Insurance Law Hawaii

Missouri Federal District Court Denies, In Part, Insurer's Motion for Summary Judgment on COVID-19 Claims

    The federal district court denied the insurer's motion for summary judgment to dismiss the restaurant's business interruption claim because expert testimony created a factual issue on whether COVID virus particles had actually contaminated the insured's property. K.C. Hopps v. Cincinnati Ins. Co., 2021 U.S. Dist. LEXIS 179633 (W.D. Mo. Sept. 21, 2021).

    The insured owned several bars, restaurants, catering services and event spaces. Its properties were insured under an all-risk policy issued by Cincinnati. 

    In March 2020, the insured's operations were limited to delivery, drive-thru, and carry out services due to government shutdown orders. The insured submitted a claim to Cincinnati for coverage under the business interruption provisions. The claim was denied, and the insured filed suit. Cincinnati's motion to dismiss was denied, Now both parties moved for summary judgment. 

    Under Eighth Circuit precedence, there had to be some physicality to the loss or damage of property. The court agreed with the insured that proof of physical contamination was sufficient to meet the policy's requirement for physical loss or damage. The insured submitted evidence supporting the inference that COVID-19 was physical, contaminated its premises, and made the property unsafe. 

    Cincinnati argued that the insured could not demonstrate it suffered a physical loss or physical damage because it had no evidence that the virus was present on its premises. The insured relied on its expert, an academic molecular epidemiologist. He opined that it was more likely than not that the virus was present on the insured's property. He relied on data related to the community spread of the virus in the area and the particular vulnerability of bars and restaurants to sustain and spread the virus to support his opinion. The report amounted to more that a scintilla of evidence to support his conclusions. The insured was not required to present definitive proof of the virus's presence, but instead had to prove it was more like than not that the virus physically contaminated its premises. A reasonable juror could conclude that the virus was present and rendered the property unsafe. Cincinnati was not entitled to summary judgment on this point. 

    The court granted Cincinnati's motion in regards to Civil Authority coverage. While government stay-at-home orders limited the insured's operations, they did not prevent the insured from accessing its premises.

    The court then turned to the insured's motion for summary judgment. Again, there were genuine issues of material fact, including whether the virus was present on the insured's premises, whether the insured's operations were reduced to remediate the physical loss or physical damage, and the extent of the insured's damages. Therefore, the insured was not entitled to summary judgment.

Court Finds Possible Sliver of Coverage for COVID-19 Claim

    The court granted the insurer's motion for judgment on the pleadings, in part, but left the door open for the insured to pursue claims under two provisions in the policy. Monarch Casino & Resort v. Affiliated FM Ins. Co., 2021 U.S. Dist. LEXIS 179812 (D. Colo. Sept. 17, 2021).

    Monarch owned a casinos in Reno, Nevada and Black Hawk, Colorado. Monarch submitted a claim to its insurer, Affiliated, for business interruption losses due to COVID-19. Monarch alleged that it incurred business interruption losses of between $7,500,000 and $12,500,000 a month due to COVID-19 and the attendant executive orders directing the closure of the two casinos.

    The policy included two communicable disease coverage provisions. The Commnicable Disease-Property Damage exemption from the communicable disease exclusion provided that if access to a described location with the presence of a communicable disease was limited by a government order, the policy would cover the reasonable and necessary costs incurred by the insured for the cleanup, removal, and disposal of such presence of communicable disease from the insured property. The Communicable Disease-Business Interruption exemption covered the business interruption loss incurred during the period in which the property was not accessible due to government orders issued as a result of the presence of communicable disease.

    The dispute was not whether these exemptions applied to  Monarch's claims, but whether the exemptions rendered the Contamination Exclusion unenforceable as a whole. Monarch argued that the policy could not exclude coverage for viruses while also including coverage for communicable diseases. 

    The court found that the Communicable Disease exemptions were not irreconcilable with the Contamination Exclusion. The exemptions did not conflict with the exclusions; they simply carved out narrow circumstances where coverage was permitted. While Monarch could be entitled to limited coverage under the Communicable Disease exemptions, Monarch's request for coverage for the full amount of the losses in incurred was barred by the Contamination Exclusion. 

    It was also possible that Monarch was entitled to Professional Fees Coverage, which covered the reasonable and necessary expenses incurred by the insured of certain professionals engaged to determine the amount of loss payable under the policy. Affiliated offered no argument for why it was entitled to judgment on the pleadings for claims based on this provision. It was therefore not entitled to judgment on the pleadings as to claims based on this provision.

