Insurance Law Hawaii

Ninth Circuit Affirms No Coverage in Dispute Over Salvage of Sunken Ship

    The Ninth Circuit affirmed the district court's decision that the insured was not covered for a dispute over the salvage of a sunken ship. Great American Ins. Co. v. May, 2024 US App. LEXIS 10137 (9th Cir. April 26, 2024). 

    MK Salvage Ventures LLC (MK) attempted to recover lost treasure from the SS Islander, a ship that sank in 1901 off the coast of Juneau, Alaska, while carrying a sizeable cargo of gold bullion,. MK was now dissolved. 

    The salvage efforts were largely unsuccessful. May and his business partner, Peter Rutte, agreed in 2016 to dissolve MK, divide its assets, and convey to May the right to conduct future salvage operations. May subsequently sued MK, Kettle, and one of Kuttel's businesses (Insureds) in state court for refusing to give to May certain intellectual property generated by prior expeditions. The Insureds tendered the suit to Great American, which denied coverage. The state court action settled with a $75 million covenant judgment, which assigned the Insured's policy rights against Great American to May.

    While the state court action was pending, Great American sought a declaration in federal court that it owed no duty to defend or indemnify May. The district court granted summary judgment to Great American on both issues. It concluded May's intellectual property (IP)-related claims did not conceivably arise from an "occurrence" or alleged damage to "tangible" property as required by the policy. The court then dismissed May's bad faith counterclaims. May appealed. 

    To establish an "occurrence," or accident, under the policy, May alleged that the Insureds' "failure to relinquish" the IP rendered him unable to "move forward with the salvage operations, jeopardising the recovery of what could be millions of dollars worth of gold bullion." May also alleged that he had "demanded that [the Insureds] relinquish possession" of IP that he believed was "important, if not critical" to any future salvage operations. 

    May argued that the Insureds' "wrongful deprivation" of his IP rights constituted an "accident" under Washington law. The district court rejected the argument and the Ninth Circuit agreed. There was no actual or alleged possibility of any "occurrence" because the loss of access to the IP was not the result of an "accident." 

    Under Washington law, an event was an "accident" only if both "the means as well as the result were unforeseen, involuntary, unexpected and unusual." Here, there was no geinuine dispute that the Insureds acted deliberately by withholding the IP. It was foreseeable that refusing to deliver IP to May would result in a claim for damages, Even if liberally construed, the complaint indicated that the Insureds understood and foresaw the consequences of withholding the intellectual property from May, and yet they wilfully withheld it. These allegations did not rise to any conceivable possibility of an "accident." 

    Because Great American's interpretation of the policy was reasonable, the bad faith claims also failed.

 

Insurer's Motion to Dismiss "Redundant Claims" Denied

    The insurer's motion to dismiss was more appropriate for an eventual summary judgment motion and was consequently denied. Sivan Lam v. Scottsdale Ins. Co., 2024 U.S. Dist. LEXIS 81262 (M.D. Fla. April 12, 2024).

    Lam suffered a loss to her home due to Hurricane Ian. When only a portion of the claim was paid, Lam sued his insurer, Scottsdale, for breach of contract (Count I) and declaratory relief (Count II).

    Scottsdale argued that Lam's request for declaratory relief was redundant of her breach of contract claim. The court noted that Rule 12 (b)(6), Fed. R. Civil P.,  was a vehicle to challenge a claim's sufficiency. Redundancy was not insufficiency, and it was not a ground for dismissal under Rule 12 (b)(6). 

    Scottsdale also argued that the complaint alleged nothing needing a declaration. But the complaint sought a declaration of rights, sought a determination of full coverage, and identified several exclusion provisions in need of a decision. Because there was a fight over whether Scottsdale had to provide coverage for the property damage, the complaint alleged an actual controversy to survive dismissal at this stage. It was possible that Lam could secure full relief through the breach of contract claim, but this question was best resolved at the summary judgment stage after discovery was completed.

    The motion to dismiss was denied. 

