Insurance Law Hawaii

Insured Survives Motion for Summary Judgment in Collapse Case

    The insurer's motion to exclude expert testimony and for summary judgment in a cases involving collapse was denied. Firehouse Church Ministries v. Church Mut. Ins. Co., 2022 U.S. Dist. LEXIS 53959 (D. Miss. March 25, 2022).

    A roof truss, a framework supporting the roof, collapsed in the church. The cause was either deterioration over time or a nearby tornado. The Church claimed that before the tornado passed, the church was clean and in orderly condition. When inspected after the tornado, there was debris and wreckage, including tin, insulation dust, plaster, and ceiling tile, on the floor. 

    The Church had a contractor, Gregory Blanchard, inspect. He added posts to support the truss and made other repairs, but informed the Church that the damage was worse than expected and it could not be easily repaired. 

    The Church filed a claim with Church Mutual Insurance Company (CMIC). An inspector, Jason Grover, was hired by CMIC. He reported the wind during the tornado was not sufficient to cause the damage. Instead, the damage was caused by a progressive failure of the main center roof truss and the supporting wall. Based on Grover's findings, CMIC denied the claim. The Church then hired another inspector, Nathan Carter, who issued an expert report. Carter determined that the tornado was the only logical cause of the damage. 

    The Church sued, alleging breach of contract and bad faith. CMIC moved to exclude Carter as an expert and for summary judgment. 

    CMIC argued that Carter's opinions were unreliable. He testified that he had dealt with "quite a few" tornados during his engineering career. He relied on public data from NOAA and is experience and education to determine wind speed. The court found that CMIC's objections went to the weight and credibility of Carter's testimony rather than its admissibility. His opinions were based on data, education, experience, and personal observation of the property. Therefore, his testimony was reliable and CMIC's motion to exclude was denied.

    The court also denied CMIC's motion for summary judgment. Grover had concluded that the roof truss failed due to long-term deterioration. The Church, on the other hand, relied on Carters' opinions and conclusions. The court found that genuine issue of material facts existed as to whether CMIC breached the policy. The expert reports supplied differing opinions about what caused the truss to collapse - a material fact needed to decide whether coverage was warranted. A reasonable jury could decide that the roof truss failed due to the tornado and find for the Church as the nonmoving party. 

    Finally, the court granted CMIC's motion for partial summary judgment on the bad faith claim. The court determined that CMIC had an arguable basis to deny payment due to its engineer's conclusion that long-term deterioration of the roof truss damaged the building. The record reflected that CMIC realistically evaluated the claim despite the Church's argument to the contrary.  CMIC acted on a reasonable belief that there was no coverage because the tornado did not proximately damage the property. 

Subsidence Exclusion Bars Coverage for Damage Caused by Landslide

    The Ninth Circuit affirmed the district court's order granting summary judgment to the insurer who denied coverage based upon the policy's subsidence exclusion. Atain Spec. Ins. Co. v. JKT Associates, 2022 U.S. App. LEXIS 6351 (9th Cir. March 11, 2022). 

    JKT was hired by Lora Eichner Blanusa in 2011 to perform landscape and hardscape work at her house. After selling the house to Richard Meese, a catastrophic landslide occurred in 2019. Portions of the rear of the property slid downhill by 15 feet. Meese sued JKG and others. The owner of an adjacent property, Kristi Synek, filed a separate action against JKT and others. JKT tendered both suits to Atain, who defended under a reservation of rights.

    Atain filed a coverage action in federal district court regarding both underlying suits. The district court granted summary judgment to Atain, ruling there was no duty to defend or to indemnify.

    The Ninth Circuit affirmed. The subsidence exclusion read:

This insurance does not apply and there shall be no duty to defend or indemnify any insured for any "occurrence", "suit", liability, claim, demand or cause of action arising, in whole or part, out of any "earth movement." This exclusion applies whether or not the "earth movement" arises out of any operations by or on behalf of any insured.

    Because a landslide was an "earth movement," the terms of the exclusion barred any coverage for any claim "arising, in whole or pert," from the landslide or from any "settling" or "slipping" that preceded the landslide, and did so regardless of the case of the landslide.

