Insurance Law Hawaii

Insurance Agent Successful in Dismissing Insureds' Claims for Fraud

    The Federal District Court for Hawaii granted Moa Insurance Services Hawaii's (Moa) motion to dismiss the insureds' complaint alleging that they had been forced to purchase worthless surplus lines policies for volcano damage. Aquilina v. Certain Underwriters at Lloyd's Syndicate #2003, 2019 U.S. Dist. LEXIS 165866 (D. Haw. Sept. 26, 2019).

    The insureds purchased surplus lines homeowners insurance policies with the assistance of two retail brokers, Pyramid Insurance Centre, Ltd., and Moa. The policies were underwritten by several syndicates of Lloyd's. Pyramid and Moa placed the policies and worked on the insureds' behalf to procure the insurance. 

    The complaint alleged a "steering scheme" through which various defendants, including Moa and Pyramid, sold surplus lines policies to the insured without complying with obligations under Hawaii law. After the Kilauea Volcano eruption, the insured were denied coverage under the policies for significant damage to their homes and properties. The complaint alleged that defendants unlawfully placed surplus lines insurance instead of more comprehensive coverage, such as was available through the Hawaii Property Insurance Association (HIPA). Selling Lloyd's policies was more lucrative to defendants. 

    One exclusion in the Lloyd's policies precluded coverage for "the peril of lava and/or lava flow causing direct or indirect physical damage or loss of use of the insured property." (Lava Exclusion). The complaint alleged that for a home located in a particularly risky Lava Zone, a homeowner's policy excluding lava coverage amounted to no coverage at all.

    Moa moved to dismiss relying primarily upon Rule 9 (b), Fed. R. Civ. P. Under Rule 9, where a party alleged fraud or mistake, a heightened pleading standard was required. A pleading had to identify the who, what, when, where, and how the misconduct harmed the plaintiff. 

    The court dismissed the insureds' complaint, as to Moa, without prejudice. The claims were based on a single deceptive and fraudulent "scheme to steer" the insureds into purchasing illusory surplus lines insurance that they would not have otherwise purchased. The complaint failed to allege specific facts plausibly giving rise to the insureds' suspicions of a "scheme.' The allegations did not address who made what specific representations or statements to the insureds and when, what representations the insureds relied on, how Lloyd's paying commissions to brokers constituted "improper kickbacks," and how the insureds were "steered" into purchasing the policies. 

  

Equal Access to Justice Act Fee Request Rejected in Flood Case

    The insured's claim for fees under the Equal Access to Justice Act (EAJA) for seeking coverage under a flood policy was rejected. Hampson v. Wright Nat'l Flood Ins. Co., No. 4:19-cv-10083-KMM (S.D. Fla. Aug. 11, 2019)(Order on Motion to Dismiss). The order is here. 

    The insurer did not compensate plaintiff for flood-related damages under the terms of a Standard Flood Insurance Policy (SFIP). The insurer was a Write-Your-Own (WYO) Program insurance carrier participating in the National Flood Insurance Program (NFIP). By statute, a WYO carrier acts as a "fiscal agent" and "fiduciary" of the United States. 

    The insured's property suffered damage from a hurricane. The insured sued the carrier for breach of contract and attorney's fees under EAJA. The insurer moved to dismiss the claim for fees under EAJA. A party could recover fees and costs under the EAJA as the prevailing party in a case "brought by or against the United States . . . unless the court finds the position of the United States was substantially justified." 28 U.S.C. 2412 (d) (1) (A), (b). The statute defined the "United States" to include "any agency and any official of the United States acting in his or her official capacity." However, attorney's fees were not recoverable under the EAJA in cases for breach of an SFIP brought against a WYO program insurance carrier participating in the NFIP because WYO carriers were not considered "agencies" under the EAJA. 

    Here, the insured brought a claim for breach of an SFIP against a WYO carrier participating in the NFIP. Thus, the insured's claims for attorney's fess and cases pursuant to the EAJA were dismissed. 

Hawaii Supreme Court Finds Insurer's Actions Prior to Submission of Claim Can Constitute Bad Faith

     In an issue of first impression in Hawaii, the Hawaii Supreme Court ruled that an insurer's actions before an actual claim is submitted can be considered in determining whether the insurer acted in bad faith. Adams v. Hawaii Medical Service Ass'n, 2019 Haw. LEXIS 263 (Haw. Sept 30, 2019). Disclosure - our firm was co-counsel for the petitioner, Patricia Adams.

