Insurance Law Hawaii

Business Risk Exclusions Bar Coverage Whether or Not Operations Completed

    The federal district court found that exclusions j (5), (6) and l barred coverage for damage caused to the city's water main collector system. Sunwestern Contractors, Inc. v. Cincinnati Indem. Co., 2019 U.S. Dist. LEXIS 82642 (D. Ariz. May 15, 2019).

    Sunwestern contracted with the city of Tucson for the construction of a water main collector system. During the project, Sunwestern conducted a pressure-test of the pipeline when several flanges, which connected the pipe sections, came apart. The flange failure caused water to tear out gaskets, seriously damage the pipeline, components of the pipeline, and surrounding areas. Four million dollars in damage was caused. 

    Sunwestern had a CGL policy with Cincinnati. Coverage was denied by Cincinnati when it determined there was no "occurrence."

    There was no dispute that the work was faulty. The relevant inquiry was whether Sunwestern's faulty workmanship resulted in property damage. It was uncontroverted that it did. Improper installation of pipe components led to damage to the pipeline and surrounding areas. The flanges were improperly installed. Sunwestern showed that serious property damage resulted from its defective work and consequential property damage resulting from the faulty work was an occurrence under the policy. 

    The court then turned to the business risk exclusions. Exclusion j (6) precluded coverage for incorrectly performed work. But the exclusion included an exception for completed operations. Further the exclusion did not exclude coverage for property damage for non-defective property that resulted from faulty workmanship. Thus, while exclusion j (6) unambiguously excluded coverage for damage to the flanges and other incorrectly constructed portions of the pipeline, if they were not "completed," it did not exclude coverage for consequential damage to non-defective property caused by that incorrectly performed work. 

    Exclusion j (5) barred coverage for property damage to "that particular part of real property on which you or any contractors or subcontractors working . . . on your behalf are performing operations, if the 'property damage' arises out of those operations." Like exclusion j (6), exclusion j (5) only precluded coverage for work that was still in progress. The court found that exclusions j (5) and j (6) unambiguously precluded coverage for the incident and all residual property damage stemming from the incident. However, exclusions j (5) and j (6) only precluded damage to work that was not yet completed, or still in progress. 

    Exclusion (l), however, applied, excluding property damage to "work or operations performed by" Sunwestern that was included in the products-completed operations hazard. Consequently, exclusion (l) precluded coverage for Sunwestern's completed work.

    In all, if the work was completed, it was excluded by exclusion (l). If it was not completed, it was excluded by exclusions j (5) and j (6). The products-completed operations hazard provision was still subject to any relevant exclusions and any faulty work that was encompassed in the products-completed operations hazard provision was unambiguously excluded from coverage by exclusion (l). 

    There was no ambiguity in the exclusions. Exclusions j (5) and j (6) unambiguously precluded coverage for incorrectly performed work. While exclusions j (5) and j (6) did not preclude coverage for incorrectly performed work that was completed, exclusion (l) unambiguously did. Therefore, Sunwestern was not entitled to coverage and Cincinnati's motion for partial summary judgment was granted. 

    

Summary Judgment for Partial Collapse Granted to Insurer

    The partial collapse of an exterior brick veneer of an apartment building was found not to be covered under the apartment policy. Keyser v. State Farm Fire & Cas. Co., 2019 U.S. Dist. LEXIS 81194 (W.D. Pa. May 14, 2019).

    Norene Keyser was insured by State Farm for a six-unit apartment building. The exterior brick veneer of the property's west-facing wall partially collapsed while a maintenance staff attempted remedial repairs. Keyser filed a claim and State Farm hired Jon Nedley, an engineer, to determine the cause of the loss, and a contractor, Dave Wahl, to estimate the cost to repair the damage.