 

Insurer's Refusal to Consider Supplemental Claim Found Improper

    The Eleventy Circuit reversed the district court's finding that the insurer had properly rejected the insured's supplemental claim. Great Lakes Ins. SE v. Concourse Plaza A Condomiium Association, Inc., 2024 U.S. App. LEXIS 8958 (11th Cir. April 15, 2024). 

    On September 10, 2017, Hurrican Irma struck Concourse Plaza's building, causing wind and water damage. Great Lakes sent a adjuster to inspect the property. The adjuster found damages to the building were $31,035.21, well below the policy's deductible. Accordingly, Great Lakes advised that the net amount of the claim was zero. 

    Concourse Plaza responded on September 4, 2020, just shy of three years after the cliam accured. Concourse Plaza disputed the damages estimate, but did not include a competing estimate. The letter said an estimate was being prepared and Great Lakes should consider the letter as notice of the intent to pursue additional benefits for the loss pursuant to the policy's notice provisions and Florida law. 

    On April 8, 2021, Concourse Plaza formally submitted a proof of loss statement, providng a damages estimate of $6,403,728.62. Concurse Plaza also invoked the appraisal remedy. Concourse Plaza leter lowered its estimate to $3,276,080.50 while maintaining its appraisal demand.

    Great Lakes filed suit seeking a declaratory judgment that Concourse Plaza's September 2020 letter did not constitue a valid notice of a supplmental insurance claim under the Florida statute requiring notice within three years of the hurricane making landfall.

    The district court held that the Florida statute required an insured's notice of a supplemental claim to inlcude an estimate of claimed damages. Therefore, Concourse Plaza had failed to provide a qualifying notice within three years. Summary judgment was awarded to Great Lakes. Concourse Plaza appealed.

    On appeal, the court noted that Concourse Plaza sought additional recovery for lossess from the same hurricane as the original claim. Further, Great Lakes conceded that the policy by itself did not impose a requirement to provide an estimate of damages. Concourse Plaza's September 2020 letter therefore qualifed as a notice of a supplemental claim under the statute. Because it was sent within three years of the date Hurrican Irma made landfall, the statute was satisfied.

    The district court's grant of summary judgment to Great Lakes was reversed and the matter was remanded.

 

Sixth Circuit Predicts Michigan Allows Reimbursement of Defense Costs to Insurer

    The Sixth Circuit affirmed the district court in finding that the insurer who reserved rights was entitled to reimbursement for uncovered claims. Great Am. Fid. Ins. Co. v. Stout Rises Ross, Inc., 2024 U.S App, LEXIS 8576 (6th Cir. April 8, 2024). 

    Stout Rises Ross, Inc. was sued in two civil actions: the Appvion ESOP and Halperin actions. Both stemmed from Stout's professional services for Appvion, Inc, a paper manufacturing company owned by Paperweight Development Corp. (PDC). Appvion operated an Employee Stock Ownership Plan (ESOP), which owned all of PDC's stock and was governed by the Employee Retirement Income Security Act (ERISA). The ESOP's trustees hired Stout to serve as a financial advisor and value PDC's stock price. The lawsuits alleged that Stout overvalued PDC's stock and induced Appvion employees to invest their retirement savings in the ESOP. When Appvion declared bankruptcy in October 2017, PDC's stock price collapsed, resulting in hundreds of millions of dollars in losses of funds invested in the ESOP. In addition to claims arising out of ERISA and securities laws, the underlying lawsuits alleged fraud, negligent misrepresentation, and breach of fiduciary duty.

    Stout turned to its insurer, Great American Fidelity Insurance Company, for a defense. The policy's Exclusion F excluded from coverage any claim "based on or arising out of actual or alleged violation" of ERISA or securities laws. Great American agreed to defend in both underlying cases, but reserved the right to seek a declaration regarding its rights and obligations. It also reserved the right to seek reimbursement if it had no duty to defend.

    Great American filed suit for a declaratory judgment that it had no duty to defend or to indemnify Stout. The district court denied the motion because Exclusion F did not preclude coverage for common law claims such as fraud and negligent misrepresentation alleged in the underlying suits. 

