Insurance Law Hawaii

Wind vs. Flood Issues Negate Insurer's Summary Judgment Motion

   Disputed evidence on whether the property damage was caused by wind or flood related to Hurricane Katrina was at issue in C.R. Pittman Constr. Co., Inc. v. Nat'l Fire Ins. Co. of Hartford, 2011 U.S. App. LEXIS 20002 (5th Cir. Sept. 30, 2011).

   Pittman Construction had equipment for pumping units stored both inside and outside of its warehouse in New Orleans. Its "all risks" policy, issued by National Union, was in place when Hurricane Katrina struck. The equipment was damaged. When National Union refused to provided coverage, Pittman Construction sued. The parties disputed whether the damage was caused by rain and wind or by the excluded peril of flooding.

   Both parties moved for summary judgment. Pittman Construction submitted an affidavit by its owner, Jay Pittman, Jr. Mr. Pittman stated he was present at the warehouse when Katrina hit, and that wind tore off parts of the side and roof of the warehouse, allowing rain to destroy the insured property before any flooding occurred. An employee's affidavit stated after wind blew away a tarp covering generators in the construction yard, rain destroyed the generators. In support of its motion for summary judgment, National Union contended the failure of the levee system had caused flooding that destroyed Pittman Construction's equipment. The district court granted National Union's motion for summary judgment and dismissed Pittman Construction's suit.

   The Fifth Circuit reversed, in part. The district court failed to consider the Pittman affidavits because they were self-serving. Although they were arguably self-serving, the Pittman affidavits were not wholly conclusory, but were based on personal knowledge and created a fact issue as to the cause of the damage to the equipment. Therefore, granting summary judgment to National Union was improper.

  

Fifth Circuit Revisits Interpretation of Anti-Assignment Provision

   Our prior post reported on the Fifth Circuit's certified question to the Louisiana Supreme Court regarding anti-assignment provisions in policies assigned to the State. Louisiana distributed funds from the "Road Home" program to Louisiana homeowners to repair uninsured and under-insured property damaged by hurricanes. Before funds were issued, the homeowners had to sign a "Limited Subrogation/Assignment Agreement" whereby any claims of future rights to reimbursement were assigned to the State. However, there was a one billion dollar projected shortfall in the Road Home program.

   To remedy the situation, the State sued more than 200 insurance companies pursuant to the assignments to recover the funds granted under the Road Home program. The insurers moved to dismiss, arguing that the State's claims failed as a matter of law because anti-assignment clauses in the policies invalidated the purported assignments. The federal district court denied the motion to dismiss, holding that the contractual anti-assignment provisions did not bar post-loss assignments under Louisiana law.

   The Fifth Circuit asked the Louisiana Supreme Court whether the anti-assignment provisions were valid. The Louisiana Supreme Court responded there was no public policy in Louisiana which precluded an anti-assignment clause from applying to post-loss assignments. The court warned, however, that the anti-assignment clause must clearly and unambiguously state that it applies to post-assignment losses.

   Given this response, the Fifth Circuit determined in it was unable to resolve the parties' dispute on appeal. In Re: Katrina Canal Breaches Litigation, 2011 U.S. App. LEXIS 13169 (5th Cir. June 28, 2011). The district court's judgment denying the insurers' motion to dismiss was vacated and and the case was remanded for further proceedings.

   Thanks to Damon Key blogging colleague Rebecca Copeland (http://www.recordonappeal.com/) for notice of this case.

Does Act of God Defense Absolve Boat Harbor of Liability for Tsunami-Related Damage?

   KITV reported last week that the Keehi Marine Center, owner of a boat harbor in Honolulu, and its insurer, Travelers, are denying claims for boats moored at the harbor and damaged during the March 11, 2011 tsunami. Liability is being denied because damage to the boats "occurred as a result of the tsunami, an Act of God."

   My fellow Damon Key blogger, Mark Murakami (www.hawaiioceanlaw.com) queried whether this sounded correct and suggested a post to investigate. So here goes.

