Insurance Law Hawaii

Excess Insurer Must Indemnify for Sexual Abuse Claims

    Affirming the district court, the Second Circuit agreed that the excess insurer had a duty to indemnify the insured for sexual abuse claims. Hartford Roman Catholic Diocesan Corp. v. Interstate Fire & Cas. Co., 905 F.3d 84 (2nd Cir. 2018).

    The Archdiocese had excess policies from Interstate between September 1, 1978 and September 1, 1983. The Archdiocese had underlying policies with Lloyds and Centennial Insurance Company. Interstate provided the second layer of excess coverage, following form to Lloyds' policies. 

    Beginning in 2008, Interstate received notice from the Archdiocese that four underlying ciaimants had sent demand letters seeking damages for sexual abuse by priests. The Archdiocese settled with the four victims and asked Interstate for reimbursement of portions of the settlement amounts. When Interstate refused, the Archdiocese filed suit, claiming breach of contract and breach of the covenant of good faith and fair dealing. 

    Interstate moved for summary judgment based on an assault and battery exclusion, while the Archdiocese moved for summary judgment on breach of contract. After a trial, the district court found that Interstate breached its contract to indemnify, but did not violate the covenant of good faith and fair dealing. Cross appeals followed.

    Interstate contended that because the priests who committed the molestation were assureds under the policy, there was no coverage for the Archdiocese under the assault and battery exclusion. The exclusion stated coverage did not apply "to liability of any Assured for assault and battery committed by or at the direction of such Assured . . ." The term "Assured" included the Archdiocese and "any official, trustee, or employee of the for the Archdiocese while acting within the scope of his duties as such . . ." Interstate argued that the exclusion was meant to bar recovery as to all assureds if any one of them committed the assault or battery, arguing that the phrase "such assured" referred back to the phrase "any assured" and thus encompassed them all. Since the priests were assureds, Interstate's argued that recovery is excluded as to the Archdiocese as well. 

    In response, the Archdiocese observed that the exclusion applied only to a person "acting within the scope of his duties," and that the priests were not acting within the scope of their duties when they committed assault. Further, the wording excluded coverage only to those Assureds who committed or directed the assault rather than to all assureds. 

    The court agreed with the Archdiocese. Even Interstate agreed in its reservation of rights letter that the priests were acting outside the course and scope of their priestly duties when they allegedly abused the victims. Interstate was bound by its own reading of the policy. Further, even if the priests were "assureds," the exclusion barred coverage only for an assailant, not for all Assureds. 

    Interstate next argued that there was no coverage if the accident was intended or expected, regardless of whether the resulting loss was intended or expected; intention and expectation was an objective test rather than a subjective question viewed from the standpoint of the insured. The Archdiocese had prior notice of one priest's proclivities before the abuse occurred. Therefore, the issues were whether the molestation was an occurrence and whether it was intended or expected. 

    The court noted that the Archdiocese wanted to send the priest to the House of Affirmation, a rehabilitation center for sexual dysfunction. But the Center could not accommodate the priest, so he went instead to St. Luke Institute, an alcohol treatment center. The inpatient treatment ended in July 1979, and the priest was reassigned to a school for girls to serve as a chaplain. While the school was informed that the priest had been treated for alcohol abuse, the child molestation was not disclosed. The priest was moved to a high school after his doctor and alcoholism counselor gave full support for a reassignment to a "more exciting teaching assignment." While at the high school, the priest molested a young boy. 

    The district court determined that the Archdiocese relied upon the doctor's assessment that the priest would not return to sexual abuse of minors if he remained sober, and that the Archdiocese therefore lacked notice that the priest would molest a student.Therefore, under the policy, the Archdiocese did not subjectively know that it was substantially probable that the priest would abuse children. 

