Insurance Law Hawaii

Texas Supreme Court Holds Stipulated Extrinsic Evidence May Be Considered in Determining Duty to Defend

    Responding to certified questions from the Fifth Circuit, the Texas Supreme Court held that in limited circumstances, extrinsic evidence may be considered in determining the duty to defend. Monroe Guar. Ins. Co. v. Bitco Gen. Ins. Corp., 2022 Tex. LEXIS 148 (Tex. Feb. 11, 2022). 

    The two insurers each provided CGL coverage to the insured, 5D Drilling & Pump Service, Inc., at different times. BIitco provided two consecutive one-year CGL policies covering October 2013 to October 2015. Monroe's CGL policy covered 5D from October 2015 to October 2016. 

    5D was sued by David Jones for breach of contract and negligence, seeking damage allegedly resulting from 5D's drilling operations on Jones's property. Jones contracted with 5D in the summer of 2014 to drill a 3600-foot irrigation well on his farmland. The complaint did not detail when 5D's purportedly negligent acts occurred or even when 5D began or stopped the work. 

    5D demanded a defense from both insurers. Bitco defended under a reservation of rights, but Monroe refused to defend, contending that any property damage occurred before its policy period began. Bitcon sued Monroe in federal district court, seeking a declaration that Monroe owed a defense to 5D. Bitco and Monroe stipulated that 5D's drill bit stuck in the bore hole during 5D's drilling "in or around November 2014," or about ten months before Bitco's policy would end and Monre's would begin. Both parties sought summary judgment on the issue of whether Monroe owed a duty to defend.

    The federal district court applied the eight-corners rule and concluded Monroe owed a duty to defend. Monroe appealed. The Fifth Circuit certified questions to the Texas Supreme Curt asking whether consideration of extrinsic evidence was permissible as articulated in Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523 (5th Cir. 2004). Northfield predicted the Texas Supreme Court would recognise an exception to the eight-corners rule and apply it only "when it is initially impossible to discern whether coverage is potentially implicated and when the extrinsic evidence goes solely to a fundamental issue of coverage which does not overlap with the merits of or engage the truth or falsity of any facts alleged in the underlying case." Id. at 531.

    The Texas Supreme Court adopted the Northfield standard. If the underlying petition stated a claim that could trigger the duty to defend, and the application of the eight-corners rule, due to a gap in the plaintiff's pleading, was not determinative of whether coverage existed, Texas law permitted consideration of extrinsic evidence provided the evidence (1) went solely to an issue of coverage and did not overlap with the merits of liability, (2) did not contradict facts alleged in the pleading, and (3) conclusively established the coverage fact to be proved. 

    The second certified question ask whether, when applying the exception, could the court consider extrinsic evidence of the date of an occurrence? The court answered yes, so long as the extrinsic evidence met the other requirements set forth by the court. Here, however, the extrinsic evidence did not pass the test. Evidence of the date of property damage overlapped with the merits. A dispute as to when property damage occurred also implicated whether property damage occurred on that date, forcing the insured to confess damages at a particular date to invoke coverage, when its position could very well be that no damage was sustained at all. Because the use of the stipulation would overlap with the merits of liability, it could not be considered in determining whether Monroe owed a duty to defend. 

Insurer Must Defend Faulty Workmanship Claims

    The court determined that the insurer improperly denied a defense for construction defect claims made against the insured. Amerisure Mut. Ins. Co. v. McMillin Tex. Homes, 2022 U.S. Dist. LEIS 40363 (W.D. Texas March 8, 2022). 

    McMillin was a developer, general contractor and home seller. It constructed multiple homes in various communities in the San Antonio area. After the homes were completed, homeowners observed defects in the artificial stucco exterior finish. After claims were lodged against McMillin, the various claims were tendered to Amerisure. Amerisure filed for declaratory judgment that it had to duty to defend or indemnify and moved for summary judgment.

