Insurance Law Hawaii

Claims that COVID-19 Present on Property Survive Motion to Dismiss

    Plaintiffs successfully argued against a motion to dismiss by alleging COVID-19 was present on their premises and required repairs and alterations to their properties. Legacy Sports Barbershop LLC v. Cont'l Cas. Co., 2021 U.S. Dist. LEXIS 102545 (N. D. Ill. June 1, 2021). 

    Plaintiffs operated a barbershop, barbering school and hair salon. They were insured by Continental. Plaintiffs alleged that the presence of COVID-19 required that they install a new air filtration system, build a new outdoor patio to accommodate patrons outside, install social distancing barriers and germ sanitation stations, and remove 60% of their workstations to allow for social distancing indoors. Coverage under the Business Income and Civil Authority provisions in the policy were denied by Continental.

    Plaintiff sued. Continental moved to dismiss because there was no "physical loss of or damage to" the properties. Continental also agued that any losses caused by a virus were excluded. The court found, however, that plaintiffs sufficiently alleged that the properties underwent a distinct, demonstrable, physical alteration, and therefore suffered "physical loss of or damage to" the properties. 

    Further, the applicability of the virus exclusion was not free from doubt. The policy did not specifically exclude from coverage damage caused by viruses, but instead excluded damage caused by the "presence growth, proliferation, spread or any activity of fungi, wet or dry rot or microbes." The exclusion said that "microbe" did not mean "microbes that were transmitted directly from person to person. Therefore, it was not clear whether "microbe" as defined in the policy included a virus such as SARS-CoV-2 because that virus could spread from person to person. Continental failed to establish that the claims were excluded from coverage at this stage.

Insured's Failure to Prove Entire Collapse of Building Leads to Dismissal

    The Fifth Circuit affirmed the district court's dismissal of the insured's claim for damage to her home caused by collapse. Stewart v. Metropolitan Lloyds Ins. Co. of Texas, 2021 U.S. App. LEXIS 14221 (5th Girl May 13, 2021). 

    One evening, the insured was awakened by a loud bang that shook her house. The next morning, she noticed the damage to her home, cracked sheetrock and sunken floors. She cut a hole through her floor and discovered that a couple of joists below her subfloor had broken and fallen away. The insured filed a claim with Metropolitan. 

    Metropolitan hired an expert who found broken and deteriorated floor joists, deteriorated floor decking, walls not plumb and gaps in the wall-to-ceiling interface. It was determined that the rot in the floor joists and subfloor decking were caused by a combination of termite damage and exposure to moisture over the lifespan of the structure, resulting in the broken floor joists and unlevel floors. The insured's own expert agreed that termite damage and wood rot were the cause of the foundation collapse failure.

    The claim was denied and the insured sued. Metropolitan moved for summary judgment. The district court found that the insured did not experience an "entire collapse" as defined in the policy. The insured appealed.

    The policy required an "entire collapse" and defined collapse as "an abrupt falling down or caving in of a building or any part of a building." The definition excluded settling, cracking sagging, etc. 

    The Fifth Circuit noted that "entire" meant "with no element or part excepted" or "complete in degree." A structure merely in danger of future collapse had not yet fallen down or caved in, so it had not suffered an entire collapse. The damage the insured described did not rise to the level of an entire collapse. While the floor was not level, the insured continued to live in her home. The court therefore affirmed the judgment of the district court. 

South Caroline Holds Actual Cash Value Can Include Depreciation of Labor Costs

    Answering a certified question, the South Carolina Supreme Court held that the insurer could calculate actual cash value (ACV) by including an estimate of the depreciation of embedded labor costs. Butler v. Travelers Home & Marine Ins. Co., 2021 S. C. LEXIS 51 (S.C. May 12, 2021). 

