Insurance Law Hawaii

Reservation of Rights Letter Merely Citing Policy Provisions Inadequate

    In an unpublished opinion, the Fourth Circuit affirmed the district court's finding that the insurers' reservation of rights letters did not provide a basis for denial of coverage. Stoneiedge At Lake Keowee Owners Ass'n Inc. v. Cincinnati Ins. Co., 2022 US. App. LEXIS 34292 (4th Dist. Dec. 13, 2022).

    The Stoneledge AOAO sued the general contractor Marlick Home Builders, LLC and other defendants after construction of 37 units. The complaint alleged construction defects that resulted in water intrusion and other physical damage. Marlick notified its insurers, Cincinnati Insurance Company and Builders Mutual. Various reservation of rights letter were sent by the insurers.

    In the underlying case, a judgment was entered against Marlick totalling approximately $1.6 million. As a judgment creditor of Marlickm, Stoneledge sued Cincinnati and Builders Mutual. The district court granted Stonelege's motion for summary judgment, primarily on the ground that the insurers failed to reserve the right to contest coverage.

    On appeal, the South Carolina Supreme Court's decision in Harleysville Group Insurance v. Heritage Communities, Inc., 803 S.E. 2d 288( S.C. 2017), was controlling. There, the Supreme Court held that "generic denials of coverage coupled with furnishing the insured with a copy of all or most of the policy provisions (through a cut-and-paste method) is not sufficient." In Harleysville, the insurer failed to reserve its rights as to the following issues: whether any damages resulted from acts meeting the definition of occurrence, whether any damages occurred during the applicable policy periods, and what damages were attributable to non-covered faulty workmanship (e.g., the your-work exclusion]. 

    The court found that, at the very least, an insurer should discuss its position as to the various provisions  and explain its reasons for potentially denying coverage. If the reservation of rights was ambiguous, it had to construed against the insurer and liberally in favor of the insured, 

    Here, the letters failed to inform the insureds that the insurers intended to litigate coverage issues and did not apprise the insureds of potential conflicts of interest. Builders Mutual's letter merely referred the insured to certain policy exclusions and summarised the general nature of those exclusions.

    Cincinnatti's letter presented a closer question. It listed certain policy exclusions and noted that "coverage may be limited by several other exclusions and endorsements." The letter continued with respect to whether coverage was triggered in the first place, stating that "it is doubtful that the claim alleges the happening of an 'occurrence'" or the the "claim alleges 'property damage' within the policy definition," and if there is no "occurrence" or "property damage" as defined by the policy, there is "no coverage."

    Under Harleysville, this was still insufficient to reserve the right to dispute coverage as to the policy exclusion. The letter was devoid of any explanation for why Cincinnati found it "doubtful" that there was an "occurrence" or "property damage" within the meaning of the policy. Therefore, the district court's judgment was affirmed. 

    

    

Ninth Circuit Upholds Hawaii District Court Decision Finding Coverage for Employee Theft

    The Ninth Circuit agreed with the Federal District Court, District of Hawaii, in finding multiple limits for occurrences over the years of coverage were applicable. The Arc In Hawaii v. DB Ins. Co., Ltd., 2022 U.S. App. LEXIS 31231 (9th Cir. Nov. 10, 2022). 

    The Arc served persons with disabilities in Hawaii. The Arc filed a claim with DB Insurance when a bookkeeper writing unauthorized checks resulted in a loss of $6,000,000 during five consecutive policy periods. 

    Each policy excluded "loss or damage caused by or resulting from . . . dishonest or cirminal acts by . . . employees." An enhancement extended coverage for forgery of checks "made or drawn by . . . one acting as the insured's agent or claiming to have been so made or drawn." The parties agreed that the checks represented "dishonest or criminal acts by employees." The district court ruled in favor of the Arc because under Hawaii law, the insured had a reasonable expectation that the forgery extension covered forgery by its employees. The court rejected DB Insurance's contention that, in light of the exclusion for employees' criminal or dishonest acts, the foregery extension did not provide coverage for forgeries by employees.

    The Ninth Circuit agreed with the district court. It was difficult to read the forgery extension's reference to an "agent" as excluding an employee. There was at most a ambiguity that had to be interpreted in favor of the Arc. 