   The "Act of God" defense is sparsely mentioned in Hawaii appellate court decisions. In the early case of Medeiros v. Honomu Sugar Co., 21 Haw. 155 (1912), a tree on the sugar plantation's property leaned over a public road. Plaintiff was injured as he rode by and the tree collapsed onto his carriage. In response to the sugar plantation's "Act of God" defense, plaintiff argued that the tree was obviously in a dangerous condition, which was known, or by exercise of ordinary care, could have been known, by the sugar plantation. The Hawaii Supreme Court noted that the Act of God defense was not available when the cause of harm was, in part, the intervention, neglect, or failure to act of man. The sugar plantation could not rely on the defense because, by the exercise of ordinary care, it could have known of the danger. Therefore, the sugar plantation had a duty to exercise reasonable care to prevent the tree from falling and injuring passers-by. Having failed to do so, the sugar plantation was negligent and the Act of God defense was not available. Id. at 158-59.

   A similar result was reached in Cabral v The City and County of Honolulu, 22 Haw. 872 (1933). There, the landowner maintained a culvert in a stream, causing the stream to flow at a right angle to its ordinary course. In repeated instances of heavy rainfall prior to 1930, it became apparent that the culvert was inadequate to handle the storm waters. In November 1930, the culvert overflowed after a heavy rainfall, causing a flood on plaintiff's property. The Hawaii Supreme court again held that the Act of God defense was not available because plaintiff was aware, or should have been aware, of the potential for flood given the prior problems with the culvert. Id. at 878.

   Cases from other jurisdictions seem to reach the same result when the Act of God defense is raised. In Matter of the Complaint of Cenac Towing Co., Inc., 2007 U.S. App. LEXIS 11705 (11th Cir. May 18, 2007), the defendant was sued when his barge broke free during Hurricane Ivan and damaged other boats. The court noted that the Act of Cod defense "applies only to events in nature so extraordinary that the history of climatic variations and other conditions in particular locality affords no reasonable warning to them." Id. at 932 (quoting Warrior & Gulf Navigation Co. v. United States, 864 F.2d 1550, 1553 (11th Cir. 1989)). The court held that the defendant was negligent in not property tying up his barge, thereby negating the Act of God defense.

   Hurricane Katrina was a catastrophic hurricane, creating unexpected results, making courts more receptive to reliance on the Act of God defense. In Duboue v. CBS Outdoor, Inc., 996 So. 2d 561 (La. Ct. App. 2008), plaintiff sued when defendant's sign blew off the roof, causing damage to plaintiff's building. An expert civil engineer testified that the sole cause of the damage to plaintiff's building was Hurricane Katrina, whose wind forces exceeded those contemplated by the building code requirements in existence when the sign was constructed fifty years prior to the hurricane. The court concluded that the damage was due to natural caauses without human intervention and no negligent behavior by the defendant had contributed to the accident. Id. at 563.

   And in Simmons v. Berglin, 2010 U.S. App. LEXIS 23499 (5th Cir. Nov. 12, 2010), the court determined that plaintiff made adequate efforts to tie down her boat prior to the approach of Hurricane Katrina, absolving her of responsibility for damage her boat caused to plaintiff's property. Given the strength of Hurricane Katrina and the widespread devastation it inflicted upon the docks and boats in the area, plaintiff's actions, even if negligent, had no effect on the boat's coming loose. Id., 2010 U.S. app. LEXIS 23499, at *17.

   Did the owners of the Keehi Boat Harbor have prior knowledge that a tsunami could cause damage to boats moored there, imposing a duty to strengthen the docks? It is arguable they did. Tsunamis are not an infrequent occurrence in Hawaii. Fortunately, a potentially large tsunami created by the February 2010 earthquake in Chile never materialized. Still, officials recognized that Hawaii "dodged a bullet. Even so, this "small" tsunami created waves of 5.5 feet at Hilo and 6.5 feet on Maui. Consequently, perhaps Keehi Marine Center should have known of the potential for damage to the boat harbor in the event of a tsunami and made preparations for such events.

Mortgagor Not Liable For Failing to Procure Coverage

   Failing to understand the relationship between himself, his mortgage company, and his insurer, the plaintiff was left without coverage for damage caused by Hurricane Katrina.  Dace v. Novastar Mortgage Inc., 2011 La. App. Unpub. LEXIS 233 (La. Ct. App. April 13, 2011).