    On appeal, Interstate first argued that the accident itself must be unexpected or unintended, even if the resulting injury came as a surprise. The Second Circuit held, however, that the proper inquiry was whether the injuries were expected, not whether the accidents were expected. The occurrence clause defined an occurrence as an accident that "unexpectedly or unintentionally results in personal injury." The focus, therefore, was on intention and expectation as to the resulting injury rather than the accident itself. To find otherwise would require discounting the clause after "accidents." 

    Another issue addressed by the Court was whether intention and expectation was determined by an objective test of what a reasonable person knew or should have known (as Interstate argued), or whether it was determined subjectively from the standpoint of the insured (as the district court concluded). The Second Circuit agreed with the district court.

    Consequently, the district court was affirmed. 

 

    

    

    

No Coverage for Defects in Subcontrator's Own Work

    Damage to the concrete floor installed by the insured subcontractor was not property damage and thus not covered under the insured's CGL policy. Kalman Floor Co. v. Old Republic Gen. Ins. Corp., 2019 U.S. Dist. LEXIS 3319 (D. Colo Jan. 8, 2019). 

    In 2007, Kalman Floor Co. was subcontracted to construct over 158,000 square feet of concrete flooring for a cold storage facility. The concrete floor was completed in late 2008. In late 2009, the contractor notified Kalman that pockmarks, or "pop-outs," were visible on the concrete flooring. The only damage to tangible property in the facility caused by the pop-outs was the concrete flooring itself.

    On January 31, 2009, Old Republic issued a general liability policy to Kalman for one year. The policy excluded for damage to "your work," defined as "work or operations performed by you or on your behalf." Old Republic denied coverage for damage to the concrete floor. Kalman sued, seeking a declaration that the exclusions did not bar coverage. 

    Under Tenth Circuit law, as established in Greystone Const, Inc. v. Nat'l Fire & Marine Ins. Co., 661 F.3d 1272 (10th Cir. 2011), the term "occurrence" in a CGL policy encompassed unforeseeable damage to non-defective property arising from faulty workmanship. The policy was intended to protect the insured business from claims by third parties concerning personal injury or property damage resulting from accidents. In discovery, Kalman admitted the pop-outs in the concrete floor "did not physically injure or damage any tangible property other than the floor system it installed." Thus, under the terms of the policy, property damage did not occur. 

    Consequently, Old Republic's motion for summary judgment was granted and the case dismissed with prejudice.

Confusion in Renewing Policy Leads to Coverage

    The court determined the insurer must defend after confusion arose in renewal of the insured's policy. Nat'l Fire & Marine Ins. Co. v. Infini PLC, 2019 U.S. Dist. LEXIS 1052 (D. Ariz. Jan 3, 2019).

    The insured, Infini, was insured by Lexington Insurance Company for medical procedures it performed. Wells Fargo Insurance Services was Infini's broker. On July 24, 2014, Well Fargo sent a renewal application to Infini. Several weeks later, Infini returned the application after crossing out certain kinds of liposuction - specifically liposelection and lipodissolve - because Infini did not perform these procedures. On the same page, the application noted that Infini performed large quantities of "local anesthesia lipo." Wells Fargo sent the handwritten application to Lexington's underwriter. A note signified that "the premium increase is due to the significant increase in exposures." But the coverage ultimately obtained did not included coverage for liposuction. 

    An Infini doctor performed a liposuction procedure on Donna Willis. After the procedure, she was hospitalized and required additional surgeries. Ms. Willis filed suit against Infini. Lexington informed Infini that the new policy did not cover injuries caused by liposuction and it would not defend. Infini filed a third-party complaint against Lexington, alleging Lexington had wrongfully denied coverage. Lexington moved for summary judgment.

    The court noted that to prevail, Lexington had to show it provided full and adequate notice to Infini regarding the change in liposuction coverage, or that the change in coverage was not unusual or unexpected. Lexington had to also demonstrate that it did not induce a reasonable belief of coverage through ts acts. There remained factual disputes over whether Infini was ever given full and adequate notice of the change in terms, whether the change was unusual or unexpected, or whether Lexington's conduct caused Infini to reasonably expect it had coverage for liposuction. 