    Next, the court considered what policy limits were applicable. The policy's coverage for "employee dishonesty" limited payment for one occurrence for loss or damage to $250,000. The policy further stated that DB Insurance would only "pay for loss or damage [the Arc] sustaines through acts committed or events occurring during the Policy Period." The Arc had five different one-year policys with DB Insurance. Each policy had the same employee dishonesty extension with a $250,000 liability limit. 

    The district court held that the Arc could recover the $250,000 limit for each of the five policy periods. DB Insurance contended that all loss caused by the employee represented one occurrence that was subject to one payment of $250,000 regardless of the number of policy periods.

    The Ninth Circuit found that the district court had properly relied upon relevant case law from California because there was no Hawaii authority on the issue. In a similar case from California, the court held that the term "occurrence" in the provision was ambiguous and was therefore construed in favor of the policyholder. Here, it was reasonable for the insured to expect each policy to be separte and to reocver the $250,000 limit under each of the five policies. 

No Coverage for Subcontractor's Faulty Workmanship

    Finding faulty workmanship that did not cause property damage beyond the subcontractor's work, the court found there was no coverage under the CGL policy. Middlesex Ins. Co. v. Dixie Mech., Inc., 2022 U.S. Dist. LEXIS 175190 (N. D. Ga. Sept. 27, 2022). 

    The case involved a construction project on Elba Island, Georgia. IHI E&C International Corporation (IHI) filed suit against Robinson Mechanical Contractors ("Robinson") for faulty construction work, including a pipe rack and process module installation. The pipe racks allegedly contained defective welds. Robinson filed a third-party complaint against Patriot Modular, Inc. (Patriot), Robinson's subcontractor, for faulty work for IHI. Finally, Patriot filed a fourth-party complaint against Dixie Mechanical, Inc. (Dixie), alleging it subcontracted with Dixie to perform fabrication, welding, testing, and inspection of pipes under Patriot's subcontract with Robinson. Patriot contended that to the extent it was found liable to Robinson for any defective work, delays or breaches of contract for Dixie's work, Patriot was entitled to recover such amounts from Dixie.

    In this case, Dixie's insurer, Middlesex Insurance Company, sought a declaration that it had no duty to defend or to indemnify Dixie. Middlesex contended that the claims of faulty workmanship in the underlying complaints constituted neither an "occurrence" nor "property damage."

    The court agreed. "Occurrence" had to cause "property damage" and the insured had to incur a liability to pay "damages because of such property damage." Coverage for property damage under a CGL policy required damage to property other than the work itself, and the insured' liability for such damage would have to arise from negligence. The only reasonable interpretation of the allegations in the underlying complaints was that the asserted damages resulted from Dixie's allegedly faulty workmanship under the subcontract and affected only the construction project.

    Therefore, judgment was entered in favor of Middlesex. 

Contractor Owed a Defense

    The Illinois Appellate Court reversed the lower court and found that the insured contractor was entitled to a defense for alleged construction defects. Acuity v. M/I Homes of Chicago, LLC, 2022 Ill. App. LEXIS 393 (Ill. Ct. App. Sept. 9, 2022).

    The owners association (AOAO) sued M/I Homes for breach of contract and the implied warranty of habitability due to alleged defects. The AOAO alleged that the defects caused physical injury to the townhomes. There was resulting property damage such as damage to other building materials, windows and patio doors, and water damage to the interior of units. M/I Homes requested a defense from Acuity, but the request was denied. 

   Acuity filed a complaint for declaratory judgment against M/I Homes and the AOAO, seeking a declaration that it had no duty to defend. Cross-motion for summary judgment were filed. Acuity argued that the actual property the insured was working on did not constitute covered property damage caused by an occurrence. M/I Homes contended that there was damage to other property that was beyond repair and replacement of the construction work. 

    The trial court granted summary judgment to Acuity and denied M/I Homes' motion. M/I Homes appealed. M/I Homes argued that the allegations of damage to "other property" in the underlying complaint referred to "property other than the townhomes themselves (i.e. property other than the contractor's work product)" and was sufficient to qualify as property damage. This was also an occurrence because the underlying complaint alleged that damage was an accident caused by the defective work of the subcontractor and was neither expected nor intended by M/I Homes. 

