Insurance Law Hawaii

Carrier Has Duty to Defend Claim for Active Malfunction of Product

    Rejecting that the underlying claim was based solely on faulty workmanship, the Third Circuit held the insurer had a duty to defend allegations of a malfunctioning product. Nautilus Ins. Co. v. 200 Christina Street Partners LLC, 2020 U.S. App. LEXIS 22118 (3d Cir. July 16, 2020).

    The insureds were sued by homeowners in two separate suits alleging defects in the construction of their homes. Nautilus defended under a reservation of rights. Nautilus filed suit in District Court and moved for judgment on the pleadings. The District Court denied the motion, finding Nautilus had a duty to defend because the underlying claims sufficiently alleged product--related tort clams that could fall within the scope of coverage under the relevant policies.

    The Third Circuit affirmed. There was a distinction between a claim of faulty workmanship, for which the insurer did not have a duty to defend, and a claim of "active malfunction" of a product, for which an insurer did have such a duty. An active malfunction was sufficiently fortuitous as to constitute an "occurrence."  

    Nautilus argued that the underlying claims stemmed from the insureds' alleged faulty workmanship, so the defects alleged were not "occurrences." Liberally construing the underlying complaints in favor of the insureds, however, the complaints alleged the use of faulty materials, and the active malfunction of products, such as windows and moisture barriers. These active product malfunctions constituted "occurrences" under the policies. Thus, the District Court properly held that Nautilus had a duty to defend the underlying cases. 

 

Federal Court Dismisses Coverage Action in Favor of Pending State Proceeding

    The federal district court declined to exercise jurisdiction over the coverage action that was parallel to a case pending in state court involving the same parties and same issues pending. Navigators Ins, Co. v. Chriso's Tree Trimming, 2020 U.S. Dist. LEXIS 129711 (E.D. Calif. July 22, 2020). 

    Pacific Gas & Electric (PG&E) entered into a tree, brush and wood removal contract with Mount F Enterprises, Inc. Mountain F subsequently entered into a subcontractor agreement with Chriso Tree Trimming, Inc. for work to be performed for PG&E. In August 2017, Chriso attempted to remove a tree, but the tree accidentally fell in the wrong direction and knocked down nearby powerlines. The powerlines came into contact with surrounding brush and started the "Railroad Fire." The fire was eventually contained on September 15, 2017, after 12, 407 acres were burned and 7 structures and 7 homes were destroyed.

    Five subrogation lawsuits were filed in state court against Chriso and Mountain F by various insurance companies that paid for the damage caused by the Railroad Fire. A policy limits demand to settle all claims against Chriso and Mountain F was made. Navigators insured Chriso for $9 million through a Commercial Excess Liability Policy, payable once all other insurance was exhausted. The policy included a "Professional Services Endorsement" (PSE Exclusion) that excluded coverage of "professional services." "Professional services" was defined through a list of 12 non-exclusive professions and services that generally referred to activities involving specialized knowledge or skill that was predominantly mental or intellectual in nature rather than physical or manual.

    Navigators filed in federal court for declaratory judgment against Chriso and Mountain F, contending there was no duty to defend or to indemnify because of the PSE Exclusion. Navigators argued that the trimming involved mental or intellectual skill and the labor involved was increasingly secondary with technological advances. 

    A couple of months later, Mountain F filed suit in state court against Chriso, Navigators and Chriso's primary carriers. The suit alleged that Chriso failed to defend and indemnify Mountain F. Further Navigators failed to defend Mountain F as an additional insured under Chriso's policy. The suit alleged that the PSE Exclusion did not apply because tree cutting and tree felling were not similar to any of the 12 examples of "professional services" listed in the policy. 

    Navigators filed a motion for summary judgment in the federal action. Mountain F followed with a motion to stay or, in the alternative, to dismiss, in light of the state court action. The court stayed Navigator's motion for summary judgment pending resolution of the motion for stay 

    The court considered the factors in Brillhart v. Excess Ins. Co., 316 U.S. 491 (1942) and Government Employees Ins. Co. v. Dizol, 133 F.3d 1220 (9th Cir. 2002). First, the court found this case was duplicative because the same issues involving the same parties were present in the state court case. There would be a needless determination of state law if jurisdiction was retained because two courts would apply the same settled principles to the same issues. Forum shopping was not an issue as Navigators had filed in federal court first.