    Two insureds had their homes damaged in separate fires. Each held homeowners' policies with Travelers. The policies provided replacement cost value coverage to repair or replace damaged portions of homes. In the event that the insures chose not to immediately repair or replace the damaged home, the policies afforded payment to the insured for the actual cash value instead of replacement cost value. Both insured elected not to immediately repair or replace their homes, thereby deciding to accept a cash payment for the ACV of the damaged property. Neither was satisfied with the payment and both filed suit in federal district court.

    Travelers determined the ACV payment by estimating the replacement cost value (RCV) of the damage and then subtracting depreciation. The certified question presented by the federal district court was whether Travelers could depreciate the labor component of the costs of repair or replacement when determining the ACV. 

    The court noted that to calculate RCV, a determination was made on the extent of the damage and then soliciting bids to have the damage repaired or replaced. ACV, on the other hand, was difficult to determine in a specific situation. There was normally no market for aged and partially deteriorated portions of homes. 

    Here, Travelers began by estimating the RCV of the damaged property, and from that number it subtracted a separate estimate of lost value, or depreciation. It was unclear how Travelers went about determining the appropriate amount for depreciation. but it did include labor costs in the depreciation calculation. 

    The court found that labor costs were "embedded" with the property. To illustrate, the cost of a new roof included the cost of shingles and nails. Initially, the shingles and nails had labor costs because workers had to make them. By the time the shingles and nails were sold to the roofer, however, those labor costs were "embedded" in the market price the roofer paid to purchase them. Thus, the roofer paid one price for the shingles and one price for the nails. There was no differentiation between the cost of materials in those products and the cost of labor used to make them. Similarly, the cost of a new roof included paying workers to remove the old roof and install the new one. The market had one price for the roof because the material and labor costs were "embedded" in it. 

    Here, the value of the damaged property was reasonably calculated as a unit. Therefore, the court answered the certified question "yes." It made no sense for an insurer to include depreciation for materials and not for embedded labor. 

    The court noted, however, that if the insured believed its insurer made an incorrect calculation on ACV, a question of fact was presented for a fact finder to determine. 

    

Motion to Dismiss Beauty Salon's COVID-19 Claim Denied

    The insured beauty salon's claim for losses caused by shutdown orders due to COVID-19 survived the insurer's motion to dismiss based upon a Communicable Disease endorsement. Treo Salon, Inc. v. West Bend Mut. Ins. Co., 2021 U.S. Dist. LEXIS 88577 (S.D. Ill. May 10, 2021). 

    The insured's policy included an endorsement for Communicable Disease Business Income and Extra Expense Coverage. It provided coverage for any shutdown or suspension be due to an outbreak of communicable disease at an insured premises. The insured's beauty salon was ordered closed when the pandemic hit. 

    When coverage was denied, the insured filed a class action complaint seeking a declaratory judgment that its losses were covered by the Communicable Disease endorsement.  West Bend moved to dismiss arguing that coverage was triggered only if: (1) there was a communicable disease at the insured's premises; and (2) the business closed due to the outbreak. The insured did not establish that any governmental order was "due to" any outbreak on their premises. 

    The court noted that the case dealt with a specific and finite policy endorsement, not a traditional business interruption provision. Here, there was no doubt that the shutdown orders were in response to the outbreak of COVID-19. The issue was whether the shutdown due to an outbreak was at the insured premises. West Bend could not be certain that COVID-19 was not at the premises. The insured sufficiently pled a cause of action against West Bend and plausibly alleged that it was entitled to coverage. 

Restaurant's COVID-19 Claim Survives Motion to Dismiss

    The insurer's argument that the insured restaurants' claim for business interruption due to COVID-19 should be dismissed because there was no physical damage to the structure was rejected by the federal district court in Alabama. Serendipitous, LLC v. Cincinnati Ins. Co., 2021 U.S. Dist. LEXIS 86998 (N.D. Ala. May 6, 2021).

    Due to closure orders issued at the beginning of the coronavirus pandemic, restaurants could provide only curb pick up for months Later, they were allowed to seat customers, but at a restricted capacity.  The restrictions caused the restaurants to suffer business income losses, so the restaurants submitted a claim to Cincinnati for coverage. The claim was denied. The restaurants filed suit.

