Insurance Law Hawaii

Insurer's Summary Judgment Motion for Rescission or Reformation of Umbrella Policy Fails

    The insurer was unsuccessful in seeking rescission or reformation of an umbrella policy. Great Am. Ins. Co. v. Zelik, 2020 U.S. District. LEXIS 5229 (S.D. N. Y. Jan. 6, 2020). 

    Kim Hodges tripped and fell in front of vacant lot owned by Joseph Zelik, a real estate investor. Zelik tendered to Great American under the umbrella policy he had covering the lot. Zelik obtained the policy through Secure Insure, an insurance broker. 

    As part of the application process for the umbrella policy, Zelik sent Secure a spreadsheet of twenty-seven properties Zelik wanted insured under the policy,. The spreadsheet included descriptions of the properties as well as the underlying carrier and policy number per location. Secure provided Great American with the same spreadsheet. The spreadsheet indicated that the underlying carrier for a number of the properties was Allstate. All properties for which the underlying insurance policy was listed as "Allstate" had an underlying homeowner's policy.

    The application, which was signed by Secure on Zelik's behalf, stated that underlying insurance for each property was a CGL policy with a limit of no less than $1 million per occurrence. Neither Zelik nor Secure altered the Allstate homeowner's insurance underlying some of the properties before binding the umbrella policy. 

    Great American offered $5 million of commercial coverage under the umbrella policy, The policy covered all properties listed in the spreadsheet, including those covered under the Allstate homeowner's policy. 

    One of the properties listed as covered in the umbrella policy was a vacant lot at 467 Bushwick Avenue, where Hodges tripped and fell. Allstate provided Zelik with a defense in the suit filed by Hodges. Allstate notified Great American of the suit. Allstate tendered the one million dollar limit of its primary policy to contribute to the Hodges' lawsuit for the settlement demand  in excess of the Allstate limit.  Allstate advised Great American of the tender. 

    When Great American investigated, it learned that the underlying policy for 467 Bushwick Avenue was a homeowner's policy. Great American advised Zelik that based on material misrepresentations made in the application for the umbrella policy, Great American would seek to rescind the policy. Great American then filed suit against Zelik. Zelik filed a counter-claim and a third-party complaint against Secure.

    Great American moved for summary judgment seeking to rescind or reform the policy. The court determined that the evidence on whether there was a misrepresentation was not clear and substantially uncontradicted on the question of materiality, so it remained a question for the jury. Provisions in the policy suggested that the nature of the underlying insurance was immaterial to Great American's decision to issue the policy. The policy stated that if the insured failed to maintain compliant underlying coverage, Great American would only be liable to the same extent that it would have been had the insured fully complied with the policy requirements. 

    Great American also asked that the policy be reformed to remove the properties that were not properly insured by CGL coverage. While Great American showed that it entered the policy under the mistaken belief that all the properties had underlying CGL policies, it did not show that this mistake was mutual. Nor did Great American show that Secure, Zelik's agent, believed that the six properties were covered by CGL policies. Therefore, Great American's motion for summary judgment was denied,. 

    Secure's motion for summary judgment against Zelik also failed. Zelik adduced evidence that it asked Secure to obtain umbrella coverage for all of his properties, including 467 Bushwich Avenue. If Great American succeeded on any of its claims that the umbrella policy did not cover the Hodges incident, Secure would have failed to do just that. Therefore, Secure's motion for summary judgment in the negligence and malpractice claim failed. 

Motion to Dismiss Insureds' Counterclaim on the Basis of Prior Knowledge Denied

    The insurer unsuccessfully moved to dismiss portions of the insureds' counterclaim based upon prior knowledge. Hudson Spec. Ins. Co. v. Talex Enter., 2018 U.S. Dist. LEXIS 105598 (S. D. Miss. June 25, 2018). 

    The insureds' building collapsed in McComb, Mississippi. Pubic utilities were damaged and traffic disrupted. The City sued the insured, alleging that the building collapsed because there was too much water gathered on its roof. The City further alleged that the insureds knew too much water was on the roof because they had been told by someone hired to clean the drain that it was clogged and by a contractor that the roof was so damaged that it could not safely be repaired.