    Several facts in the record could support a finding that Infini did not receive full and adequate notice of the change in coverage. All of Infini's previous policies provided coverage for liposuction. Infini's rates went up in the 2014-2015 policy, which would generally indicate the same or better coverage. Lexington's underwriter noted that the premium increase was due to the significant increase in exposure. Further, it was hard to believe that Infini would agree to the 2014-2015 policy if it had known that it did not cover liposuction procedures, which were most likely to cause liability. Therefore, Lexington had failed to demonstrate it provided sufficient notice to Infini of the lack of coverage in the 2014-2015 policy.

    Moreover, a reasonable jury could find that Lexington was reckless as to the reasonableness of its conduct in processing Infini's application for renewal and in its ultimate decision to deny coverage. Therefore, Lexington was not entitled to summary judgment in Infini's bad faith claim. 

Tucson ABA Insurance Coverage Seminar Coming Soon

    The dates for this year's ABA Insurance Coverage Litigation Committee CLE Seminar in Tucson are February 27 to March 2, 2019. Again this year, the seminar promises to provide cutting edge CLE programming and many networking opportunities. I will be on a panel addressing "Changing Climate, Changing Risks and Policies," with my esteemed colleagues, Rina Carmel, Esq., Karin S. Aldama, Esq., and Demetrius E. Rush, Esq.

    Registration information is here. If you have any interest in coverage issues, this is the event to attend.

Insurer Must Defend Subcontractor For Claims Alleging Faulty Workmanship

    Interpreting Florida law, the federal district court found that the insurer must defend the subcontractor for claims based upon faulty workmanship. S. Owners Ins. Co. v. Gallo Bldg. Servs., 2018 U.S. Dist. LEXIS 212961 (M.D. Fla. Dec. 18, 2018).

    Gallo Building Services entered a subcontract with KB Homes, developer, related to the construction of a condominium project. All of the work was subcontracted by KB Homes to subcontractors, suppliers and material men. After completion of the project, the Condominium Association found a number of alleged construction defects at the project. KB Homes notified the subcontractors and tendered its defense. The subcontractors rejected the tender. 

    KB Homes filed suit against Gallo and other subcontractors. Claims against Gallo included breach of contract, breach of express and implied warranty, negligence and indemnity. Specific allegations against Gallo included failing to install all necessary control joints, installing incorrect mid-wall flashing, installing stucco in direct contact with dissimilar materials, etc. 

    Southern Owners Insurance Company filed suit for declaratory judgment that it had no duty to defend or indemnify its insured, Gallo. Gallo was subsequently dissolved. A default judgment was entered against Gallo, but KB Homes moved to set the default judgment aside, which was granted. KB Homes then moved for summary judgment in favor of Gallo. 

    The court noted that under Florida law, there was no property damage if there was no damage beyond the faulty workmanship, unless the faulty workmanship damaged some otherwise nondefective component of the project. Here, the court found that the underlying complaint alleged physical injury to tangible property by claiming that, in addition to faulty workmanship, defects in Gallo's work caused damage to other building components, damage to other property, and property damage to the work of KB Homes and other subcontractors. 

    Nevertheless, Southern argued two exclusions barred coverage. The Your Work Exclusion excluded coverage for "property damage" to "[Gallo's] work arising out of it or any part of it and included in the 'products-completed operations hazard.'" The policy defined "your work" to included "work or operations performed by [Gallo] or on [Gallo's] behalf. The "products-completed operations hazard" meant Gallo's completed work. Southern argued that the alleged construction defects arouse out of Gallo's own work and the policy contained no subcontractor exception. Typically, a CGL policy included an exception to the Your Work Exclusion for work performed by the insured's subcontractor.