    Acuity argued that the allegations of damage to "other property" were not enough to trigger its duty to defend. The allegations were unconnected to a theory of recovery and the underlying complaint failed to both identify the owner of the "other property' and explain how the AOAO had standing to sue for the damage to that property. 

    The court noted that the underlying complaint simply alleged, in the broadest possible terms, that there was damage to "other property." These allegations were sufficient to trigger Acuity's duty to defend. The case was remanded to enter summary judgment in favor of M/I Homes on the duty to defend. 

No Duty to Defend under Homeowner's Policy Where No Occurrence, No Property Damage

    The federal district court for the district of Hawaii granted the insurer's motion for summary judgment determining there was not duty to defend and no duty to indemnify the insured under a homeowner's policy. Allstate Ins. Co. v. Rosfeld, 2022 U.S. Dist. LEXIS 139123 (D. Haw. Aug. 4, 2022). 

    The insured homeowners were sued in the underlying case for alleged failure to disclose poor flooding and plumbing issues during a December 2016 sale of the residence on Kauai. The disclosure statement purportedly made false representations and omitted material facts regarding various issues with the residence. The disclosure statement noted no sewage, drainage, water-related, or grading problems on the property, no damage to structures from flooding or leaks, no defects in the foundations or slabs, and no defects in the interior walls, baseboards or trim despite the insureds having experienced such issues during their ownership. The underlying complaint further alleged that the property had a history of drainage problems dating to 2006 and 2007, which the insureds knew about, or should have known about, when completing the disclosure statement. The insureds made a claim with Allstate in 2014 under their flood and homeowners policies for flooding or seepage into the basement of the house.

    The insured tendered the underlying lawsuit to Allstate, who defended under a reservation of rights. Allstate then filed this suit in federal district court for a declaration that it had no duty to defend or indemnify the insureds. Allstate moved for summary judgment.

    The court determined there was no property damage alleged in the underlying suit. The complaint alleged that after they moved in, the plaintiffs discovered "numerous cracks in the concrete slab (many of which appeared to be covered with concrete caulk or liquid filler." The negligence claims in the underlying case were based on the insureds' failure to disclose the repairs, not that the repairs were negligent and caused further property damage. 

    There was also no "occurrence" alleged in the underlying case. The underlying complaint alleged that the insureds' actions or omissions were entirely intentional, not accidental. The underlying complaint alleged that the insureds knew about flooding and plumbing defects - for example, having warned a neighbor about them and having made an insurance claim for certain damages  - prior to selling the property, and yet failed to disclose those material conditions. Accordingly, Allstate owed no duties. 

    The insureds' cross-claim for bad faith was also dismissed. The insureds produced no evidence of bad faith to create an issue of fact at the summary judgment state. 

 

Failure to Allege Property Damage Within Policy Period Defeats Insured's Claim

    The insured's inability to determine when water damage occurred meant it could not pursue claims of property damage against the insurers. Creek v. State Farm Fire & Cas. Co., 2022 U.S. Dist. LEXIS 116939 (W.D. Wash. July 1, 2022). 

    Gold Creek Condominium complex experienced water damage. The complex was completed in 1982. The owners sued State Farm and Travelers under all-risk policies when tenders for the damage were denied. 

    In 2017, Creek hired an expert to investigate deterioration due to water intrusion. The expert noted that "water intrusion had been evident in the exterior walls, soffits, terraces, handrails and elevated entry walkways for some time." Thereafter, Creek tendered claims for property damage to State Farm and to Travelers.

    In January 2020, a joint exploratory investigation was conducted with representatives from Creek, State Farm and Travelers participating. Exploratory opening were made.so that the gypsum sheathing could be seen. Only one of the openings did not have water damage to the gypsum and it was in an area that was sheltered from wind-driven rain. 

