Insurance Law Hawaii

Illinois Federal District Court Finds Duty to Defend COVID-19 Claim

    The federal district court found that the insurer had a duty to defend the underlying suit based on damages allegedly arising from exposure to COVID-19. McDonald's Corp. v. Austin Mutual Ins. Co., No. 20 C 5057, Order (N.D. Ill. Feb.22, 2021). The decision is here. 

    McDonalds was sued for pubic nuisance and negligence based on its decision to remain open during the COVID-19 pandemic without enhanced health and safety standards. The underlying plaintiffs sought an injunction requiring McDonalds to: (1) provide employees with adequate protective equipment; (2) preclude the reuse of face masks; (3) supply hand sanitiser; (4) require that customers wear face masks; (5) monitor employee COVID-19 infections; and (6) provide employees with accurate information about COVID-19. 

    The suit was tendered to Ausin Mutual, but coverage was denied. Austin Mutual contended that the underlying suit did not seek "damages because of bodily injury." McDonalds responded that but for the underlying plaintiffs contracting COVID-19 (a bodily injury) it would not have to expend money as "damages" to comply with the mandatory injunction in the underlying suit. Further, exposure to the virus constituted "bodily injury" and money spent to comply with the mandatory injunction would constitute "damages" "because of" the exposure to the virus.

    McDonalds sued. Austin Mutual moved to dismiss. Regarding "damages," the court found that the mandatory injunction sought by the underlying plaintiffs was also a "damage" because it would require McDonalds to expend money to remediate the continuous and ongoing exposure to the virus. 

    Considering the phrase "because of," the policy did not say "proximately because of," but merely said "because of." So simple "but for" causation was enough. McDonalds had adequately alleged "but for" causation because "but for" the underlying plaintiffs actual contraction of COVID-19, McDonalds would not have to incur "damages" to comply with a mandatory injunction. Therefore, McDonalds met it burden of alleging that it might be on the hook for "damages" "because of" or "but for" the employees contracting COVID-19. 

    Finally, three employees had suffered  "bodily injury" by contracting the virus. Further, if the underlying plaintiffs prevailed, McDonalds would have to spend money to prevent the virus from entering the restaurants, and to eliminate or mitigate its presence in the restaurants. Those strategies would decrease the risk of bodily injury from exposure to the virus and from the possibility of reinfection. Further, Austin Mutual could have explicitly included a virus exclusion had it intended to not provide coverage for "bodily injury" caused by a virus. 

    Austin Mutual's motion to dismiss was denied.

Insured's Claim Under Computer Transfer Fraud Provision Denied

    The Fifth Circuit upheld the district court's denial of coverage under the policy's Computer Transfer Fraud provision. Mississippi Silicon Holdings, L.L.C. v. Axis Ins. Co., 2021 U.S. App. LEXIS 3112 (5th Cir. Feb. 4, 2021).

    Mississippi Silicon Holdings' (MSH) chief Financial Officer, John Lalley, received an email from a regular vendor, Energoprom, advising that future payments should be routed to a new bank account. The email body also contained previous emails between Lalley and Energoprom concerning invoices and shipment details. Lalley authorized two wire transfers from MSH to Energoprom's new bank account totaling approximately $1.025 million. 

    In December 2017, MSH realized it had sent the wire transfers to the fraudster's bank account, not that of Energoprom. MSA submitted a sworn proof of loss to Axis. The claims was granted under the Social Engineering Fraud provision and Axis paid MSH the $100,000 policy limit. Coverage under the Computer Transfer Fraud provision, with a limit of $1 million, was denied. Axis determined that the Computer Transfer Fraud provision did not apply because: (1) the funds were transferred with MSH employees' knowledge; and (2) the fraud was accordingly not confined to the computer system, as the policy required. 

    The Computer Transfer Fraud provision read:

The insurer will pay for loss of . . . Covered Property resulting directly from Computer Transfer Fraud that causes the transfer, payment, or delivery of Covered Property from the Premises or Transfer Account to a person, place, or account beyond the Insured Entity's control, without the Insured Entity's knowledge or consent. 

MSH contended that the receipt of the fraudulent email fell within the Computer Transfer Fraud provision. Axis argued the Computer Transfer Fraud provision was not implicated because the scheme only involved emails that did not have any functionality that permitted them to do anything other than sit in MSH's email system. 

