Insurance Law Hawaii

Insurer's Motion To Dispose of Bad Faith Claim Fails

    The court denied the insurer's motion for partial summary judgment seeking to dismiss the insured's claim for bad faith in handling his claim. Davis v. Allstate Indem. Co., 2022 U.S. Dist. LEXIS 93475 (C.D. Cal. April 15, 2022).

    On February 5, 2012, Terry Davis had an auto policy with Allstate providing $30,000 in uninsured motorist (UM) bodily injury coverage and $100,000 in medical payments coverage. Mr. Davis was involved in an auto accident with an uninsured motorist. The next day, he reported the accident to Allstate. Allstate confirmed that the at-fault driver was uninsured and opened a UM bodily injury claim file. 

    On January 15, 2014, counsel for Mr. Davis sent Allstate a letter demanding UM coverage. An Allstate claim handler reviewed Mr. Davis' medical records and noted they were related to prostate, urinary tract, and constipation issues which pre-dated the accident. In March 2014, Allstate asked Mr. Davis to provide there years of historical medical records. Starting in October 2014, Allstate sent Mr. Davis monthly letters that claimed it still did not have the information needed to evaluate the claim. On February 25, 2015, an Allstate representative told Mr. Davis's counsel that the medial records revealed many illnesses that were not acute and appeared to be unrelated to the accident. Counsel did not return subsequent calls from Allstate. Allstate closed Mr. Davis's claim on June 16, 2015. The parties never commenced UM arbitration.

    Davis filed suit alleging Allstate breached the covenant of good faith and fair dealing. Allstate moved for summary judgment arguing (1) Mr. Davis's claim was time barred or (2) there was a genuine fact dispute as to when his injuries originated which precluded a finding of bad faith. 

    The court first found that the claim was not time-barred. At no point within five years did Allstate commence, or offer to commence, arbitration proceedings after Mr. Davis's request. Under California law, a cause of action to compel arbitration of an uninsured motorist claim did to accuse, and the statute of limitations did not begin to run, until one party refused to submit to arbitration. Mr. Davis's cause of action accrued on January 15, 2019 and he filed his complaint on June 3, 2020. Therefore, he filed within the two year statute of limitations. 

    Next the court found that the investigation could be found to have been conducted in bad faith. Therefore, Allstate was not entitled to a genuine dispute defense. Based upon the medical records, Allstate believed the injuries were due to a pre-existing condition. Allstate ignored that a severe car accident, in which Mr. Davis's car was t-boned and suffered major damage, may have caused new issues that related to his prior condition but were in fact novel. A reasonable jury could find that Allstate acted unreasonably in determining that Mr. Davis's injuries were not caused by the accident but instead were pre-existing conditions. Therefore, Allstate's motion on the bad faith claim was denied. 

Insurer's Motion for Summary Judgment on Business Interruption Claim Denied

    The insurer's motion to cap a potential business interruption claim after the insured failed to provide documentation was denied. Lake Charles Instruments Inc. v. Scottsdale Ins. Co., 2022 U.S. Dist. LEXIS 116802 (W.D. La. July 2, 2022).

    Plaintiff operated a business that was damaged during Hurricane Laura on August 27, 2020, and subsequently by Hurricane Delta on October 9, 2020. Plaintiff had a commercial property policy issued by Scottsdale that provided business income coverage of up to $500,000. 

    After Hurricane Laura, plaintiff submitted a claim. Plaintiff requested an advance. Scottsdale paid $50,000 on the business interruption (BI) claim while reserving rights to require full compliance with the policy, including submission of appropriate documentation. Scottsdale continued to request documentation, but none was received. Plaintiff also failed to provide documentation for its BI claim after Hurricane Delta. When documentation was finally provided, Scottsdale disputed that the documentation showed a BI claim that exceeded policy limits. Scottsdale determined the BI claim was below the policy limits.

    Plaintiff filed suit. Scottsdale moved for summary judgment because plaintiff had not provided any report or documentation to refute Scottsdale's findings. Plaintiff opposed the motion, arguing that its secretary and treasurer was familiar with the company's bookkeeping and records, and would be able to testify that the company lost more than $500,000 in business income as a result of the storms. 