    Wahl provided a preliminary estimate of $115,000 for the cost of repairs for the west wall. Wahl found that the collapse did not damage the north, south, and east facing exterior walls. Nedley concluded that the construction work performed by Keyser's maintenance men caused the west-facing brick veneer to collapse. State Farm concluded that the damage caused by the collapse was covered by the policy. Wahl later updated his repair estimate to $123,446. State Farm calculated the depreciation for the loss and determined that the actual cash value benefits were $40,107. State Farm eventually paid $108,747 in covered benefits and Keyser remained eligible for an additional $87,052 in benefits if repairs were made to the property.

    Keyser sued, claiming she was owed coverage for the damage to the north, south and east-facing brick veneer. State Farm argued there was no evidence that the collapse to the west-facing brick veneer caused damage to the north, south, and east-facing veneer. State Farm moved for summary judgment. Even Keyser's expert admitted that he could not casually relate the damage to the north, sough, and east-facing brick veneer to the collapse of the west-facing brick veneer. Without such proof, Keyser could not support that the policy required coverage for any damage to the north, south and east-facing brick veneer.

    Keyser also claimed that if only the west facing brick veneer was replaced, it would not match or conform to the other sides of the property. State Farm argued that Keyser had not met her burden that replacement of the west-facing brick veneer would not be with a material of "like kind or quality" as required under the policy. There was no evidence to support Keyser's argument on the feasibility of matching brick. Further, Keyser failed to identify any masons or contractors who could offer testimony on her behalf that the north, south, and east-facing walls needed to be demolished and replaced in order to preserve a matching veneer. Therefore, Keyser had not met her burden that the replacement of the west-facing veneer could not be accomplished with material of "like kind or quality." Thus, Keyser's breach of contract claim that the north, south and east-facing brick veneer needed to be replaced to match the west-facing brick veneer did not present a question for the jury. 

    Accordingly, State Farm's motion for summary judgment was granted and the claim was dismissed.

No Coverage for Faulty Workmanship Based Upon Exclusion for Contractual Assumption of Liability

    The Supreme Court for West Virginia determined the policy's contractual assumption exclusion barred coverage for the general contractor based upon claims of faulty workmanship. J.A. St & Assocs. v. Bitco Gen. Ins. Corp., 2019 W. Va. LEXIS 205 (May 1, 2019).

    J.A. Street & Associates, Inc. entered a contract with the developer, Thundering Herd Development, L.L.C., to build a commercial shopping center on seventy-eight acres of land. Street agreed to oversee the site preparation for the development and the construction of many of the buildings. Thundering Herd retained an engineering firm, S&ME, Inc. to do geotechnical exploration and to provide advice regarding land preparation for the shopping center. Thundering Heard also entered an agreement with the Target Corporation to construct a store on a pad to be prepared at the shopping center. 

    Street hired subcontractors to prepare the site by grading the land and installing fill material. A slope was constructed at the rear of the proposed Target site, but it failed, causing a landslide, damage to the pad, and damage to adjacent property owned by a third party. Thundering Heard incurred $721,875 in additional costs to repair this slope, reconstruct the Target site, and compensate the neighbor for the damage to the adjacent property. 

    Another problem arose with the foundation of Shops A when the walls began cracking due to settlement. Remedial action included the installation of pilings under the foundation and grout injection under the slab, as well as repairs of damage to the building. 

    Thundering Heard filed suit against S&ME. The complaint was later amended to add Street as an additional defendant based upon Street's failure to comply with the construction contracts. resulting in harm to the shopping center due to the landslides.

    Street was insured under several CGL, umbrella and excess policies. Bitco General Insurance Corporation provided a defense to Street. Bitco also filed a declaratory judgment action asking the court to rule that it had no duty to defend or indemnify. Street filed a third-party complaint against all of its insurers who issued CGL, umbrella or excess policies during the period of construction. 

    In ruling on six different summary judgment motions, the circuit court found there was an "occurrence" resulting in "property damage" under the insurers' policies. However, the contractual liability exclusion precluded coverage under each policy. 