    Here, Gallo was a subcontractor responsible for a limited scope of work within the much larger general condominium project. The underlying complaint did not allege that Gallo's scope of work encompassed construction of the overall project. Rather, the underlying complaint alleged Gallo's limited scope of work. Further, the underlying complaint alleged that alleged defects "caused damage to other building components, damage to other property, loss of use, and required relocation of residents." Thus, damage beyond the scope of Gallo's work was alleged in the underlying complaint and the exclusion did not bar coverage.

    Southern also argued there was not duty to defend because the allegations in the underlying complaint fell within the Stucco Exclusion. This exclusion barred coverage for any suit for property damage which "is in any way related to or arising out of an exterior finishing system or exterior stucco application." KB Homes argued that Gallo performed multiple scopes of work unrelated to stucco or an exterior finishing system and the underlying complaint contained allegations entirely unrelated to the application of either exterior. Consequently, this exclusion did not apply, either.

    Finally, although Southern had a duty to defend, it was premature to determine whether there was a duty to indemnify because there had been no factual determination as to liability in the underlying case.

Insured May Recover Consequential Damages From Insurer’s Breach of Duty to Defend

   Answering a certified question, the Nevada Supreme Court determined that an insurer breaching its duty to defend may be liable for consequential damages caused to the insured. Century Sur. Co. c. Andrew, 2018 Nev. LEXIS 112 (Nev. Dec. 13, 2018). 

   Michael Vasquez struck a minor, causing significant brain injury. Vasquez used the truck for personal use as well as for his mobile auto detailing business, Blue Streak. Vasquez was covered by a personal auto policy issued by Progressive. The policy had a limit of $100,000. Blue Streak had a CGL policy with Century Surety Company with a policy limit of $1 million. 

    Century Surety conducted an investigation and determined that Vasquez was not driving in the course and scope of his employment at the time of the accident. Therefore, the accident was not covered under the CGL policy. Century Surety rejected Blue Streak's demand to settle the claim within the policy limits.

    The minor's parents sued Vasquez and Blue Streak, alleging that Vasquez was driving in the course and scope of his employment at the time of the accident. Century Surety refused to defend. Vasquez, Blue Streak and the minor's parents settled, agreeing that the minor's parents would not execute on any judgment against Vasquez and Blue Streak and Blue Streak would assign its rights against Century Surety. In addition, Progressive agreed to tender Vasquez's $100,000 policy limit. The minor's parents then secured a default judgment for $18,050,183 against Blue Streak and Vasquez. The factual findings stated that Vasquez negligently injued the minor and that he was working in the course and scope of his employment with Blue Streak at the time, making Blue Streak also liable. 

    The minor's parents then sued Century Surety in federal district court. The court found that Century Surety did not act in bad faith, but it did breach its duty to defend Blue Streak. The court determined that Blue Streak was entitled to recover consequential damages that exceeded the policy limit for Century Surety's breach of its duty to defend. Bad faith was not required to impose liability on the insurer in excess of the policy limit. 

    The federal district court then certified a question to the Nevada Supreme Court, asking whether the liability of an insurer that breaches its duty to defend, but has not acted in bad faith, is capped at the policy limit or whether the insurer is liable for all losses consequential to the insurer's breach.

    The Nevada Supreme Court noted that the majority view was that where there was no opportunity to compromise the claim and the only wrongful act of the insurer was the refusal to defend, the liability of the insurer was limited to the amount of the policy plus attorneys fees and costs.

    In contrast, the minority held that damages for a breach of the duty to defend were not automatically limited to the amount of the policy; instead, the damages awarded depended on the facts of each case. The objective was to have the insurer pay damages necessary to put the insured in the same position he would have been in had the insurer fulfilled the policy. Damages that may naturally flow from an insurer's breach included: (1) the amount of the judgment or settlement against the insured plus interest (even in excess of the policy limits); (2) costs and attorney fees incurred by the insured in defending the suit; and (3) any additional costs that the insured could show naturally resulted from the breach. 