    MSH sued. Both parties moved for summary judgment. The district court granted summary judgment to Axis because the loss was not caused by the fraudulent computer use, but by the affirmative acts of MSH employees in initiating and authorizing the transfer. 

    On appeal, the Fifth Circuit agreed with Axis. The manipulation of emails did not constitute Computer Transfer Fraud as defined by the policy. The fraudsters apparently gained access to the company's email system, but they did not manipulate those systems through the introduction of data or programs that could independently instruct the computer system to act upon electronic data. Unfortunately for MSH, coverage did not extend to the fraud scheme at issue here.

Oklahoma Finds Policy Can Be Assigned Post-Loss

    Oklahoma joined the majority of court in finding that after a loss occurs, the insured can assign the policy to another. Johnson v. CSAA Gen. Ins. Co., 2020 Okla LEXIS 118 (Okla. Dec. 15, 2020).

    Johnson's property was damaged in a storm. She filed a claim with her insurer. She also executed an assignment of her claim in order to repair the property with the execution of assignment to Triple Diamond Construction LLC. An appraiser retained by Triple Diamond determined the storm damage was $36,346.06. The insurer paid only $21,725.36 for the loss.

    Johnson and Triple Diamond sued the insurer for breach of contract, seeking $14,620.70, not inclusive of interest, attorneys' fees and costs. The insurer filed a motion to dismiss, or an alternative motion for summary judgment to dismiss Triple Diamond as a party. The insurer argued that both the policy and an Oklahoma statute barred the assignment. The district court granted the insurer's motion.

    After review of Oklahoma law and cases across the country on assignments of a policy post-loss, the Supreme Court reversed. Distinguishing between an assignment of a policy and an assignment of a post-loss chose in action which did not increase the insurer's risk was recognised by the majority of courts as implementing an important public policy. An assignment by an insured possessing an insurable interest when the subject of the assignment was a post-loss chose in action was valid in Oklahoma. The district court's dismissal of Triple Diamond was reversed. 

 

Life Insurance Claim Against Employer Prevails In Ninth Circuit Review

    The estate's claims against the life insurance company failed, but the Ninth Circuit remanded for further review claims against the decedent's employer. Estate of Foster v. Am .Marine Sys. Group Ben. Plan, 2021 U.S. App. LEXIS 3555 (9th Cir. Feb. 9, 2021). 

    The estate filed suit under the civil enforcement provision of ERISA against American Marine Corporation (American Marine) and United Omaha Life Insurance Company (United) alleging defendants wrongfully denied a claim for life insurance benefits after the decedent died of oesophageal cancer on June 24, 2016. The district court dismissed some claims and granted summary judgment to defendants on remaining claims. 

    The decedent worked for American Marine as a Health, Safety, Environmental & Security Manager. He became terminally ill in March 2015. On February 1, 2016, American Marine laid him off, but assisted him in filing a claim with United for long-term disability (LTD) benefits.  The application for LTD was approved on February 15. American Marine also allowed the decedent to exhaust twenty accrued vacation days and thirty-five accrued sick days before he stopped receiving a salary. Therefore, he was on the payroll until April 15. LTD benefits continued until the decedent's death on June 24. 

    The estate filed a claim with United for life insurance benefits. The claim was denied because American Marine had stopped paying life insurance policy premiums on his behalf as of April 30. This appeal addressed whether the decedent received sufficient notice that his life insurance coverage would end on that date unless he converted the policy to an individual policy and started paying the premiums himself. 

    American Marine employees were entitled to group life insurance benefits under a policy issued by United and administered by American Marine. The decedent had been given a life insurance handbook explaining how to convert the policy when an individual terminated work at American Marine. If any employee's life insurance ended because his employment ended, he was entitled to a "conversion privilege," meaning that he could apply for an individual policy within thirty-one days. If the employee died during the conversion period, United would pay the amount of group life insurance the employee was entitled to convert.

    United concluded that the decedent was ineligible for life insurance benefits when he died because American Marine stopped paying premiums on April 30 and the decedent failed to exercise his conversion privilege within thirty-one days, or by May 31. 

    On appeal, the Ninth Circuit noted that as a fiduciary, American Marine had an obligation to convey complete and accurate information material to the beneficiary's circumstance, even when a beneficiary did not specifically ask for the information. American Marine argued that the handbook apprised the decedent of his conversion rights. But the Ninth Circuit held that American Marine was required to provide further explanation under the circumstances. 