    The insureds requested a defense from Hudson under a CGL policy and coverage under a commercial property policy. The policy provided that coverage was void if the insured committed fraud or intentionally concealed or misrepresented information. Hudson denied coverage and sued for a declaratory judgment. 

    The City executed an assignment with the insureds by which the City's claims would be made solely under the CGL policy. The City and the insureds counterclaimed against Hudson. They alleged that the policies covered the building's "unexpected" collapse, but that Hudson failed to fulfill its obligations under the policies.

    Hudson's motion sought to dismiss parts of the counterclaim that went beyond the pleadings and were better resolved on summary judgment. The court determined that the counterclaim alleged facts showing an actual, present dispute regarding coverage under the policies. Nothing more was required under Rule 12 and the motion to dismiss was denied. 

Negligent Misprespresentation Claim Must be Defended

    Interpreting Missouri law, the federal district court found that the insurer must defend the negligent misrepresentation claim filed against the insured seller of a home. Am. Family Mut. Ins. Co. v. Spencer, 2018 U.S. Dist. LEIS 44272 (E.D. Miss. March 19, 2018).

    The insurer issued a homeowners policy to Nancy Spencer with liability coverage in the amount of $300,000. Spencer sold her home to Jane Volz, who sued Spencer after the sale. Volz alleged that the disclosure statement stated that Spencer was not aware of any dampness, water accumulation or leakage in the basement. Subsequent to the closing, water leaked and seeped into the basement of the home every time it rained. Volz sued for fraudulent misrepresentation and negligent misrepresentation among other claims. 

    The insurer agreed to defend under a reservation of rights, but also sued Spencer for a declaratory judgment seeking a determination that there was no coverage under the policy. The insurer filed a motion for summary judgment and Spencer filed a cross motion. 

    The insurer maintained that the alleged misrepresentation did not result in "property damage" as required to trigger the policy. Rather, the insurer argued that the damage to the property all existed prior to the sale of the home and was concealed by the acts of Spencer. The court disagreed. In the underlying petition, Volz alleged that misrepresentations made by Spencer while Spencer owned the property resulted in damage to Volz subsequent to the sale of the property. 

    Consequently, the insurer's motion for summary judgment was denied and it was obligated to continue defending Spencer. 

Negligent Misrepresentation Not Covered by Homeowner's Policy

    The seller's alleged negligent misrepresentation about the condition of the house was not covered by the homeowner's and umbrella policies. Allstate Ins. Co. v. Swaminathan, 2017 U.S. Dist. LEXIS 211931 (D. Conn. Dec. 27, 2017).

    The insureds owned a home insured by Allstate under both a homeowner's and umbrella policy. They sold the house to Kristin Cole. Thereafter, Cole discovered that concrete in the home had been deteriorating for years and would need to be replaced. 

    Cole sued the insureds, alleging they knew or should have known about the condition of the concrete and that the concrete houses in the area had been deteriorating. Further, the insureds used a sealer to conceal the problem and failed to disclose it.  

    Allstate denied the claim and filed suit for a declaratory judgment that it had no duty to defend or indemnify. Allstate then moved for summary judgment. 

    The homeowner's policy provided coverage for claims "because of bodily injury or property damage arising from any occurrence to which this policy applies." The underlying lawsuit did not hinge on the deteriorating concrete itself, but rather on the insureds' intentional or negligent misrepresentations about the condition of the concrete. None of the allegations in the complaint asserted property damage or bodily injury covered by the homeowner's policy. Instead, Cole sought damages related to the insureds' fraudulent or negligent misrepresentation of the condition of the concrete supporting the house. Therefore, Cole's injury stemmed from the insureds' alleged deception, not from the property damages that preceded the misrepresentations. Allstate had no duty to defend the insureds under the homeowner's policy based upon the alleged misrepresentation.

    Nor was there coverage under the umbrella policy. The policy did not cover intentional acts or damage that the insured could have reasonably expected to result from an insured's intentional conduct. 