    The court concluded that the minority view was the better approach. An insured could recover any damages consequential to the insurer's breach of its duty to defend. An insurer's liability for the breach of the duty to defend was not capped at the policy limits, even in the absence of bad faith.

"Occurrence" Viewed From Eyes of Insured

    The court determined that a young girl's suicide prompted by the insured's text messages constituted an occurrence under the homeowner's policy. State Farm Fire and Cas. Co. v. Motta, 2018 U.S. Dist. LEXIS 208472 (E.D. Pa. Dec. 11, 2018).

    High school student Zach Trimbur harassed and cyberbullied classmate Julia Morath. When the boy's parents, Walter Trimbur and Stephanie Moota, were informed, they assured school administrators they would supervise, discipline and control their son. Yet, the boy continued his conduct. The boy was suspended by the school, but still continued his cyberbullying after his suspension. Julia subsequently committed suicide.

    The Moraths sued Zach and his parents, alleging negligence, wrongful death, and survival. Stephanie Motta sought coverage under her homeowners policy with State Farm. State Farm defended under a reservation of rights.

    State Farm filed suit for a declaratory judgment that it had no duty to defend or indemnify the Trimbur boy in the underlying case. State Farm argued the suicide did not arise from an "occurrence" because the cyberbullying was non-accidental. The court determined there was an "occurrence" and State Farm had to provide a defense for Zach. 

    The underlying complaint alleged that Zach's actions were wanton and willful. State Farm argued that Zach intentionally cyberbullied and harassed Julia Morath, meaning there was no "accident" to trigger the policy. Zach countered by arguing that intentional acts can have unintended consequences, and Pennsylvania courts considered whether an insured could have reasonably foreseen the resulting injury. Julia Morath's death by suicide was an extraordinary intervening event unforeseeable to him. 

    The court noted that when properly focused on the entire occurrence, the fact that Julia Morath, not Zach Trimbur, inflicted the only alleged bodily injury was material. Further, the Moraths alleged a negligence theory against Zach. Though the underlying complaint used the words "harassment," "bulling," and "intentional," the Moraths alleged not a single intentional tort against Zach.

    Viewing these events from Zach's perspective, the court could not conclusively find death by suicide was foreseeable from his cyberbullying. From the boy's perspective, his classmate's death by suicide was an accident. Therefore, State Farm had a duty to defend.

Complaint Against Life Insurance Agent Survives Motion to Dismiss

    The plaintiff's suit against her agent for allegedly misleading her regarding certain investment strategies for proceeds of a life insurance policy and fees survived the agent's motion to dismiss. Waldemar v. Golden, 2018 U.S. Dist. LEXIS 204801 (M.D. Fla. Dec. 4, 2018).

    The facts were based upon the allegations in the complaint. Golden, the agent, sold a life insurance policy to plaintiff's husband. After her husband's death, Golden contacted plaintiff and offer his services to handle the investment of the $426,000 life insurance proceeds. Golden gained control of the life insurance proceeds and the money in plaintiff's IRA account. Golden had plaintiff sign an agreement without explaining his $395 per hour fee plus disbursements for any time spent on the matter. 

    When Golden took control of the accounts, the contained $426,319, plus interest from the insurance proceeds and $79,266.34 from the IRA. Plaintiff instructed that the funds were not to be traded until further notice. Nevertheless, Golden started trading the funds and reduced the account by almost $200,000. Golden had charged here $50,000 in fees up to that point. 

    Plaintiff sued and Golden moved to dismiss. Golden argued, among other things, that plaintiff's allegations that she gave oral instructions while the agreement required written instructions. 

    Plaintiff's claims for fraudulent inducement and common law fraud was sufficient. The agreement said Golden would act according to plaintiff's instructions and investment objections which was false in light of what transactions followed. Plaintiff sufficiently stated a claim for breach of fiduciary duty and for negligence. 