    On September 25, 2020, the ESOP filed an amended complaint in the Appvion ESOP action asserting only federal securities law claims, not common law claims. Great American again moved for partial summary judgment. The district court granted the motion, finding Great American no longer and a duty to defend or indemnify Stout. Great American then moved for partial summary judgment for reimbursement for expenses in defending the Appvion ESOP litigation. The district court held that Great American could recover defense costs incurred after September 25, 2020, the date of the amended complaint, under an implied-in-fact contract theory.

   Both parties appealed. The Sixth Circuit held that the district court properly concluded that Great American's duty to defend Stout in the Appvion ESOP action ended with the filing of the amended complaint which eliminated the common law claims. Likewise, the Halperin action's sole live claim against Stout, alleging a state law breach of fiduciary duties, did not stem from a violation nof ERISA or securities law. Therefore, the district court's ruling regarding Great American's duty to defend Stout in the two underlying cases prior to the filing of the amended complaint was affirmed.

    On the reimbursement issue, the court noted that the policy did not expressly authorize reimbursement, but the district court granted the motion for reimbursement on implied-in-fact contract grounds. Where an insurer explicitly reserved its right to reimbursement and notified the insured of the specific possibility of reimbursement, the parties formed an implied-in-fact contract for the reimbursement of costs expended by the insurer for claims that it had no duty to defend.

    The court noted Michigan law had not answered whether an insured must reimburse the insurer for defendants claims that the insurer had no duty to defend. The court had to make an Erie guess had to predict how the Michigan Supreme Court would rule. Michigan law generally recognised impoied-in-fact contracts. Here, Stout accepted the defense after Grant American notified Stout that it might seek reimbursement. Therefore, the district court's determination that Stout must reimburse Great American for defending in the Appvion ESOP action after September 25, 2020, under an implied-in-fact contract theory, was affirmed. 

    Accordingly, the Sixth Circuit's decision that Michigan would allow reimbursement of defense costs for uncovered claims even though such right was not reserved in the policy departed from the Hawaii Supreme Court's recent decision on St. Paul Fire & Marine Ins. Co. v. Bodell Contr. Co., 153 Haw. 381, 538 P.3d 1049 (Haw. 2023). There, the Hawaii Supreme Court held there was not right to reimbursement of defense costs for uncovered claims if such a right was not provided for in the policy. 

Res Judicata Bars Insured from Challenging Insurer's Use of Schedule to Deduct Depreciation from the Loss

    The insured was barred by res judicata from filing a second lawsuit challenging the insurer's method of establishing the amount of the loss. Burke v. GeoVera Spec. Ins. Co., 2024 U.S. App. LEXIS 9186 (5th Cir, April 16, 2024).

    On August 29, 2021, Hurricane Ida caused wind damage to the Burkes' home. They filed a claim with their insurer, GeoVera Specialty, and received payment. In calculating the payment, GeoVera Specialty adjusted the damage claim pursuant to its Roof System Payment Schedule, which lists the criteria used in reducing roof damage claims based on depreciation. Based on that schedule, GeoVera Specialty reduced the roof damage component of the Burkes' claim by forty-eight percent.

    In March 2022, the Burkes filed suit alleging that GeoVera Specialty undervalued their claim. On September 8, 2022, the parties filed a joint motion to dismiss the lawsuit after reaching a settlement, which the district court granted.

    Over a year later, in July 2023, the Burkes filed this suit against GeoVera Specialty, again attacking the payment of their Hurricane Ida claim, but on the grounds that use of the Roof System Payment Schedule violated a Louisiana statute. The Burkes alleged that the Roof System Payment Schedule was a "predetermined rate of depreciation to be applied to every roof based exclusively on its objective age and roofing materials without regard for its actual condition prior to the covered wind damage." They further alleged that this ran counter to the statute's requirement that "depreciation shall be reasonable and based on a combination of objective criteria and subjective assessment, including the actual condition of the property prior to loss." (Depreciation Statute).