    On appeal, the court found that the installation of fill material, the grading of the land, the construction of the slopes and other site preparation work constituted faulty workmanship and use of materials. Therefore, correction of the site preparation work was not covered under Bitco's CGL policy. But damages for other injury to property that resulted from the alleged faulty workmanship, such as cracked walls or floors in structures caused by the setting of improper fill material, was covered "property damage."

    But Bitco's policies excluded "'bodily injury' or 'property damage' for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." Thundering Herd's underlying complaint sought to have Street to pay damages by reason of Street's alleged assumption of liability in contract claims for the recovery of money. Such a claim was not covered by the policies. 

      In addition to the exclusion in Bitco's policies, the umbrella and excess policies had similar exclusions for the contractual assumption of liability. Therefore, none of the insurers owed a defense to Bitco and the circuit court's six orders granting summary judgment to the insurers were affirmed. 

One Occurrence Means One Deductible

    The court held that claims regarding the negligent supervision of an independent contractor who engaged in the sexual abuse of three victimes amounted to one occurrence, requiring a single deductible. Scott Fetzer Co. v. Zurich Am. Ins. Co., 2019 U.S. App. LEXIS 13023 (6th Cir. April 30,2019). 

    In 2013, three women filed suit against Scott Fetzer Company (dosing business as Kirby Company), Crantz Development LLC, and John Fields. The women alleged that John Fields had sexually assaulted them on numerous occasions between May 2012 and January 2013. Fields was an independent dealer of vacuum cleaners who worked for Crantz, a factory distributor of Kirby vacuums, which were manufactured by Fetzer. The women alleged multiple instances of verbal abuse and harassment, inappropriate touching, force sexual acts, and rape. The women asserted that Fetzer and Crantz Development were negligent in hiring Fields as an independent dealer, allowing Fields to go on sales trips with the women, and failing to have policies and procedures in place to prevent sexual harassment.

    Fetzer settled with the three women and then sought reimbursement from Zurich under two general liability policies. Under the policies, Zurich agreed to pay $2 million per "occurrence" of bodily injury, but Fetzer was responsible for paying the first $1 million for each "occurrence." Of the three settlements, only one exceeded the per-occurrence deductible amount. Zurich paid the amount that exceeded the deductible, but it refused to pay anything for the other two settlements. Fetzer contended that the "occurrence" was its negligent hiring and supervision of Fields, which limited the number of occurrences to one, and therefore, Fetzer would have to pay only one deductible. Zurich argued that Fields's actions against each individual woman were all separate occurrences, meaning that there were three occurrences and Fetzer was responsible for paying three separate deductibles.

    The district court found that there were three separate occurrences. The Sixth Circuit reversed.

    Under Fetzer's interpretation of "occurrence," the "accident" was not that the women were exposed to Fields, but that they were exposed to Fetzer's negligent supervision of Fields. Ohio courts had determined that the relevant "occurrence" could fairly be interpreted as negligent supervision, not the acts perpetrated by the bad actor. The court agreed that the relevant occurrence was Fetzer's negligent supervision of Fields.

    If the relevant "occurrence' was negligent supervision, there was only one occurrence. Ohio followed the cause test. The number of occurrences was determined by reference to the cause or causes of the damage or injury, rather than the number of individual claims. Because the occurrence was the negligent supervision of Fields, it was reasonable to read the policy to mean there was only one occurrence.

Few Insurance-Related Bills Passed by 2019 Session of Hawaii Legislature

    Only four insurance-related measures were enacted by the Hawaii Legislature in the recently concluded 2019 session. The legislation is as follows:

    HB 273 - This bill establishes an exemption for insurers issuing group policies from the required annual privacy notice to individual customers under certain circumstances. The bill was transmitted to the Governor on April 24, 2019. 

    SB 25 - Related to health insurance, the measure amends portions of the Hawaii Insurance Code under title 24 to update and improve existing code provisions. It allows the Insurance Division to create stopgap measures to implement the National Association of Insurance Commissioners' Health Benefit Plan. The bill was enrolled to the governor on May 6, 2019. 

