If a condominium owner suffers damage caused by a leak from another unit, may it sue the insurer for the Association of Apartment Owner (AOAO) for coverage? The federal district court for Hawaii said "no" in a decision by Judge Mollway. See Peters v. Lexington Ins. Co., 2011 U.S. Dist. LEXIS 148734 (D. Haw. December 27, 2011).
Two cases were consolidated. In each case, Plaintiffs owned condominium units at the Watercrest Resort on Molokai. Water leaking from another unit damaged Plaintiffs' units.
Watercrest Resort was insured by Lexington pursuant to a policy maintained by the AOAO. Plaintiffs filed claims with Lexington. Lexington hired an adjustor.
Unhappy with the adjustment of their claims, Plaintiffs sued Lexington and the adjustor. The AOAO was not named as a party. The first count of Plaintiffs' complaint was entitled, "Breach of the Insurance Agreement by Lexington." Count two sought punitive damages against Lexington and the third count sought punitive damages against the adjustor. Lexington moved for a judgment on the pleadings with respect to counts one and two.
The court construed count one as a claim for breach of the policy between Lexington and the AOAO. Plaintiffs had no privity with Lexington, however, as they were not insureds under the policy. Therefore, Plaintiffs lacked standing to assert a breach of the policy.
Plaintiffs also argued provisions in the Hawaii condominium statutes gave them standing. Section 514B-143 (b) of the Haw. Rev. Stat. required a homeowner's association to insure individual units. The statute was silent, however, on whether the owner of an individual unit could bring an action directly against the insurer to enforce an association's policy.
Nor was there an implied private remedy granted by the statute to Plaintiffs. First, it was not clear that the statute was enacted to provide a special benefit to, or a right in favor of, the unit owners. Second, there was no indication that the Hawaii legislature intended to create a right of action for unit owners to enforce their AOAO's policy.
In closing, the court noted that Plaintiffs had a remedy against the AOAO if they believed it was not vigorous enough in its dealings with Lexington for coverage on the damage.
Special thanks to public adjustor, Robert Joslin of Hawaii Public Adjustors, for sharing this case during his recent address to the Hawaii State Bar Association's Insurance Coverage Litigation section.
Although the Nevada Supreme Court adopted the efficient proximate cause doctrine, it determined it did not apply to salvage coverage under an all-risk policy for a rain-damaged building. Fourth Street Place, LLC v. The Travelers Indemn. Co., 2011 Nev LEXIS 114 (Nev. Dec. 29, 2011).
Fourth Street owned an office building which was insured by an all-risk policy issued by Travelers. Fourth Street hired Above It All Roofing to repair the roof of the office building. Above It All removed the waterproof membrane on the roof and prepared to replace the membrane the following week. Over the weekend, however, substantial rain hit. On Sunday, Above It All returned to cover the exposed portions of the roof with tarps, but wind later blew the tarps away. The building suffered significant interior damage as it continued to be exposed to the rain.
Fourth Street notified Travelers, who denied the claim. Fourth Street sued. The trial court granted Traveler's motion for summary judgment. The court found the rain damage did not result from a "Covered Cause of Loss" because the building did not first sustain actual damage to its roof or walls by wind or hail, as required by the Policy before coverage of damage caused by rain was invoked. Further, the doctrine of efficient proximate cause did not apply because neither cause of loss - Above It All's faulty workmanship or the rain - was a covered cause of loss under the policy.
The Nevada Supreme Court affirmed. The Limitations section of the policy stated there was no coverage for damage to the interior of a building unless the building first sustained actual damage to the roof or walls by wind or hail. The tarps used to cover the building did not constitute a "roof" for purposes of the Policy's rain limitation.
Second, the policy excluded damage caused by or resulting from faulty workmanship, unless the faulty workmanship resulted in a covered cause of loss. Here, by leaving for the night without covering the exposed portions, Above It All allowed rainwater to damage the building. Because the building did not "first sustain actual damage to the roof . . . by wind or hail," the rain that caused the damage was not a covered cause of loss.
Finally, the court determined the efficient proximate cause doctrine was not applicable under these facts. Under the doctrine, where covered and noncovered perils contribute to a loss, the peril that set in motion the chain of events leading to the loss or the "predominating cause" was deemed the efficient proximate cause or legal cause of the loss. Here, neither cause of loss (the rain and faulty workmanship) was a covered cause of loss. Accordingly, the doctrine did not provide relief here. Nevertheless, the court joined the majority of jurisdictions by adopting the doctrine of efficient proximate cause in Nevada.
The insured moved to dismiss the insurers' action for declaratory judgment because a parallel action was pending in Missouri state court. Axis Surplus Ins. Co. v. McCarthy/Kiewit, 2012 U.S. Dist. LEXIS 3612 (D. Haw. Jan. 12, 2012).