   Novastar held the mortgage on the plaintiff's property in New Orleans.  There were two residences on the property.  Novastar collected and held in escrow property taxes and fire/hazard insurance premiums.  Novastar secured a policy with Lloyd's, but only one of the residences was insured under the policy.  In August 2005, the property sustained significant wind damage from Hurricane Katrina.  After the hurricane hit, Lloyd's refused to provide coverage for one of the residences because it was not covered under the policy.

   The plaintiff sued Novastar and Lloyd's.  The complaint alleged Lloyd's denial of claim for the second residence was in error because Novastar procured the policy to cover the entire property, including both residences.  Regarding the mortgagor, Novastar knew Lloyd's denied the claim for loss of the second residence, yet did not nothing to pursue this claim under the policy.  This caused damage to the plaintiff because he could not rent the second residence, which was the source of income for paying his mortgage.  Novastar responded by foreclosing on the property. 

   The trial court granted Lloyd's motion for summary judgment.  After a one day bench trial, the court ruled in favor of Novastar and dismissed the Plaintiff's claim.  The mortgage contract did not obligate Novastar to purchase any particular type or amount of coverage.

   The Court of Appeal affirmed.  The mortgage contract expressly obligated the Plaintiff to procure and maintain insurance coverage.  If the borrower failed to secure coverage, the lender could obtain coverage, at the lender's option.  Further, the lender could make proof of loss if not made promptly by the borrower, but was not obligated to do so.

Claim for Lost Business Opportunities Survives Summary Judgment

   Lost business opportunities after Hurricane Katrina hit was the issue before the court in Safeguard Storage, Properties, L.L.C. v. Donahue Favret Contractors, Inc., 2011 La. App. LEXIS 391 (La. Ct. App. March 31, 2011).

   Safeguard planned to develop a minimum of twelve to fifteen new self-storage locations each year for several years.  Market evaluations were performed for five different metropolitan locations.  Nineteen new projects were being developed when Hurricane Katrina struck. 

   The hurricane damaged Safeguard's New Orleans area facilities and interrupted the business operations of Safeguard's corporate office and national call center.  Safeguard's office space sustained $30 million in damages. 

   Safeguard sued its insurers, seeking compensation for its damaged property and for lost business opportunities at locations Safeguard was allegedly unable to open due to Hurricane Katrina.  The insurers filed motions for partial summary judgment asserting that Safeguard's lost business opportunities claims for forty years of profits from 36 stores that would have allegedly been built but for Hurricane Katrina were too speculative as a matter of law.  The trial court agreed and granted summary judgment.

   The policies provided that business losses would be adjusted on the basis of actual loss sustained by the insured resulting from interruption of business, "consisting of the net profit which is thereby prevented from being earned."  To determine the amount of loss sustained, consideration was to be given to the experience of the business before the date of damage and to the probable experience had no loss occurred.

   On appeal, the court could not determine as a matter of law that a portion of Safeguard's claims for loss business opportunities was not covered under these provisions.  A projection of earnings was an accepted method of calculating business interruption.  Safeguard contended it developed thirty-eight new storage facilities from 2001 to 2005.  It sustained lost business income due to its alleged inability to build thirty-seven new storage facilities.  A Safeguard expert stated that a conservative estimate for Safeguard's lost business opportunities was $332.5 million.  Whether these estimates were credible was a determination to be made by the finder of fact.  Therefore, the trial court erred in granting the insurers' motion for summary judgment.

Excess Policy Incorporates Anti-Concurrent Causation Clause, Eliminating Coverage

   The Fifth Circuit considered whether the second-layer excess policy incorporated the anti-concurrent causation clause and water exclusion from the primary policy.  See ARM Properties Management Group v. RSUI Indemn. Co., 2010 U.S. App. LEXIS 23174 (5th Cir. Nov. 5, 2010).

   ARM purchased property insurance for hundreds of apartment complexes.  By grouping separate properties together under a single policy, ARM was able to obtain better insurance rates for property owners.  When Hurricane Katrina struck in August 2005, nine of ARM's covered properties sustained damage.  Each of the properties had three layers of coverage.  The primary policy had a $20 million coverage limit.  A first-layer excess had a $10 million limit for damage amounts exceeding the primary policy limits.  Finally, RSUI issued a second-layer excess policy with a $470 million coverage limit for damage amounts exceeding the combined primary and first-layer excess coverage limit of $30 million.

