied.

    H&S brought suit. Mutual argued H&S failed to allege "direct physical loss" under the policy. H&S argued that the terms "direct physical loss of" or "damage to" the covered property were ambiguous. Further, H&S suffered a direct physical loss of covered property when the dental offices and dental equipment could not be used for their intended use. Given the government orders, there was also a triable issue as to H&S's access to the property by reason of property damage occurring at locations other than their business. 

    The court noted that the policy did not define "direct physical loss," loss of" or "damage to." The policy language used "or" to separate the "direct physical loss of" and "damage to," providing for an alternative means of coverage. The dictionary definition for "loss" included "deprivation." The court found that H&S's position that the dental practice had a "direct physical deprivation" of its property when they were unable to see patients and practice dentistry was a reasonable interpretation of the policy.

    While there was no factual allegation of physical alteration of the property, "physical loss of" provided an alternative basis for coverage. Otherwise the policy would use one or the other term and not both. The fact that both terms were included in the coverage provision showed that the drafters of the policy meant the term "physical loss of" to mean something other than "damage to." Mutual's argument that gave the same exact meaning to both terms contradicted and ignored the clear intent of the policy. 

    The court therefore found that the phrase "physical loss of" was ambiguous because it was fairly susceptible of two reasonable interpretations. The motion to dismiss was denied.

Hawaii Supreme Court Tackles Chain-of-Events Test in UM Claim

    In responding to a certified question from the Ninth Circuit, the Hawaii Supreme Court determined that a permissive user was entitled to uninsured motorist benefits under the chain of events test when injured by an uninsured motorist. State Farm Mut. Auto. Ins. Co. v. Mizuno, 2020 Haw. LEXIS 359 (Haw. Nov. 20, 2020). 

    Mizuno received permission from his girlfriend, Wong, to use her vehicle to deliver the couple's bills to the post office and to drive to work. After dropping of the bills, Mizuno was struck and injured by an unidentified driver. He collected compensation for injuries under his own auto policy and then sought benefits under Wong's policy for UM coverage.

    The State Farm UM coverage provided that State Farm "will pay damages for bodily injury an insured is legally entitled to recover from the owner or driver of an uninsured motor vehicle." The policy defined "insured" to include any person occupying the vehicle with a reasonable belief that he was entitled do so. State Farm argued that the policy occupancy restriction for uninsured users, limiting the meaning of "occupying" to situations where the "other person" was "in, on, entering, or exiting" the vehicle, excluded coverage for Mizuno. 

    State Farm sued in federal district court for a declaratory judgment and obtained summary judgment on the issue of whether Mizuno was "occupying" Wong's vehicle at the time of the accident. On appeal, Mizuno argued he was entitled to UM coverage because he was using the insured vehicle to deliver mail and due to an uninterrupted "chain of events" involving the insured vehicle, was injured. 

    The Ninth Circuit certified the following question to the Hawaii Supreme Court:

Under Hawaii law, is a permissive user of an insured vehicle, whose connection to the insured vehicle is permission to use the vehicle to run errands and drive to work, entitled to uninsured motorist (UM) benefits under the chain-of-events test because he was injured by an uninsured motorist?

    The Hawaii Supreme Court answered in the affirmative. The court broadly interpreted Hawaii's UM statute so that UM benefits applied even when a individual was not "in, on, entering, or exiting" the insured vehicle. Under the chain of events test, the factual determination for whether UM coverage was available for a permissive user injured outside of the insured vehicle was whether the claimant could demonstrate some connection with the insured vehicle.

    Mizuno's case fell squarely within the chain of events test. His use was permissive. Further, Mizuno had some connection to the insured vehicle. 

Hawaii Court of Appeals Confirms Bad Faith Exists Even if No Contractual Duty to Pay Benefits

    The Hawaii Intermediate Court of Appeals reversed the trial court's granting of summary judgment to the insurer on the insured's bad faith claim. Carvalho v. AIG Hawaii Insurance Company, Inc., 2020 Haw. App. LEXIS 382 (Haw. Ct. App. Nov. 16, 2020).

    Plaintiff Carvalho's son was killed in a two-car accident. The other car and driver were uninsured. The deceased son was covered by a policy issued by AIG to his maternal grandparents. Plaintiff made a clam for uninsured motorist (UM) and underinsured motorist (UIM) benefits under the AIG policy. AIG claimed that only non-stacked UM and UIM coverages totaling $70,000 were available. 

    Carvalho filed suit against AIG seeking a declaratory judgment for increased and stacked UM and UIM coverage totaling $1.2 million under the AIG policy. AIG later agreed that the stacked maximum UM and UIMj coverage limits were $1.2 million. AIG maintained, however, that the value of the wrongful death claim had not yet been resolved. 

   The court proceeding was stayed so that an arbitration could take place pursuant to the policy. An arbitration award of $1.75 million was made to the son's estate and Carvalho. AIG paid $1.2 million to Carvalho, reflecting policy limits. Once the stay was lifted, AIG moved for summary judgment on all remaining claims. The trial court granted AIG's motion. 

    On appeal, AIG argued Carvalho could not establish that she had incurred any damages as of February 18, 2008, the date that AIG by letter recognized the increased UM/UIM policy limits, where it was not until April 2, 2009 that the arbitrator determined the amount of damages to be awarded.

    The appellate court noted, however, that under Hawaii law an insured could maintain a claim against an insurer for bad faith mishandling of the insured's claim even where the insurer had not contractual duty to pay any benefits. Further, Carvalho was not required to prove that she suffered economic loss caused by AIG's alleged bad faith in order to recover emotional distress damages caused by AIG's alleged bad faith, which she sought in her complaint. Accordingly, contrary to AIG's argument, summary judgment was not appropriate on the basis that the February 18, 2008 letter acknowledged the increased UM/UIM policy limits, before the arbitration award was made in excess of AIG's payment. AIG's obligation to act in good faith was independent from its contractual obligation to tender benefits to the insured.

    Therefore, summary judgment on the bad faith claim was not appropriate. Thanks to my blogging colleague, Mark Murakami (www.hawaiioceanlaw.com) for flagging this case.

Blog is Thirteen Years Old

    Insurance Law Hawaii is thirteen years this week, 1453 posts later. We began in December 2007.

    We strive to keep readers abreast of new developments in cases from Hawaii and across the country. Coverage issues in the past year have been dominated by COVID-19 and business interruption claims. This trend will likely continue over the next year and we will do our best to track developments. 

    Other Damon Key blogs to visit are www.inversecomdemnation.com [here] authored by Robert Thomas, Mark Murakami's  www.oceanlawhawaiil.com [here] and www.hawaiiconstructionlaw.com [here] by Anna Oshiro.

    Thank you for following along as we head into our fourteenth year.