    Cincinnati moved to dismiss, arguing that the restaurants had not adequately pleaded a direct physical loss under the terms of the policy. The court focused on the word "loss" as used in the policy. "Loss" was defined in the policy as "accidental physical loss or accidental physical damage." Cincinnati argued that the term "loss" was unambiguous and that the restaurants failed to identify "physical" loss or damage to property needed to trigger coverage. The restaurants argued "loss" was ambiguous as used in the policy. Further, the "loss" or "damage" requirements in the definition of "loss" were disjunctive, so the words must have distinct meanings. 

    The court agreed that the alternative phases "accidental physical loss" and "accidental physical damage" in the definition of "loss" indicated that each phrase had a separate meaning. Otherwise, one of the phrases was superfluous. The distinction indicated that loss meant something other than damage. Further, when property was damaged so badly that it could not be used again, it typically was considered a loss. 

    The restaurants alleged that they were physically deprived of their property because of the COVID-19 virus. Civil orders restricting the restaurants' access to their property because of the widespread presence of a rapidly spreading, invisible, lethal virus that survives on surfaces such as restaurant tables were no different from civil orders restricting access to a restaurant after fire destroys part of a building. The restaurants alleged that civil authorities limited access to the restaurants because the virus was so prevalent in the community. Further, the restaurants had to close completely when an employee contracted the virus, whether or not the employee contracted CZOVID-19 at the restaurant, to disinfect the premises because the potential for spread of the highly contagious virus made the premises "dangerous" and unusable until the premises were disinfected. 

    Accordingly, Cincinnati's motion to dismiss was denied. 

 

Claim for Business Interruption Based on Government Orders Precluding Use of Property Survives Motion to Dismiss

    The court found that the insured hair salon and barbershop plausibly alleged an entitlement to coverage for lost business income when the government orders restricted use of the property as intended. Seifert v. IMT Ins. Co., 2021 U.S. Dist. LEXIS 103420 (D. Minn. June 2, 2021). 

    Plaintiff's business was ordered to close by two executive orders issued in response to the growing number of COVID-19 cases in Minnesota. The policy covered the loss of business income due to a "suspension of your 'operations' . . . caused by direct physical loss of or damage to property . . ." Plaintiff sought coverage for his business losses. IMT Insurance Company denied the claim. Plaintiff sued and IMT moved to dismiss. The motion was initially granted without prejudice and plaintiff filed an amended complaint. 

    Plaintiff did not allege any damage to his property, so only the phrase "direct physical loss of" was relevant. "Direct physical loss of" was a severing of an owner's possession of property, one which caused an immediate and materially perceptible inability to occupy and control property as intended. A qualifying loss could arise from an impairment of function and value to property, when legal regulations stymied a business's ability to lawfully provide its products. Further, a loss could arise if a building's function was seriously impaired and the property was rendered useless. If a government deemed a property dangerous to use and an owner was unable to lawfully realize the business property's physical space to provide services, Minnesota courts would find this to be a cognizable impairment of function and value. Plaintiff alleged a plausibly direct physical loss of property by alleging that executive orders forced a business to close because the property was deemed dangerous to use and its owner was thereby deprived of lawfully occupying and controlling the property to provide services within it. 

    The policy also included a virus exclusion that precluded coverage for any loss or damage caused by any virus that induced or was capable of inducing physical distress, illness or disease. Here, plaintiff alleged that his business would be open if not for the governmental orders. Thus he alleged a single cause of loss: the executive orders. The virus exclusion was intended to preclude coverage only where there was some direct or indirect contamination of the business premises, not whenever a virus was circulating in a community and a government acted to curb its spread by means of executive orders of general applicability. The losses, as alleged, were not precluded by the virus exclusion. 

COVID-19 Claim Survives Insurer's Motion for Judgment on the Pleadings

    The Federal District Court for the Easter District of Texas rejected the insurer's motion for judgment on the pleadings on the insured's claim for losses due to the coronavirus. Cinemark Holdings, Inc. v. Factory Mut. Ins. Co., 2021 U.S. Dist. LEXIS 90124 (E.D. Tex. May 5, 2021). 