Kaiser Foundation Health Plan, Inc. hired the insured, a joint venture, to act as general contractor for construction of an addition to the Moanalua Medical Center. The joint venture was insured under a CGL policy issued by Arch Insurance Company. Excess layers of coverage were issued by RSUI Indemnity Company and Axis Surplus Insurance Company.
Kaiser sued the joint venture in Missouri state court for damages due to construction defects on the project. Arch agreed to defend under a reservation of rights. RSUI and Axis refused to defend and filed a complaint in Hawaii state court for declaratory relief against the joint venture and Arch. The case was subsequently removed to the federal district court. The joint venture then filed a complaint against Arch Axis and RSUI in Missouri state court for breach of contract, anticipatory breach of contract, breach of the implied covenant of good faith and fair dealing, bad faith and declaratory judgment.
The joint venture moved to dismiss the Hawaii federal court action. The district court, in a decision by Judge Kobayashi, considered the standard for stay or dismissal of the federal action as set forth by the Ninth Circuit in Gov't Employees Ins. Co. v. Dizol, 133 F.3d 1220, 1225 (9th Cir. 1991). Under the test, district courts were to: (1) avoid needless determinations of state law issues; (2) discourage litigants from filing declaratory actions in an attempt to forum shop; and (3) avoid duplicative litigation.
Regarding the first criteria, avoiding needless determinations of state law, the court first noted this case paralleled proceedings in the Missouri state court. Second, the case involved insurance law, an area that Congress had expressly left to the states. Third, there was no compelling federal interest in adjudicating insurance disputes based on diversity jurisdiction. Fourth, the court could be faced with unsettled issues of Hawaii state insurance law. Although the Hawaii Intermediate Court of Appeals decided in Group Builders, Inc. v. Admiral Ins. Co., 123 Haw. 142, 231 P.3d 67 (Haw. Ct. App. 2010) that construction defects did not constitute an "occurrence," the legislature enacted HB 924, which directed that the term "occurrence" be interpreted based on the law at the time the policy was issued. Accordingly, this first factor weighed in favor of dismissing or staying the federal action.
Turning to the issue of forum shopping, the court found this factor was neutral in determining whether to exercise its discretionary jurisdiction over the case because it appeared both parties had engaged in forum shopping.
Finally, under the third factor, the policy of avoiding duplicative litigation tipped slightly in favor of staying or dismissing the case pending the resolution of the broader Missouri action. Factual and legal determinations made in the Missouri action would be common to both cases.
Considering other factors outlined in Dizol, the federal action would not settle all aspects of the controversy. Even if the federal court resolved the insurers' claims here, a number of related issues would remain in the Missouri action. Further, if both the federal court and the Missouri state court reached the merits of the insurance coverage issues, there would be a risk of inconsistent judgments, piecemeal litigation, and entanglement between the federal and state court systems.
Finally, the court decided a stay pending resolution of the state court litigation was appropriate instead of a dismissal.
When only a portion of a hotel was closed after damage was caused by Hurricane Ike, the court determined there was no coverage for business interruption. H&H Hospitality LLC v. Discovery Specialty Ins. Co., 2011 U.S. Dist. LEXIS 146055 (S.D. Texas Dec. 20, 2011).
Strong hurricane winds caused damage to the hotel, including the loss of part of the roof on one of its buildings. Approximately 40 hotel rooms were unusable after the storm. The hotel, however, had some undamaged, rentable rooms which were rented continuously after the storm. The hotel claimed business interruption losses of $293,191.00, but the insurer only paid $51,971.02.
The policy stated, in part, business interruption damages would be paid during "the necessary suspension of your operations." The insurer argued this meant a complete cessation or stoppage of business activities. The hotel countered that consideration should be given to the nature of the premises at issue in determining what constituted a "necessary suspension of operations."
The court noted that the policy did not define "necessary suspension of your operations." Other courts, however, had interpreted indentical or similar language to cover the risk of a complete cessation of business activities at the covered premises. The business interruption provision in other policies provided coverage for the "necessary interruption of business, whether total or partial." When faced with this language, courts allowed coverage for a partial cessation of business without requiring a total business shut down.
Here, however, the policy lacked such qualifying language to cover the risk of "potential" or "partial" suspension. Thus, the hotel's argument that its policy provided coverage for its reduced business operations, or a partial suspension, lacked support in the plain language of the policy. Accordingly, the insured was entitled to summary judgment on the hotel's business interruption claim.