    All aspects of the controversy could be resolved in the federal case, favoring retaining litigation. Retaining jurisdiction would clarify whether the PSE Exclusion applied, but the same analysis would apply to the state case. Although res judicata might apply depending on which case was first resolved, this factor weighed in favor of retaining jurisdiction. There was no evidence that the federal case would be entangled with the state case, so this factor also weighed in favor of retaining jurisdiction. Finally, neither party would be inconvenienced by the federal court retaining jurisdiction.

    While some factors weighed in favor of the federal court retaining jurisdiction, the court did not find that the factors were so weighty to overcome the presumption against retaining jurisdiction. Because the same issues and same parties were proceeding in a parallel state court case, the court declined to exercise jurisdiction over the declaratory judgment action. Navigators' case was therefore dismissed. 

Judicial Panel Denies Nationwide Consolidation of COVID-19 Business Interruption Cases

    The Judicial Panel on Multidistrict Litigation denied motions to centralize pretrial proceedings in pending COVID-19 business interruption claims. In re COVID-19 Business interruption Protection Insurance Litigation, 2020 U.S. District. LEXIS 144446 (Aug. 12, 2020). 

    Plaintiff policy holders sought consolidation, contending their policies provided coverage for business interruption losses caused by the COVID-19 pandemic and the related government orders suspending, or severely curtailing, operations of non-essential businesses. The Panel considered 15 actions on the pending motions, but had notice of 263 related actions. 

    Some plaintiffs opposed centralization or sought to be excluded from any MDL. Some argued the Panel should centralize the coverage actions on a state-by-state, regional, or insurer-by-insurer basis. 

    The Panel did not accept consolidation of all cases. There was little potential for common discovery across the litigation because there was no common defendant as the actions involved either a single insurer or insurer-group. The various cases involved different insurance policies with different coverages, conditions, exclusions, and policy language, purchased by different businesses in different industries located in different states. 

    While policy language for business income and civil authority coverages should be very similar among the policies, seemingly minor differences in policy language could have significant impact on the scope of coverage. Managing such litigation would be an ambitious undertaking  and implementing a pretrial structure that was efficient would take time. Yet, time was of the essence in this litigation as many plaintiffs were on the brink of bankruptcy. An industry-wide MDL would not promote a quick resolution of these matters. Therefore, the motions for centralisation were denied. 

    Arguments for insurer-specific MDLs were more persuasive, however. Such an MDL would be limited to single insurer or group of related insurers and would not entail the managerial problems of an industry-wide MDL involving more than 100 insurers. 

    Orders would issue in actions naming four insurers or groups of related insurers - Certain Underwriters an Lloyd's, London; Cincinnati Insurance Company; the Hartford insurers; and Society insurance. The parties were ordered to show cause why those actions should not be centralized. With respect to these four insurers or insurer groups, centralization could be warranted to eliminate duplicative discovery and pretrial practice. 

    

With No Evidence of COVID-19 Being Present, DC Trial Court Finds No Claim for Business Interruption

    A D.C. Superior Court rejected a business interruption claim due to closures related to the COVID-19 pandemic. Rose's 1, LLC v. Erie Ins. Exchange, Civil Case No 2020 CA 002424 B (Order dated Aug. 8, 2020). The decision is here. 

    Plaintiffs owned a number of restaurants in the District of Coiumbia. Plaintiffs had commercial property coverage in a policy issued by Erie. The policy provided coverage for loss of income sustained due to interruption of business resulting directly from "loss or damage" to the insured property. 

    DC Mayor Bowser issued a series of orders in March 2020 which closed all non-essential businesses, including plaintiffs' restaurants. Plaintiffs filed claims with Erie. When coverage was denied, plaintiffs filed suit. Both sides moved for summary judgment. 

    The dispute centered on whether the closure of the restaurants due to the mayor's orders constituted a "direct physical loss" under the policy. Plaintiffs argued that the loss of use of the restaurants was "direct" because the closures were the direct result of the mayor's orders without intervening action. The court reasoned, however, that the orders were governmental edicts that commanded individuals and businesses to take certain actions. Standing alone and absent intervening actions by individuals and businesses, the orders did not effect any direct changes to the properties. 