    The Meese complaint did not allege any facts or claims concerning injuries that occurred independent of the occurrence of the landslide and the earth movement that preceded it. Nothing in the underlying complaint suggested that Meese suffered any relevant injuries that were independent of the landslide. Because all injuries connected to the Meese complaint "aris[e] in whole or part, out of . . . 'earth movement,'" there was no possibility of coverage. 

    The same conclusion was reached as to the Synek complaint. JKT could not point to any allegation in the complaint that sought compensable damage flowing from the alleged encroachment apart from its subsequent contribution to the landslide,.

 

Court Finds Coverage for Computer Fraud

    The court found that a fraudster's sending of an email was a "computer use" under the Computer Fraud Insuring Agreement (CFIA) of the policy. City of Unalaska v. Nat'l Union Fire Ins. Co., 2022 U.S. Dist. LEXIS 51387 (D. Alaska March 18, 2022).

    The city of Unalaska received an email purportedly sent by one of the City's regular vendors, Northern Alaska Contractors (NAC). The email requested a copy of the City's "ACH/EFT" form in order to change its method of receiving payments for invoices from paper checks to electronic ACH transfers. The email was from a fraudster. A city employee emailed the ACH form to the fraudster and advised that even after receipt of the completed form, it would take at least ten days for the city to process the request before issuing payments. The fraudster returned the completed ACH form by email, designating a Citibank Account in New York as the new method for receiving payments. Once the transfer by ACH was ready, the city initiated several payments totalling $2,985,406.10 to the fraudster's account.

    Several months later, the city discovered the fraud and reported it to the FBI. It was able to recover close to $2.35 million, resulting in a net loss of $637,861.67. The city submitted a claim for the loss to National Union, which accepted coverage under the Impersonation Fraud Coverage endorsement of the policy and paid the $100,000 polemic limits of that coverage. The city requested payment of the remaining loss of $537,861.67 under the CFIA, but National Union refused payment because the city's claim "did not directly involve the use of any computer to fraudulently cause a transfer of property from inside the premises to a person or place outside the premises."

    The city sued and filed a motion for summary judgment. National Union filed a motion for judgment on the pleadings. Both parties agreed that the case presented an issued of first impression in Alaska.

    The court found that a reasonable insured would expect coverage under the CFIA. By its plain language, the CFIA applied under these circumstances; the city experienced a loss of money resulting directly from the fraudster's use of a computer - sending an email impersonating the city's vendor - to fraudulently cause a transfer of funds from the city to the fraudster's bank account. The weight of relevant authority in other jurisdictions indicated that the CFIA provided coverage under these circumstances. Therefore, the city's motion was granted and National Union's motion was denied.

 

No Duty to Defend Construction Defect Claims

    The court determined the insurer had no duty to defend construction defect claims asserted against the insured. Pa. Nat'l Mut. Cas. Ins. Co. v. River City Roofing, 2022 U.S. Dist. LEXIS 38226 (E.D. Va. March 3, 2022).

    Branch Builds, Inc, was the general contractor for Shock Valley View Genesis, LLC ("Genesis") in charge of constructing apartments. River City Roofing was a subcontractor for all roofing, aluminum and composition siding at the project. River City contracted and warranted its materials and work, agreed to indemnify Branch, and agreed to make Branch an additional insured under its CGL policy. 

    After completion of the project, Genesis reported defects in the construction. The roof, aluminum and composition siding allowed water intrusion and property damage to the apartments. Branch repaired and compensated Genesis for all damage done to the apartments. Branch then sued River City and another subcontractor and demanded judgment of $3,000,000. 

    River City's CGL policy was issued by plaintiff insurer. River City failed to pay premiums and the policy was cancelled while construction was ongoing. The insurer filed suit seeking a declaratory judgment that it had no duty to defend or indemnify River City. Branch answered the complaint, but River City never made an appearance or filed an answer. 

    The insurer argued there was no duty to defend because the policy was cancelled. The underlying complaint, however, did not say that the policy was cancelled before the end of the policy period. Consequently, the policy cancellation did not guide the court's determination on the duty to defend. 

    The court looked to the exclusions. The "Your Work" exclusion barred coverage for "property damage to your work arising out of it or any part of it." The alleged damage to the apartments was River City's own work. River City was hired to handle the roofing, which Genesis alleged was faulty and led to water intrusion. Any resulting damage to the portion of the property not built by River City, but which was caused by River City's defective job performance, would be property damage "arising out of" River City's work.