    Monarch's remaining claims under the various business interruption provisions were precluded. Affiliated's motion for judgmenon the pleadings was granted in part. 

Eleventh Circuit Finds No Coverage for Faulty Workmanship Claims

    The Eleventh Circuit affirmed the district court's grant of summary judgment to the insurer on the general contractor's claims for damages due to faulty workmanship. Tricon Dev. of Brevard v. Nautilus Ins. Co., 2021 U.S. App. LEXIS 27317 (11th Cir. Sept .10, 2021). 

    Tricon was the general contractor for a condominium project in Florida. Tricon hired a subcontractor to fabricate and install metal railings for the project. The subcontractor was insured by Nautilus under two CGL policies. The policies had endorsements to add Tricon as an additional insured. 

    The subcontractor fabricated some of the railings, but they had defects and damage. Further they were not installed properly and did not meet the project's specifications. Tricon found another manufacturer to fabricate new railings to satisfy the projects' requirements. Tricon agreed to pay the cost of removing the subcontractor's railings and fabricating and installing new ones. If submitted a claim to Nautilus to cover these costs.

    Nautilus denied the claim. Tricon sued and the district court granted summary judgment to Nautilus.

    On appeal, the Eleventh Circuit noted that the policies at issue were post-1986 standard form CGL policies with products-completed operations hazard coverage governed by Florida law. Such policies did not cover the costs of replacing defective products. 

    Applying Florida law, there was no coverage if there was no damage beyond the faulty workmanship, i.e., unless the faulty workmanship damaged some otherwise non-defective component of the project. Further, under Florida precedent, if a subcontractor was hired to install a project component and, by virtue of his faulty workmanship, installed a defective component, then the cost to repair and replace the defective component was not "property damage."

    Here, Tricon alleged that the subcontractor's railings were deficient due to having defects and damage, not being installed properly, and not satisfying the project's specification. Tricon did not allege that the subcontractor's faulty workmanship damaged otherwise non-defective components of the project. Thus, the costs that Tricon incurred in removing the subcontractor's railings and the fabrication and installation of new railings did not constitute "property damage" under the policies. 

    

Forum Selection Provision Not Binding in Louisiana

    The insurer's motion to dismiss based upon the policy's forum selection provision was denied. Oak Haven Mgmt., LLC v. Starr Surplus Lines Ins. Co., 2021 U.S. Dist. LEXIS 171611 (W.D. La. Sept. 9, 2021).

    The insured retirement home suffered property damage from Hurricane Laura and Hurricane Delta. After disagreements with Starr over the amount of the damage, the insured filed suit in the federal district court in Louisiana. Starr moved to dismiss, seeking to enforce the forum selection clause which required suits to be filed in New York. 

    The insured argued the clause violated a strong public policy expressed in a Louisiana statute, which forbid forum selection clauses and arbitration clauses in insurance policies. The statute was amended in 2020, resulting in a clear limitation on forum selection clauses. Starr argued that the prior version of the statute applied, rather than retroactively applying the amended statute.   

    The Louisiana Supreme Court had held, however, that laws prohibiting forum selection clauses were procedural in nature and could be retroactively applied to causes of action accruing before their effective date. Moreover, the Louisiana legislature's prohibition against forum selection clauses in insurance policies reflected a strong public interest in having disputes over policies covering Louisiana residents or property decided locally. Accordingly, the forum selection clause was unenforceable in this matter. 

Hawaii Federal District Court Remands Coverage Action

    The Federal District Court for the District of Hawaii remanded the coverage case to state court after applying the Brillhart and Dizol factors. HK Holdings, LLC v. Avemco Ins. Co., 2021 U.S Dist. LEXIS 174039 (D. Haw. Sept. 14, 2021). 

    HK Holding was a limited liability company organized and existing under the laws of the State of Hawaii. It owned and operated the Jade Dynasty Seafood Restaurant. Defendant Avemco Insurance Company was organized and existed under the laws of the State of Maryland. HK Holding held a Employment Practice Liability Insurance Policy issued by Avemco. The policy covered loss for a "Wrongful Employment Act."

    HK Holdings was sued in a class action in state court. The complaint alleged that gratuity charges applied by the restaurant were not distributed 100% to the non-management employees as tip income. The class action suit alleged several violations of various state statutes.

