Insurance Law Hawaii

Hawaii Federal District Court Grants Preliminary Approval of Settlement on Volcano Damage

    The federal district court granted preliminary approval of the class action settlement reached on behalf of insureds who suffered property damage due to the 2018 Kilauea eruption on the Big Island. Aquilina v. Certain Underwriters at Lloyd's London, 2021 U.S. Dist. LEXIS 152614 (D. Haw. Aug. 13, 2021). 

    After destruction of their homes due to lava flow, plaintiffs sued various insurers and agents as a putative class action. Plaintiffs claimed they purchased surplus lines policies brokered and underwritten by various defendants. The policies each contained an exclusion for the peril of lava flow, which plaintiffs claimed rendered them worthless or unsuitable given that their properties were located in a high-risk lava zone.

    Plaintiffs alleged that defendants breached obligations under the Hawaii Surplus Lines Act, which required that surplus lines insurers conduct a diligent search for other available coverage before placing a homeowner with surplus lines coverage. Plaintiffs alleged defendants should have advised them of the availability of lava-damage coverage through the Hawaii Property Insurance Association (HPIA), a statutorily created association of admitted insurers established in part in response to Kilauea's eruption patterns, which made the private insurance market less likely to Insure certain high-risk areas. 

    After three years of litigation, the parties reached a settlement before the class was certified. Under the settlement, defendants agreed to pay $1.8 million to be allocated among class members. The expense of notice and administration, service awards of $5,000 to the class representatives, attorneys' fees and litigation costs would be deducted from the Settlement Fund. The class members who chose not to opt out of the Settlement would agree to release all defendants from all claims and liability arising from the allegations made in the case.

    The court first considered whether to enter an order provisionally certifying the proposed Settlement Class. The court found that the Rule 23 (a) factors of numerosity, commonality, typicality and adequate representation were satisfied. The proposed class consisted of about 162 households. There were common factors of law and fact involving defendants' alleged conduct and the injuries to plaintiffs and class members. Typicality was satisfied because plaintiffs' claims challenged a course of conduct that applied to all the class members such that they all suffered the same or similar injury. Finally, the court found that the named plaintiffs and their counsel were adequate representatives of the class.

    The court next found that the Rule 23 (b) (3) requirements of predominance and superiority were satisfied.

    The court then turned to the preliminary approval of the settlement. The settlement properly struck a balance between the strengths of plaintiffs' case and risks of continued litigation before a jury. The settlement provided plaintiffs with a fair and meaningful resolution of their claims. 

    The settlement also appeared to be fair. The parties participated in arm's length settlement discussions, exchanged settlement communications for several months, attended a settlement conference and further mediation. In agreeing to a $1.8 million settlement, the parties appeared to have made serious, good faith efforts to settle, with both ceding ground on their initial positions. The settlement provided a favorable outcome to plaintiffs and the class members, each of whom were projected to receive 100% of premiums paid.

    Regarding fees to be paid to plaintiffs' counsel, the court noted that the 33.3% of the gross Settlement Fund that would be requested was not excessive, but the court was not likely to approve more that the 25% benchmark set by the Ninth Circuit. Plaintiffs' counsel, however, would have the opportunity at the final fairness hearing to present compelling evidence supporting a departure from the benchmark. 

    Finally, the court agreed that the named plaintiffs were entitled to a service fee of $2500 each. Both played a critical roll in the ligation in assisting class counsel.

Request for Stay Denied in Dispute Over Coverage for Volcano Damage

    Although there were concurrent state and federal proceedings regarding the insureds' claims for damage caused by Kilauea Volcano, the federal district court refused to dismiss or stay the federal action. Aqulina v Certain Underwriters at Lloyd's Syndicate #2003, 465 F. Supp. 3d 1066 (D. Haw. 2020).

    Plaintiffs held homeowner's policies from Lloyd's that were brokered and underwritten by various defendants. Coverage from the May 2018 eruption of Kilauea Volcano was denied based upon an exclusion precluding coverage for lava-related damage. 