    Cinemark operated the nation's third larges movie theater circuit. It held an "All Risks" policy from Factory Mutual. The policy expressly included coverage for physical loss or damage by a communicable disease. An additional coverage in the policy was issued for Interruption by Communicable Disease. Cinemark had paid over $3.7 million in premiums for its policies. 

    As a result of the COVID-19 pandemic, over 1700 Cinemark employees tested positive for, were exposed to, or displayed symptoms of COVID-19. Most of these employees were on Cinemark property just before testing positive. Cinemark was forced to close its theaters, incurring business income loss. A claim was filed with Factory Mutual. After months with no decision, Cinemark sued.

    Factory Mutual filed a Motion for Judgment on the Pleadings, alleging that Cinemark did not allege physical loss or damage, and that the policy's contamination exclusion barred the claim. Factory Mutual relied upon the court's prior decision, Selery Fulfillment, Inc. v. Colony Ins. Co., 2021 WL 963742 (E.D. Tex. March 15, 2021).

    The motion was denied. Cinemark stated plausible claims to defeat a Rule 12 (c) motion. Selery was distinguishable because there were no allegations that COVID-19 had entered the property, only that the pandemic prevented Selery from fully utilizing the property. Here, Cinemark alleged that COVID-19 was actually present and actually damaged the property by changing the content of the air. Further, Cinemark's policy was much broader that the one in Selery because it expressly covered loss and damage caused by "communicable disease." Both parties agreed that "communicable disease" encompassed COVID-19. Therefore, Cinemark met its burden to defeat the Rule 12 (c) motion. 

  

Contractor Prevails on Summary Judgment To Establish Coverage under Subcontractor's Policy

    When sued for construction defects caused by the subcontractor, the general contractor was granted summary judgment on the issue of coverage under the subcontractor's policy. Meritage Homes of Ga. v. Grange Ins. Co., 2021 U.S. Dist. LEXIS 84591 (N.D. Ga. March 23, 2021). 

    Meritage built a home for the owners. Easterwood Excavating, Inc. was the subcontractor for excavation and grading work. Meritage was named an additional insured under Easterwood's policy with Grange.

    After construction was completed, the owners were experiencing severe flooding after rain storms purportedly due to defects in the grading, site preparation and excavation. The owners filed an arbitration against Meritage for damages. The owners alleged that Meritage improperly excavated and graded their lot, causing water to collect and pool in their yard. Meritage denied all liability and looked to Easterwood and Grange for defense and indemnification. Grange denied coverage, contending there was no occurrence which resulted in property damage. The arbitrator found that the folding of water was caused by Meritage's improper grading of the lot. A Final Award in the amount of $129,530.93 was issued against Meritage. 

    Meritage filed suit against Grange. On cross motions for summary judgment, Grange argued the dispositive issues were whether Meritage's claims constituted "property damage" under the policy, and if so, whether Meritage's claims fell within the exclusions under the policy. Under Georgia law, coverage for faulty workmanship was limited to cases where the faulty workmanship damage was to other non-defective property or work. Here, the parties agreed that the owners alleged that the defective grading ruined the landscaping at the property. Additionally, the owners alleged that they suffered the loss of use and enjoyment of their home. Therefore, there was a claim for property damage beyond the defective work done by Easterbrook. 

    Nevertheless, Grange argued that the owners' allegations fell with the business risk exclusions because as the general contractor, Meritage was responsible for the entire project, and it was Meritage's scope of work that was to be considered in deterring whether there were allegations of property damage beyond faulty workmanship, not Easterbrook's scope of work. The court agreed that Easterbrook, not Meritage, was the named insured under the policy. Therefore, the policy would not cover Easterbrook's faulty workmanship if Easterbrook sought coverage. But there would have been coverage for claims raised by Easterbrook for damage to property other than the defective grading and excavating. It was this coverage the Additional Insured was entitled, nothing more. Grange had a duty to defend Meritage in the underlying arbitration and Heritage was entitled to summary judgment on this issued.