    Amerisure first argued the homeowners' faulty workmanship claims did not allege "property damage" under the policies. It argued there were no allegations that any property damage existed, but merely that the stucco suffered from construction defects. The court disagreed. Among the allegations was the statement that due to the construction defects, the homes suffered damage "not only to the exterior stucco, but also to the underlying wire lath, paper backing, house wrap, flashing, water resistive barriers, sheathing, interior walls, interior floors and/ or other property." Consequently, the underlying claims amounted to property damage.

    The court then considered exclusions relied upon by Amerisure. Exclusions J (5) and (6) precluded coverage for faulty workmanship. Both were limited by the phrase "that particular party" of property damaged due to the insured's work. This limitation precluded application of the exclusions to damage on other parts of the home or non-defective portions of the insured's work. Here, several of the homeowners alleged damage to parts of the house beyond the stucco system, including interior walls, interior floors and other property. Therefore, Amerisure failed to establish as a matter of law that Exclusions J (5) and (6) prohibited coverage for the homeowners' claims. 

    Next the court determined that Exclusion k did not apply to the construction of a building because buildings were constructed or erected, not manufactured. 

    Exclusion L, Damage to Your Work, only applied to exclude damages to the insured's "competed" work. The underlying complaints did not specifically allege when property damage from McMillin's work occurred. The property damage could have occurred before, during, and after completion of McMillin's work. 

    Finally, there was a duty to defend rip and tear allegations. Amerisure asserted that the policy did not cover tear-out work performed to remove and replace the stucco system because defective work itself did not constitute covered "property damage" and any ensuing tear-out work would not qualify for independent coverage under the policies. The extent of any property damage and whether repair or removal of the stucco exterior was necessary to fix any covered damages would depend upon the facts in each instance. For the duty to defend analysis, the insured needed only to demonstrate the potential that tear-out work would be necessary. 

    The duty to indemnify could only be determined when the underlying suit was concluded.

    Consequently, Amerisure's motion for summary judgment was denied. 

    

Broker's Conversations with Insured's Attorney Privileged

    The court denied the insurer's motion to compel seeking communications between the insured, its attorney and the insured's  broker. M&C Holdings Del. P'ship v. Great Am. Ins. Co., 2021 U.S. Dist. LEXIS 186358 (S.D. Ohio Sept. 29, 2021). 

    The insured's employee siphoned off commission payments to fictitious recipients. Great American had issued a crime insurance policy to the insured. The insured, through its broker, Aon, notified Great American about the potential loss under the crime policy. Aon also provided Great American with a proof of loss form in the amount of $1,954,329. Great American denied coverage for large portions of the claim.

    The insured sued and Great American sought communications that Aon had with the insured's legal counsel. Aon and the insured had entered an agreement whereby Aon would act as an independent contractor and not an agent of the insured. Aon helped the insured submit its claim because the insured lacked a dedicated staff capable of pursuing the claim and advocating for coverage. 

    Opposing the motion to compel, Aon submitted a declaration. An Aon employee often participated in communications with the insured's employees and lawyers to assist the lawyers in their efforts to provide legal services regarding the claim. 

  The insured argued that these communications were protected under the privilege by the necessary intermediary doctrine. Various courts had held that brokers were considered to be "insiders" with the insured parties for purposes of the insured party's attorney-client privilege.

    The court noted that the majority of the withheld documents were created after Aon and the insured entered into their agreement for the purpose of assisting the insured with the claim. After review the documents in camera, the court was satisfied that the communications were made to assist counsel in providing legal advice and strategy to the insured.  Accordingly, the motion to compel was denied.

Attempt to Overrule Trial Court's Order to Produce Underwriting Manual Fails

    After being ordered by the trial court to produce its underwriting manual, the insurer's writ of certiorari to quash the order was denied by the Florida Court of Appeals. People's Trust Ins. Co. v. Foster, 2022 Fla. App. LEXIS 542 (Fla. Ct. App. Jan. 26, 2022). 

    The insured sued after his claim for damage caused by a water pipe in his home that leaked. In discovery, the insurer refused to produce its underwriting manual. Ruling on a motion to compel, the trial court ordered that the manual be produced. The insurer appealed.