    Brent Adams was diagnosed with a rare cancer, stage III multiple myeloma, in August 2006. His doctors advised a tandem stem cell transplant, under which he would receive a transplant of his own stem cells (autologous or "allo" transplant) followed by a stem cell transplant from a matched sibling donor (allogenic or "allo" transplant). Brent informed his health insurance provider, Hawaii Medical Service Association ("HMSA") of his intent, on the advice of his doctors, to pursue the auto and allo transplants. 

    HMSA directed Brent to seek treatment at City of Hope in Duarte, California. HMSA's case manager maintained a log of communications to oversee Brent's care. The log demonstrated that Brent's wife, Patricia Adams, told HMSA that she and Brent and were leaving for City of Hope on December 11, 2005 for testing and consultation. Patricia's declaration stated that she told HMSA that Brent would seek the auto and allo transplants at City of Hope and asked HMSA if anything else was needed to inform HMSA of the treatment plan. HMSA did not provide any further instructions. 

    On December 15, 2005, Brent's doctor at City of Hope, Dr. Stein, submitted a precertification request for an auto transplant. The request noted that Brents' siblings would be tested to determine if they could serve as donors, in which case Brent would pursue an allo transplant following the auto transplant. HMSA approved the auto transplant. HMSA, however, informed Dr. Stein that it would only pay for the testing of potential donors for the sibling that provided a match. 

    Brent underwent the auto transplant in January 2006. Dr. Stein then contacted HMSA regarding Brent's participation in a clinical trial for stem cell transplants in preparation for the allo transplant. HMSA informed Dr. Stein he should contact the precertification division and recommend that he submit data supporting the efficacy of the clinical trial. In January and February 2006, Brent and Patricia communicated numerous times with HMSA about Brent's desire to do the allo transplant. On January 17, 2006, HMSA informed Patricia that Dr. Stein had not submitted a precertification request for the allo transplant. On February 22, 2006, Brent informed HMSA that one of his siblings appeared to be a match and he hoped to pursue the allo transplant. HMSA again noted that a precertification request had to be submitted and advised Brant that "in terms of the care plan, the goals remain appropriate and on target." Patricia informed HMSA a couple of weeks later that they were "desperately trying to avoid any delays." 

    On March 2, 2006, Dr. Stein submitted a precertification request for the allo transplant. Four days later, HMSA denied the procedure because it was "investigational." The Adams were taken by surprise, viewing the denial as an abrupt change by HMSA, especially when Brent had a matched sibling donor. After an appeal to the circuit court, HMSA finally covered the allo transplant in 2007, but Brent died approximately one year later. 

    Before Brent died, he and Patricia filed suit for breach of contract, bad faith and additional claims. The circuit court granted HMSA's motion for summary judgment on all claims. The Intermediate Court of Appeals ("ICA") affirmed on the breach of contract claim, but vacated the circuit court's grant of summary judgment on the bad faith claim. The ICA held it could not conclude, as a matter of law, that HMSA reasonably handled Brent's claim for the allo transplant.  

    On remand, HMSA argued it denied coverage two days after the precertification request was submitted, so its handling of the claim was objectively reasonable. The circuit court agreed and again granted summary judgment on the bad faith claim to HMSA. The ICA affirmed, determining that no genuine issues of material fact existed as to whether HMSA mishandled the claim. HMSA denied the precertification request within the time period required under HMSA's Plan. Until a request was submitted, there was no claim for HMSA to process. The ICA noted that "the duties of good faith and fair dealing implied in every insurance contract arise after the insured complies with the claims procedure described in the insurance policy."

    On appeal, the Supreme Court considered whether, viewing the evidence in the light most favorable to Patricia, the record contained evidence establishing that HMSA committed the tort of bad faith by unreasonably handling Brent's claim for an allo transplant. The Court considered the conduct of the parties before and after the formal submission of the claim to determine whether the insurer acted reasonably. The covenant of good faith and fair dealing required HMSA to act in good faith before and after the formal submission of the claim. The record contained facts that suggested HMSA had unreasonably handled Brent's claim. This included the fact that HMSA was aware that Brent was considering the allo transplant on December 15, 2005, but did not inform him that the allo transplant would not be covered until after a formal request was submitted on March 2, 2006. Further, HMSA was aware that Brent was testing his five siblings to seek a match for the allo transplant, but did not tell Brent the procedure was not covered. 