    State Farm's expert found improper construction of the exterior walls and failure to adequately maintain the building enclosure system at the exterior walls led to rainwater infiltrating in during the frequent rainfall. Creek's expert opined that water intrusion, in the form of rainwater events, including wind-driven rain, was the primary causes of the water damage. At a deposition, Creek's expert acknowledged that he could not look at deteriorated gypsum sheathing plywood siding or wood framing and develop an opinion as to how long it took to deteriorate. Finally, Travelers' expert opined that the original construction deficiencies, poorly implemented repairs, inadequate maintenance, and genenal wear and tear had contributed to ongoing water infiltration at the exterior walls, walkways, and decks. Based on these reports, both State Farm and Travelers denied coverage.

    Creek filed suit for breach of contract and all parties moved for summary judgment. The court granted State Farm's motion based upon the one-year limitations provision of the policy. It stated that no action could be brought unless within one year after the occurrence causing loss or damage. "Occurrence" was defined as "an accident, including continuous or repeated exposure to conditions, which results in property damage. Therefore, Creek had to demonstrate the damage occurred during the policy period of 1989 to 1990, or not more than one year after the wind-driven rain caused the loss. The language of the policy did not depend on when the loss happened but when the "occurrence causing the loss' happened." The evidence did not give an reliable date of when the loss or damage occurred, so the policy was not triggered. 

    Travelers' motion also argued Creek could not prove that covered physical damage "commenced" during the policy's effective period. The policy provided that "Travelers will cover loss or damage commencing . . . during the policy period shown in the Declarations." Creek failed to identify instances of new damage during the Travelers policy's period to trigger coverage. Therefore, Travelers' motion also granted.

COVID-19 Claim with Multiple Occurrences Prevails on Summary Judgment

    The federal district court found there were multiple occurrences of property damage under a disease contamination provision in the policy. Dental Express, LLC v. Massachusetts Bay Ins. Co., 2022 U.S. Dist. LEXIS 119701 (N.D. Ill. July 7, 2022). 

    Dental Express operated seventy-three dental offices across nine states and the District of Columbia. All of the practices were covered by a policy issued by Massachusetts Bay. When the pandemic struck, state and local authorities nationwide issued executive orders suspending the operations of nonessential businesses. Dental Express suspended its operations to comply with these orders and consequently lost business income. It filed claims with Massachusetts Bay.

    The policy's disease contamination provision provided,

We will pay the actual covered loss of "business income" or "extra expensive" you sustain due to the necessary "suspension" or delay of your "operations" during the "period of Restoration." The "suspension" must be caused by a disease contamination event declared by the National Center for Disease Control, or the applicable city, county or state Department of Health.

Coverage applied "on an 'occurrence' basis" and limited a claim to $25,000 per occurrence. 

    Massachusetts Bay agreed Dental Express was entitled to coverage, but only for $25,000 for all office closures because there was a single occurrence. Dental Express filed suit, arguing that, with several different executive orders, each qualified as an occurrence as set forth in the policy. 

    The court determined that the executive orders were the operative event, not the pandemic itself. Illinois followed a cause-based rule for policies that were premised liability on a per-occurrence basis. Therefore, the number of occurrences was determined by referring to the cause or causes of the damages.

    The policy here defined "a series of similar, related acts" as a single occurrence. Each of the claimed losses was the result of a separate and intervening human act - specifically, executive orders issued separately by a number of different state or local governmental authorities. Therefore, Dental Express' losses qualified as multiple occurrences. Dental Express was entitled to summary judgment on liability on its breach of contract claims. 

Faulty Workmanship Claims Amount to Multiple Occurrences

    In a recommended decision, the magistrate found that claims of faulty workmanship against the insured constituted multiple occurrences. Millsap Waterproofing, Inc. v. United States Fire Ins. Co., 2022 U.S. Dist. LEXIS 90112 (S.D. Tex. May 19, 2022).     

    Maravilla Condominiums in Galveston, Texas was damaged by Hurricane Ike in 2008. While repairing the damage caused by the hurricane, an unrelated fire broke out and damaged 77 units. 

    In 2010, the Maravilla Owners Association, Inc. hired several contractors, including Millsap Waterproofing, Inc. Multiple problems arose with the various contractors' work. In 2016, Maravilla sued the contractors alleging that their shoddy work damaged the condominium complex. More than 80  condominium owners intervened, alleging that Millsap negligently performed work on windows, doorways, walkways, and balconies, resulting in extensive water damage. 