    Plaintiffs sued Lloyds and various brokers in federal court, alleging that defendants had engaged in a deceptive scheme to defraud plaintiffs and deprive them of meaningful coverage. Lawsuits were also filed in state court, with plaintiffs arguing their losses were covered by their policies and that defendants wrongfully relied solely on the lava exclusion to deny claims. 

    Defendant Retail Brokers, one of the brokers, moved to dismiss or in the alternative stay the federal court proceedings under the Colorado River abstention doctrine. See Colorado River Water Conservation Dist. v. United States, 424 U.S. 800 (1976). To utilize the abstention doctrine, Retail Brokers had to show "exceptional circumstances" under an eight part test.

    The court determined that Retail Brokers failed to show "exceptional circumstances" to suggest piecemeal litigation would be problematic if the court retained jurisdiction. The court agreed with plaintiffs that the federal and state-court actions raised different issues and that the state-court action would not answer the central questions in this case. The state action addressed allegations of coverage under the policies, while the federal case involved issues regarding the procurement of the policies. While state law controlled, the federal court was fully capable of deciding claims of unfair and deceptive acts and negligence. 

    The only facts that weighed in favor of a stay were the minor inconvenience of the federal action where the federal court was located on Oahu and defendants were located on the Big Island, the fact that plaintiffs filed both parallel actions, and the similarities between the state and federal lawsuits. On balance, these factors did not establish "exception circumstances" required for the Colorado River deference. Neither dismissal nor a stay was warranted. 

    

Hawaii Federal District Court Remands Coverage Dispute

    Accepting the insured's amended complaint, the federal district court of Hawaii remanded the coverage action to state court. Hale v. Lloyd's, London, 2020 U.S. Dist. LEXIS 9061 (D. Haw. Jan. 17, 2020). 

    Hale purchased a policy for his home in Hilo, Hawaii, from Defendant Pyramid Insurance Centre. The policy was memorialized by a Lloyd's Certificate issued by Defendant Lloyd's. On September 19, 2017, Hale entered Chapter 7 Bankruptcy. Included in the bankruptcy proceeding was Hale's home and a secured home mortgage loan now owned by Defendant Specialized Loan Servicing, LLC. The Bankruptcy Court issued a discharge order on January 18, 2018. 

    On May 9, 2018, Hale's home was destroyed, being covered with lava from the Kilauea volcano eruption. Hale filed a claim with Lloyd's based upon the loss of his home. The claim was denied. Subsequently, however, Lloyd's issued a check for the full amount of the policy. Both Hale and Specialized Loan were listed as payees on the check. 

    Hale sued in state court for unfair and deceptive business practices and breach of the covenant of good faith and fair dealing. The complaint also alleged actions of the defendants violated the Bankruptcy Code. Specialized Loan removed the case to federal court. Hale filed a Motion to Remand the case back to state court. Attached to the Motion to Remand was a proposed Amended Complaint removing all references to federal law. At the hearing on Hale's Motion to Remand, Hale's counsel made an oral Motion to Amend his Complaint, as proposed in the attachment to his Motion to Remand.

    In her decision, Judge Gillmor first granted the Motion to Amend. Lloyd's argued that Hale's five-month delay in  moving to amend caused prejudice through increased litigation expenses. Litigation expenses incurred before a motion to amend was filed did not establish prejudice, however. In the absence of prejudice, there was a strong presumption in favor of granting leave to amend. The court also found there was no bad faith or futility in seeing to amend. Therefore, Hale was granted leave to file the proposed Amended Complaint 

    The court next considered whether the case should be remanded to state court. The original complaint alleged that defendants had violated the Bankruptcy Code. At the time of removal, the bankruptcy claims gave the federal court original federal question jurisdiction. The proposed Amended Complaint removed all reference to Hale's federal claims and his underlying bankruptcy. Instead, the remaining claims were exclusively state law claims of unfair and deceptive business practices and breach of the implied covenant of good faith and fair dealing.