    Scottsdale argued the declaration from the secretary/treasurer was unsupported and the lay testimony would be insufficient to create a fact issue. The court disagreed. Based on the secretary/treasurer's knowledge and experience of the business operations after the storm, she could  testify and rebut the opinions offered by Scottsdale's experts. Therefore, Scottsdale's motion was denied.

COVID-19 Claim with Multiple Occurrences Prevails on Summary Judgment

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

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

    The policy's disease contamination provision provided,

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

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

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

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

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

California Court of Appeals Refuses to Lift Stay of Coverage Action Involving Opioid Crises

    The appellate court affirmed the trial court's order staying St. Paul's declaratory judgment action involving the defense of distributors of opioid to users. St. Paul Fire & Marine Ins. Co. v. AmerisourceBergen Corp., 2022 Ca. App. LEXIS 535 (Cal. Ct. App. June 20, 2022).

    The trial court issued a stay due to the bellwether case of national importance pending in West Virginia (VW action), which, like this case, was addressing the opioid prescription abuse and addiction crises. The WV action involved whether St. Paul and other insurers were obligated to defend and indemnify the ABC Entities against prescription opioid lawsuits in West Virginia that settled in January 2017 for $16 million. One of the ABC Entities filed the WV coverage action against several insurers in March 2017.

    The WV action commenced four years before St. Paul filed its action in California. By the time the stay was issued, the WV action had progressed significantly. The trial court found that the WV action addressed some of the same policies, including at least one St. Paul policy, to determine whether they covered opioid litigation, which was the subject of the underlying litigation in West Virginia and other states. The trial court therefore stayed further proceedings on St. Paul's complaint filed in California pending resolution of the WV action. 

    The California Court was unaware of any other case in the country, other than the WV action, addressing coverage issues for the opioid crises. The West Virginia trial judge was among the most experienced jurists in the underlying subject matter having previously heard and resolved similar cases. Since its inception, the parties in the WV coverage action had engaged in discovery and motion practice. On November 20, 2020, the court in the West Virginia action denied the insurers' summary judgment motions finding that coverage was available under the St. Paul policy, at least at the current stage of the litigation, for lawsuits by government entities seeking damages for injuries suffered by citizens. 

    The appellate court noted that granting a stay in a case where the issues in two actions were substantially identical was a matter of sound discretion of the trial court. Here, St. Paul failed to rebut the ABC Entities showing of sufficient similarity to warrant a stay. St. Paul failed to rebut the ABC Entities' showing that the relevant policy language was essentially the same. Granting of the stay was affirmed.

Washington Federal District Court Grants Stay of COVID-19 Coverage Action

    To await a decision from the Washington Supreme Court, the federal district court stayed the COVID-19 coverage action pending before it. Reckless Enter. v. First Mercury Ins. Co., 2022 U.S. Dist. LEXIS 120832 (W.D. Wash. July 8, 2022). 

    Plaintiff owned and operated a restaurant that lost income during the height of the COVID-19 pandemic after the governor issued shut-down orders. Plaintiff tendered a claim for loss of income during the pandemic under its policy with First Mercury. The claim was denied because COVID-19-related losses did not constitute direct physical loss or damage.

    The federal district court had previously issued its decision in Nguyen v. Travelers Cas. Ins. Co. of Am., 2021 WL 2184878 (W.D. Wash. May 28, 2021), where it denied coverage for a COVID-19 loss of income matter because such losses did not constitute "direct physical loss of or damage to property." Nevertheless, Plaintiff moved to stay this current case until the Washington Supreme Court ruled in Hill & Stout PLLC v. Mutual of Emumclaw Ins. Co. which, involved identical policy language. First Mercury opposed the motion claiming it was "based on the remote possibility that the Washington Supreme Court colud issue a decision diametrically opposed to the prior decision of this Court, the Ninth Circuit, every other state and federal appellate court, hundreds of state and federal courts across the country and the basic tenets of contract interpretation."

