Insurance Law Hawaii

Deceptive Practices, Punitive Damage Claims Dismissed in Property Damage Suit

    The insured's claims for breach of contract and bad faith remained while his claims for deceptive practices and punitive damages were dismissed. Fishberg v. State Farm Fire & Cas. Co., 2021 U.S. Dist. LEXIS 135043 (S.D. N. Y. July 20, 2021).

    The insured rented a apartment. He was insured under a Renter's Policy issued by State Farm. The policy covered direct physical loss cased by windstorm or hail. The policy also provided coverage for additional living expenses if the residence became uninhabitable. 

    In August 2019, the ceiling of his apartment collapsed due to a windstorm. A water leak occurred from the roof due to a severe rainstorm. The insured's personal property was damaged. The insured also lost use of the apartment and he was forced to expend monies to repair, remediate and restore his personal property. State Farm denied the claim,

    The insured filed suit alleging four causes of action: (1) State Farm failed to timely investigate and adjust the claim in good faith; (2) consequential damages in the form of the costs of medical bills, loss of monies and loss of use of the apartment as a residence as a result of State Farm's failure to investigate and adjust the claim in good faith; (3) materially unfair and deceptive acts and practices in violation of a New York statute; (4) State Farm engaged in wilful and wanton misconduct and denied the claim after failing to investigate, adjust, and pay the loss in accordance with the policy, justifying punitive damages.

    State Farm moved to dismiss counts two through four. Regarding the second count, New York courts recognised that an insurer's handling of a claim could breach its duty of good faith and fair dealing. The court disagreed with State Farm that the second cause of action alleged the same conduct as the first cause of action, The first cause of action addressed the denial of insurance coverage. The second cause of action addressed the process whereby defendant reached that result - the claim that it did not send an adjuster to the property. Therefore, the second cause of action could not be dismissed as duplicative off the first.

    For the third cause of action, the insured alleged that State Farm's website described its renters insurance and claimed coverage was provided for windstorm, hail, and water damage from plumbing. The insured argued this would lead a reasonable person to understand that the policy would cover losses such as those sustained by the insured. However, the insured did not allege what precisely the loss he suffered was and what language on the website would lead a reasonable consumer to believe that the insurer would automatically agree to extend coverage to an insured upon notice of claim without determining for itself whether the loss was covered or not. The allegations did not state a claim under the New York statute.

    Turning to the fourth cause of action, New York did not provide an independent cause of action for punitive damages. The insured did not defend the fourth cause of action.

    The insured also sought an award of punitive damages in connection with his second, third and fourth causes of action. But the insured pled mere conclusions not supported by any facts. The insured pleaded no more than that his claim was improperly denied after insufficient investigation, which was not enough. 

 

Coverage, Bad Faith Upheld In Construction Defect Case

    The California Court of Appeal affirmed the trial court's finding of coverage for faulty workmanship allegations and bad faith by the insurer. Pulte Home Corp. v. Am Safety Indem. Co., 2017 Cal. App. LEXIS 748 (Cal. Ct. App. Aug. 30, 2017). 

    Pulte Home Corporation was the general contractor and developer of two residential projects. American Safety issued several sequential comprehensive general liability policies to three of Pulte's subcontractors which named Pulte as an additional insured. The projects were completed by 2006.

    In 2011 and 2013, two groups of residents sued Pulte for faulty workmanship in separate lawsuits. American Safety denied tenders for a defense of both lawsuits. 

    The policies stated that the aggregate limit for "products-completed operations" was $1 million. "Products-completed operations" was defined to include all property damage occurring away from the insured's premises, arising out of 'your product' or 'your work.'" The policies defined additional insureds in an Additional Insured Endorsement (AIE) as "WHO IS AN INSURED" as "the person or organization shown in the Schedule, but only with respect to liability arising out of 'your work' which is ongoing and which is performed by the Named Insured for the Additional Insured on or after the effective date of this Endorsement." 

    In denying coverage, American Safety relied upon separate "faulty workmanship" or "work product" exclusions. In exclusion j (5), the subcontractors' policies stated that no coverage was afforded for "property damage" to "[t]hat particular part of real property on which you . . . are performing operations, if the 'property damage' arises out of those operations[.]" Exclusion j (6) precluded coverage for "]t]hat particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it." 

    Pulte sued American Safety. The trial court granted Pulte's motion for summary judgment, determining that American Safety had a duty to defend. The court also determined that contract damages were owed on each policy for the failure to defend. The trial court further ruled that American Safety had breached its implied covenant duties through its bad faith conduct in claims handling that denied a defense. Finally, the court awarded Pulte punitive damages.