    Millsap had two policies. Amerisure issued a primary policy with limits $1 million per occurrence, subject to a $2 million aggregate limit. Millsap also had an umbrella policy issued by United States Fire Insurance Company with limits $11 million per occurrence in excess of the Amerisure policy. Amerisure agreed to defend. When it became clear that the claims would not settle for less than $1 million, Amerisure argued that the plaintiffs' damages arose from a single occurrence and refused to contribute more than $1million to a potential settlement. U.S. Fire denied coverage because it determined that the damages stemmed from multiple occurrences and were, therefore, subject to Amerisure policy's $ 2 million aggregate limit. 

    Millsap settled by adding $550,000 of its own money to the $1 million contributed by Amerisure.

    Millsap sued both insurers and filed a motion for partial summary judgment seeking a determination on whether Millsap's liability resulted from one or more occurrences. The motion was presented to the magistrate judge.

    Texas applied the "cause" approach to determine the number of occurrences. Under this test, the focus was on the events that caused the injuries and gave rise to the insured's liability, rather than on the number of injurious effects. The appropriate inquiry was whether there was one proximate, uninterrupted, and continuing cause which resulted in all the injuries and damage. If so, then there was a single occurrence. If the chain of proximate causation was broken by a pause in the negligent conduct or by some intervening cause, then there were multiple occurrences, even if the insured's negligent conduct which cause each of the injuries was the same kind of conduct.

    Amerisure argued that Millsap's negligent workmanship was the single proximate, uninterrupted, and continuing cause for damages sought against it. But this overlooked Millsap's various acts of faulty workmanship. The damages caused by Millsap were not the result of a single, uninterrupted, continuing cause, but from different types of work on multiple areas of separate buildings. The work lasted over a 10 month period and caused damages to both the individual condominium units and common elements. 

    The magistrate judge recommend that the court grant Millsap's motion to the extent it requested a finding that the claims brought against it involved more than one occurrence, and deny Amerisure's Motion for Summary Judgment. 

    

Insurer Has Duty to Defend Sub-Contractor

    Interpreting Connecticut law, the federal district court had that the insured sub-contractor was entitled to a defense. County Wide Mech. Servs. LLC v. Regent Ins. Co., 2022 U.S. Dist. LEXIS 86726 (D. Conn. May 13, 2022).

    The underlying plaintiff, The Saybrook at Haddam, entered a contract with PAC Group to serve as general contractor for construction of an addition to The Saybrook's facility. PAC Group sub-contracted with County Wide Mechanical Services to install the HVAC system.

    The HVAC system was put into service on November 14, 2014. In October 2019, The Saybrook filed the underlying action against PAC group, County Wide, and others. The underlying complaint alleged that there had been at least seven "critical failures" of the HVAC system. As a result, The Seabrook had to replace multiple compressors and several circuit boards, valves, and other components. Further, the entire system had to be replaced. The underlying complaint alleged breach of contract against PAC Group and County Wide. In addition to the alleged breach of contract between The Saybrook and County Wide, the Saybrook also alleged it was a third-party beneficiary of PAC Group's contract with County Wide regarding installation of the HVAC system. PAC Group cross-claimed against County Wide, asserting one count of contractual indemnification and one count of breach of contract under the PAC Group's contract with County Wide.

    County Wide tendered to its insurer, Regent. Coverage was denied based on there being no "property damage" caused by an "occurrence." Country Wide sued for breach of contract and bad faith. Regent moved for judgment on the pleadlngs.

    County Wide argued that a reasonable reading of the underlying complaint potentially included damage beyond the HVAC system itself, triggering Regent's duty to defend. The court agreed with County Wide. The Saybrook alleged that, as a result of the HVAC system's critical failures, it had to replace multiple compressors in the HVAC system and several circuit boards, valves and other components. The underlying complaint was silent as to whether the circuit boards, valves and other components were part of the HVAC system. Therefore, the allegations plausibly stated that the allegedly damaged circuit board, valves, and other components were external to the HVAC system. 