    Turning to the duty to indemnify, some portion of the Final Award was for damage to property other than that which fell within Easterbrook's scope of work This meant Grange had a duty to indemnify as to at least some of the damages awarded against Meritage. Therefore, Meritage was also entitled to summary judgment on the duty to indemnify. 

    The portions of the Final Award for the costs of construction work to alleviate the water problems cause by the defensive grading and excavating and the costs of professional engineering expenses required to determine how to correct the deficiencies in the grading and excavation were not part of the amount of indemnification, 

California Statute Barring Defense Obligations for Alleged Consumer Protection Violation Upheld

    The Ninth Circuit found that a California statute excluding coverage for alleged violation of consumer protection laws did not violate due process. Adir Int'l, LLC v. Starr Indem. & Liability Co., 2021 U.S. App,. LEXIS 10756 (9th Cir. April 15, 2021).

    Adir operated a retail chain called Curacao. In 2017, the California Attorney General sued Adir for unfair and misleading business tactics that allegedly exploited low income, Spanish-speaking customers. The complaint alleged violation of California's Unfair Competition Law (UCL) and False Advertising Law (FAL), and sought restitution, civil penalties, costs of suit and other equitable relief. 

    Adir tendered the defense to Starr Indemnity. A defense was initially granted under a reservation of rights. The defense was revoked, however, when Starr received a letter from the Attorney General explaining that Starr violated the California statute which stated no insurer would provide any coverage for payment of any fine penalty, or restitution in any proceeding brought pursuant to the UCL or FAL by the Attorney General. 

    Adir sued Starr. Starr moved for summary judgment. The district court granted the motion, noting that the California statute unambiguously precluded an insurer's duty to defend any claim brought pursuant to the UCL or FAL in which the Attorney General sought a fine, penalty, or restitution. The court also found that Starr was entitled to reimbursement of defense costs because the policy provided for a right to reimbursement.

    Adir appealed, arguing the California statute violated an insured's due process right to retain and find counsel of its choice. The Ninth Circuit noted there was no allegation that Adir could not afford competent counsel absent coverage under the policy. The law made it harder, but not impossible, for a civil litigant to retain the counsel of its choice. Therefore, the constitutional challenge was rejected. 

    Starr was also entitled to reimbursement of defense costs based upon the policy language. Because there was no duty to defend or indemnify, Starr was entitled to reimbursement of any defense funds expended on behalf of Adir. 

    Thanks to my blogging colleague, Mark Murakami, for the heads up on this case. 

Kona Coffee Distributor's Coverage Case Transferred from Washington to Michigan

    The insured's coverage suit seeking the defense and indemnity of the underlying action pursued by Kona coffee growers was transferred from the Western District of Washington to the Western District of Michigan. Kihnke v. Liberty Mutual Ins. Corp., 2021 U.S. Dist. LEXIS 71991 (W.D. Wash. April 14, 2021).

    The insured was sued in a putative class action by Kona coffer farmers located in Hawaii, alleging defendants, including the insured, sold regular coffee and labeled it as Kona coffee. The Kona coffee farmers alleged that by doing so, the insured disparaged the authentic coffee grown, harvested and sold by the insured, selling an inferior product. The insured tendered to Liberty Mutual and sued in federal district court on Washington after coverage was denied.

    Liberty Mutual moved to dismiss or alternatively transfer the case to the Western District of Michigan, where Liberty Mutual first brought a declaratory judgment action to determine it was not obligated to cover the insured in the putative class action. 

    The court granted the motion to transfer. The subject matter of the suit was the insurance agreements between the parties, which were negotiated and executed in Michigan, where Liberty Mutual's base of operations was located. The policy contained Michigan-specific provisions and applied to actions the insured took nationally. The lack of strong connections to Washington weighed in favor of the transfer.