    Accordingly, HMSA's duty of good faith and fair dealing arose based upon the insurance contract entered with Brent. Evidence of HMSA's conduct during its relationship with Brent raised genuine issues of material fact as to whether HMSA unreasonably handled Brant's claim for an allo transplant. The ICA's judgment on appeal was vacated, as was the circuit court's order granting summary judgment to HMSA on the bad faith claim. The case was remanded to the circuit court. 

    

   

Endorsements Preclude Coverage for Alleged Faulty Workmanship

    The court found coverage for alleged faulty workmanship was barred by the Combination Construction Related Endorsement and Roofing Endorsement. Evanston Ins. Co. v. A&S Roofing, 2019 U.S. Dist. LEXIS 142828 (W.D. Okla. Aug. 22, 2019).

    In 2010, A&S entered into a subcontract with the contractor to replace roofs on three buildings owned by Oklahoma Property Investors (OPI). Eagle was a subcontractor of A&S that installed the roofing. After the roofs were replaced, OPI filed suit against A&S, alleging that A&S provided 15-year warranties for the roofing work performed on the three buildings and that A&S breached each warranty by performing the work in a poor manner, resulting in failures to each of the roofs. OPI sought monetary relief including damages to its properties, of its tenants, and costs of repairs to its properties. 

    A&S's insurer, Evanston, denied coverage. Evanston pointed to the"legally obligated to pay" language of the CGL policy and argued coverage only extended to tort-based claims. Evanston argued the OPI lawsuit did not allege any tort claims, only warranty claims arising from contract. Second, Evanston contended the alleged "poor craftsmanship" giving rise to the claims in the OPI lawsuit that did not constitute an "occurrence" under the policy. 

    A&S argued that OPI's claims sounded in negligence. The court found that the OPI lawsuit alleged claims that arguably sounded in both contract and tort. Although the word "negligence" did not appear in the complaint, the claims alleged a breach of warranty due to the work being performed in "a poor craftsmanship like manner" and sought damages proximately caused by the poor performance of that work, i.e., damage to OPI's properties (other than costs of repair or replacement) and damage to the property of OPI's tenants. Such proximately-caused damages sounded in tort. Evanston was entitled to a declaratory judgment that it had no duty to indemnify with respect to the contract-based claims. But because the OPI lawsuit included allegations which rose the potential of liability with respect to tort-based claims, Evanston was not entitled to a declaratory judgment that the "legally obligated to pay" coverage language applied to relieve Evanston of its duty to defend.

    Regarding an "occurrence," faulty workmanship gave rise to an occurrence where, as here, the work was not that performed by the insured but by a subcontractor of the insured, the property damage was not caused by purposeful neglect or knowingly poor workmanship and the damage included damage to the non-defective work product of the contractor and damage to the third-party property. Here, the undisputed factual record showed that Eagle, a subcontractor of A&S, installed the roofing. Accordingly, the court denied Evanston's summary judgment motion on grounds no occurrence triggered coverage. 

    But the Combination General Endorsement exclusion barred coverage for breach of contract. Further, the Roofing Endorsement precluded coverage for operations involving membrane roofing. Evanston's expert had found that membrane roofing was installed on the OPI buildings. Therefore, Evanston had neither a duty to indemnify nor a a duty to defend and was entitled to summary judgment. 

Insured's Remand of Bad Faith Action Granted

    The federal district court agreed remand of the insured's bad faith action to state court was appropriate. Kavanaugh v. Nat'l Union Fire Ins. Co., 2019 U.S. Dist. LEXIS 138465 (C.D. Calif. Aug. 15, 2019).

    The insured sued National Union and Great American Insurance Company in state court for failing to defend him in three civil actions. In the alternative, claims were brought against Gallagher Risk Management Services, Inc. and Chelsea Laing for professional negligence in failing to broker and procure adequate insurance for him. Laing acted as an "agent and/or broker and procured at least one of the policies at issue." 