    The court then considered Excision (b), which provided an exclusion for contractual liability. The exclusion provided exceptions for "liability for damages . . . [a]ssumed in a contract or agreement that is an insured contract." "Insured contract" was defined, in part, as "That part of any other contract or agreement pertaining to our business . . . under which you assume the tort liability of another party to pay for 'bodily injury' . . . to a third person or organisation. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement."

    The Saybrook complaint alleged that County Wide was directly liable for breaching the contract between Country Wide and PAC group because The Seabrook was an intended third-party beneficiary of that contract. The district court was unaware of an interpretation of the assumption of liability exclusion by the Connecticut Supreme Court. PAC Group's cross-claim alleged additional theories of liability against County Wide. First, PAC Group claimed that if it was liable to The Seabrook for the HVAC system, County Wide should indemnity PAC Group. Second, PAC Group claimed that County Wide was direct liable it for breaching the contract between them. 

    The court found the assumption of liability exclusion ambiguous. The phrase "assumption of liability" did not convey a definite and precise intent either to apply narrowly to only an insured's indemnification agreements or to apply broadly to all of an insured's contractual obligations. The exclusion did not unambiguously preclude coverage for County Wide as to all of the theories of liability that County Wide faced in the underlying suit. Because the phrase was ambiguous, Regent had a duty to defend.

    Regent also moved to dismiss the bad faith count. The court ruled that this was premature on a judgment on the pleadings. Whether County Wide had suffered damages arising from Regent's refusal of coverage was not yet determined. 

Disagreeing with Hawaii Supreme Court, South Carolina Holds Post-Lost Assignment Valid

    The South Carolina Supreme Court held that a post-loss assignment of rights under the policy was valid even though consent of the insurer was not requested. PCS Nitrogen, Inc. v. Cont'l Cas. Co., 2022 S.C. LEIXS 54 (S.C. April 13, 2022).

    In 1966, Columbia Nitrogen Corporation (Old CNC) began operating a fertilizer manufacture site. The insurers issued primary and excess liability policies to Old CNC with policy periods ranging form 1966 to 1985. The policies included an anti-assignment clause which read,"Assignment of interest under this policy shall not bind the company until its consent is endorsed hereon."

    Old CNC ceased all fertilizer production at the site in 1972 and sold the site in 1985. In 1986, Old CNC sold assets related to its fertiliser production business to CNC Corp. (New CNC). New CNC assumed some of Old CNC's liability, including those related to Old CNC's fertilizer production business. Old CNC dissolved. In 1997, New CNC became PCS Nitrogen (PCS) through mergers. 

    In 2005, Ashley II of Charleston, LLC, then owner of the site, filed a declaratory judgment action against PCS alleging PCS was liable under CERCLA for environmental remediation at the site. Ashley II alleged Old CNC contaminated the site and that PCS was liable for remediation. The federal district court found PCS liable under CERCLA.

    In this case, PCS sought a declaration that the insurers were obligated to provide coverage for its defense costs and environmental liabilities stemming from the CERCLA litigation. PCS contended that the insurers' consent to the assignment was not required because the assignment took place after the loss occurred. The circuit court granted summary judgment to the insurers, ruling the assignment was unenforceable as a matter of law because Old CNC did not secure the insurers' consent. The circuit court ruled that the assigment was not a post-loss assignment because, at the time of the assignment, no judgment had been entered against Old CNC. 

    On appeal, the Supreme Court noted that the majority rule was that such a provision did not bar an assignment made after a loss. The insurers relied upon decisions from Oregon and Hawaii (Del Monte Fresh Produce (Hawaii), Inc. v. Fireman's Fund Ins. Co., 117 Haw. 357 (2007). The South Carolina court refused to follow Hawaii and Oregon, and adopted the post-loss exception. Insurer consent was not required for an assignment of liability insurance coverage rights made after a loss. 

    The court next considered when the loss occurred and whether it was post-assignment. Again, the court followed the majority of jurisdictional and held the "loss" in the context of the post-loss exception, was synonymous with the "occurrence." In this case, the loss occurred before Old CNC executed the assignment in 1986.

    The court also agreed with PCS's public policy argument that relieving the insurers of their contractual duty to provide coverage would give the insurers a windfall.