    The court granted the motion for stay. It would not be in the interest of judicial economy for this court to predict how the Washington Supreme Court would rule when very soon the court would issue its ruling. First Mercury would not be prejudiced by a stay. The Washington Supreme Court had already held oral argument in Hill & Stout and presumably would issue a ruling shortly. 

Rest in Peace, Justice Moon

    The Hawaii legal community lost a legendary member of the judiciary with the passing of retired Chief Justice Ronald T.Y. Moon on July 4, 2022. While serving as Chief Justice, the Supreme Court decided landmark cases including same sex marriage to protecting native Hawaiian rights and the environment. Justice Moon served as Chief Justice of the Hawaii Supreme Court for 17 years before retiring in 2010.

    Justice Moon was also instrumental in developing Hawaii jurisprudence in insurance law. Some of the significant insurance-related cases he authored are as follows:

AIG Hawaii Ins. Co. v. Smith, 78 Haw. 174, 891 P.2d 261 (1995) - insurer is estopped from denying coverage after failing to reserve rights and retaining control of the defense.

Christiansen v. First Ins. Co., 88 Haw. 136, 963 P.2d 345 (1998) - application of equitable tolling in coverage action. 

Enoka v. AIG Hawaii Ins. Co., 109 Haw. 537, 128 P.3d 850 (2006) - insurer may be in bad faith even if there is no coverage under the policy.

Hough v. Pacific Ins. Co., 83 Haw. 457, 927 P.2d 858 (1996) - workers' compensation insurer owes contractual duties to the worker, as an intended beneficiary of the employer's policy; employee may enforce those duties, including the duty to handle and pay claims in good faith. 

Sentinel Ins. Co., Ltd. v. First Ins. Co. of Hawaii, Ltd., 76 Haw. 277, 875 P.2d 894 (1994) - adopted the Legal Ambiguity rule for duty to defend, whereby, if there is no Hawaii decision on a coverage issue and competing decision exist across the country, the interpretation most favorable to the insured is used. Justice Moon also found the injury-in-fact trigger was applicable in CGL policies where progressive bodily injury or property damage continued across many policy periods. Finally, the decision addressed the consequences when an insurer breaches the duty to defend.

    A special session of the Hawaii Supreme Court will convene on August 8, 2022, at 3:30 p.m. to honor Justice Moon. Due to social distancing, the ceremony is by invitation-only, but the session will be live-streamed for public viewing on the Judiciary's YouTube Channel. 

    Rest in Peace, Justice Moon

Cyber Heist Excluded From Coverage

    The court found there was no coverage for the insured's transmission to a foreign account held by someone who gained unauthorized access to the account. Construction Fin. Admin. Services, LLC v. Fed Ins. Co., 2022 U.S. Distl LEXIS 103042 (E.D. Pa. June 9, 2022). 

    The insured, Construction Financial Administration Services, LLC (CFAS) was a thirty-party construction funds administration company. CFAS disbursed funds for contractors whose clients required performance and payment bonds from sureties. One of CFAS's clients was SWF Constructors (SWF). In 2017, SWF agreed to perform construction work in California for the U.S. Army Engineer District involving fence replacement over two miles. 

    A surety issued performance bonds and required SWF to deposit all payments received from the project owner into a disbursement account administered by an independent third-party. SWF entered into a funding agreement with CFAS in order to meet the surety's requirement that project payments be administered by an independent third party. 

    CFAS established a disbursement account and arranged for project payments from the owner to be directly deposited into the disbursement account. On April 9, 2018, CFAS received a request from what it believed to be SWF to make a payment from the account of $600,000 by wire transfer to a company in Hong Kong named HK Canopy Technology Limited (HK). HK was no listed in SWF's budget as a subcontractor, nor had CFAS received a copy of any executed agreement between HK and SWF. Further, the invoice did not refer to the project nor identify what work or materials were supplied. Nevertheless, the payment was made. 

    The next day, another request was received from what CFAS believed was from SWF seeking payment from the disbursement account for $700,000 by wire transfer to HK. Again, no disbursement voucher nor any item identification was received. The payment was sill authorized.