    The "impaired property' exclusion barred coverage for damage to certain portions of the property other than River City's work. Branch argued the work by River City was defective in workmanship and materials and that defective work caused damage to the roof itself, and other parts of the property. Further, Branch repaired the roofing deficiencies. Therefore, the exclusion applied. 

    Every allegation Branch alleged against River City was excluded by on the the exclusion. No accident occurred, and the alleged damage was entirely attributable to River City's own work, or arose out of River City's work, and was able to be repaired. Therefore, summary judgment was granted to plaintiff on the duty to defend.

    The motion was denied, however, on the duty to indemnify. A ruling on the duty to indemnify had to be deferred until after a final ruling in the underlying case.  

Construction Defect Claims Not Covered

    The court found that the insured's negligent acts causing damage to only the structure of the home it built were not covered under the CGL policy. Westfield Ins. Co. v. Zaremba Builders II LLC, 2022 U.S. Dist. LEXIS 36189 (N.D. Ill. March 2, 2022).

    Zaremba contracted to build a house for the Vrdolyak Trust. After completion of the home, the occupants found many problems, including painting defects such as bubbling and peeling, leaving the basement full of water for months, causing damage to ductwork, framing and piping in the house, etc. The Trust sued and Westfield denied a defense.

    Westfield filed a declaratory judgment action for a ruling that it had no duty to defend or indemnify. On Westfield's motion for summary judgment, the court determined there was no property damage. Property damage included "physical injury to tangible property." When the alleged damage occurred in the course of a construction project, tangible property had to be property outside the scope of the contract for project. 

    Zaremba's construction project encompassed the entire home. The underlying complaint alleged only damage to the structure itself, or damage that fell within the scope of Zaremba's contract. All the alleged damage constituted damage to the very house Zaremba was contracted to build. Therefore, it did not quality as "property damage" under the policy.

    Zaremba argued he purchased Products-Completed Operations coverage. But purchase of the coverage did not mean that, once the project is complete, any damage to the project itself was covered. While the Products-Completed Operations provision extended the grant of coverage in the insuring agreement to completed products or operations, it remained limited by the terms of that grant of coverage. Here, the insuring agreement required that an "occurrence" result in "property damage' to trigger coverage. There was no property damage here when the underlying complaint alleged only construction defects causing damage within the scope of the contracted-for project. 

    Therefore, summary judgment was granted to Westfield. 

Texas Supreme Court Holds Stipulated Extrinsic Evidence May Be Considered in Determining Duty to Defend

    Responding to certified questions from the Fifth Circuit, the Texas Supreme Court held that in limited circumstances, extrinsic evidence may be considered in determining the duty to defend. Monroe Guar. Ins. Co. v. Bitco Gen. Ins. Corp., 2022 Tex. LEXIS 148 (Tex. Feb. 11, 2022). 

    The two insurers each provided CGL coverage to the insured, 5D Drilling & Pump Service, Inc., at different times. BIitco provided two consecutive one-year CGL policies covering October 2013 to October 2015. Monroe's CGL policy covered 5D from October 2015 to October 2016. 

    5D was sued by David Jones for breach of contract and negligence, seeking damage allegedly resulting from 5D's drilling operations on Jones's property. Jones contracted with 5D in the summer of 2014 to drill a 3600-foot irrigation well on his farmland. The complaint did not detail when 5D's purportedly negligent acts occurred or even when 5D began or stopped the work. 

    5D demanded a defense from both insurers. Bitco defended under a reservation of rights, but Monroe refused to defend, contending that any property damage occurred before its policy period began. Bitcon sued Monroe in federal district court, seeking a declaration that Monroe owed a defense to 5D. Bitco and Monroe stipulated that 5D's drill bit stuck in the bore hole during 5D's drilling "in or around November 2014," or about ten months before Bitco's policy would end and Monre's would begin. Both parties sought summary judgment on the issue of whether Monroe owed a duty to defend.

    The federal district court applied the eight-corners rule and concluded Monroe owed a duty to defend. Monroe appealed. The Fifth Circuit certified questions to the Texas Supreme Curt asking whether consideration of extrinsic evidence was permissible as articulated in Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523 (5th Cir. 2004). Northfield predicted the Texas Supreme Court would recognise an exception to the eight-corners rule and apply it only "when it is initially impossible to discern whether coverage is potentially implicated and when the extrinsic evidence goes solely to a fundamental issue of coverage which does not overlap with the merits of or engage the truth or falsity of any facts alleged in the underlying case." Id. at 531.