    Therefore, the court no longer had original federal question jurisdiction. The court declined to exercise its discretionary supplemental jurisdiction over the case. The case was remanded to the state court. 

    

Hawaii Federal District Court Decides Choice of Law Dispute In Insured's Favor

    The federal district court, District of Hawaii, denied the insurers' motion to dismiss a claim asserted by the insured under Nevada's unfair practices statute. Puna Geothermal Venture v. Allianz Global Risks US Ins. Co., 2019 U.S. Dist. LEXIS 211661 (D. Haw. Dec. 5, 2019).

    Puna Geothermal's power plant was damaged on the Big Island when the Kilauea volcano erupted in May 2018. The plant has remained closed. The insurers denied the claim. Puna Geothermal sued the insurers, including an unfair practices claim under Nevada Revised Statutes sec. 686A.310 (1). The statute provided it was an unfair practice to misrepresent to insureds or claimants pertinent facts or policy provisions relating to any coverage at issue. The insurers argued that the unfair practices claim should be dismissed because Hawaii law, not Nevada law, applied. 

    The policies had a choice of law provision stating that, "[t]his policy shall be governed by the laws of the State of Nevada."

    Puna Geothermal argued that ties to Nevada included the policies were purchased by a Nevada entity. The insurers argued that the policy insured property located in Hawaii, a Hawaii partnership was an insured, and the decision to deny coverage was made in a third state. 

    The court noted that both states applied similar principles in deciding choice of law issues. First, when interpreting a policy, both states asked what a reasonable person in the position of insured would have understood the contract to mean. Second, both states also instructed courts to interpret contracts n a manner that effectuates the intent of the parties. Third, both the Hawaii and Nevada Supreme Courts looked to California law when their own law was silent on a particular issue. Under California law, sophisticated parties would not intend that the laws of multiple jurisdictions would apply to a single controversy having its origin in a single, contract-based relationship. 

    These principles supported a broad interpretation of the policies' choice-of-law clauses. An ordinary person reading that the policy was governed by the laws of the State of Nevada would expect Nevada law to apply to any dispute related to the agreement. 

    Therefore, the court read the choice-of-law provisions in the policies broadly as providing that Nevada law applies to any claims arising out of the parties' contractual relationship even if those claims were not contract claims. The choice-of-law clauses permitted Puna Geothermal to bring an unfair practices claim based upon the Nevada statute. The insurers' motion to dismiss was denied. 

    

Insurance Agent Successful in Dismissing Insureds' Claims for Fraud

    The Federal District Court for Hawaii granted Moa Insurance Services Hawaii's (Moa) motion to dismiss the insureds' complaint alleging that they had been forced to purchase worthless surplus lines policies for volcano damage. Aquilina v. Certain Underwriters at Lloyd's Syndicate #2003, 2019 U.S. Dist. LEXIS 165866 (D. Haw. Sept. 26, 2019).

    The insureds purchased surplus lines homeowners insurance policies with the assistance of two retail brokers, Pyramid Insurance Centre, Ltd., and Moa. The policies were underwritten by several syndicates of Lloyd's. Pyramid and Moa placed the policies and worked on the insureds' behalf to procure the insurance. 

    The complaint alleged a "steering scheme" through which various defendants, including Moa and Pyramid, sold surplus lines policies to the insured without complying with obligations under Hawaii law. After the Kilauea Volcano eruption, the insured were denied coverage under the policies for significant damage to their homes and properties. The complaint alleged that defendants unlawfully placed surplus lines insurance instead of more comprehensive coverage, such as was available through the Hawaii Property Insurance Association (HIPA). Selling Lloyd's policies was more lucrative to defendants. 

    One exclusion in the Lloyd's policies precluded coverage for "the peril of lava and/or lava flow causing direct or indirect physical damage or loss of use of the insured property." (Lava Exclusion). The complaint alleged that for a home located in a particularly risky Lava Zone, a homeowner's policy excluding lava coverage amounted to no coverage at all.

