Insurance Law Hawaii

No Duty to Defend Under Renter's Policy

    The court agreed that the insurer had no potential liability under a policy where the insured allegedly concealed facts and made misrepresentations regarding the condition of the property it sold. State Farm Fire & Cas. Co. v. TFG Enterprises, LLC, 2021 Neb. LEXIS 27 (Neb. Feb. 19, 2021).

    TFG sold a house to Jeffrey Barkhurst. Thereafter, Barkhurst filed suit alleging that TFG failed to disclose and actively concealed several defects, including water intrusion, the presence of mold, substandard repairs and structural issues. State Farm agreed to TFG defend under a reservation of rights. State Farm then filed a declaratory judgment action to determine its obligations under the policy. 

    State Farm relied upon various exclusions in the rental policy issued to TFG. The exclusions provided there would be no liability coverage for "property damage to property owned by an insured"; "property damage to property rented to, occupied or used by or in the care of the insured"; or "property damage to premises the insured sells. . . if the property damage arises out of these premises."

    In the underling lawsuit, TFG admitted none of the conditions or defects identified in the Barkhurst's lawsuit existed when it bought the house. TFG further admitted that it used the house and the house was in its care and possession up until the time it was sold. 

    The lower court granted summary judgment to State Farm.  Any negligent misrepresentation by TFG did not cause property damage. Nor was there an occurrence. 

    The Nebraska Supreme Court affirmed, but focused on the policy exclusions. To the extent that the underlying lawsuit was one for property damage to the house, it fell squarely within each of the exclusions. It was undisputed that the house was owned, in the care of, and then sold byTFG. 

    Given the plain language of the exclusions, State Farm had no potential liability from the underliyng lawsuit under the rental policy. 

Claim Against Broker Survives Motion to Dismiss

    The insured's complaint against its broker for failure to secure adequate coverage survived a motion to dismiss. Broecker v. Conklin Prop., LLC, 2020 N.Y. App. Div. LEXIS 7399 (Dec. 2, 2020). 

    Conklin Property, LLC purchased real property and entered into a contract with JJC Contracting, Inc. for construction and renovation of the property. The broker, Total Management Corp. (TMC) was retained by Conklin to secure insurance for the construction phase of the renovation project. During the renovation, an employee of JJC was injured at the property and died. The employee's estate then sued Conklin. US Underwriters, the insurer, disclaimed coverage pursuant to an exclusion for bodily injury to contractors and subcontractors and their workers.

    Conklin then sued TMC for failure to procure coverage for injury to contractors, subcontractors, and their workers. The complaint further alleged that TMC was negligent in failing to exercise due care in procuring coverage that satisfied Conklin's insurance needs. The allegations in the complaint addressed TMC's assessing Conklin's insurance needs based on its review of the construction contract with JJC. The complaint further alleged Conklin relied on Conklin's expertise. These allegations were sufficient to plead the existence of a special relationship necessary to sustain a negligent misrepresentation cause of action. 

Insured's Claim for Cyber Coverage Rejected

        Having failed to adequately secure cyber coverage, the insured law firm's lawsuit was properly dismissed by the trial court on summary judgment. Johnson v. Smith Bros. Ins., LLC, 2020 Vt. Unpub. LEXIS 98 (Vt. Sept. 4, 2020).

        The law firm attended a CLE seminar presented by the Vermont Attorneys Title Insurance Corporation. Scott Garcia, an employee of Smith Brothers, an insurance agency, gave a presentation on professional liability insurance focusing on cybersecurity issues, including fraudulent scams. After the presentation, one of the law firms members spoke with Garcia and expressed an interest in securing a professional malpractice policy with cyber security coverage. Garcia said he would check the firm's current policy, but was confident he could provide better coverage. It was unclear whether the firm ever provided its current policy.

    A couple of weeks later, the firm submitted an online application for professional liability coverage through the Smith Brothers' website. The application neither referenced the conversation with Garcia nor specifically requested cybersecurity coverage. Smith Brothers then sent the policy covering a one-year period. The policy included  coverage for up to $10,000 for losses resulting from a network or security breach in the performance of professional services. A year later, the firm renewed the same policy.