   The primary policy and first-layer excess paid the combind  liability limit of $30 million.  ARM sought $5.5 million in combined wind and water damage from RSUI's policy.  RSUI responded that no payment was due because the wind-water damage was excluded under the primary policy's anti-concurrent causation clause:

   We will not pay for loss or damage caused directly or indirectly by any of the following.  Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.

The primary policy also excluded water damage.    

    The parties stipulated that if the RSUI policy incorporated the anti-concurrent causation clause and water exclusion, the total losses would not reach RSUI's coverage layer.  The district court awarded ARM its full claim of $5.5 million.

   Two provisions of the RSUI policy directly referenced the primary policy and expressly incorporated the primary polices coverage parameters.  First, under the "Insuring Clause," RSUI agreed to "indemnify in respect of direct physical loss or damage to the property . . . which are also covered by and defined in the [primary policy]."  Second, the "Maintenance of Primary Insurance Clause" provided, "this policy is subject to the same warranties, terms and conditions . . . as are contained in or as may be added to the primary policy." 

    The Fifth Circuit held that taken together, these two clauses meant the RSUI policy only covered damage that was also covered by the primary policy and excluded any damage excluded by that policy.  The plain language of the anti-concurrent causation clause and water exclusion, read together, excluded from coverage any damage caused by a combination of wind and water.  Thus, the combined wind-water damage at issue here was a peril expressly excluded from coverage by the primary policy.  The  anti-concurrent causation clause and water exclusion were therefore expressly incorporated by the RSUI policy pursuant to the Insuring Clause and the Maintenance of Primary Insurance Clause.  Accordingly, the district court was reversed.

Agent's Alleged Negligence In Discouraging Need For Flood Insurance Presents Factual Issue

   When the insureds purchased their home along the Mississippi Gulf coast, they discussed obtaining property insurance with Richard Schmidt, a Nationwide insurance salesman employed by Felsher Insurance Agency.  See Mladineo v. Schmidt, 2010 Miss. LEXIS 569 (Miss. Oct. 28, 2010).  The insureds' complaint alleged they told Schmidt they desired a policy with full protection from all weather conditions.  Schmidt allegedly informed them they needed a hurricane policy, but would not need a separate flood policy in order to be covered for all wind and water damage.  Schmidt further informed the insureds their property was not located in a flood zone.

   The insured's agreed to purchase a "hurricane policy," which became effective the day the insureds closed on the purchase of their new home.  The policy, however, was not received by the insureds for another six weeks.  Upon receipt, the insureds filed the policy without ever reading it.  The policy provided that hurricane coverage did not include loss caused by flooding.  Further, loss resulting from water was not covered even if other perils contributed directly or indirectly to cause the loss.

   Hurricane Katrina caused extensive damage to the insureds' home on August 29, 2005.  Nationwide denied coverage for damage to the home caused by water.  The insureds alleged that in subsequent conversations, Schmidt admitted he never indicated that an exclusion existed in the policy for water damage.  Moreover, the insureds subsequently learned that a portion of their property was in a flood zone.  The insureds sued Nationwide, Felsher and Schmidt on a variety of claims for negligence, negligent misrepresentation and tortious breach of contract.  The trial court granted defendants' motion for summary judgment on all claims.  The insureds' reliance on Schmidt's representations that contradicted the policy was per se unreasonable.

   The Mississippi Supreme Court affirmed in part and reversed in part.  Having possession of the policy for four months before Katrina hit was enough time to have read the policy.  Therefore, the insureds were imputed with knowledge of the policy's contents.  Nonetheless, if an insurance agent offered advice, he had a duty to exercise reasonable care.  Accordingly, there was a question of fact whether Schmidt breached his duty of care by allegedly stating the property was not in a flood zone and counseling against flood insurance.  Further, there was a question of fact whether any such breach proximately caused any damages such as uninsured claims resulting from a lack of flood coverage.  Consequently, summary judgment was improperly granted to defendants on the negligence issue.