    Although the decedent had the handbook, it was ambiguous as to the exact date that the thirty-one day conversion clock started. It could have been February 29, or the last day of the month in which he was laid off. It could have been April 30, the last day of the month when the decedent was no longer being paid. Or it could have been a later date, so long as American Marine continued paying premiums and the decedent remained totally disabled. 

    Therefore, a genuine issue of material fact existed as to whether the decedent knew when his coverage would expire. While summary judgment in favor of United was upheld, the district court decision that American Marine had no duty to notify the decedent that his life insurance would end on April 30, 2016, other than sending him the handbook, was in error. 

No Coverage for Insured Who Plants Hidden Camera in Neighbors' Bathroom

    The homeowners policy did not cover the insured after he was sued for planting a hidden camera in the bathroom of his neighbors. State Farm Fire & Cas. Co. v. Rodriguez, 2021 U.S. Dist. LEXIS 22161 (D. Haw. Feb. 5, 2021). 

    The insured's neighbors brought suit alleging that the insured secretly installed a hidden miniature camera in their bathroom. The discovery of the camera shocked and outraged the neighbors and their girls, aware that someone had snuck into their home and placed a hidden camera in their upstairs bathroom. The underlying action alleged that the insured was arrested and had pleaded no contest to criminal charges. A SIM card from the camera revealed several pictures of the neighbors and their girls in the bathroom and a few pictures of the insured who appeared to be adjusting the camera as it was installed. The neighbors sued the insured. 

    The insured tendered to State Farm under his homeowners and umbrella policies. Coverage was denied and State Farm filed suit for a declaratory judgment that it had no duty to defend or indemnify.

    The court found there was no occurrence under the homeowners policy. The underlying action alleged no "accident." Under Hawaii law, an occurrence could not be the expected or reasonable foreseeable result of the insured's own intentional acts or omissions. The underlying complaint described entirely intentional acts by the insured by placing a hidden camera without permission of the neighbors. Nor did the underling action alleged an bodily injury. The policy stated that bodily injury did not include "emotional distress, mental anguish  . . . or any similar injury . . ." Even if the underlying complaint did allege a bodily injury, the injury would still be excluded as "either expected or intended by the insured" or "the result of wilful and malicious acts of the insured."

    Nor was coverage owed under the umbrella policy. Again, there was no accident because the insured's acts were entirely intentional or knowing.

Insured's Claims Under Communicable Diseases Coverage Survive Motion to Dismiss

    While the court determined the virus or bacteria exclusion precluded coverage under business income, extra expense, or civil authority for the insured's COVID-19-related shutdown, the insurer's motion to dismiss was denied based upon the communicable diseases coverage. Salon XI Color & Design Group v. W. Bend Mut. Ins. Co.,, 2021 U.S. Dist. LEXIS 21298 (E.D. Mich. Feb. 4, 2021). 

    The Governor's order on COVID-19 forced the insured to close its salon. The insured tendered to West Bend for business interruption losses that occurred during the closure required under the Executive Order. Coverage was denied and suit was filed.

    The court found the insured had plausibly alleged that the COVID-19 particles infected the property, exposed staff and patrons, and prevented the insured from using its property for its intended purpose. This was enough to survive a motion to dismiss when the policy promised to cover "direct physical loss or damage" and left "Loss" and "damage" undefined. 

    The policy included a virus or bacterial exclusion, however, providing that West Bend "will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism . . ."  West Bend did not dispute that COVID-19 was a virus. However, in addition to being a virus, COVID-19 was also a "communicable disease" as defined in the policy. The insured argued a special grant of coverage for communicable diseases followed by an exclusion for virus or bacteria could not plausibly exist in the same policy. This contradictory language was ambiguous and was to be construed in favor of the insured. 

    The court found that the virus or bacteria exclusion was written to exclude "any virus" from the business income, extra expense, and civil authority coverages. Nevertheless, the virus and bacteria exclusion did not preclude the communicable disease coverage. The insured's claim under the communicable disease coverage survived the motion to dismiss.

Limited Coverage For Computer Fraud Claim

    While the Arizona Appellate Court found limited coverage for a computer fraud attack against the insured, it also determined there were multiple occurrences. AIMS Ins. Program Managers, Inc. v. Nat'l Fire Ins. Co., 2921 Ariz. App. Unpub. LEXIS 123 (Ariz. Ct. App. Feb. 4, 2021).