 

Negligent Misrepresentation Claim Does Not Allege Property Damage, Barring Coverage

    The Tennessee Court of Appeals reversed the trial court's determination that the seller's alleged negligent misrepresentation regarding the propensity of the property to flood was covered. Erie Ins. Exh. v. Maxwell, 2017 Tenn. App. LEXIS 746 (Tenn. Ct. App. Nov. 15, 2017).

    The Chapmans purchased a residence from the Maxwells on March 7, 2014. Prior to the sale, the Maxwells completed a residential property disclosure in which they allegedly misrepresented the propensity of the property to flood. Five months after the purchase, the residence sustained damage as a result of two floods within three days. The Chapmans sued, alleging they relied on the Maxwells' representations regarding the propensity of the property to flood. The Chapmans further alleged that they sustained property damage as a result of the Maxwells' negligence and negligent misrepresentations. 

    The Maxwells notified their insurer, Erie. Erie then filed an action for declaratory judgment, alleging that the policy offered no coverage for the claims asserted in the underlying lawsuit. Erie filed a motion for summary judgment, arguing that none of the claims asserted in the Chapman complaint alleged an "occurrence." The trial court denied the motion. 

    The appellate court reversed because the alleged misrepresentations did not cause the damage to the property. Under the policy, property damage was covered only if it was caused by an occurrence. Under the Chapman complaint, the property damage sustained by the Chapmans was caused by flooding, not by the alleged misrepresentation of the Maxwells. The court emphasized it was not determining whether a negligent misrepresentation was an accident, but rather, whether the alleged misrepresentations by the Maxwells caused the damage to the property. The court determined that the misrepresentations did not cause the damage.

Rescission of Policy for Mispresentation in Application Reversed

    The California Court of Appeal reversed the trial court's issuance of summary judgment to the insurer, finding that the insured did not make misrepresentations when applying for a policy to cover rental property. Duarte v. Pacific Spec. Ins. Co., 13 Cal. App. 5th 45 (2017).

    Duarte rented his house to Jennifer Pleasants. Duarte gave her a 45-day notice to quit in February 2012, but she did not leave. Two months later, Duarte applied for landlord-tenant coverage with Pacific. The application was submitted electronically and Pacific issued a policy to Durate the same day. 

    In June 2012, Pleasants filed a lawsuit against Duarte, alleging ten causes of action arising from habitability defects which began in 2009. The suit claimed Pleasants had notified Duarte about the defects, she had suffered emotional distress and physical injury, and over paid rent, and had out-of-pocket expenses.

    In August 2012, Duarte tendered the defense of the suit to Pacific, which denied coverage. Duarte then sued Pacific for a declaratory judgment that Pacific must defend Duarte. Both parties filed motions for summary judgment. Pacific argued it had no obligations under the policy because Duarte had made misrepresentations when applying for the policy by not notifying Pacific of the prior dispute with Pleasants and not informing Pacific that Pleasants ran a business out of the home. The trial court granted Pacific's motion and ruled that Pacific was entitled to rescind the policy because Duarte made material misrepresentations in applying for the policy. 

    The court of appeal reversed. In his application Duarte answered "no" to question 4, 'has damage remained unrepaired from previous claim and/or pending claims, and/or known or potential (a) defects, (b) claim disputes, (c) property disputes and/or (d) lawsuits?" Duarte also answered "no" to question 9, "is there any type of business conducted on the premises"?

    The court found question 4 utterly ambiguous. The syntax of question 4 was garbled. The only verb was contained in the phrase "has damage remained unrepaired?" The subject of the verb was "damage." Therefore, the question was reasonably construed as simply asking whether damage has "remained unrepaired" from various past events, such as a "previous claim" or a property dispute or lawsuit. In other words, a logical way to read the inconsistently worded sentence was to tie everything back to the existence of unrepaired damage. 

    The court agreed with Duarte that the question was reasonably interpreted as asking whether the property had unrepaired damage associated in some with previous or pending claims, known or potential defects, known or potential claim disputes, known or potential property disputes, or known or potential lawsuits. Duarte understood the term "claim" to mean insurance claim. When he submitted the application, there was no unrepaired damage at the property from previous insurance claims.