    GeoVera Specialty moved to dismiss. The district court granted the motion and dismissed the compliant with prejudice. The court concluded that the claims were barred by res judicata based on the dismissal of the Burkes' earlier suit for the same property damage. The Burkes appealed.

    The Fifth Circuit considered the elements of claim preclusion, or res judicata. The only issue was whether there was a valid judgment in the Burkes' prior lawsuit. The Burkes argued it was not a valid judgment because it resulted from the parties' settlement agreement, which in turn was based on a depreciation calculation that violated the Depreciation Statute. Therefore, the settlement was void under another Louisiana statute providing that "a contract is absolutely null when it violates a rule of public order, as when the object of a contract is illicit or immoral." (Public Order Statute). The district court rejected the argument and concluded that the Depreciation Statute was not a rule of public order, and therefore its prior judgment of dismissal barred this action under the doctrine of res judicata. 

    The Fifth Circuit affirmed. The success of the Burkes' argument depended on accepting that the Depreciation Statute was a rule of public order within the meaning of Public Order Statute. The district court correctly held that the Depreciation Statute was not a rule of public order and instead was a rule intended for the protection of private parties.  

 

Only A Few Insurance-Related Bills Enacted By The Hawaii Legislature

    Several insurance-related bills were introduced by the Hawaii Legislature, but only a few were passed before the session ended on May 3, 2024. Here are the bills that were passed by the Legislature and sent to the Governor for signature.

    HB 1686 - Increases the reimbursement rate for chiropractic treatments for personal injury protection benefits under motor vehicle insurance from $75 to $100.

    HB 2394 - Amends various provisions of the Insurance Code to update and improve existing provisions related to captive insurers, trade names, continuing education provider filing requirements, reinsurance, surety bonds, and amends certain definitions.

    SB 3083 - Amends various sections of Article 11 of the Insurance Code to adopt revisions to the National Association of Insurance Commissioners Model No. 440, Insurance Holding Company System Regulatory Act. 

    Major revisions to regulating property insurance were introduced in SB 3234, but did not pass the Legislature, The bill would have amended laws relating to the Hawaii Hurricane Relief Fund and the Hawaii Property Insurance Association by imposing a different transient accommodation tax rate for transient vacation rentals. The bill would have imposed a property insurance surcharge on conveyance tax and a temporary property insurance stabilization fee on real property transactions to capitalise the Hawaii Property Insurance Association and Hawaii Hurricane Relief Fund. The bill would have amended the designated geographic areas eligible for coverage to specifically include lava zones 1 and 2. Further, the bill would have mandated that the Hawaii Hurricane Relief Fund and Hawaii Property Insurance Association to be insurers of last resort. 

Excess Policy Not Triggered Despite Dissolution of Primary Carrier

    The excess carrier did to have to contribute to the defense and indemnity of the insureds because the dissolution of one of the primary carriers meant full exhaustion had not been accomplished. Continental Cas. Co., et al. v. Argonaut Ins. Co., et al., 331 Ore. App. 26 (Or. Ct. App. 2024). 

    Schnitzer Steel Industries, Inc. and MMGL Corporation (insureds) were deemed potentially responsible parties by the EPA for the environmental cleanup of the Portland Harbor Superfund Site. The insureds submitted claims for defense and indemnity to their CGL insurers, including Continental. They also filed a claim with Insurance Company of the State of Pennsylvania (ICSOP), which provided umbrella insurance with limits of $5,000,000. ICSOP denied coverage, contending that the insureds' environmental claims were subject to the excess liability portions of its policies and those provisions had not been triggered. 

    A federal judgment determined that Continental had a duty to defend the insureds. Continental brought this action for contribution against all other insurers, including ICSOP. ICSOP argued that it should not be allocated any portion of contribution because its policies were excess to the loss covered by the underlying insurance listed in the policies, including El Dorado Insurance Company, which was defunct.  ICSOP also argued that its policies required horizontal exhaustion, meaning there must be an exhaustion of all CGL policies the insureds held for the covered loss, not just the El Dorado policies. 