    Moa moved to dismiss relying primarily upon Rule 9 (b), Fed. R. Civ. P. Under Rule 9, where a party alleged fraud or mistake, a heightened pleading standard was required. A pleading had to identify the who, what, when, where, and how the misconduct harmed the plaintiff. 

    The court dismissed the insureds' complaint, as to Moa, without prejudice. The claims were based on a single deceptive and fraudulent "scheme to steer" the insureds into purchasing illusory surplus lines insurance that they would not have otherwise purchased. The complaint failed to allege specific facts plausibly giving rise to the insureds' suspicions of a "scheme.' The allegations did not address who made what specific representations or statements to the insureds and when, what representations the insureds relied on, how Lloyd's paying commissions to brokers constituted "improper kickbacks," and how the insureds were "steered" into purchasing the policies. 

  

Coverage for Loss Due to Lava Flow, Volcanic Eruption Addressed by SuperLawyers

    As homeowners on the Big Island contemplate pursuing claims due to loss caused by volcanic eruption or lava flow, SuperLawyers has a post addressing some of my thoughts on the issue. The post is here.

Coverage for Loss Caused by The Big Island's Volcanic Eruptions

   Spring brought to the Puna District of the Big Island numerous volcanic eruptions causing extensive loss of property. As of late May, the lava was moving at a speed to cover six football fields an hour according to the U.S. Geological Survey. Two dozen recent fissures have created lava fountains and explosions during the eruption. Fissures have been seen spouting lave over 200 feet into the air. Numerous homes have been destroyed.

    Residents who have secured a Homeowners 3 ISO Policy may have some coverage for their loss related to the volcanic eruptions. The policy states it will "insure against risk of direct physical loss" to dwellings and other structures unless specifically excluded by the policy. Volcanic eruption is not excluded under the standard Homeowners Policy. Moreover, some policies have a specific endorsement to cover loss to a dwelling or other structures caused by volcanic eruption/lava flow. Coverage is provided for loss caused by the eruption, explosion, effusion of a volcano, or a moving outpouring of lava. Fire or explosion resulting from volcanic eruption should also be covered. And insurance should be available for vandalism or theft due to looting from a home where the owners are displaced.  

    But some loss related to a volcanic eruption will not be covered. Damage from earth movement is typically excluded. This includes earthquake, land shock waves or tremors before, during or after a volcanic eruption. Damage to land, trees, shrubs, lawns, etc. is not covered. The cost of removing ash from land surrounding the dwelling is also not covered.

    If a homeowner is unable to obtain a policy in the private market, coverage may be available from the Hawaii Property Insurance Association, a nonprofit collection of insurance companies created by statute in 1991 to provide basic property insurance. Any insurance agent can assist in applying for such a policy. The catch, however, is that uninsured homeowners must wait six months before the policy becomes effective.

    Only a handful of cases addressing coverage for volcanic eruptions have been issued by courts across the country, probably because there are so few areas exposed to active volcanoes. The Washington Supreme Court addressed coverage issues in 1983 after the eruption of St. Helens. The insureds’ homes were destroyed by a mud flow ten hours after the eruption began. Coverage was denied under an earth movement exclusion. The trial court granted summary judgment to the insurers.

    The Washington Supreme Court determined it was unclear whether the eruption or earth movement caused the damage. Under the efficient proximate cause doctrine, the court noted that the efficient or predominant cause which sets into motion the chain of events producing the loss is regarded as the proximate cause, not the last act in a chain of events. If the predominant cause is a covered peril, there was coverage under the policy. The mud flows that caused the destruction of the homes would not have occurred without the eruption of St. Helens. Therefore, the case was remanded for the jury to consider whether the mud flows or the eruption were the proximate cause of the damage.

     Hawaii courts have also adopted the efficient proximate cause doctrine when two or more perils combine to cause a loss. Therefore, if the insurer claims earth movement from the Kilauea eruptions caused damage to the home, coverage may still be available if fire or other perils that originated from the eruptions were the primary cause of the damage.