    On appeal, the insurer argued its underwriting manual was categorically prohibited in breach of contract cases until and unless bad faith litigation commenced. Although courts had quashed the premature discovery of insurers' business practices, claims files, underwriting files, underwriting manuals, and the like in breach of contract actions, there was no categorical legal rule prohibiting discovery of underwriting manuals in breach of contract cases, especially if they were relevant. 

    Here, the insured argued that some scope-of-inspection-related information in the underwriting manual could be relevant to contesting the insurer's affirmative defense that the insured's pipe damage predated the inception of his policy. On the existing record, there was no basis for rejecting the merits of the insured's assertion that the underwriting manual was relevant. Therefore, the petition for writ of certiorari was denied. 

Burden to Prove Exception to Exclusion Falls on Insured

    In a dispute between two insurers, the Ninth Circuit relied upon Nevada law in finding that the burden of proving that an exception to the exclusion applies was on the insured. Zurich Am. Ins. Co. v. Ironshore Specialty Ins. Co., 2022 U.S. App. LEXIS 1626 (9th Cir. Jan. 20, 2022). 

    Ironshore insured seven subcontractors. The policy included an exclusion providing there was no coverage for any property damage for the subcontractors' for "work performed prior to the policy inception." An exception to the exclusion provided that the exclusion did not apply to property damage that was "sudden and accidental and takes place within the policy period."

    The seven subcontractors were sued for work they had performed. Zurich defended and indemnified the subcontractors. Zurich then sued Ironshore seeking contribution and indemnification for defense and settlement costs. The parties stipulated that all construction work at issue had been completed before the inception of Ironshore's policy and that none of the complaints against the subcontractors alleged that sudden and accidental damage had occurred after the inception of Ironshore's policy. 

    After a bench trial, the district court ruled in favor of Zurich on the ground that Ironshore failed to carry its burden of showing the that the exception to the exclusion was not applicable. Ironshore appealed. 

    The Ninth Circuit found that the district court erred in holding that Zurich was entitled to judgment because Ironshore failed to meet its burden of proving that the exception to the exclusion was not applicable. The Nevada Supreme Court had held that (1) the burden of proving the applicability of an exception to an exclusion for coverage fell on the insured, and (2) the insured "may rely on any extrinsic evidence that was available to the insurer at the time the insured tendered the defense."

    Therefore, the burden of proving that the exception to the exclusion for coverage was applicable fell on Zurich. The judgment issued by the District Court was reversed.

 

Prior Occurrence Exclusion Bars Coverage for Construction Defects

       While the insured's faulty work constituted an occurrence under Florida law, a prior occurrence exclusion barred coverage. Pro-Tech Caulking & Waterproofing v. TIG Ins. Co., 2022 U.S. Dist. LEXIS 12319 (S.D. Fla. Jan. 19, 2022).

    Pro-Tech was a waterproofing subcontractor for construction of a oceanfront condominium building and was responsible for the installation of waterproofing systems on the Project. Pro-Tech entered into a separate contract with the developer, BRE Point Parcel, LLC to install a traffic coating on the garage floors.

    BRE sued the general contractor, Pro-Tech and others for construction defects. The underlying action alleged that Pro-Tech, among other things, failed to wrap the filter fabric to protect the weep holes, improperly installed sealants between the stucco and the underside of the horizontal tile at the balcony slab edge, and failed to properly install traffic coating in one garage. The underlying complaint did not state exactly when the "property damage" resulting from Pro-Tech's alleged defective work occurred.

    Pro-Tech tendered under its CGL policy to TIG. The policy excluded prior occurrences and pre-existing damage. The policy stated, in part, "It is agreed that this insurance does not apply to any 'occurrence' of incident, claim or 'suit' which first occurred prior to the inception date of this policy . . ." The tender was denied. Pro-Tech sued TIG. TIG moved for summary judgment,

    The court concluded that TIG was entitled to summary judgment. Coverage did not apply because the relevant "occurrences" were in the process of occurring at the inception of the policy period. Pro-Tech's alleged defective work was fully performed prior to the start of the policy period. Accordingly, TIG did not have a duty to defend and summary judgment in TIG's favor was warranted. 