    The breach of contract claim was also adequately pled. While Golden was correct in noting that generally oral modifications to written agreements were unenforceable if proscribed by the written agreement, there were exceptions to the rule where, for example, there was detrimental reliance. The agreement obligated Golden to act in plaintiff's best interests, in a matter consistent with her investment objectives and instructions, in good faith, and compliance with applicable laws and regulations. Golden breached these obligations and plaintiff suffered damages as a result. 

Insured Proves Collapse, but Fails to Establish Any Value for Loss

    While the insured was able to carry his burden to show the collapse of a roof, he failed to establish damages under the policy. Iannucci v. Allstate Ins. Co., 2018 U.S. Dist. LEXIS 203687 (N.D. N.Y. Dec. 3, 2018). 

    In 2005, the insured purchased a parcel of land together with a three-story building constructed in 1870. No one resided in the building at the time of purchase or afterward. The building was not well maintained and all utilities were shut off. No work was done on the building between 2005 and 2014. Between 2011 and 2014, the Fire Department issued multiple zoning/ordinance violation notices ordering the insured to make various improvements to the building and property. A notice issued in October 2013 stated that "the roof on your house needs to be replaced." Before any work was done on the roof, however, it collapsed during a snowstorm on February 21, 2014. 

    The insured's all-risk policy excluded loss caused by such things as enforcement of building codes, failure to preserve property, wear and tear, aging, and faulty, inadequate or defective maintenance. The policy covered collapse, however, for "(a) the entire collapse of a covered building structure; (b) the entire collapse of part of a covered building structure; and (c) direct physical loss to covered property caused by (a) or (b)." The collapse had to be "sudden and accidental" and caused by, among other things, weight of snow which collected on a roof.

    On March 5, 2013, the fire department issued a violation notice directing the insured to demolish the building because the roof had collapsed. The City's file indicated that the roof's collapse had been caused by the accumulation of snow. The insured notified Allstate. A claims adjuster visited the property and photographed extensive damage to the building. Allstate denied the claim based upon an expert's report that the cause of the roof collapse was the lack of adequate and timely maintenance. Allstate cited several additional exclusions, including enforcement of building codes, failure to preserve property, wear and tear, and inadequate maintenance in denying the claim. 

    The insured sued and a bench trial was conducted. The court found that the collapse of the roof was sudden, but the "entire collapse" of the building was not. The insured therefore failed to prove that the loss of the building structure was within coverage under the policy, even if the collapse of the roof was covered. 

    The policy stated it did "not cover loss to covered property . . . when :(a) there are two or more causes of loss to the covered property; and (b) the predominant cause(s) of loss is (are) excluded" from coverage. Here, the evidence did not show that any cause was predominant to the weight of snow in directly bringing about the collapse of the roof. Instead, the preponderance of the evidence indicated that the most direct and obvious cause of the collapse of the roof was the weight of the snow. Allstate failed to prove that any of the other causes, such as inadequate maintenance - considered separately or together - predominated over the weight of the snow as the efficient cause of the collapse. 

    Therefore, the insured carried his burden to prove coverage for collapse of the roof. Nevertheless, the insured failed to establish the value of his loss under the policy. The insured failed to provide any evidence regarding the value of the roof or from which to infer its value, e.g., the market value of the building before and after the collapse or the cost of replacing the roof with one of like kind or quality. Allstate, on the other hand, established that the roof was worthless. Accordingly, the insured was not entitled to damages for the loss of the roof. 

Damon Key Team Argues Bad Faith Case Before Hawaii Supreme Court

    Our Damon Key team argued a bad faith case before the Hawaii Supreme Court today, Adams v. Hawaii Medical Service Association, SCWC-15-0000396.

    Pictured below: Joanna Zigler, Rafael del Castillo, Tred Eyerly and Robert Thomas.