    Regarding business being conducted on the property, Pleasants' father worked on motorcycles and occasionally sold refurbished motorcycles. Duarte thought the question referred to regular and ongoing business activity. Since there was no regular and ongoing business activity at the rental house when he applied for insurance, Pacific had not met its burden. 

    

Insurer Must Defend Allegations of Misrepresentation

    The Montana Supreme Court held that the insurer had a duty to defend allegations of misrepresentation against the insured seller of a home. Huckins v. United Serv. Auto. Assoc., 2017 Mont. LEXIS 334 (Mont. June 13, 2017).

    Barry Van Sickle placed his home on the market for sale and completed a Property Disclosure Statement. Where the statement asked for information about the basement, including leakage or flooding, he wrote "N/A."

    Jessica Huckins made an offer on the house that was accepted. She had a home inspection performed and asked for home insurance costs. The inspection revealed an "unconventional" sump in the basement, and the home insurance quotes indicated that a claim for flooding in the house had been made in 2011. 

    When Huckins entered the house after closing, the basement was flooded. She sued Van Sickle for failure to disclose the previous basement flooding problems and set forth claims of negligent misrepresentation and fraud.

    Van Sickle was insured by USAA. His homeowner's policy excluded coverage for damages "arising out of your failure, intentionally or unintentionally, to disclose information regarding the sale or transfer of real property. In addition to the homeowner's policy, Van Sickle, who had moved to and rented a home in California, had a renter's policy. 

    USAA tendered the underlying suit to USAA, who conducted a phone interview with Van Sickle and his wife. Thereafter, coverage was denied based on the exclusion and because allegations of misrepresentation and concealment did not rise to an occurrence. 

    Van Sickle settled with Huckins and assigned rights under all his policies with USAA. Huckins then sued USAA for breach of the duty to defend Van Sickle. Summary judgment was granted to USAA because the trial court found the claim did not constitute an "occurrence" as defined by the policies. 

    The Montana Supreme Court agreed there was no duty to defend under the homeowner's policy based upon the exclusion for failure to disclose information regarding the sale of real property. 

    The renter's policy was similar to the homeowner's policy, but did not have the failure to disclose exclusion. In the interview with USAA, Van Sickle's wife had explained they understood the Disclosure form to be asking about current problems, not prior problems. The Montana Supreme Court had previously held that policy language defining accidents may include intentional acts of the damages that were not objectively intended or expected by the insured. The statements given by the insureds during the interview indicated they were confused about the Disclosure form and how to complete it accurately, raising a legitimate question about whether they intended to provide inaccurate content in their answers. It was impossible to conclude that Huckins' claims fell outside the Renter's Policy. Therefore, USAA had a duty to defend Van Sickle, at least until a ruling was obtained declaring there was no coverage.

Denial of Claim for Concealment or Fraud Reversed by Sixth Circuit

   The Sixth Circuit reversed the district court's order granting summary judgment to State Farm based upon the insured's alleged concealment of the truth when questioned about a fire that destroyed his home. Rose v. State Farm Fire & Cas. Co., 2014 U.S. App. LEXIS 17312 (6th Cir. Sept. 8, 2014). 

   A fire destroyed the insured's home. He reported the loss to State Farm, who assigned Rob Raker to investigate the claim. Coverage was denied because State Farm contended that the "Intentional Acts" and "Concealment or Fraud" conditions of the homeowner's policy were violated. 

   The insured sued State Farm. The district granted summary judgment to State Farm after finding that some of the answers the insured gave to Raker were misleading and material. The court determined that the insured failed to identify multiple tax liens and judgments when questioned about his financial status.

   The Sixth Circuit reversed. In order for State Farm to rely on the concealment provision, the insured must have intentionally concealed or misrepresented a material fact. False statements alone were not enough. In response to an open-ended question, the insured volunteered that a suit was on-going between himself and a bank. The insured offered to let Raker talk to the attorney handling the case. 