    Avemco denied coverage asserting that the complaint did not allege a "Wrongful Employment Act" and that the damages sought by the employees did not constitute a "Loss" as defined in the Policy. 

    HK Holdings filed suit in state court against Avemco, seeking a declaratory judgment that Avemco had a duty to defend and a duty to indemnify HK Holdings against the class action suit. Avemco removed the compliant to federal district court. HK Holdings filed a Motion to Remand, urging the federal court to avoid needless determinations of Hawaii state insurance law and to avoid duplicative litigation with the on-going class action suit in state court.

    The federal court noted it had discretion under the Declaratory Judgment Act to exercise its jurisdiction when the complaint was limited to declaratory relief. The court analysed the three factors set forth in Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491 (1942) in evaluating whether to decline jurisdiction over a complaint limited to declaratory relief. 

    The court first determined that there were parallel state court proceedings. Both the underlying class action suit and the Declaratory Judgment Complaint involved overlapping factual circumstances. Both cases required factual determinations as to the employment practices of HK Holdings. The existence of the parallel state court proceedings weighed strongly in favor of the court exercising its discretion to decline to exercise jurisdiction. 

    The court also noted that insurance law was regulated by the states. The class action suit asserted violations of several Hawaii state statutes. This factor supported a finding that the federal proceeding could involve the federal court making unnecessary determinations of state law. 

    The court found no compelling federal interest in the case. The court, however, found the forum shopping prong neutral. There was no evidence that the case was brought merely for procedural fencing and there was no evidence that Avemco's removal was reactionary or for an improper purpose.

    There was concern over duplicative litigation. Facual issues in the underling class action suit paralleled the factual issues that had to be resolved in the insurance coverage case. The central factual question in the coverage dispute concerned whether HK Holdings engaged in a Wrongful Employment Practice. The class action suit involved overlapping issues with respect to HK Holdings and its employment practices. Therefore, the Brillhart facts favored remanding the proceedings.

    Turning to the factors utilized by the Ninth Circuit in Gov't Emps. Ins. Co. v. Dizol, 133 F.3d 1220 (9th Cir. 1998), the court found that the declaratory action in federal court would not settle all aspects of the controversy. Second, although the declaratory judgment action would serve a useful purpose in clarifying the legal relationship between HK Holdings and Avemco, it would not serve to streamline the underlying class action proceedings. The two lawsuits had overlapping issues and maintaining actions in separate forums would entangle the state and federal court systems. Third, the state court forum would provide as convenient of a forum as the federal district court would and would avoid duplicative litigation. Finally, there were procedural considerations of maintaining suits in two separate forums that favored remanding proceedings.

    Both the Brillhart and Dizol factors favored that the federal court exercise its discretion to remand proceedings. 

Contractor Entitled to Continued Defense Against Allegations of Faulty Construction

    The U.S. District Court found that the contractor was entitled to a defense in the underlying state court action. Pa. Nat'l Mut. Cas. Ins. Co. v. Zonko Builders, 2021 U.S. Dist. LEXIS 168855 (D. Del. Sept. 7, 2021).

    Zonko was the general contractor for building the Salt Meadows Townhomes Condominium. This included supervising subcontractors in the installation of siding, house wrap, and flashing in five buildings between 2005 and 2007. In 2016, Salt Meadows and its individual members ("Association") found property damage in the condominiums.

    The Association sued Zonko in state court, alleged that resulting damages included drywall damage in ceilings or walls, flooring and carpet, water damage around window trim, rot on window frames, incorrect flashing around roofs and windows, possible ridge vent leaks, and possible foundation issues. 

    Zonko tendered to Penn National, who agreed to defend. Penn National then filed this suit and a motion for judgment on the pleadings, hoping to no longer have to pay defense costs. 

    The court first determined an occurrence was alleged in the underlying case. The policy's Subcontractor Exception confirmed that Penn National would provide coverage for the faulty workmanship of subcontractors.  The endorsement provided coverage for "property damage" to "your work" if such "'property damage' is the result of work performed on your behalf by a subcontractor that is not a Named Insured." The underlying lawsuit alleged that subcontractors performed defective work causing property damage, which constituted an occurrence.

    Further, none of the exclusions raised by Penn National applied. The "your product" exclusion was not applicable because it "your product" was defined as "goods or products, other than real property." The underlying complaint concerned property damage to real property, not damage to Zonko's products or equipment.

    The "contractual liability" exclusion did not bar coverage because the underlying action also plead negligent construction and respondeat superior theories. The court similarly found that the exclusions for "damage to impaired property," "recall of products," and "fungi or bacteria" were not applicable. 