    Our thoughts and prayers remain with the residents of the Puna District.

 

2016 Hawaii Legislature Enacts Five Insurance-Related Bills

    The 2016 Hawaii legislative session passed five insurance-related bills.  Bills that have been enacted are the following:

    HB 260 - The bill establishes motor vehicle insurance requirements for transportation network companies and drivers that will take effect on September 1, 2016. The Insurance Commissioner is directed to examine the effects of this measure on personal motor vehicle insurance policy rates in the State and submit an annual report to the Legislature. The bill will sunset on September 1, 2021. The measure has been transmitted to the Governor for signature.

    HB 1705 - Electronic insurance cards, in addition to paper cards, are permitted by the bill. The card serves as proof of insurance for motor vehicles and is to be carried in the vehicle at all times. The legislation has been forwarded to the Governor for signature.

    HB 1897 - This legislation ensures that all insurers in the State provide insurance coverage for sexually transmitted disease screenings, including screenings for human immunodeficiency virus and acquired immunodeficiency syndrome. The bill awaits the Governor's signature.

    HB 2084 - All insurers are prohibited from discriminating with respect to participation and coverage under a policy, contract, plan, or agreement against any person on the basis of a person's actual gender identity or perceived gender identity. The bill pends the Governor's signature.

    SB 2851 - Under this bill, the Insurance Commissioner is to determine whether residential property insurance is unavailable due to a moratorium on insurance policies in a lava zone during a state of emergency due to lava flow. The bill has been signed by the Governor. 

 

Hawaii Bill Preserves Insurance Coverage in Lava Zones

   The Hawaii legislature passed a bill in its recently concluded session to protect homeowners and businesses affected by lava flows from losing coverage.

   The Puna district on the Big Island was severely impacted by the Pu`u O`o lava flow as it crept closer to homes, businesses, schools and populated areas. Problems were created by the imposition of a moratorium on the sale of new policies in certain areas of the Puna district. 

   SB 589 [here] grants relief to homeowners who have had continuous insurance in lava zone areas that are declared to be in a state of emergency. The bill (1) allows the homeowners to have their policies renewed, (2) permits continued coverage for homeowners who wish to sell their homes, (3) grants coverage for new buyers of an insured property, and (4) allows homeowners who have not previously had insurance to purchase coverage from the Hawaii Property Insurance Association.

   Section 2 of SB 589 restricts the number of policies that may be non-renewed in a lava zone declared to be in a state of emergency to no more than five percent of the total number of covered policies issued by an insurer in that lava zone. 

    Section 3 of SB 589 provides that where a state of emergency is declared in a lava zone and residential property insurance is unavailable due to a moratorium on the issuance of policies, the Association shall remove its moratorium. After removal of the moratorium, the Association shall offer new policies with a waiting period of no longer than six months for the policy coverage to take effect.

   SB 589 was signed by the governor on May 6, 2015.

   Special thanks to my Damon Key co-blogger Mark Murakami (www.hawaiioceanlaw.com) for bringing this legislation to my attention.

Insuring Property for Catastrophes

   Our firm has had many questions on insurance related issues since Friday's Earthquake and Tsunami in Japan.  The following outline is quick primer on insurance coverage related to natural catastrophes.

INSURING PROPERTY FOR CATASTROPHES

●          Cost of Natural Disasters:

∙   Hurricane Katrina in 2005 cost insurers and reinsurers $62.2 billion.    

∙   Hurricane Ike in 2008 cost the insurance industry $18.5 billion.

∙   1995 Kobe Earthquake cost insurers about $3 billion.

∙      Current estimates for 3/11/11 Japan earthquake, excluding damage caused by tsunami, are 2.8 trillion yen ($34 billion)

∙    Largest component of insured loss will be covered by the property insurance market.

∙    $2 to $4 billion of total insured loss is expected to be covered by the Japan Earthquake Reinsurance Co. Ltd. pool.