    Thereafter, the law firm conducted a residential real estate closing, representing the buyers. At the closing, the law firm provided the sellers with a $100,744 check for the net proceeds of the sale. That same day, the law firm received an email purportedly from the sellers' attorney stating that the sellers wanted the buyers to stop payment on the check and instead wire wire the money to a bank in Texas. The law firm did so, but learned a few days later that the firm was the victim of a wire fraud scam. The sellers had never asked that payment be stopped on the check nor that the funds be wired to a bank in Texas. 

    The law firm sought coverage under its policy. The claim was initially denied, but then the insurer paid $50,000 as part of a settlement of the sellers' lawsuit against the law firm. 

    The law firm sued Smith Brothers and Garcia for breach of contract and negligent misrepresentation. The trial court granted defendants summary judgment. 

    The Supreme Court affirmed. The negligent misrepresentation claim failed because no reasonable factfinder could conclude that the law firm reasonably relied on Garcia's representation at the CLE seminar to mean that the firm would be provided with some unidentified level of cybersecurity coverage in any policy that they applied for a month later on Smith Brothers' website without any request for such coverage.

    As for their breach of contract claim, the law firm made no showing that a contract was formed between the parties at the CLE seminar. The casual conversation with Garcia, which was nothing more than a preliminary informational discussion, did not amount to a contract to procure insurance. 

Insurer Must Defend Negligent Misrepresentation Claims

    The Missouri Court of Appeals reversed the trial court's ruling that the insured's policy did not cover claims based upon negligent misrepresentation. Am. Family Mut. Ins. Co. v. Sharon, 2020 Mo. App. LEXIS 123 (Mo. Ct. App. Feb. 4, 2020). 

    Robert Sharon sued Gregory and Kristine Schwenzer for, among other things, negligent misrepresentation and unlawful merchandising practices in connection with Sharon's purchase of the Schwenzers' home. Sharon's complaint alleged that after the sale, he found significant water leaks and water damage in the basement. The disclosure statement represented that there was no water leakage or dampness in the house or basement. 

    The Schwenzers were insured by American Family. After the Sharon suit was tendered, American Family filed suit for declaratory judgment that it had no duty to defend and that the underlying claims were not covered because they did not allege an occurrence. The trial court agreed coverage was barred by the owned-property exclusion, the expected-or-intended exclusion, and other exclusions. 

    On appeal, it was unclear whether the trial court resolved whether an occurrence was alleged in the underlying complaint. The trial court found that Sharon's claims were not covered based upon the exclusions. The appellate court noted that an alleged negligent misrepresentation could be an accident for purposes of determining whether there was coverage under an "occurrence" provision of a policy.  The same conclusion applied to Sharon's unlawful merchandising claim where he alleged that the Schwenzers engaged in misrepresentations before and during the sale, causing him to incur significant costs to repair portions of the basement.

    The court determined that Sharon could not recover costs to repair defects that existed at the time of the sale because there were no damages to tangible property caused by the misrepresentation. The court found that alleged water damages following the sale could meet the definition of property damage, however.

    Turning to the exclusions, the owned-property exclusion stated, "We will not cover property damage to . . . property owned by any insured." The policy covered resulting property damage that occurred during the policy period. To negate coverage under the exclusion, the damage must have occurred when the damaged property was owned by the insured. Here, the trial court erred in granting American Family's petition for declaratory judgment based on the owned-property exclusion to the extent that Sharon's underlying complaint alleged that an accident (a negligent misrepresentation) resulted in property damage (water damage) when the property was no longer owned by the insured. Because the property was not owned by the insureds when the post-sale water damage allegedly occurred, the trial court erred in concluding that the owned-property exclusion barred coverage as to any such claim in the underlying complaint.

    The expected-or-intended exclusion stated there was no coverage for property damaged arising out of an expected or intended act or omissions. A claim for negligent misrepresentation, unlike one for fraud, did not involve a question of intent. Here, the court was unable to say that the Schwenzers' acts or omissions were recklessly injurious because it was conceivable that they believed their repairs were sufficient to prevent future water damage. Thus, the expected-or-intended exclusion did not apply. 

    Therefore, American Family had a duty to defend the Schwenzers. The trial court was reversed and the case was remanded. 

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.