Jeff City Industries was the general contractor for a sewer system improvement project in Branson, Missouri. Bituminous Cas. Corp. v. United HRB Gen. Contractors, Inc., 2011 U.S. Dist. LEXIS 145666 (W.D. Mo. Dec. 19, 2011). Branson sued Jeff City, alleging breach of the construction contract for the project. The claims included improperly bedded sewer piping, improper aligning portions of trenching for the sewer piping, improper service line connections to the sewer piping, etc. Further, Ozark Mountain Consultants, a subcontractor of Jeff City and a third-party defendant in the underlying action, brought a cross claim against Jeff City for negligent misrepresentation as to whether Jeff City procured insurance.
Bituminous sought a declaratory judgment that it had no duty to defend because Branson's claims against Jeff City did not constitute "occurrences." Moreover, Ozark Mountain's claims did not allege "bodily injury" or "property damage."
The court first determined that Branson's petition in the underlying case only alleged contractual claims. Accordingly, there was no "accident" or "occurrence" triggering Bituminous' policy.
Turning to Ozark Mountain's cross claim, the court agreed that negligent misrepresentation could be an "occurrence" under a CGL policy. Here, however, the cross claim did not allege physical damages such as flooding or loss of use, but only asserted costs incurred in defending and prosecuting legal actions. Because Ozark Mountain's petition did not allege "bodily injury" or "property damage," Bituminous had no duty to defend.
The Court considered how to allocate defense and indemnity responsibilities among various insurers in The Travelers Indem. Co. v. W.M. Barr & Co., No. 2:08-CV-02649 (D. Tenn. Nov. 28, 2011).
W. M. Barr manufactured a variety of solvents, removers, and other related products. Barr was sued in various lawsuits alleging injury resulting from benzene contained in its products. Barr held CGL policies issued by various carriers from 1965 to the present. One insurer, Travelers, sued, seeking a declaratory judgment and the recovery of a proportionate share from Barr and the various insurers for the costs of defending Barr in the underlying lawsuits. Barr filed a counterclaim against Travelers and cross-claims against the defendant insurers, alleging they had breached their policies for failure to defend Barr in the underlying suits.
Barr moved for summary judgment to establish the insurers had a duty to defend or to settle, a finding that these insurers breached their contractual duties, and an award of damages.
One group of insurers had issued polices without self-insured retentions. The central issue was whether these insurers were responsible only for a pro rata allocation of the costs of defendant Barr, with Barr covering defense costs that certain insolvent insurers would have been obligated to pay. The court found no express pro rata provision in the policies, nor any language to suggest the parties intended such a partial exclusion of coverage. So long as a lawsuit brought against Barr alleged benzene exposure during a period in which such a policy was in force, the insurer had to indemnify and defend such claims in their entirety, even if the injury at issue was, in part, suffered outside of the insurer's policy period. While the insurer could seek contribution from other insurers it had no such right against the policyholder as so-called "self-insurer."
The court next considered the insurers who issued polices with self-insured rententions. The central issue under these policies was whether the "per occurrence" language of the SIR provisions was properly construed as meaning per claims, as the insurers argued, or as including all claims arising out of the same defect in the manufacture and sale of its products, as Barr asserted. The court agreed with Barr. The "per occurrence" language was properly construed as including all claims arising out of the same defect in the manufacture and sale of its products.
Relying on the efficient proximate cause doctrine, the court determined coverage potentially existed for damage caused by water. Union Sav. Bank v. Allstate Indem. Co., 2011 U.S. Dist. LEXIS 134398 (S.D. Ind. Nov. 21, 2011).
The Tods purchased property that was mortgaged by Union Savings. The Tods obtained a Landlords Policy for the property from Allstate. When the Tods were in default on their loan, Union Savings notified them that foreclosure proceedings would commence. Union Savings sent an appraiser to the property who discovered water in the basement. Water and electricity to the building were off. Union Savings notified Allstate and later filed a formal claim under the mortgagee clause in the Landlords Policy. This clause stated, "A covered loss will be payable to the mortgagees named on the policy declaration. . . ."
Allstate denied coverage, citing exclusions for water damage. The policy excluded coverage for a loss consisting of or caused by "water or any other substance that overflows from a sump pump." Suit was filed, followed by cross motions for summary judgment.
Allstate's investigator concluded that the water damage was the result of a lack of power to the sump pumps for extended periods. Union Savings asserted that the sole cause of the damage was the Tods' negligence in paying their electricity bills, resulting in an electrical shut down which cased the sump pump failure, and ultimately, water damage. Allstate contended the water damage caused by the overflowing sump pump was an intervening event that broke the causal chain started by the Tods' failure to maintain electric service to the house. However, under the efficient proximate cause theory, the water event that occurred after the causal chain was set in motion was simply an effect of the insured risk. Accordingly, if the Tods' failure to maintain electric service to the property was an insured risk, then the claimed loss was covered if it was caused by such failure.
Therefore, to the extent that the damage was caused by the Tods' failure to maintain electricity to the Property, the Landlord's Policy provided coverage to the mortgagee, Union Savings. Allstate's motion, seeking a determination that the policy did not provide coverage for Union Savings' claimed loss, was denied.