    When SWF submitted a disbursement voucher, CFAS stated that the two payments to HK had left insufficient funds to make the requested disbursement. CFAS borrowed $1,000,000 and placed those funds into the disbursement account in order to avoid SWF's default  of payment to its actual subcontractors and supplies. 

    An investigation revealed that a SWF employee's email had been hacked by an unknown fraudster. The fraudster gained access to SWF's network prior to the unauthorised transfers. Posing as a SWF employee the fraudster sent emails to CFAS requesting the transfers.

    CFAS submitted a claim to its insurer, Federal Insurance Company (FIC). The policy excluded claims arising from unauthorized access to any computer program, computer, or computer system. Further, the policy provided that the insured could not settle or offer to settle any claim without FIC's prior written consent. Under these provisions, FIC denied the claim. CFAS filed suit.

    After discovery, cross-motions for summary judgment were filed. The court found in favor of FIC. There was no breach of the policy because it did not cover the loss. The language of the exclusion clearly contemplated losses precipitated by social engineering events such as hacking. Even if the exclusions did not apply, CFAS failed to provide notice of the loss to FIC before settling the claims. Summary judgment was therefore granted to FIC. 

Allegations that COVID-19 Virus Lives on Surfaces Adequately Alleges Direct Physical Loss or Damage

    The California Court of Appeal reversed the trial court's granting of the insurer's demurrer and found the insured adequately pled a claim of direct physical loss or damage due to the presence of COVID-19. Mariana Pacific Hotel & Suites, LLC v. Fireman's Fund Ins. Co., 2022 Cal. App. LEXIS 608 (Cal. Ct. App. July 13, 2022).

    Fireman's Fund issued a general property policy to the Hotel which provided coverage for direct physical loss or damage to the insured property. Business interruption coverage was extended for the actual loss of business income due to the necessary suspension of operations during the period of restoration arising from direct physical loss or damage to covered property. 

    The Hotel's first amended complaint alleged, on information and belief, that "the presence of COVID-19 on property, including on and within Insured Properties, caused and continues to cause physical loss and/or damage to property by causing, among other things, a distinct, demonstrable or physical alteration to property."

    The first amended complaint further alleged, "A study by the Virology Journal showed that COVID-19 can survive on surfaces up to 28 days, serving as a vehicle for transmission during that time span." The Hotel alleged that COVID-19 had been present in and before March 2020 on a variety of physical objects in the insured properties, including furniture, countertops, walls, bedding, appliances and food and other packaged items, as well as in the air. By government order, the Hotel had to be evacuated, decontaminated, or disinfected and one employee was ordered by the Department of Health to evaluate the hotel and quarintine. The physical loss or damage to property required the closure or suspension of operations at the Hotel. 

    Fireman's Fund demurred to the first amended complaint, arguing the Hotel had failed to allege facts showing direct physical loss or damage to covered property. Fireman's Fund pointed out that courts across the country had ruled the pandemic did not equate to physical loss or damage and argued loss of use alone did not constitute direct physical loss or damage.

    The trial court granted Fireman's Fund's demurrer. The court relied on MRI Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co., 187 Cal. App. j4th 766 (2010), which held "accidental direct physical loss required 'an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so." The court explained, "[W]here the property has simply been rendered unusable based on a virus, rather than an external force, the loss of use of the property in a typical manner is not a 'directly physical loss' contemplated by the insurance policy."

    On appeal, the Hotel pointed to prior cases in which the Court of Appeal held a home had suffered physical loss or damage when the land underlying the home slid away, leaving the home standing on the edge of a newly formed cliff. In another case under a third-party liability policy, the existence of asbestos fibers on surfaces in a building constituted property damage. 

    The Hotel pleaded direct physical loss or damage to covered property within the definition articulated in MRI Healthcare - a distinct, demonstrable, physical alteration of the property. The Court of Appeal agreed. The firs amended complaint adequately alleged direct physical loss or damage within the MRI Healthcare definition. The court did not have to decided whether direct physical loss or damage could be shown without evidence of a physical alteration in the insured property. 