    The Texas Supreme Court adopted the Northfield standard. If the underlying petition stated a claim that could trigger the duty to defend, and the application of the eight-corners rule, due to a gap in the plaintiff's pleading, was not determinative of whether coverage existed, Texas law permitted consideration of extrinsic evidence provided the evidence (1) went solely to an issue of coverage and did not overlap with the merits of liability, (2) did not contradict facts alleged in the pleading, and (3) conclusively established the coverage fact to be proved. 

    The second certified question ask whether, when applying the exception, could the court consider extrinsic evidence of the date of an occurrence? The court answered yes, so long as the extrinsic evidence met the other requirements set forth by the court. Here, however, the extrinsic evidence did not pass the test. Evidence of the date of property damage overlapped with the merits. A dispute as to when property damage occurred also implicated whether property damage occurred on that date, forcing the insured to confess damages at a particular date to invoke coverage, when its position could very well be that no damage was sustained at all. Because the use of the stipulation would overlap with the merits of liability, it could not be considered in determining whether Monroe owed a duty to defend. 

Insurer Must Defend Faulty Workmanship Claims

    The court determined that the insurer improperly denied a defense for construction defect claims made against the insured. Amerisure Mut. Ins. Co. v. McMillin Tex. Homes, 2022 U.S. Dist. LEIS 40363 (W.D. Texas March 8, 2022). 

    McMillin was a developer, general contractor and home seller. It constructed multiple homes in various communities in the San Antonio area. After the homes were completed, homeowners observed defects in the artificial stucco exterior finish. After claims were lodged against McMillin, the various claims were tendered to Amerisure. Amerisure filed for declaratory judgment that it had to duty to defend or indemnify and moved for summary judgment.

    Amerisure first argued the homeowners' faulty workmanship claims did not allege "property damage" under the policies. It argued there were no allegations that any property damage existed, but merely that the stucco suffered from construction defects. The court disagreed. Among the allegations was the statement that due to the construction defects, the homes suffered damage "not only to the exterior stucco, but also to the underlying wire lath, paper backing, house wrap, flashing, water resistive barriers, sheathing, interior walls, interior floors and/ or other property." Consequently, the underlying claims amounted to property damage.

    The court then considered exclusions relied upon by Amerisure. Exclusions J (5) and (6) precluded coverage for faulty workmanship. Both were limited by the phrase "that particular party" of property damaged due to the insured's work. This limitation precluded application of the exclusions to damage on other parts of the home or non-defective portions of the insured's work. Here, several of the homeowners alleged damage to parts of the house beyond the stucco system, including interior walls, interior floors and other property. Therefore, Amerisure failed to establish as a matter of law that Exclusions J (5) and (6) prohibited coverage for the homeowners' claims. 

    Next the court determined that Exclusion k did not apply to the construction of a building because buildings were constructed or erected, not manufactured. 

    Exclusion L, Damage to Your Work, only applied to exclude damages to the insured's "competed" work. The underlying complaints did not specifically allege when property damage from McMillin's work occurred. The property damage could have occurred before, during, and after completion of McMillin's work. 

    Finally, there was a duty to defend rip and tear allegations. Amerisure asserted that the policy did not cover tear-out work performed to remove and replace the stucco system because defective work itself did not constitute covered "property damage" and any ensuing tear-out work would not qualify for independent coverage under the policies. The extent of any property damage and whether repair or removal of the stucco exterior was necessary to fix any covered damages would depend upon the facts in each instance. For the duty to defend analysis, the insured needed only to demonstrate the potential that tear-out work would be necessary. 

    The duty to indemnify could only be determined when the underlying suit was concluded.

    Consequently, Amerisure's motion for summary judgment was denied. 

    

Broker's Conversations with Insured's Attorney Privileged

    The court denied the insurer's motion to compel seeking communications between the insured, its attorney and the insured's  broker. M&C Holdings Del. P'ship v. Great Am. Ins. Co., 2021 U.S. Dist. LEXIS 186358 (S.D. Ohio Sept. 29, 2021). 