    The appellate court affirmed the decision that American Safety had breached its duty to defend. American Safety argued that the underlying complaints failed to allege any ongoing operations at the time the homeowners bought the homes, and therefore there was no potential for coverage. Once the defective homes were sold, only completed operations coverage could have applied, but it was excluded by including the ongoing operations language in the AIEs. To the extent that a subcontractor caused damage to the project during its ongoing operations, American Safety argued that the faulty workmanship exclusions j (5) and j (6) applied to preclude any duty to defend. Pulte responded that if the American Safety AIEs expressly stated there would be no completed operations coverage, then the subcontractors would have been told to go back to the insurer to obtain more complete additional insured coverage.

    The appellate court stated that the AIEs seemed to allow completed operations coverage based on potential liability that might yet arise from the subcontractors' completed work. The policies also added another form of coverage for "ongoing operations . . . on or after the effective date of this Endorsement." The purported "ongoing" limitation did not undo a grant of coverage against liability arising from work completed during the effective dates of the AIEs. If the "ongoing operations" language was meant by American Safety to preclude coverage for completed operations losses, it had to expressly state "that coverage was limited to claims arising from work performed during the policy period."

    Moreover, the record did not show that all of the damage the homeowners were claiming was limited to the particular location where one or another of the subcontractors was performing their work, such that the exclusions relied upon by American Safety would apply. The complaints alleged potentially overlapping forms of damage among the different locations of concrete, electrical and other types of work, all of which had permitted some kind of moisture damage to occur over time. It was factually unclear under exclusion j (5) that no coverage was possible for property damage located at the site of each named insured's operations, or if the alleged damage arose solely out of those particular operations.

    Regarding exclusion j (6), coverage would be precluded for damage to portions of property " that must be restored, repaired or replaced because 'your work' was incorrectly performed on it." The complaints broadly alleged that both work and materials were defective, and American Safety did not show that each of the named insureds' work was incorrectly performed such that no possible basis for coverage could have existed, on a vicarious liability basis. Therefore, the faulty workmanship exclusions did not clearly apply to preclude a duty to defend.

    On the bad faith issue, American Safety had disregarded the only available case law in evaluating its duties in claims handling and denials of defenses. There were several instances of conduct by American Safety representatives that constituted bad faith. American Safety was aware of trial court decisions against its position on the interpretation of ongoing operations. American Safety had been a defendant in some of these cases. There was evidence that hundreds of additional insureds' claims were routinely denied  based on the restrictive policy interpretations. Letters denying a defense were form letters, rather than the product of a case-by-case analysis. This demonstrated that the claims were not reviewed carefully, if at all. It was clear American Safety was looking out for its own interests in refusing to defend its additional insureds. 

    Further, punitive damages were properly awarded. The company's upper management and general counsel did not need to be consulted on denials of tenders because the denials were routine. American Safety inflicted economic harm on Pulte as a result of intentional malice, trickery or deceit. 

    

No Bad Faith Failure to Indemnify for Punitive Damages

    The court determined the insurer did not act in bad faith when it failed to indemnify the insured for an award of punitive damages. Bensalem Racing Ass/n v. Ace Prop. & Cas. Ins. Co., 2017 Phila. Ct. Com. Pl. LEXIS 11 (Pa. D. Jan. 20, 2017).

    The insured, Parx Racing, operated a racetrack. Mario Ramiro Calderon was injured in an accident while he was exercising a horse at the track. The accident was allegedly caused when a chicken on the racetrack spooked the horse on which Calderon was riding, causing Calderon to fall, suffer injury and die. A wrongful death suit was filed against Parx and its related entities, alleging negligence in allowing chickens to roam freely on the racetrack. No Parx employees were identified as defendants. An amended complaint was filed to add a claim for punitive damages, alleging that Parx knew that the presence of chickens posed a serious damage to horse riders, yet Parx took no action to ban the chickens from the racetrack.

    Parx had a commercial umbrella liability policy with Ace. The policy did not contain an exclusion for punitive damages. Ace associated with the insured in the defense of the Calderon action, as permitted by the policy, but issued a reservation of rights letter disclaiming coverage for any punitive damages.

    The jury returned a verdict against Parx and awarded $7,764,429 in damages. Of this amount, $5,000,000 was attributable to punitive damages. The underlying case eventually settled for $5.5 million, with $2,647,374 attributable to punitive damages. Ace paid the judgment with the exception of the punitive damages.

    Parx sued Ace for breach of contract and bad faith for failing to pay the punitive damages portion of the judgment. Ace argued it was a violation of Pennsylvania law and its public policy to allow coverage for punitive damages. An exception existed, however, where the insured's liability stemmed solely from vicarious liability. Allowing one who is only vicariously liable for punitive damages to shift the burden of satisfying the judgment to his insurer did not conflict with the rule that otherwise disallowed coverage for punitive damages.