    SB 1210 - This bill meets the National Association of Insurance Commissioners (NAIC) accreditation requirements by adopting the NAIC Corporate Governance Annual Disclosure Model Act and adopting revisions to the NAIC Insurance Holding Company System Regulatory Act. The bill was enrolled to the governor on May 6, 2019. 

    SB 1211 - The legislation removes the requirement that a vehicle protection product warrantor and a service contract provider submit to the Insurance Commissioner a copy of each warranty or service contract form proposed for use in the State. The governor has signed this bill. 

Computer Fraud Claim Dismissed in Part

    The federal district court granted in part, denied in part, the insurer's motion to dismiss a claim for computer fraud submitted under the insurer's crime protection policy. Childrens Place, Inc. v. Great Am. Ins. Co., 2019 U.S. Dist. LEXIS 70109 (D. N. J. April 25, 2019).

    On July 24, 2017, The Children Place Inc. (TCP) learned that two payments totaling $967,714 were made to an unauthorized third party (the Hacker) instead of TCP's vendor, Thailand-based Universal Apparel Co., Ltd. (Universal). The Hacker intercepted an email conversation between TCP and Universal, inserted itself into the conversation, requested a change of bank information, and fraudulently directed TCP to pay Universal using the new bank account number set up by the Hacker. The Hacker's fraud took place over a six week period. TCP was unable to recover any of the funds transferred. 

    TCP was insured under the crime protection policy that included coverage for computer-related crime and social engineering schemes. The insurer denied coverage and suit was filed.

    The insurer moved to dismiss. The court first found that TCP had sufficiently stated a claim for computer fraud under the policy. "Computer fraud" included "the use of any computer . . . to gain direct access to [TCP's] computer system." TCP alleged, "The Hacker, through the use of a computer . . . accessed and infiltrated Universal's web email service . . . and inserted itself into TCP's email conversation." The insurer contended that these allegations did not mean the Hacker actually accessed TCP's email system. But any factual issue as to whether the Hacker actually accessed TCP's email system could not be decided on a motion to dismiss. 

    The insurer also argued there was no causation alleged because the complaint did not claim that the Hacker's activities fraudulently caused the transfer of money. At the motion to dismiss stage, however, the court was obligated to accept the plaintiff's factual allegations as true. Here, TCP alleged that its "employees transferred the Loss to the Hacker as a direct result of the Hacker's access to TCP and Universal's emails." Questions as to the cause of the loss were left for a jury or for summary judgment. 

    The court agreed with the insurer, however, that TCP had not adequately pled "forgery or alteration" under the policy. The policy defined forgery or alteration as "loss resulting directly from forgery or alteration of checks, drafts, promissory notes, or similar written promises . .. . to pay a sum certain in money that are . . . made or drawn upon you." TCP argued that a letter forging Universal's signature was a written direction to pay a sum certain in money under the policy. But the letter did not reference "a sum certain in money." Accordingly, TCP did not state a claim for declaratory relief or breach of contract under the policy's coverage for "forgery or alteration." 

    Nor did TCP adequately state a claim for "fraudulently induced transfers." TCP failed to comply with the policy's requirement that it call Universal before forwarding the payment. The complaint did not allege that this condition precedent was satisfied. Instead, TCP contended that "application of the verification requirement would result in illusory coverage and cannot be given effect." The court disagreed. The policy did not require that TCP successfully verify the authenticity and accuracy of a payment instruction, only that it attempt to convey the transfer.

    Therefore, the motion to dismiss was granted in part and denied in part. TCP was given leave to amend its complaint with respect to its claims for forgery or alteration and fraudulently induced transfers. 

Claim Against Insured's Agent Dismissed

    The Hawaii Federal District Court dismissed a purported third party beneficiary's claim against the insured's agent. United States Fire Ins. Co. v. Hawaiian Canoe Racing Ass'ns, 2019 U.S. Dist. LEXIS 65829 (D. Haw. April 17, 2019). 