   The trial court properly granted summary judgment on the negligent misrepresentation claim, however.  The insureds could not have reasonably relied on the alleged assurances of coverage by Schmidt that directly contradicted the plain language of the policy they had in their possession.

Fifth Circuit Grants Rehearing on Case Involving Measurement of Loss

   A prior post [here]  discussed the Fifth Circuit's grappling with the proper measurement for covering loss of a home due to Hurricane Katrina.  On rehearing, the Fifth Circuit altered its prior determination that the policy's loss provision was ambiguous.  See Bradley v. Allstate Ins. Co., 2010 U.S. App. LEXIS 19476 (5th Cir. Sept. 20, 2010).

   Hurricane Katrina totally destroyed the insureds' home, leaving only a slab.  Allstate determined the dwelling was unlivable.  Payments for structural damage under the insureds' flood policy were $63,800 and from their homeowners' policy $41,339.06, for a total of $105,139.06.  Allstate later performed a retroactive analysis that appraised the pre-storm market value of the home at $85,000.  The insureds indicated at a deposition they intended to rebuild their home.

   Section 5 (a) of the Allstate policy promised to pay actual cash value if the insured did not repair or replace the damaged property.  If the insured repaired the home within 180 days of the actual cash value payment, additional payments would be made to reimburse for the costs of repair.  Section 5(e) stated that in the event of the total loss of the dwelling, the insured would pay the policy limits of $105,600.  Elsewhere, however, the policy excluded coverage for loss to property caused by flood.  Moreover, if there were two causes of loss and the predominant cause was excluded by the policy, there was no coverage.  

   The insureds sued Allstate, claiming they were entitled to policy limits of $105,600. The district court determined that, despite the total loss provision in the homeowners policy, the insureds were only entitled to the actual cash value of their home, which, prior to Katrina, was less than the total amount they received under their homeowners and flood policies.  Accordingly, any further recovery would amount to a double recovery.

   In its initial decision, the Fifth Circuit determined "total loss" was ambiguous because the provision was susceptible of two possible meanings. The ambiguity was construed in favor of the insureds, entitling them to a recovery of up to policy limits, or $105,600.  Bradley v. Allstate Ins. Co., 606 F.3d 215 (5th Cir. 2010).  The new decision abandoned the ambiguity determination, instead noting the relevant question was whether a non-covered peril (flood) was the predominant cause of the loss, an issue never decided by the district court.  Accordingly, the district court did not address the total loss provision under section 5 (e), instead grating summary judgment to Allstate based on the actual cash value under section 5 (b).  Consequently, the case was remanded so that the district court could evaluate the causation issues and ascertain the applicability of the section 5(e) total loss provision.

   The Fifth Circuit also altered its prior discussion on the potential double recovery by the insureds.  Previously, the court found an unresolved question on whether the appropriate measure of the insureds' actual loss was the cost to rebuild or actual cash value, believing the insureds had an option to rebuild.  The new decision held that the insureds had failed to repair, rebuild, or replace their home within the two year period allowed under the policy and state law.  Thus, the appropriate measure of loss was the actual cash value of the property, not the cost to rebuild or replace the property.

   Further, depending on the factual determinations to be made on remand regarding the predominant cause of the damage to the insureds' property, either: (1) the total loss provision in section 5 (e) would dictate that the insureds were entitled to recover the full policy limits for covered losses; or (2) the actual cash value provision in section 5 (b) would dictate that the insureds were entitled to recover the actual cash value of their home, replacement cost minus depreciation.  Under either section 5(e) or 5(b), the fact-finder would arrive at the proper figure for the actual cash value to establish the amount of actual loss.  As long as the insured's combined recovery under their homeowners and flood policies was less than their actual loss, then the double recover rule would not preclude the insureds from receiving additional compensation under their homeowners policy.

Fifth Circuit Considers Business Interruption Coverage After Hurricane Katrina

   The insured had a commercial property policy with Lexington.  Coverage included $25 million in losses for business interruption.  See Consolidated Co. Inc. v. Lexington Ins. Co., 2010 U.S. App. LEXIS 17146 (5th Cir. Aug. 17, 2010).  