    

    

No Duty to Defend Opioid Cases Where Only Economic Damages Sought in Underlying Case

    Reversing the lower court, the Delaware Supreme Court found there was not duty to defend a supplier of opioids when the counties pursuing the underlying litigation only sought economic losses. Ace Am. Ins. Co. v. Rite Aid Corp., 2022 Del. LEXIS 9 (Del. Jan. 10, 2022).

    Two Ohio counties sued Rite Aid to recover opioid-epidemic-related economic damages. Policies issued by Rite Aid's insurers provided, "We will pay those sums that the insured becomes legally obligated to pay as damages because of 'personal injury' . . . to which this insurance applies." The lower court determined that the lawsuits sought damages "for" or "because of" personal injury  because there was arguably a causal connection between the counties' economic damages and the injuries to their citizens from the opioid epidemic.

    The insurers moved for summary judgment on the grounds they had no duty to defend in the underlying suits. The lower court granted summary judgment to Rite Aid, finding that "some of the economic losses sought by the governmental entities are arguably because of bodily injury" because the economic costs were related to injuries to individuals.

    The insurers argued on appeal that coverage depended on whether the bodily injury was suffered by the plaintiff, or someone asserting bodily injury liability derivatively for the harmed party. The insurers claimed that the counties did not suffer personal injury and thus compensation only for their non-derivative economic harms, even if those harms had some causal connection to a bodily injury. Rite Aid responded that the policies did not exclude non-derivative economic damages related to bodily injury. If the damages sought were causally related to a covered "occurrence," the duty to defend was triggered.

    The underlying complaints sought "economic damages" as a "direct and proximate result" of Rite Aid's failure to "effectively prevent diversion" and "monitor, report and prevent suspicious orders" of opioids. Absent from the complaints, however, were personal injury damage claims for or on behalf of individual who suffered or died from the allegedly abusive prescription dispensing practices.

    The Supreme Court agreed with the lower court that the counties' economic losses were arguably linked to care for Ohio residents affected by the opioid epidemic. But under the policies, damages for bodily injury were covered losses only when asserted by (1) the person injured, (2) a person recovering on behalf of the person injured, or (3) people or organizations that treated the person injured or deceased, who demonstrated the existence of and cause of the injuries. The counties expressly disclaimed all personal injury damages, stating their claims were "not based on" the injuries of others. Thus, the insurers had no duty to defend.

 

Appraisal Ordered After Carrier Finds Loss Even if Cause Disputed

    The court ordered an appraisal when the parties differed on the amount of loss to the dwelling even when the carrier contended the dispute was over the cause of the loss. Khaleel v Amguard Ins. Co., No. 21 C 992, Memorandum Opinion and Order (N.D. Ill. Feb. 11, 2022). The order is here.

    Plaintiffs home was damaged by wind and hail. A claim was submitted to Amguard for damage to the roof. Amguard found there was hail damage to the soft metal vents on the roof and estimated repair costs to be $3,815.16. Amguard found no damage to the roof itself. Plaintiffs contended there was additional damage to the roof. Plaintiffs demanded an appraisal. Amguard rejected the appraisal demand, claiming that the damage to the roof was due to wear and tear, and therefore constituted an excluded cause under the Policy. 

    Plaintiff filed suit. After Amguard answered, plaintiffs moved for judgment on the pleadings. 

    Under the policy, if the parties disagreed as to the "amount of loss," either party could request an appraisal. A coverage dispute was handled by the court, but a dispute for loss was for the appraiser to determine. Plaintiffs asserted that when the insurer admitted there was a covered loss, finding the extent and causation of the damage was part of the "amount of loss" determination and was subject to the appraisal clause. Amguard framed the dispute as whether the damage to the roof was caused by hail or by wear and tear (the latter being excluded from coverage). Amguard contended that it had not admitted coverage for the hail damage to the roof, and thus, this was a coverage dispute and appraisal was inappropriate. Amguard had acknowledged hail damage to the soft metal vents on top of the roof, but denied that the roof itself was damaged by hail.