    Plaintiffs argued that their losses were "physical" because the COVID-19 virus was "material" and "tangible." But plaintiffs offered no evidence that COVID-19 was actually present on their insured properties at the time they were forced to close. 

    Plaintiffs also argued "loss" incorporated "loss of use" in the policy, which only required them to be deprived of the use of their properties, not that the properties suffered physical damage. But under a natural reading of the term "direct physical loss," the words "direct" and "physical" modified the word "loss." Any "loss of use" had to be caused, without the intervention of other persons or conditions, by something pertaining to matter - in other words, a direct physical intrusion on to the insured property. The mayor's orders were not such a direct physical intrusion. 

    The court noted cases cited by plaintiffs in which "direct physical loss" was found even though there was no physical damage to a structure. Interestingly, the court found that Murray v. State Farm Fire & Cas. Co., 509 S.E. 2d 1, 16-17 (W.Va. 1998), where the future risk of a landslide was a "direct physical loss" because it rendered the homes uninhabitable, was not applicable here. 

    Consequently, Erie's motion for summary was granted while plaintiffs' motion was denied. 

    Thanks to the Hunton Insurance Recovery Blog [here] for covering this recent case. 

 

     

Hundreds of Coronavirus Coverage Cases Await Determination on Consolidation

    On July 30, 2020, the Judicial Panel on Multi-District Litigation (JPML) heard oral argument on the potential consolidation of all federal cases involving business interruption coverage relating to coronavirus and shut-down orders. A decision will be rendered in the near future.

    Meanwhile, many cases are on hold, waiting for a determination on consolidation. One such case is Pigment Inc. v. Hartford Fin. Servs. Group, 2020 U.S. Dist. LEXIS 133230 (S.D. Cal. July 27, 2020), where the court granted a stay pending a decision by the JPML. The case is a class action based on denial of coverage under business interruption insurance. Plaintiff's case alleged a bad faith denial that risked the permanent closure of its business due to unexpected temporary shutdowns from the COVID-19 pandemic.  Plaintiff sought a stay pending the decision of the JPML.

    The court considered the possible damage which could result from granting a stay, the hardship which a party could suffer in being required to go forward, and the orderly course of justice measured by the simplifying or complicating of issues, proof, and questions of law which could be expected to result from a stay. 

    Given that he JPML would soon hear and decide whether to consolidate cases, a short stay until a decision was made would have very little effect on the ultimate resolution of the case. Therefore, the insurers had not presented any persuasive argument of prejudice if the motion was granted. Accordingly, the action was stayed pending the JPML's decision on consolidation. 

COVID-19 Case Remanded for Failure to Meet Amount in Controversy

    The federal district court remanded to state court a loss of rent claim because the amount in controversy requirement was not met. Geragos & Geragos Fine Arts Bldg., LLC v. Travelers Indemn. Co., 2020 U.S Dist. LEXIS 127427 (C.D. Cal. July 20, 2020). 

    Geragos suffered loss of rental income due to the COVID-19 tenant relief measures implemented in Los Angeles. The tenant relief orders would remain in effect for the duration of the emergency period, the end date of which was not presently set. 

    Geragos submitted a claim for loss of rental income to Travelers. When the claim was denied, Geragos sued in state court. Travelers removed to federal district court. Geragos moved to remand the case back to state court for lack of subject matter jurisdiction. 

    Travelers asserted that Geragos rental income of $6,800per month could serve as a basis for calculating the amount of controversy. The court disagreed that Geragos' monthly rental income represented a colorable source of damages. The Los Angeles ordinance provided that "nothing in this article eliminates any obligation to pay lawfully charged rent." The ordinance also provided, however, that no owner could charge interest or late fees on rent not paid due to the ordinance. Even if policy benefits were triggered by the ordinances at issue, it was not clear that Geragos would ultimately be damaged in an amount greater than the lost interest or late fees on delinquent rents. Therefore, the argument for the amount in controversy was too speculative to overcome the strong presumption against removal jurisdiction given the highly unpredictable nature of the COVID-19 pandemic. 