   It was true that in the years leading up to the fire, dozens of tax liens had been filed against the insured. But Raker never asked the insured directly about tax liens. Further, an accountant handled all of the insured's finances and taxes. Finally, although there were several lawsuits that had been filed against the insured over the years, State Farm had the burden of establishing that the insured intentionally gave inaccurate answers. The insured was forthcoming in disclosing a multi-million dollar judgment. Therefore, a jury might reasonably conclude that he had little motive to conceal the existence of other, relatively minor legal debts. 

Ill-fated Complaint Fails to State Claims Against Broker and FEMA

   A complaint lodged against the insureds' broker and FEMA was dismissed for failure to state a claim. Lopez v. State Farm Gen. Ins. Co., 2014 U.S. Dist. LEXIS 109803 (E.D. La. Aug. 8, 2014).

   The insureds held a Standard Flood Insurance Policy (SFIP) issued by FEMA, but sold by the broker. The insureds alleged that their property was totally destroyed by Hurricane Isaac. FEMA paid the insureds $234,513.02 for damage to their dwelling and $80,566.17 for its contents, for a total of $315,079.19. This was $34,920.81 below the policy limits. The insureds sued, claiming FEMA negligently miscalculated their damages, misvalued their property, and improperly adjusted their claim. The insureds also alleged that the broker failed to properly advise them regarding the nature of their coverage, the true value of their property, or to purchase the correct amount of insurance on their behalf. 

   The negligent procurement claim against the broker failed because the insureds did not allege any specific facts tending to establish that the broker failed to use reasonable diligence in procuring their insurance. Likewise, the negligent misrepresentation claim against the broker was dismissed. Insurance agents had a duty to supply their customers with correct information, and they could be liable for negligent misrepresentation if they provided incorrect information and an insured was damaged. Here, the insureds did not allege a breach of the duty to supply correct information.

   Regarding claims against FEMA, the FEMA administrato,r instead of FEMA, was the proper party defendant in a dispute arising under SFIP. Therefore, the claims against FEMA were dismissed for lack of subject matter jurisdiction. Further, while the insureds contended their damages exceeded the amounts provided in a sworn Proof of Loss and paid by FEMA, they did not submit any additional Proof of Loss to support any supplemental claim. 

   Finally, the insureds' claims arising from defendants' alleged faulty adjustment were preempted by federal law and the defendants' motion for summary judgment was granted on the remainder of the insureds' complaint. 

Innocent Insured Doctrine Preserves Malpractice Coverage for One Partner

   The Illinois Court of Appeal found that an innocent law partner was entitled to coverage under the firm's malpractice policy despite misrepresentations made by another partner. Illinois State Bar Association Mutual Ins. Co. v. Law Office of Tuzzolino and Terpinas, 2013 Ill. App. LEXIS 816 (Ill. Ct. App. Nov. 22, 2013).

   Tuzzolino and Terpinas were law partners. Tuzzolino agreed to file a complaint for a client, but neglected to do so. The case was dismissed. Nevertheless, for the next 18 months, Tuzzolino led the client to believe that the matter was pending. The client eventually checked the court file and learned the case had dismissed. Tuzzolino offered the client $670,000 to settle any claims against him.

    Following this settlement offer, Tuzzolino attempted to renew the firm's malpractice policy. The renewal form asked if there were any circumstances which might give rise to a claim that had not been reported. Tuzzolino checked the box marked "no." Tuzzolino then signed and submitted the form. Terpinas did not see or sign the form.

   Subsequently, Terpinas received a lien letter from an attorney hired to represent Tuzzolino in the pending malpractice claims against him. This was the first Terpinas heard of the claims against his partner. Terpinas reported the malpractice suit against his partner to the insurer.

   The insurer then filed a complaint to rescind the policy and for other relief against the firm and its partners. The trial court eventually rescinded the policy in its entirety and found the insurer had no duty to defend Terpinas or the firm in the malpractice suit pursued by Tuzzolino's client. 

      The appellate court considered the common law innocent insured doctrine. The doctrine applied where two or more insureds have a policy and one of the insured commits an act that would normally void the policy. The innocent insured doctrine preserved coverage for the innocent insureds where a reasonable person would not understand that the wrongdoing of a co-insured would prevent recovery under the policy.

   The court held that the doctrine preserved coverage for Terpinas. The judgment of the trial court was reversed.