    This was the third recent decision regarding a boating accident in which the underlying plaintiff was injured by a propeller when entering Mark Stevens' boat during the Pailolo Challenge Outrigger Canoe Race. [prior posts here and here]. Hawaiian Canoe Racing Association (HCRA) was insured under U.S. Fire's policy, with other participants in the race named as additional insureds. HCRA's insurance agent, Servco Pacific Insurance, moved to dismiss Stevens' third-party complaint. Stevens alleged that Servo "had a legally recognized duty to procure the appropriate insurance for the reasonably foreseeable scope of injuries that could be suffered during an open ocean canoe race . . ." Stevens asserted he would have been a third-party beneficiary of the appropriate insurance that Servco should have obtained for HCRA. Thus, Servco had independent liability to him. 

    The court noted that under Hawaii law, "[a]n insurance agent owes a duty to the insured to exercise reasonable care, skill and diligence in carrying out the agent's duties in procuring insurance." Quality Furniture, Inc. v. Hay, 61 Haw. 89, 93 (1970). Such a duty is owed to "the extent of the responsibilities that the agent had in rendering help and providing advice to the insured." Macabio v. TIG Ins. Co., 87 Haw. 307, 318 (1998). The nature of the relationship between the agent and the insured had to be scrutinized.

    Here, Stevens was not the insured who obtained the policy through Servco and there was no direct relationship between Servco and Stevens. Nor had Stevens adequately pled he was a third-party beneficiary. He alleged he would have been a third-party beneficiary if Servco had obtained a policy that was appropriate for HCRA. Consequently, there was no contract to examine. Further, Stevens did not allege what the terms of the hypothetical policy would have been. Therefore, the third-party complaint failed to plead sufficient factual allegations to support a reasonable inference that Stevens was a third-party beneficiary of any policy that Servo obtained, or could have obtained, on HCRA's behalf. The third-party complaint therefore failed to state a claim upon which relief could be granted and was dismissed. 

    

Ninth Circuit Reverses Grant of Summary Judgment to Insurer For Fortuitous Loss

    The Ninth Circuit reversed the district court's issuance of summary judgment regarding coverage for damages when the insured's plant had to be shut down due to an accident. Ingenco Holdings, LLC v. Ace American Ins. Co., 2019 U.S. App. LEXIS 10946 (9th Cir. April 15, 2019). 

    Ingenco operated a gas purification plant which converted raw landfill gas into usable natural gas. The final step in the purification process involved the removal of excess nitrogen from the landfill gas. The gas was directed through adsorbent beads, to which nitrogen adhered, contained within pressure vessels.The beads could not withstand the direct pressure of the landfill gas inflow. which, if untreated, could grind the beads down into dust. To reduce the force of the gas flow on the beads, a "diffuser basket" was suspended from the top of each bead-filled pressure vessel. The diffuser basket acted as a shield that prevented the full force of the incoming landfill gas from striking the beads directly. 

    In 2010, metal brackets securing a diffiuser basket broke. This resulted in damage to other components and an eventual shutdown of the entire facility. The plant remained idle for several months as Ingenco investigated alternative nitrogen filtration options and undertook repairs. 

    Ingenco filed a property damage claim with Ace in May 2011. The all-risk policy excluded "faulty or defective material, faulty workmanship, faulty methods of construction . . . unless loss by a peril not otherwise excluded ensues . . ." Ace denied coverage, contending that the losses were not caused by any"external" force, but rather from defects in the diffuser basket. Ace reasoned that without an "external cause" there was no covered loss. Even if there were an external cause, coverage would still be denied under the "defective material," "wear and tear," "deterioration," and other, similar exclusions. 

    Ingenco sued for breach of contract and declaratory relief. The district court granted summary judgment to Ace, agreeing that Ingenco's losses did not result from an "external cause," but rather from an inherent problem in the system, which had been designed to withstand the "external" force at issue, i.e., the landfill gas. The "ensuing loss' exception to the "defective material" exclusion did not apply because there was no covered loss in the first place. Ingenco appealed. 