    Because Travelers failed to meet its burden to establish the requisite amount in controversy, the court granted Geragos' motion to remand. 

Coverage for Faulty Workmanship Denied

    The court found that the insurer had no duty to defend claims against the insured for faulty workmanship. HT Services, LLC v. Western Heritage Ins. Co., 2020 U.S. Dist. LEXIS 123664 (D. Colo. July 10, 2020). 

     Western Heritage Insurance Company issued three concurrent general liability policies to HT Services, LLC. The policies insured two properties owned by HT in Colorado Springs, its offices and vacant land. HT eventually developed a residential community on the vacant land. In January 2016, the homeowners' association filed suit against HT for negligent design and construction of a retaining wall at the project. 

    HT requested Western to defend and indemnify against the suit. Western denied coverage and HT sued. HT asserted that Western had a duty to defend and asserted claims for declaratory relief, breach of contract and bad faith. HT moved for partial summary judgment on its claims for declaratory relief, seeking a determination of its rights under the policies. Western moved for summary judgment on all of HT's claims. 

    The court found were was no reasonable interpretation of the AOAO's complaint that would require coverage under the policies. The underlying complaint alleged that HT "defectively designed and/or constructed retaining walls" during the development and "breached the duties owed to the AOAO by negligently, carelessly, tortiously, and wrongfully failng to use reasonable care in the design and/or construction of the improvements." These allegations fell within several exclusions in the policies. 

    First the policies excluded from coverage claims or suits for work on condominiums or any other type of residential structure. A retaining wall was not itself a "residential structure." But the exclusion applied to activities "relating to or in any way connected with" the construction of residential structures. The retaining wall was constructed as part of the development and fit within the exclusion. 

    Second, another exclusion provided, "This insurance does not apply to 'property damage' to that particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it." Under Colorado law, this provision did not require an insurer to defend its insured in a suit for damages to repair mistakes made in construction of the project. There was no plausible reading of the underlying complaint that would trigger coverage.

"Decay" Found Ambiguous in Collapse Case

    The federal district court granted, in part, the insured's motion for summary judgment seeking coverage for a collapse of a church's ceiling. Derbyshire Baptist Church v. Church Mut. Ins. Co., 2020 U.S. Distl LEXIS 113346 (E.D. Va. June 29, 2020).

    A large portion of the sanctuary ceiling of the insured's church collapsed. A claim was filed with the insurer. The insurer hired a forensic engineer who found the collapse was caused by the disconnection of wire support hangers from the wood roof beams. Further, "the redistribution of load on the hangers resulted in a progressive failure of the hangers and their supported components." Based on these findings, the insurer denied coverage. 

    The policy excluded coverage for collapse, but in the Additional Coverage portion of the policy, collapse caused by "decay that is hidden from view" was covered. The court pondered the meaning of "decay," which was not defined in the policy. 

    The court interpreted the term "decay" by considering the meaning of the policy as a whole. More than one construction was possible. "Decay" first appeared in the policy as an exclusion, where decay and deterioration were excluded. Elsewhere, "Wet Rot" was excluded. "Decay" could be read as distinct from "deterioration," as they were both enumerated in the same provision of the policy. The drafter would not have included both terms if they had identical meanings. On the other hand, "decay" must have a distinct meaning from "rot," which suggested that "decay" had a broad definition, one that did not merely encompass the decomposition of organic material. These two competing constructions of decay were equally possible. 

    The insurer contended that the collapse was due to deterioration, not decay. The inspection  found "the initial failure resulted from withdrawal of the nails as a result of thermal expansion and contraction of the wood roof beams due to changes in temperature and humidity." Such a failure did not clearly support the insurer's position that the wood beams were "defective," as this characteristic of wood beams could be "defect" or "decay." 

    Therefore,, the term "decay" was, at least, ambiguous, and the court held in favor of the insured. The court denied the insured's motion in so far as it sought a determination that the insurer acted in bad faith in denying coverage because there was a good faith dispute on whether "decay" existed." 