    Numerous courts within the district agreed with plaintiffs and routinely rejected the argument that issues implicating damage causation were not appropriate for resolution by appraisal.This court agreed with those cases and plaintiffs' reading of the policy. Because Amguard agreed that some portion of the dwelling was damage by hail and constituted a covered loss, this suit was not a coverage dispute but a dispute over the amount of loss. Consequently, appraisal was appropriate,. Otherwise, the insurer could separate its coverage based on individual components of the building such as each roof shingle, gutter, or vent cover. The policy did not permit such a reading because it granted coverage to the dwelling as a whole. 

    The court granted plaintiffs' motion for judgment on the pleadings. 

Connecticut Supreme Court Rules Matching of Materials Decided by Appraisers

    The Connecticut Supreme Court determined that an appraisal panel could resolve whether the insurer must replace undamaged materials so that they match the damaged materials. Klass v. Liberty Mut. Ins. Co., 2022 Conn. LEXIS 2 (Conn. Jan. 11, 2022).

    The insured reported damage to the roof of his home to Liberty Mutual. A representative from Liberty Mutual inspected and noticed a few shingles missing from the rear slope of the roof. The representative agreed that the damage was caused by wind damage, a covered loss under the policy. Liberty Mutual accepted coverage and issued an estimate to replace the rear slope of the roof. The insured's contractor inspected the roof and provided an estimate that contemplated replacement of the entire roof at nearly double the cost of Liberty Mutual's estimate. 

    The insured requested an appraisal. Liberty Mutual responded that the insured could not invoke the appraisal process in the absence of a "competing" estimate (i.e., one that addressed the claim for which coverage was accepted). Any dispute regarding the matching of the front and rear roof slope was a question of coverage, not an issue for appraisal.

    Liberty Mutual's appraiser then inspected the roof and concluded that "given the roof configuration, it is reasonable to conclude that the shingles along the rear slope and ridge caps can be replaced such that a reasonable uniform appearance of the roof covering is maintained." Consequently, coverage was denied for the front roof slope. Given the denial of coverage for the front portion of the roof,, Liberty Mutual contended there was no valuation issue remaining for the appraisal process. 

    The insured then filed an application to compel an appraisal. The lower court ordered an appraisal. 

    Liberty Mutual appealed, contending the dispute was a coverage dispute and improper for the trial court to compel appraisal before the legal issue regarding the coverage dispute were resolved by the court. 

    The issue was whether a dispute as to the scope of an insurer's replacement obligation under the state matching statute was a question of coverage to be resolved by the courts or a question of the amount of loss to be resolved by the appraisal panel. The court concluded that it was the latter. 

    Liberty Mutual's own appraiser reached a conclusion on the very issue that Liberty Mutual claimed was a legal question that was improper for resolution by appraisers. The report stated that the purpose of this examination was to "determine the scope of damage to the roof . . . " He noted both sides of the roof presumably were not visible from the ground and reached a conclusion that replacement of only the damaged rear sides of the roof and roof ridges would be covered. 

    The court concluded that, when an insurer concedes the existence of a covered peril to an insured's premises, issues concerning the extent of the insurer's obligation to replace adjacent, undamaged items to achieve a reasonably uniform appearance was a component of the "amount of loss" and were part of the appraisal process. The parties' disagreement regarding how many shingles needed to be replaced - whether it be only the missing shingles or the entire roof - in order to make the insured whole was a factual dispute that fell within the scope of the policy's appraisal clause. Therefore, the judgment below was affirmed. 

"Why Can't We Settle" Presentation Today

This afternoon, our panel discussed "Why Can't We Settle? Consequences When Insurer and Insured Disagree not he Value of the Underlying Claim" at the ABA's Insurance Coverage Litigation Committee seminar in Tucson. My co-panelists are Winter Wheeler of Winter Wheeler Mediation and Arbitration in Atlanta and Rina Carmel from Anderson, McParlin & Conners LLP in Los Angeles