    The court found that the limited exception for vicarious liability did not apply to Parx. The record was filled with evidence of Parx's own direct negligence based on its knowledge of the chickens' presence and the company's failure to address the problem. For example, Parx's chief of security was informed about the chickens spooking horses and responded there was nothing they could do to solve the problem. Therefore, the evidence was persuasive that the jury's punitive damages award was against Parx for its own direct negligence The company failed to maintain a safe racetrack even when it was aware of the risks.  

Bad Faith Attorneys' Fees Decided After Verdict May Be Included in Punitive Damage Calculation

       The California Supreme Court considered whether the calculation for punitive damages may include attorneys' fees expended to obtain benefits determined after the jury has rendered its punitive damages verdict. Nickerson v. Stonebridge Life Ins. Co., 2016 Cal. LEXIS 3757 (Cal. June 9, 2016).

    The insured broke his leg on February 11, 2008, when he fell from the wheelchair lift on his van. He was treated in the emergency room and then admitted to the hospital. After spending several weeks confined to a hospital bed, he was permitted to move to his wheelchair, but could tolerate sitting in the wheelchair for only limited periods of time. On May 19, 2008, the insured's doctor determined he was ready to return home except that he was unable to maneuver through his home without a particular part for his wheelchair. After obtaining the part, the insured was released from the hospital on May 30, 2008. He had been hospitalized for 109 days.

    Following his release from the hospital, the insured sought benefits from Stonebridge Life Insurance Company under a policy that promised to pay him $350 per day for each day he was confined in a hospital for necessary care and treatment. Invoking the policy's definition of "necessary treatment", Stonebridge determined, without consulting the views of the insured's treating physicians, that his hospitalization was "medically necessary" only from February 11 to 29. Stonebridge sent the insured a check for $6,450, which represented payment of $150 for one visit to the emergency room and $6,300 for 18 days of hospitalization at $350 per day.

    The insured file suit, alleging that Stonebridge breached the policy by failing to pay him benefits for the full 109 days of his hospital stay and that Stonebridge breached the implied covenant of good faith and fair dealing by denying him his full policy benefits. The parties stipulated before trial that if the insured succeeded on his complaint, the trial court could determine the amount of attorneys' fees to which the insured was entitled under Brandt v Superior Court, 37 Cal. 3d 813 (1985). Under Brandt, if the insurer withholds policy benefits in bad faith, attorneys' fees incurred to compel payment of the benefits are recoverable as an element of the plaintiff's damages.

    The jury awarded the insured $31,500 in unpaid policy benefits and $35,000 for emotional distress. The jury also found that Stonebridge engaged in fraud and awarded $19 million in punitive damages. After the jury rendered its verdict, the parties stipulated that the amount of attorneys' fees to which the insured was entitled under Brandt was $12,500, and the court awarded this amount.

    Stonebridge moved for a new trial seeking a reduction in the punitive damages award. The trial court agreed and granted Stonebridge a new trial unless the insured consented to a reduction of the punitive damages award to $350,000. In calculating the permissible amount of punitive damages, the court considered only the $35,000 the jury had awarded in compensatory damages for emotional distress for Stonebridge's tortious breach of the implied covenant of good faith and fair dealing; it did not include the $12,500 in Brandt fees.

     The insured rejected the reduction in punitive damages and appealed the order granting a new trial. The Court of Appeal affirmed, rejecting the insured's argument that the trial court should have taken in to account the $12,500 in Brandt fees.

    The California Supreme Court granted review, limited to the following question: "is an award of attorneys' fees under Brandt properly included as compensatory damages where the fees are awarded by the jury, but excluded from compensatory damages when they are awarded by the trial court after the jury has rendered its verdict?" In other words, should the $12,500 that was awarded as attorneys' fees be included in the calculation of the ratio of punitive damages to compensatory damages for the purpose of determining whether, and by what amount, the jury's $19 million punitive damages award exceeded constitutional limits?

    Stonebridge argued that when a trial court determines Brandt fees after the jury has already rendered its punitive damages verdict, the fees should not be considered in calculating the punitive-compensatory ratio.

    The Supreme Court disagreed. There was no reason to exclude the amount of Brandt fees from the constitutional calculus merely because they were determined, pursuant to the parties' stipulation, by the trial court after the jury rendered its punitive damages verdict. To exclude the fees from consideration would mean overlooking a substantial and mutually acknowledged component of the insured's harm. Therefore, the judgment of the Court of Appeals was reversed and the case was remanded to the Court of Appeals for further proceedings.

Insurer Must Indemnify for Settlement Reached Without Its Consent

     The Illinois Appellate Court determined the insurer must cover a settlement reached by its insured and it independent counsel who was retained due to a potential conflict. Standard Mut. Ins. Co. v. Lay, 2014 Ill. App. LEXIS 20 (Ill. Ct. App. Jan. 23, 2014). 