   Hurricane Katrina damaged the insured's property and equipment.  The insured was able, however, to resume partial operations ten days after the storm.  In the 15 months prior to full restoration, the insured made a small profit of about $300,000. 

   Lexington initially advanced $3 million under the policy.  After adjusting the claim, Lexington determined the total loss was $3,247,070.  Believing the payment was insufficient, the insured refused to cash a supplemental check for $247,070.  By the time of trial, the insured claimed $19 million in business interruption losses under the policy, consisting of $7 million for lost profits and $12.3 million for "charges and expenses." 

   "Charges and expenses" under the policy were expenses that would have been incurred without the loss, but which continued during the business interruption.  The "actual loss" under the policy consisted of the net profit or loss which the business interruption prevented from being earned, and of all charges and expenses.  The policy allowed the insured to resume operations if it would reduce the loss.  Profits recoverable under the policy were those that would have been earned during the period but for being shut down by the hurricane.  The usual expenses that the insured still incurred, even though not operating, were also recoverable.

   At trial, the parties disagreed on whether the charges and expenses of $12.3 million should be paid in full or reduced to the extent they were offset by the income during the 15 months prior to restoring complete operations.  The jury awarded the insured $19.5 million for business-interruption loss, which included the insured's claim for charges and expenses.  The district court reduced by $3 million to account for the alleged failure of the jury to deduct the advance Lexington paid.  

   On appeal, Lexington argued the district court erred by not instructing the jury to reduce the insured's "charges and expenses" by revenues the insured earned during its 15 months of partially resumed operations.  The Fifth Circuit agreed and reversed this portion of the jury verdict.  When a partial resumption in operations reduced the actual loss, so substantially as to create some profit, all charges and expenses were, by definition, covered by income.  The charges and expenses for which the policy would pay had there been no resumption of operations was shown to be $12.3 million.  These expenses had to be part of the $205 million in expenses that were incurred during resumed operations.  All expenses were recouped from the income of the business and were not a "loss" to the compensated under the policy.  Just as the insured would have paid the charges and expenses out of its revenue if Katrina had never struck, the policy provided for the insured to pay them to the extent it could do so out of the revenue from partially resumed operations.  Therefore, the award of $12.3 million in charges and expenses was vacated.

   Thanks to my Damon Key colleague, Rebecca Copeland, for sending me this case.

Burden of Proving Damage Caused by Both Covered and Non-Covered Risks Addressed

   When both a covered risk and a non-covered risk cause some of the property damage, which party bears the burden of identifying the discrete items of property that were damaged and proving what portion of the damage was caused by a non-covered or excluded risk?  See Bayle v. Allstate Ins. Co., 2010 U.S. App. LEXIS 16635 (5th Cir. Aug. 11, 2010).

  The insureds' home was damaged by Hurricane Katrina.  After the insureds evacuated, eight to ten feet of water (mixed with escaped oil from a nearby storage tank) flooded their one-story house.  Little of the damage appeared to have been caused by wind.  An adjuster observed severe damage to the interior and contents of the house, all of which were attributed to flood.  Further, few window panes were broken.   Policy limits of $105,000 were paid under the flood policy.  But only $17,560.73 was paid for wind damage under the homeowners policy.

   The insureds sued and Allstate moved for summary judgment.  The district court granted Allstate's motion because the insureds failed to point to any wind damaged items for which Allstate had not already compensated them.

   On appeal, the Fifth Circuit noted that Allstate did not contest that a covered peril (wind) caused some damage to some of the insureds' property.  The question was which particular items of property were damaged by wind.  The insureds never identified which particular damaged items had gone uncompensated or under-compensated under their policy's coverage for structural damage.  They simply presented the court with a line-item cost estimate to repair all the damage to their property, without attempting to explain which portion of those costs were attributable to wind-caused damage. 

   When Allstate presented evidence sufficient to establish a prima facie case that flood, not wind, caused any uncompensated or under-compensated damage complained of by the insureds, the burden of production shifted to the insureds to offer rebuttal evidence sufficient to create a genuine issue of material fact as to which, if any, uncompensated items of damage were caused by wind.  Summary judgment was proper because the insureds failed to bear their burden of production after Allstate produced evidence identifying those items of damage that were excluded from wind coverage because they were caused by flood.