    Gallagher removed the action based on federal diversity jurisdiction. Although Laing was a citizen of California, Gallagher argued she was fraudulently joined and was a sham defendant, so her citizenship should be disregarded for purposes of diversity jurisdiction. The insured moved to remand because Laing was a proper defendant. 

    The court noted that where a non-diverse defendant was fraudulently joined, there was no diversity. A non-diverse defendant was fraudulently joined if the plaintiff failed to state a cause of action against a resident defendant, and the failure was obvious according to the settled rules of the state. Courts recognized a strong presumption against fraudulent joinder, which had to be proven by clear and convincing evidence. 

    Gallagher argued that Laing's status as an employee of Gallagher precluded any personal claims against her. In California, the "dual agency" exception to the general rule for holding agents liable was recognized. Gallagher argued that Laing was authotized to transaction business on behalf of Gallagher and her business address was at the Gallagher offices. This did not address the insured's allegation that Laing was acting as a dual agent for both the insured and Gallagher.

    Gallagher failed to meet its burden of demonstrating by clear and convincing evidence that a jury could not possibly find Laing liable under a dual agency principle. Based on the allegations in the complaint, Laing faced potential liability, and her status as an employee of Gallagher did not shield her from such liability. She was not a sham defendant and the court could not discount her citizenship. Accordingly, the court lacked subject matter jurisdiction and the case was remanded. 

Court Grants Motion to Dismiss Negligence Claim Against Flood Insurer

    The insurer successfully moved to dismiss the insured's negligence claim and demand for jury trial, leaving only the insured's breach of insurance contract claim under the National Flood Insurance Program (NFIP). La Mirage Homeowners Association Inc. v. Wright National Flood Ins. Co., 2019 U.S. Dist. LEXIS 147667 (S.D. Tex. Aug 29, 2019). 

    Hurricane Harvey damaged three of insured homeowner's association condominium's buildings. Wright National Flood Insurance Company was the insurer pursuant to the NFIP when the hurricane damaged the insured's property. The insured alleged that Wright breached the policy by underpaying on the flood loss claims and by not initiating the appraisal the insured demanded. The insured sought recovery for negligence, consequential damage, statutory penalties, attorney's fees and pre-and-post judgment interest. 

    Wright moved to dismiss the extra-contractual claims and to strike the jury demand. 

    The NFIP's regulations allowed homeowners to purchase policies either directly from FEMA or from private insurers that functioned as Write Your Own (WYO) providers and fiscal agents of the United States. The Fifth Circuit had previously held that state law tort claims arising from claims handling by a WYO were preempted under federal law. The court, therefore, was faced with the issue of whether the insured's claims of negligence, attorney's fees, statutory penalties, and interest were policy-handling claims which were preempted by federal law.

    To determine whether a plaintiff's claims arose from claims  handling, courts looked to the status of the insured at the time of the interaction between the parties. If the individual was already covered and in the midst of a non-lapsed policy, the interactions between the insurer and insured were claims-handling subject to preemption. Here, the insured was covered by Wright at the time the dispute arose. Therefore, the insured's extra-contractual allegations were claims-handling claims and preempted. 

    The Insured's jury demand was based on the negligence claim. Because the negligence claim is preempted, and FEMA is presumed to be paying both the litigation expenses and any resulting damage award of the contractual claim, the insured had no right to a jury trial. 

    Likewise, the insured's claim for statutory penalties, attorney's fees pre-judgment and post-judgment interest were not recoverable against a WYO carrier. The partial motion to dismiss with prejudice was granted, leaving the insured'clam for breach of contract under the NFIP as the sole claim regaining before the court. 

    

    

Insurer's Quote on Coverage for Theft by Hacker Creates Issue of Fact

    The appellate court found that the insurer's quote created an issue of fact on whether loss caused by a computer hacker would be covered. Metal Pro Roofing, LLC v. Cincinnati Ins. Co., 2019 Ind. App. LEXIS 355 (Ind. Ct. App. Aug. 9, 2019). 