    The insured's employee siphoned off commission payments to fictitious recipients. Great American had issued a crime insurance policy to the insured. The insured, through its broker, Aon, notified Great American about the potential loss under the crime policy. Aon also provided Great American with a proof of loss form in the amount of $1,954,329. Great American denied coverage for large portions of the claim.

    The insured sued and Great American sought communications that Aon had with the insured's legal counsel. Aon and the insured had entered an agreement whereby Aon would act as an independent contractor and not an agent of the insured. Aon helped the insured submit its claim because the insured lacked a dedicated staff capable of pursuing the claim and advocating for coverage. 

    Opposing the motion to compel, Aon submitted a declaration. An Aon employee often participated in communications with the insured's employees and lawyers to assist the lawyers in their efforts to provide legal services regarding the claim. 

  The insured argued that these communications were protected under the privilege by the necessary intermediary doctrine. Various courts had held that brokers were considered to be "insiders" with the insured parties for purposes of the insured party's attorney-client privilege.

    The court noted that the majority of the withheld documents were created after Aon and the insured entered into their agreement for the purpose of assisting the insured with the claim. After review the documents in camera, the court was satisfied that the communications were made to assist counsel in providing legal advice and strategy to the insured.  Accordingly, the motion to compel was denied.

Attempt to Overrule Trial Court's Order to Produce Underwriting Manual Fails

    After being ordered by the trial court to produce its underwriting manual, the insurer's writ of certiorari to quash the order was denied by the Florida Court of Appeals. People's Trust Ins. Co. v. Foster, 2022 Fla. App. LEXIS 542 (Fla. Ct. App. Jan. 26, 2022). 

    The insured sued after his claim for damage caused by a water pipe in his home that leaked. In discovery, the insurer refused to produce its underwriting manual. Ruling on a motion to compel, the trial court ordered that the manual be produced. The insurer appealed.

    On appeal, the insurer argued its underwriting manual was categorically prohibited in breach of contract cases until and unless bad faith litigation commenced. Although courts had quashed the premature discovery of insurers' business practices, claims files, underwriting files, underwriting manuals, and the like in breach of contract actions, there was no categorical legal rule prohibiting discovery of underwriting manuals in breach of contract cases, especially if they were relevant. 

    Here, the insured argued that some scope-of-inspection-related information in the underwriting manual could be relevant to contesting the insurer's affirmative defense that the insured's pipe damage predated the inception of his policy. On the existing record, there was no basis for rejecting the merits of the insured's assertion that the underwriting manual was relevant. Therefore, the petition for writ of certiorari was denied. 

Burden to Prove Exception to Exclusion Falls on Insured

    In a dispute between two insurers, the Ninth Circuit relied upon Nevada law in finding that the burden of proving that an exception to the exclusion applies was on the insured. Zurich Am. Ins. Co. v. Ironshore Specialty Ins. Co., 2022 U.S. App. LEXIS 1626 (9th Cir. Jan. 20, 2022). 

    Ironshore insured seven subcontractors. The policy included an exclusion providing there was no coverage for any property damage for the subcontractors' for "work performed prior to the policy inception." An exception to the exclusion provided that the exclusion did not apply to property damage that was "sudden and accidental and takes place within the policy period."

    The seven subcontractors were sued for work they had performed. Zurich defended and indemnified the subcontractors. Zurich then sued Ironshore seeking contribution and indemnification for defense and settlement costs. The parties stipulated that all construction work at issue had been completed before the inception of Ironshore's policy and that none of the complaints against the subcontractors alleged that sudden and accidental damage had occurred after the inception of Ironshore's policy. 

    After a bench trial, the district court ruled in favor of Zurich on the ground that Ironshore failed to carry its burden of showing the that the exception to the exclusion was not applicable. Ironshore appealed. 

    The Ninth Circuit found that the district court erred in holding that Zurich was entitled to judgment because Ironshore failed to meet its burden of proving that the exception to the exclusion was not applicable. The Nevada Supreme Court had held that (1) the burden of proving the applicability of an exception to an exclusion for coverage fell on the insured, and (2) the insured "may rely on any extrinsic evidence that was available to the insurer at the time the insured tendered the defense."

    Therefore, the burden of proving that the exception to the exclusion for coverage was applicable fell on Zurich. The judgment issued by the District Court was reversed.