∙    This pool covers residential buildings and can absorb losses as high as $67 billion per event.

∙  Businessinsurance.com reports Japanese insurance companies have appropriate levels of reserves and capital; the earthquake should not have significant impact on their business or claim payments.

∙  Japanese casualty insurers will pay claims totaling 10 billion yen ($122 million) to 20 billion yen ($245 million) to cover losses due to earthquake damage to cars and for fire.

∙ Japan helps underwrite residential and nuclear risks, but usually based on the reinsurers’ Japanese earthquake modeling scenarios.

∙ For this earthquake, reinsurers may be exposed to losses in rural areas that not covered by state-backed reinsurance. 

●    First Party Property Insurance

Protects property interests of insured.

∙ Types of property policies:

1)  Named Peril Coverage – provides coverage for loss cause by name perils, i.e., wind, fire.

2)  All Risk Coverage – provides coverage for all causes of loss except those excluded.  Typically, earthquake, flood, etc. are excluded.

∙           Typical Insuring Agreement:

“We (the insurer) insure against risks of direct physical loss to property described in policy.”

          ∙   What constitutes “Physical loss” is not always clear.

∙   Total loss not required – just damage to property (i.e., gas fumes making home uninhabitable meant insured suffered physical loss).

∙   Land itself is general not covered under property policy.

∙  “Direct” loss – proximity between loss and damage.

Fortuity

·  Insured cannot insure for loss that is a certainty.

∙  Insurance is for unexpected losses, not losses that are inevitable.

 Insurable Interest

Any lawful or substantial economic interest in the safety or preservation of property from loss, destruction or financial damage. 

 Test – Would the insured suffer a financial loss if the property sustained damage?

●    Property insurance can encompass many types of property and property-related losses:

1)  Homes, contents

2)  Vehicles, boats

3)  Commercial buildings, contents, equipment, boilers and machinery

4)  Business interruption

∙  Business Interruption covers the insured against losses arising from the inability to continue normal business operations due to a covered loss.

∙  Insured is paid for money losses due to the inability to continue to use the business premises.

•   Flood insurance policies

∙   In US, the National Flood Insurance Program was created by Congress in 1968 because private insurance companies do not cover flood.

 ∙  In 2008, five million flood insurance policies issued.

∙  Some mortgage companies require flood insurance if within flood zone.

∙  Premiums for flood insurance range between $300 to $2,000 annually depending on which flood zone your home is located.

∙  Maximum coverage for residential property $250,000; maximum coverage for contents $100,000.

∙   Flood policy not effective for 30 days after purchase.

∙  Two helpful websites – www.floodsmart.gov; www.fema.gov.

•   Hurricane Policies

 ∙   In Hawaii, residents can purchase separate hurricane policy.

∙  Policy provides coverage only for the peril of a windstorm during a hurricane.

∙  “Hurricane” means a storm that has been declared by the Central Pacific Hurricane Center of the National Weather Service to be a hurricane.

∙   Period of coverage begins when a “watch” or “warning” is issued until 72 hours following cancellation of “watch” or “warning.”

 ∙    “Windstorm” means wind or hail during a hurricane, which results in direct physical loss or damage to property.

∙   “Water damage” excluded from hurricane policy.  So you must also have flood insurance.

 ●          Earthquake Insurance

∙   Insurance can typically be added to policy by an endorsement.

∙   “The following are added to the Covered Causes of Loss”

       a. Earthquake.

       b. Volcanic Eruption

∙    Endorsement may also include all earthquake shocks or volcanic eruptions that occur for several days after a single Earthquake or Volcanic Eruption.

∙   But endorsement may exclude loss or damage caused by tidal wave or tsunami, even if attributable to an Earthquake.

     ●          State Regulation

∙ In US, state laws regulate the types of property insurance policies that can be issued.

∙ Some states have standard form “statutory” polices, usually ‘fire policies.” 

∙ The insurance company must provide at least as much coverage as the state’s statutory policy form.