    Therefore, Penn National's motion for judgment on the pleadings was denied.

Eighth Circuit Affirms Finding of Bad Faith, Award of Costs and Prejudgment Interest

    The Eighth Circuit affirmed the district court's finding of bad faith and award to the insured of taxable costs and prejudgment interest. Selective Ins. Co. v. Sela, 2021 U.S. App. LEXIS 26062 (8th Cir. Aug. 30, 2021). 

    The insured suffered two hail storms that damaged his home. In 2010, the first storm caused over half a million dollars in loss. Before submitting a claim to his original insurer or beginning any repairs, the insured secured a new policy with Selective. The policy did not exclude pre-existing damage, it did preclude coverage if the insured "willfully and with intent to defraud, concealed or misrepresented any material fact or circumstance relating to the insurance."

    Before issuing the policy, Selective appraised the property and assigned a $1.6 million value to the home. The insured then filed a claim with his original insurer and received $510,787.23 for actual cash value of his loss. Neither the terms of this settlement nor this new policy with Selective required the insured to repair all of the 2010 damage. 

    A second storm hit in 2015, damaging the insured's roof. Selective sent an adjuster, who found the damage was "significant." Selective then received an anonymous letter claiming the insured was a serial fraudster who was falsifying claims, Selective brought in its special investigation unit to look into potential fraud. Selective was concerned that the insured said he had repaired all of the 2010 damage while only providing documentation for about $200,000 of work. Selective eventually denied the claim based on fraud.

    Selective then filed suit for a declaration of no coverage. The insured filed a counterclaim for breach of the policy and bad faith. The court determined that the jury would decide coverage, an appraisal panel would determine damages, and the court would decide bad faith. The jury found no fraud, the damage issue went to appraisal, and a date for the bench trial was set.

    A week before the appraisal was finished, Selective moved for summary judgment, arguing the Minnesota statute would bar the bad faith claim because the claim would be resolved by appraisal. The district court denied the motion, held a bench trial and found that Selective denied the claim in bad faith. It awarded judgment for $1,024,233.10, which included the actual case value award, taxable costs, and prejudgment interest. Selective appealed.

    The Eighth Circuit noted that the Minnesota statute allowed an insured to recover taxable costs if an insurer lacked a reasonable basis for denying benefits and did so knowing of or in reckless disregard of the lack of a reasonable basis. The Eighth Circuit agreed with the district court that there was no reasonable basis to deny the insured benefits. Selective recklessly disregarded the lack of a reasonable basis to deny the claim. Prejudgment interest was also properly granted by the district court. Under Minnesota precedent, the district court found that Selective had enoguht information in the property loss notice to assess its potential liability. Prejudgment interest was due from this point forward.

Portion of COVID-19 Claim Survives Motion to Dismiss

    While the insured failed to demonstrate direct physical loss, Crisis Event coverage was still possible. SJP Investment Partners LLC v. Cincinnati Insurance Company, 2021 U.S. Dist. LEXIS 162612 (N.D. Ala. Aug. 27, 2021).

    The insured owned a hotel in Birmingham. The state's public health orders limited operations and caused temporarily closures due to the pandemic. COVID-19 was present in the hotel on a least one occasion. In mid-February 2020, a previous guest informed the hotel that she had contracted the virus and subsequently two hotel employees tested positive for the virus. 

    Cincinnati denied the claim for business interruption because the policy required physical injury to tangible property. Civil Authority and Crisis Event coverage were also denied.

    The insured sued and Cincinnati moved to dismiss. The court there was no business interruption coverage. When an item or structure merely needed to be cleaned, the insured did not suffer a loss which was both "direct" and "physical." A claim that COVID-19 was present was dismissed for failure to state a claim. 

     Nor did the Civil Authority claim survive the motion to dismiss. Again, the policy required loss or damage to property other than at covered locations. The mere presence of COVID-19 at a location did not cause loss or damage

    Cincinnati argued that directly physical loss to property was also required for Crises Event coverage. The Crises Event coverage, however, modified the property coverage part. The different types of coverage within this section were based on the presence of a "covered crisis event," not "direct physical loss or damage." The court could not decide at this point that the insured's pleadings related to the Crisis Event coverage would be futile. Therefore, the motion to dismiss Crises Event coverage was denied and the insured was given the opportunity to replead its claims for this coverage.