    The insureds, Metal Pro Roofing, LLC and Cornett Restoration, LLC ("LLC's") discovered that their bank accounts had been hacked and over $78,000 stolen. They submitted claims to their insurer, Cincinnati. Coverage was denied, and the LLCs filed suit. Cross-motions for summary judgment were filed, and the court granted summary judgment to Cincinnati. 

    The "Forgery or Alternation" coverage applied to losses resulting directly from the "'forgery' or alteration of checks, drafts, promissory notes, or similar written promises, order or directions to pay a sum of money." "Forgery" was defined as "the signing of the name of another person or organization with the intent to deceive." The LLCs did not cite any evidence that the hacker "signed" anything, let alone that they signed "the name of another person or organization." 

    The "Inside the Premises" coverage applied to losses resulting directly from "'theft' committed by a person present inside the business's 'premises' or 'banking premises.'" The policy defined "premises" as "the interior of that portion of any building you occupy in conducting your business." There was no evidence that the person who committed the thefts was inside the LLCs' buildings or a bank building. 

    The LLCs also argued that even if their computer-hacking losses did not fall under the policy's coverage, certain language in Cincinnati's quotes for that coverage led them to believe that such losses would be covered if they purchased the policy. The quotes said, in part, "While you've taken precautions to protect your money and securities, you run the risk of loss from employees, robbers, burglars, computer hackers and even physical perils such as fire." It would be reasonable for an insured to read this language to mean, "If you want to be covered for theft by computer hackers, you should buy this endorsement."

    Therefore, the court reversed the trial court's summary judgment order and remanded the case for trial. 

Ongoing Operations Exclusion Bars Coverage

    The insurer denied the insured contractor's claim seeking a defense for faulty workmanship based upon the ongoing operations exclusion. PJR Constr. of N.J. v. Valley Forge Ins. Co., 2019 U.S. Dist. LEXIS 127973 (D. N. J. July 31, 2019).

    PJR Construction was the general contractor to build a swim club and pavilion building for Cambridge Real Property, LLC. PJR began construction on May 29, 2012, and was to complete the construction by March 1, 2013. The project took much longer than anticipated. PJR was denied access to the site on November 13, 2014. Cambridge contended PJR tolerated shoddy workmanship and breached the terms of the contract documents. Cambridge estimated that the project was between 55% and 74.3% complete. 

    PJR and Cambridge went to arbitration. PJR sought a defense from the insurers. Coverage was denied based upon exclusions j (5) and j (6). Exclusion j (5), which the court referred to as the "Ongoing Operations Exclusion," provided the policy did not apply to,

Property Damage to . . . [t]hat particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the property damage arises out of those operations.

Exclusion j (6), referred to as the "Business Risk Exclusion," stated the policy did not apply to,

Property Damage to . . . [t]hat particular part of any property that must be restored, repaired or replaced because your work was incorrectly performed on it.

    PJR sued and the insurers filed a motion for summary judgment. The insurers argued that the Ongoing Operations Exclusion barred coverage because when PJR was terminated in November 2014, it was still in the process of performing work and Cambridge's alleged damages occurred while PJR"s work operations were ongoing. The sole basis for Cambridge's claim against PJR is that its work needed to be "restored, repaired, or replaced," since it "was incorrectly performed."

    The court found that although PJR may have completed some portions of the project, other portions of the project were incomplete at the time the damage occurred to Cambridge. PJR was hired to construct a building and at the time the damage occurred, PJR was still attempting to complete the building. Cambridge did not complain of damage to other parts of the worksite that PJR was not responsible for. Rather, Cambridge complained of the work PJR did on the project and damage resulting from PJR's work. Therefore, PJR was still performing wkor on that particular part of the property that was damaged. 

    Therefore, the Ongoing Operations Exclusion precluded coverage. 

 

Insurer Must Pay for Matching Siding of Insured's Buildings

    The Seventh Circuit found that the insurer was obligated to pay for siding of a building that was not damaged by hail so that it matched the replaced damaged portions of the siding. Windridge of Naperville Condominium Association v. Philadelphia Indem. Ins. Co., 2019 U.S. App. 23607 (7th Cir. Aug. 7, 2019). 