   The insured, a small real estate agency, hired a fax broadcaster to assist advertising efforts. A blast fax was sent to approximately 5,000 fax numbers. Unknown to the insured, the fax blast violated the Telephone Consumer Protection Act because the recipients did not consent to receipt of the faxes. The insured was sued in a class action which sought damages for willful violations of the Telephone Act and sought treble damages ($1,500 per occurrence).

   The insured tendered its defense to Standard. Standard accepted under a reservation of rights.The letter noted a conflict of interest for any attorney appointed by Standard to represent the insured because the class action sought treble damages for statutory violations that were allegedly willful. Coverage for intentional or non-accidental acts were excluded. The insured was advised it could hire its own attorney at Standard's expense.

   The insured initially agreed to accept counsel hired by Standard. However, the insured later selected is own counsel. The new counsel requested Standard's counsel withdraw from the case. Standard's attorney never withdrew.

   The insured and its new counsel settled with the class for $1.7 million. The class agreed not to execute on an property or assets of the insured other than the insurance policies. The trail court found the settlement was reasonable in light of the numerous unsolicited faxes the insured sent. 

   In the coverage action, Standard was granted summary judgment, finding it had no duty to defend and no further obligation to the insured with regard to the stipulated settlement in the underlying case. The appellate court affirmed, but the Illinois Supreme Court reversed and remanded. The Supreme Court disagreed with the appellate court's holding that the damages provided under the Telephone Act were punitive in nature and uninsurable under Illinois law. 

   The appellate court now held that the insured's actions were not barred as intentional acts. While the insured's action in sending the faxes were intentional, it thought it had authorization to send faxes to the particular recipients. The insured did not intend to injure anyone by sending the fax. The insured's negligent actions, i.e., it knew or should have know sending fax ads were wrongful and without authorization, were covered.

   Further, once new counsel was retained, the insured was entitled to control its defense. Where a conflict existed, the insurer's obligation to defend was satisfied by reimbursing the insured for the costs of the independent counsel selected by the insured. Standard, however, had no right to require the insured to obtain permission to settle the underling suit or to object to the settlement itself. Here, the insured's liability was clear. Absent the settlement, the result would have been the same. 

Policy Restricts Coverage Under Additional Insured Endorsement to Excess

  Two interesting issues were presented in Jeffrey M. Brown, Assoc., Inc. v. Zurich Am. Ins. Co., 2010 N.J. Super. LEXIS 108 (N.J. Super. Ct. App. Div. June 23, 2010).  First, what was the scope of coverage provided by an additional insured endorsement which provided the coverage was "excess over any other insurance?"  Second, could an additional insured endorsement which provided only excess coverage be construed to provide primary coverage if the policyholder contracted to obtain additional insurance that was primary coverage?

   The general contractor entered a subcontract with CAP Services to demolish a structure at a construction site.  The general contractor had its own CGL policy with Zurich.  But the subcontract required CAP to provide primary additional insured coverage for the general contractor.  CAP was already insured under a CGL policy issued by Interstate.  The policy included an additional insured endorsement which provided coverage that was "excess over any other insurance."  CAP never notified Interstate that it had entered a subcontract and Interstate never issued a certificate of insurance to the general contractor. 

   When employees of a subcontractor of CAP were injured at the job site, they sued the general contractor.  Zurich defended while Interstate argued it had no coverage obligations.  The general contractor and Zurich sued Interstate.  The trial court granted summary judgment against Interstate, finding that under the subcontract between the general contractor and CAP, the Interstate policy provided primary coverage.

   The appellate division reversed.  Interstate's policy was "excess" to any other coverage available to an additional insured such as the general contractor.  Zurich's policy made Interstate's coverage of the general contractor under its endorsement "excess."  Further, Interstate's policy did not commit to provide CAP with coverage for whatever additional insured coverage obligation CAP might later agree by contract to provide.  CAP could not expand the scope of coverage under the additional insured endorsement if it failed to notify Interstate of the terms of the subcontract obligation to provide additional insured coverage.

Texas Allows Insurers to Indemnify Punitive Damages

The Texas Supreme Court recently held a liability insurer may indemnify an award of punitive damages imposed because of an insured's gross negligence.  Public policy, the court reasoned, favored freedom of contract.  The court, however, limited this decision to the workers' compensation context.

Of note, the Texas court noted that Hawaii has statutorily adopted the same conclusion.  See  Haw. Rev. Stat. § 431:10-240 (2007) (“Coverage under any policy of insurance issued in this State shall not be construed to provide coverage for punitive or exemplary damages unless specifically included.”)

See Fairfield Ins. Co. v. Stephens Martin Paving, LP, 246 S.W.3d 653 (Tex. 2008).