    The court recognized its conclusion was at odds with almost all decision considering whether business losses from the pandemic were covered. Federal case law, however, was not binding on the court. Further, the pleading rules were different in federal court when evaluating a trial court order sustaining a demurrer. To survive a motion to dismiss under the Federal Rules of Civil Procedure, "a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662 (2009). Under California law, however, the plausibility of the insureds' allegations had no role in deciding a demurrer which required the court to deem as true, however improbable, facts alleged in a pleading. 

    Further, many prior cases, including Inns-by-the-Sea v. California Mutual Ins. Co., 71 Cal. App. 5th 688 (2021, involved allegations of loss of use of insured property as a result of government-ordered closures to limit the spread of COVID-19, rather than a claim the presence of the virus on the insured premises caused physical damage to covered property, which in turn led to business losses. 

    Because the insureds adequately alleged losses covered by Fireman's Fund's policy, they were entitled to an opportunity to present their case, at trial or in opposition to a motion for summary judgment. 

Claim for Punitive Damages Based on Insurers' Alleged Bad Faith Business Practices Fails

    The court granted the insurer's motion to dismiss the bad faith claim based upon allegations of a general business practice of acting recklessly toward an insured's rights under the policy. Sandpiper Isle Condo. Ass'n v. Empire Indem. Ins. Co., 2022 U.S. Dist. LEXIS 114279 (M.D. Fla. June 28, 2022). 

    Sandpiper suffered property damage from Hurricane Irma. Empire accepted the claim but there was disagreement on the value of the damage. An appraisal issued an award in favor of Sandpiper but Empire failed to pay the benefits for two years.

    Sandpiper filed suit and included a claim for punitive damages. Sandpiper argued Empire intentionally subjected insureds to "an error-ridden, lackadaisical adjustment process" to reduce Empire's payments. Sandpiper noted other instance in which "Empire engaged in conduct to omit their financial obligations to the insured, including a similar investigation process." 

    Florida law only permitted a claim for punitive damages where acts giving rise to the violation occurred with such frequency as to indicate a general business practice. But Sandpiper failed to demonstrate that Empire had a general business practice of acting with reckless disregard for an insured's rights under the policy. In a conclusory manner, Sandpiper made such claims as asserting its belief that "such conduct runs rampant within Empire prior to and at the time of the Claim, and further believes that such conduct continues with Empire today." Sandpiper did not explain how many different claims the "rampant" behavior occurred in or over what span of time.

    Therefore, Sandpiper's pleading failed to sufficiently implicate Empire's general business practices. Empire's motion to dismiss was granted without prejudice.

    

Awarding Insurer Summary Judgment Before Discovery Completed Reversed

    The Florida Court of Appeal reversed the trial court's awarding of summary judgment to the insurer because discovery was not completed. Sacramento v. Citizens Prop. Ins. Corp., 2022 Fla. App. LEXIS 4292 (Fla. Ct. App. June 22, 2022).

    The insured filed a claim under the all-risk policy for water damage caused by Hurricane Irma. Citizens denied the claim based upon a policy exclusion. The insured filed suit on March 8, 2019.

    On April 24, 2020, Citizens moved for summary judgment. A hearing was set for August 10, 2020. Citizens filed a notice for a deposition of a Mitigation Company representative scheduled to occur on December 1, 2020. On August 14, 2020, the insured filed an opposition to the summary judgment motion arguing that it would be premature to grant the motion because there were still pending depositions. The insured specifically requested that the trial court not enter summary judgment until the mitigation company's representative was deposed because he was a key witness who would be testifying regarding the cause of loss. 

    On August 18, 2020, the trial court heard the motion. Summary judgment was entered in favor of Citizens. The insured appealed.

    While the insured did not file a motion for continuance of the hearing, he did note the deposition in his opposition and called opposing counsel to ask to reset the hearing while the deposition of a key witness had already been noticed. Citizens itself defeated its own summary judgment motion by filing a notice of deposition of a key witness. 

    The trial court could not simply ignore a pending deposition of a witness whose testimony would most likely raise a genuine issue of material fact. The trial court's order granting summary judgment was reversed and the case was remanded.