    A hail and wind storm damaged buildings owned by Windridge. The storm physically damaged the aluminum siding on the buildings' sought and west sides. Philadelphia Indemnity, Windridge's insurer, contended that it was only required to replace the siding on those sides. Windridge argued that replacement siding that matched the undamaged north and east elevations was no longer available, so Philadelphia had to replace the siding on all four sides of the buildings to that all of the siding matched. 

    Windridge sued and moved for summary judgment. The district court ruled that matching was required. The only sensible result was to treat the damage as having occurred to the building's siding as a whole. 

    The policy was a replacement-cost policy. Philadelphia promised to "pay for direct physical 'loss' to 'Covered Property' caused by or resulting from" the storm, with the amount of loss being "the cost to replace the lost or damaged property with other property . . . of comparable material and quality . . . and . . . used for the same purpose." The loss payment provision offered four different measures for loss, leaving Philadelphia free to choose the least expensive: (1) pay the value of the lost or damaged property; (2) pay the cost of repairing or replacing the lost or damaged property; (3) take all or any part of the property at an agreed or appraised value; or (4) repair, rebuild or replace the property with other property of like kind and quality. 

    The Seventh Circuit noted that the district court's conclusion that the buildings as a whole were damaged - and that all of the siding must be replaced to ensure matching - was a sensible construction of the policy language as applied to the facts. Philadelphia's interpretation - pay to replace only the specific panels of siding that were directly hit by hail, leading to two-tone buildings - was less reasonable. Regardless, the unit of covered property consider under the policy (each panel of siding vs. each side vs. the buildings as a whole) was ambiguous as applied to the facts, so the interpretation that led to coverage was favored. 

    Here, each building as a whole suffered direct physical loss as a result of the storm. The storm altered the appearance of the buildings such that they were damaged. Due to the extent of the damage and the lack of matching siding available on the market, the better construction of the ambiguous policy was to require Philadelphia to replace the siding on all four elevations of the buildings. The district court's judgment in favor of Windridge was affirmed. 

Insurer's Motion for Summary Judgment to Reject Collapse Coverage Denied

    The insurer unsuccessfully moved for summary judgment seeking to reject the insured's collapse claim. Gnannn v. United Servs. Auto, Ass'n, 2019 Conn. Super. LEXIS 1955 (Conn. Super Ct. July 11, 2019).

    The insureds' home was built in 1985 and they purchased their home in 1993. A home inspection reported that some settlement and curing related cracks existed in the slab floor, but no signs of abnormal settlement were noticed. The concrete walls were in overall good condition. 

    In 2015, the insureds became aware of abnormal cracking in the basement. USAA was informed of the claim but denied coverage in October 2015. The insureds sued USAA. After suit was filed, the insureds hired an engineer, David Grandpre, to inspect their home. He observed severe cracking in the basement walls caused by an expansive chemical reaction within the concrete. The structure was not in imminent peril of falling down, and it continued as insureds' residence. But Mr. Grandpre noticed bulging and bowing, evidence that the concrete basement walls had failed and had begun to move inward due to the lateral pressure of the soil outside the home. 

    USAA's policy covered "collapse", defined as follows:

8. "Collapse" For an entire building or any part of a building covered by this insurance we insure for direct physical loss to covered property involving "collapse' of a building or any part of a building only when the "collapse" is cause by one or more of the following:

Causes listed included "decay that is hidden from view" and "use of defective materials or methods in construction, remodeling or renovation." "Collapse" meant a sudden falling or caving in."

    USAA filed its motion for summary judgment. USAA argued there was no "sudden falling or caving in." The court found that "caving in" was susceptible to a meaning other than "falling." The court determined it could not conclude, as a matter of law, that the conditions observed by Mr. Grandpre did not constituted a "caving in.' If the walls had to completely give way to the earth outside then in order to constitute "caving in,' there would be no material difference between "caving in" and "falling." Whether the insureds' basement walls had been undermined and given way to the point that they were caving in, as distinguished from falling, was a question of fact. The court found "sudden" to mean a quick or abrupt event, not just an unexpected one.

    Therefore, there was a genuine issue of material fact whether the damage described by Mr. Grandpre constituted a caving in of the basement walls. Whether the basement walls had been undermined and given way to the point that they were caving in, as distinguished from falling, was a question of fact for the jury. There was also genuine issues of material fact involved in determining whether the basement walls experienced a "sudden falling or caving in."