    The ICSOP policy included a Loss Payable provision, as follows:

Liability under this policy with respect to any occurrence shall not attach unless and until the Assured, or the Assured's underlying insurer, shall have paid the amount of the underlying limits on account of such occurrence.

    The "Other Insurance" provision stated, 

If other valid collectible insurance with any other insurer is available to the insureds covering a loss also covered by this policy . . . the insurance afforded by this policy shall be excess of and shall not contribute with such other insurance.

Because the insureds had other valid and collectible policies, ICSOP asserted that it had no liability for defense costs or a loss that had been incurred by the insureds. 

    The ICSOP policies also included a "Defense Endorsement", providing,

In consideration of the premium provided, it is understood and agreed that in the event there be no underlying insurance against loss or claim covered by this policy, ICSOP agrees to defend any suit against the insureds alleging . . . property damage and seeking damages on account thereof . . . All other terms an conditions remain unchanged.

Continental argued this endorsement triggered a duty to defend if the underlying insurance named in the policy - El Dorado - was not available to pay a claim. Thus, Continental asserted that because El Dorado had become insolvent and was no longer in existence, it was not available, and ICSOP's defense endorsement was triggered. ICSOP contended its coverage remained both excess and subject to the requirement for horizontal exhaustion - i.e., would be triggered only in excess of the limits of the El Dorado policies and when all other insurance was exhausted.

    The trial court agreed with Continental's construction of the defense endorsement and held that due to the extinction of El Dorado, there was an absence of underlying insurance, and ICSOP had a duty to defend the insureds.

    The Court of Appeals reversed. ICSOP's construction of the defense endorsement as triggered only when underlying insurance and other policy limits were exhausted was the correct construction when viewed in the context of the policy as a whole. The phrase "in the event there be no underlying insurance against loss or claim covered by [the ICSOP policies]" was a reference to coverage that ICSOP's policies provided when the limits of the underlying insurance had been exhausted. Thus, despite El Dorado's insolvency, it was nonetheless underlying insurance, and its policy limits had to be exhausted before ICSOP's duty to defend was triggered. 

    Therefore, Continental was not entitled to seek contribution from ICSOP and the trial court erred in so concluding. The appellate court reversed and remanded the judgment for a redetermination of the allocation on Continental's claim for contribution to defense costs. 

    

Coverage for Fire Loss Denied Based on Inaccurate Application for Insurance

    The Ninth Circuit affirmed the District Court's granting summary judgment to two insurers who denied coverage based upon inaccurate insurance applications. Hughes v. First National Insurance Company of America, 2024 U.S. App. LEXIS 6609 (9th Cir. March 20, 2024).

    Plaintiff submitted a claim to First National Insurance Company of America and General Insurance Company of America when her property burned down. After learning that the property was used as a short-term rental and had suffered three prior lossses in the past five years, both insurers denied the claim. They then sought judicial recission of the policites based on material misrepresentations in plaintiff's insurance applications. 

    Both insurers had applications asking whether the property was used for business or commercial purposes, and whether the applicant had suffered a loss on the property in the last five years. If an applicant answered either question in the affirmative, the application was denied.

    Here, plaintiff completed applications with both insurers stating in each that the proeprty was a "single-fmaily dwelling," that it was not used for business, and that she had suffered no losses on the property in the last five years. Based on these responses, both First National and General Insurance issued policies to plaintiff.

    The district court granted summary judgment to the insurers. On appeal, plaintiff argued that her property was used only as a single-family dwelling and that, regardless, the policies permitted occasional rental use. The policies, however, did not authorize rental use and plaintiff had used the property as a short-term rental. Plaintiff had stated in her declaration that she had never run a business at the property, but a declaration contradicting her prior testimony could not create an issue of fact. 

    Plaintiff also claimed she did not understand the applications because of a language barrier. Further, the agents who finalized her insurance applications did not seek her approval before sending them to First National and General Insurance. Under California law, however, a material misrepresentation or concealment in an insurance application, whether intentional or unintentional, allowed the insurer to rescind the policy. Therefore, plaintiff's subjective understanding or intentions were immaterial to whether she misrepresented the use of her property.