    The Ninth Circuit noted that the policy did not define the term "external cause." The proper analysis was on whether the loss was fortuitous. This required looking into whether a particular loss was certain to occur, the parties' perception of risk at the time of the policy issuance, and whether the loss could reasonably have been foreseen. The issue was not the fortuity of the process gas or some other cause, but rather whether Ingenco's loss was fortuitous. The court concluded the loss was not inevitable and could not have been reasonably foreseen. Therefore, the loss was fortuitous or, at the very least, there was a triable issue of fact.  

    Therefore, the district court's grant of summary judgment to Ace on the question of whether Ingenco's loss was the result of an "external cause" was reversed. The district court failed to consider the role of fortuity in all risks insurance disputes. 

    The court next considered the ensuing loss provision in the exclusion for faulty or defective material, etc. Ingenco argued that, even if the diffuser basket was defectively designed, and even if its failure constituted an uncovered "internal" cause of loss, the "ensuing loss" exception preserved coverage for the post-failure damage to the adsorbent beads throughout the purification system. Ace's position was that the damage did not result from an "external cause." The court reasoned that the loss of the adsorbent beads did ensue from some prior, but excluded loss or event, whether it was the stream of gas or the failure of the diffuser shield. There was no specific exclusion regarding the loss of the beads. Therefore, even if the diffuser shield suffered from some inherent defect, the subsequent destruction of the adsorbent beads would be covered under the ensuing loss exception. 

    Consequently, the Ninth Circuit reversed the district court grant of summary judgment against Ingenco and remanded the case to the district court for trial. 

    

 

No Coverage for Sink Hole Loss

    The federal district court found there was no coverage under the commercial property policy for loss suffered by the insured condominium association due to a sink hole. Bahama Bay II Condo. Ass'n. v. Untied Nat'l Ins. Co., 2019 U.S. Dist. LEXIS 67487 (M.D. Fla. April 11, 2019).

    The plaintiff condominium association had thirteen buildings inside their complex. On December 9, 2016, a sinkhole appeared near Building 43. The building was vacated and declared unsafe. Plaintiff's board excused Building 43 owners from paying association dues. 

    Plaintiff submitted a claim to the insurer for benefits under the policy. The insurer inspected and accepted coverage for Building 43 under the policy's Catastrophic Ground Cover Collapse (CGCC) provision and issued a check for $290,000 for immediate repairs. The insurer denied coverage for Buildings 42, 44, and 45; repairs to the foundation of all buildings, the retaining wall and outdoor fences; land, landscaping, and patios, uncollected association dues, and condominium unit owner property. 

    Only Building 43 meet the requirements for CGCC coverage, which included:

a) The abrupt collapse of the ground cover:

b) A depression in the ground cover clearly visible;

c) Structural damage to the building;

d) The insured structure being condemned and ordered to be vacated. 

Buildings 42, 44 and 45 had not been condemned or ordered to be vacated. Therefore, the insurer was entitled to summary judgment on the counts seeking coverage for Buildings 42, 44 and 45.

    Coverage for damage to the retaining wall and fence was excluded because they were not connected to any building. Another exclusion barred coverage for patios, foundations of buildings, trees, shrubs or plants. The insurer was entitled to summary judgment on plaintiff's claim for damage on these items. 

    The uncollected association dues for Building 43 were akin to lost business income and an economic loss. The policy only provided coverage for physical property damage, not economic losses. So the insurer was entitled to summary judgment on this claim, as well. 

    Finally, plaintiff made no argument that condominium property within individual units, owned by unit owners, qualified as Covered Property under the policy. Florida law was clear that property insurance issued to a condominium complex did not cover property within individual units. Therefore, the claim was properly denied by the insurer. 

    The insurer argued that plaintiff failed to mitigate damages. Whether plaintiff took "all reasonable steps to protect the property and whether other reasonable steps existed and should have been taken were questions of fact for a jury. Summary judgment for this proposition was denied. 

    

 

    

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