    Thieves secretly accessed from an employee of AIMS Insurance Program Manager, Inc. (AIMS) an email account to fraudulently intercept payments from AIMS to the vendor, AmWINS Brokerage of Arizona. The thieves created email accounts using the names of actual AmWINS employees and opened accounts at AmWINS' bank. The thieves then intercepted emails transmitting insurance binders and invoices from AmWINS to AIMS and replaced them with fraudulent emails, attaching the intercepted insurance binders that directed AIMS to wire payments to the thieves' accounts. 

    AIMS authorized three wire transfers, totaling $357,711.64 to the thieves in partial payment of three invoices. When AmWINS notified AIMS that it had not received payment on the invoices the fraud was discovered. AIMS was able to recover less than a quarter of the wire-transferred funds from its bank. 

    AIMS submitted a claim to its insurer, National Fire, who agreed to pay $10,000, the policy limit for a single occurrence under the "Computer Fraud'" endorsement of the policy. Coverage was denied, however, under the "Forgery and Alteration Endorsement."

    AIMS sued for declaratory judgment and the parties filed cross-motions for summary judgment. The superior court granted summary judgment in favor of National Fire.

    The forgery endorsement only insured against losses from forgeries of written promises, orders, or directions to pay a sum certain that were "similar," meaning of the same nature as checks, drafts, promissory notes, and bills of exchange. Neither the emails nor the attached insurance binders and invoices were endorsable instruments payable upon tender in the same manner as negotiable instruments.

    Regarding the number of occurrences, AIMS argued that each distinct act of fraud, namely each of the three counterfeit demands for payment, constituted a discrete "occurrence" of covered fraud under the endorsement. Therefore, the fraudulent actions resulted in three occurrences under the policy, not just one. The court agreed and AIMS was entitled to recover the per-occurrence limit of $10,000 for three occurrences. 

Unclear Sublimits Inapplicable to Superstorm Sandy Damage

    The Supreme Court of New Jersey found the policies' sublimits were not applicable to reduce coverage for property damage caused by Superstorm Sandy. N.J. Transit Corp. v. Certain Underwriters at Lloyd's London, 2021 N.J. LEXIS 4 (Jan. 27, 2021). 

    At the time Superstorm Sandy struck New Jersey, the New Jersey Transit Corporation (NJ Transit) had a $400 million multi-layered property policy program through eleven insurers. When NJ Transit sought coverage for water damage to its property caused by the storm, some of the insurers invoked the $100 million flood sublimit and declined to provide coverage up to the policy limit. NJ Transit filed suit for a declaratory judgment. The trial court found that the $100 million flood sublimit did not apply to NJ Transit's claims. Summary judgment was entered for NJ Transit. 

    The Appellate Division affirmed. The New Jersey Supreme Court affirmed the Appellate Division, largely adopting the reasoning of the Appellate Division.

    The Appellate Division noted that the policies contained separate definitions for a "named windstorm." Most of the policies separately defined "named windstorm" to include "wind driven water, storm surge and flood associated with, or which occurs in conjunction" with a "named windstorm." The court reasoned that the policies did not define "flood" to include "storm surge" and "wind driven water" associated with a "named windstorm." If the parties intended that damage from a "storm surge" would be subject to the flood sublimit, the policies would have stated so in plain language. 

    

Restaurant Group's Multi-Litigation Business Interruption Claims Survive Motion to Dismiss

    Society Insurance Company unsuccessfully sought to dismiss plaintiff restaurant group's claims for business interruption after shut-down orders followed the onset of COVID-19. In re Soc'y Ins. Co. COVID-19 Business Interruption Protection Insurance Litigation, 2021 U.S. Dist. LEXIS 32351 (N.D. Ill. Feb. 22, 2021). 

    The multi-district litigation addressed Society Insurance's denial of business- interruption coverage for several restaurants based in several states whose operations were impacted by the COVID-19 pandemic. Society sought dismissal of three cases.

    All plaintiffs were forced to modify their normal business operations due to the pandemic. They had to suspend in-person dining and relied only on take-out orders. Plaintiffs alleged that the presence of the coronavirus created a dangerous condition and rendered their premises unsafe and unfit for their intended use, causing physical property damage or loss under Society's policies. Society argued that a slowdown in business due to the public's fear of the coronavirus or a suspension of business due to governmental authority ordering businesses to close was not a direct physical loss. Further, the actual or alleged presence of the coronavirus was not a Covered Cause of Loss.