 

Michigan Finds Coverage for Subcontractor's Faulty Work

    The Michigan Supreme Court held that under a CGL policy, an "accident" may include unintentional subcontractor work that damages the insured's work product. Skanska USA Building Inc. v. M.A.P. Mechanical Contractors, Inc., et al., 2020 Mich. LEXIS 1194 (Mich. June 29, 2020).

    Skanska USA Building Inc. was the construction manager on a renovation project for a medical centre. The heatng and cooling portion of the project was subcontracted to M.A.P. Mechanical Contractors, Inc. (MAP). MAP installed a steam builder and piping for the heating system. The installation included several expansion joints. After completion, Skanska learned that MAP had installed some of the expansion joints backward. This caused significant damage to concrete, steel and the heating system. The medical center sent a demand letter to Skanska, who send a demand letter to MAP. Skanska did the repairs and replacement of the damaged property. Skanska then submitted a claim of $1.4 million for its work to Amerisure Insurance Company. The claim was denied. 

    Skanska sued Amerisure. The trial court rejected Amerisure's motion for summary judgment which argued MAP's defective construction was not a covered "occurrence." The Court of Appeals reversed and ordered that summary judgment be granted to Amerisure. The court reasoned that there was no "occurrence" because the only damage was to the insured's own work product. 

    The Michigan Supreme Court reversed the Court of Appeals. Under Michigan law, an "accident" was "an undefined contingency, a casualty, a happening by chance, something out of the usual course of things, unusual, fortuitous, not anticipated and not naturally to be expected." Generally, faulty work by a subcontractor could fall within the plain meaning of most of these terms. The accident happened by chance, was outside the usual course of things, and was neither anticipated nor naturally expected. 

    The policy as a whole confirmed this interpretation. The policy contained an exclusion precluding coverage for an insured's own work product, but it contained an exception for work performed by a subcontractor on the insured's behalf. If faulty workmanship by a subcontractor could never constitute an "accident" and therefore never be an "occurrence" triggering coverage in the first place, the subcontractor exception would be nugatory. Therefore, given the plain meaning of the word "accident," faulty subcontractor work that was unintended by the insured could constitute an "accident" under a CGL policy. 

    The context and history of CGL policies supported the court's conclusion that an "accident" could include damage to an insured's own work product. In 1986, the ISO added the policy language on a subcontractor's faulty work. It adopted changes to expand coverage to include some of the business risks that were previously excluded, specifically damage caused by a subcontractor's faulty workmanship (with no carveout based on whose property was damaged). The 1986 reformation of the scope of coverage under the CGL policies underscored a plain reading of "accident" - that faulty subcontractor work may fall within the policy's coverage. 

 

Sinking Floor Does Not Meet Strict Definition of Collapse

    The court determined that the sinking of the insured's floor caused by termites and rot deterioration did not meet the homeowners policy's definition of collapse. Stewart v. Metro. Lloyds Ins. Co., 2020 U.S. Dist. LEXIS 111527 (S.D. Tex. June 24, 2020).

    Beatrice Stewart, the homeowner, heard a loud bang one night as she lay in bed. The next day, she found that the floor near her bathroom and hallway had sunk and the house was sitting lower. She admitted the house never completely fell down. Upon investigation, Lloyds found that rot in the floor joists and subfloor decking were caused by a combination of termite damage and exposure to moisture. Lloyds denied the claim. 

    Stewart sued. Lloyds argued the policy required an "entire collapse" of the building or any part of a building, which did not occur here. The policy defined "collapse" as "an abrupt falling down or caving in of a building or any part of a building." The record did not show that any part of Stewart's floor caved in.

    Nor did the undisputed evidence show an "entire" collapse. At oral argument, Steward argued that the word "entire" applied only to the collapse of a building but not to the collapse of part of a building. The court found this was an unreasonable interpretation. The word "entire" modified "collapse," which applied to the phrase "of a building or any part of a building." The policy covered damage caused by collapse to "any part of a building" only when there had been an entire collapse. 

    The evidence showed that part of the floor sank and some floor joists underneath the house broke or cracked; some walls were not plumb with the floor and had cracks; and some doors were off their hinges. This damage was similar to sinking and cracking that was not an entire collapse. Therefore, Lloyds' motion for summary judgment was granted.