    Notably, none of the policies at issue contained a specific exclusion of coverage for losses due to a virus or pandemic. 

    Society first argued that the plaintiffs' businesses were interrupted by the various state and local shutdown orders - not by the coronavirus itself. But Society's characterization of the cause of the business interruptions was not supported by the governing law of the pertinent states, none of which imposed such a strict causation requirement. With proximate cause as the governing causation standard, a reasonable jury could find that the novel coronavirus and the resulting pandemic proximately caused the business interruptions. Even if the government shutdown orders (and not the pandemic itself) played a causal role in the plaintiffs' losses, and even if those orders could not be construed as a "direct physical loss,' the shutdown orders were proximately caused by the pandemic. 

    The court next pondered whether there was a "direct physical loss." The policies required "direct physical loss of or damage to covered property." The disjunctive "or" meant that "physical loss" must cover something different from "physical damage." Therefore, plaintiffs did not need to plead or show a change to the property's physical characteristics.

    But did the restrictions imposed on plaintiffs' property count as "physical loss"? Most of the restaurants were able to use their kitchens and thus continue to operate on a take-out and delivery basis. But plaintiffs were not able to use their premises as they did for indoor, sit-down service before the pandemic. A reasonable jury could find that the plaintiffs did suffer s direct physical loss of property on their premises. In the light most favorable to the plaintiffs, the pandemic-caused shutdown orders imposed a physical limit; the restaurants were limited from using much of their physical space. 

    Here, the scope of the term "direct physical loss" was genuinely in dispute. A reasonable jury could find for either side based on the competing arguments. Therefore, Society's motion was denied as to the policies' business-interruption coverage. 

    Society's motion was granted, however, on civil authority coverage. Even if the general public was prohibited from congregating in the covered premises, there was no allegation that employees were prohibited from accessing the premises. For some plaintiffs, take-out customers or in-room dining guests could access the premises (and the immediately surrounding areas). 

    Finally, the plaintiffs' claims for bad faith survived the motion to dismiss. A more factual-based record needed to be developed before dismissal would be appropriate.

Illinois Court Determines Duty to Defend Construction Defect Claims

    Given the underlying allegations of damage to personal property, the court determined the insurer had a duty to defend. Certain Underwriters at Lloyd's London v. Metropolitan Builders, Inc., 2019 Ill. App. LEXIS 979 (Ill. Ct. App. Dec. 18, 2019).

    Metropolitan was hired as the general contractor for construction, renovation and demolition at contiguous properties - the 1907 Property, 1909 Property, and 1911 Property. During construction activities, the structures on the 1907 Property and 1909 Property collapsed. The existing structures on the properties were later deemed unsafe and were demolished by the city of Chicago. 

    AIG insured the owner of the buildings and paid over $1.8 million for repairs and associated expenses arising from the collapse. AIG then invoked its rights of subrogation against Metropolitan by filing suit. Metropolitan tendered the suit to its insurer, Lloyd's, who denied coverage and filed for a declaratory judgment. The trial court found the underlying complaint alleged property damage, but not an occurrence. Summary judgment was awarded to Lloyd's. 

    The appellate court agreed with Lloyd's that the damage to the real property was not covered by the CGL policy. Metropolitan was the general contractor with overall responsibility for the renovation and conversion of the existing structures into single-family housing. Metropolitan's allegedly faulty workmanship led to their collapse and ultimate demolition. Thus, the collapse of the structures was not an "accident" or "occurrence", but was the natural and ordinary result of faulty workmanship on the contractor's work product. 

    Metropolitan argued that the underlying complaint alleged damage to parts of the property on which Metropolitan was not working. This, however, did not change the court's conclusion. The properties were under the responsibility of Metropolitan, as general contractor, to convert the structures into single-family homes. Even if the damage extended to parts of the project on which Metropolitan was not currently working, it was still part of Metropolitan's scope and responsibility, and thus was part of the project itself. 

    The alleged property damage to personal property deserved a different analysis, however. This was damage to something other than the project itself. The underlying complaint gave no description of what "personal property" of the owner was damaged. But it was not clear from the underlying complaint that AIG did not cover claims of damage to the owner's person property. The admittedly vague references to damage to the owner's "personal property" were enough to allege "property damage" caused by an occurrence. The allegations were enough to trigger the insurer's duty to defend.