In perhaps its most significant insurance coverage decision since Young v. Allstate, 119 Haw. 403, 198 P.3d 666 (2008), the Hawaii Supreme Court ruled that an insured need not prove economic or physical loss caused by the insurer's bad faith in order to recover emotional distress damages. See Miller v. Hartford Life Ins. Co., 2011 WL 6811570 (Haw. Dec. 28, 2011).
Hartford issued a long-term care policy to Penelope Spiller. In 2007, after she suffered a seizure and was diagnosed with lung cancer that metastasized to her brain, Hartford determined she was eligible for benefits. A year later, however, her benefits were terminated. Hartford determined Ms. Spiller was no longer "cognitively impaired" or incapable of performing two Activities of Daily Living as required by the policy.
Thereafter, Ms. Spiller repeatedly sought reinstatement of her benefits. Phone conversations between Ms. Spiller and a Hartford employee became increasingly contentious. Hartford denied an internal appeal of the termination of benefits.
On January 23, 2009, however, benefits were restored. Nevertheless, in July 2009, Ms. Spiller sued in state court for bad faith, negligence, and intentional infliction of emotional distress. She sought damages for the emotional distress incurred during the period that her benefits were denied, together with punitive damages.
The case was removed to federal court. The district court issued certified questions to the Hawaii Supreme Court. The Hawaii Court addressed one of the questions, revised to read, "If a first-party insurer commits bad faith, must an insured prove the insured suffered economic or physical loss caused by the bad faith in order to recover emotional distress damages caused by the bad faith?"
The Hawaii Supreme Court first surveyed its jurisprudence on bad faith. Under the leading case, Best Place, Inc. v. Penn Am. Ins. Co., 82 Haw. 120, 920 P.2d 334 (1996), and subsequent cases, the Court intended to provide the insured with a vehicle for compensation for all damages incurred as a result of the insurer's misconduct, including damages for emotional distress, without imposing a threshold requirement of economic or physical loss.
Nonetheless, Hartford urged the Court to rely on California law, under which economic or financial loss was required before an insured could recover emotional distress damages for bad faith. Ms. Spiller, on the other hand, urged the Court to follow Colorado's lead in rejecting California's economic loss requirement for the recovery of emotional distress damages in insurer bad faith actions. In Goodson v. Am. Standard Ins. Co. of Wisconsin, 89 P.3d 409 (Colo. 2004), the Colorado court held that in a tort claim against an insurer for bad faith, the insured could recover damages for emotional distress without proving substantial property or economic loss. Otherwise, the insurers would be encouraged to unreasonably refuse to pay, or delay payment of, a valid claim and then avoid liability for bad faith emotional distress damages by making payment at the last minute.
The Hawaii Supreme Court determined the Colorado view was more compatible with Best Place. In Best Place, the Court made clear its intent to make available to the insured a broader range of compensatory damages, including damages for emotional distress, that were generally not available in actions based solely on breach of contract.
Landmark American Insurance Company successfully moved to dismiss four of the insured's six counts. Landmark Am Ins. Co. v. Studio Imports, Ltd., Inc., Nos. 4D10-5001 and 4D10-5073 (Fla. Dist. Ct. App. Nov. 16, 2011). The trial court did not dismiss the breach of contract claim and the bad faith claim. Because both claims were to be tried simultaneously, Landmark appealed.
The back story included extensive damage to the insured's commercial property caused by Hurricane Wilma in 2005. The insured claimed Landmark took too long to reimburse for losses, which caused additional damages, such as loss of good will, a damaged reputation with customers, and ruined business relationships.
The appellate court agreed the breach of contract and bad faith claims could not be tried together under Florida law. Where causes of action for both the underlying damages and bad faith were brought in the same action, the appropriate method was to abate the bad faith action until coverage and damages were determined. Consequently, the trial court order was reversed so the underlying issue could be determined prior to the bad faith claim.
The federal district court ultimately stayed a construction defect case, but offered comments on the current status of coverage disputes for such defects in Hawaii. See National Union Fire Ins. Co. of Pittsburgh, Pa. v. Simpson Mfg. Co., 2011 U.S. Dist. LEXIS 128481(D. Haw. Nov. 7, 2011).
National Union filed a complaint for declaratory relief to establish it had no duty to defend or to indemnify Simpson Manufacturing Company in four actions pending in the Hawaii state courts. The state court actions concerned allegedly defective hurricane strap tie hold downs that were manufactured and sold by Simpson. The hurricane ties allegedly began to prematurely corrode and rust, causing cracking, spalling and other damage to homes.
National Union contended the underlying allegations did not constitute "property damage" caused by an "occurrence," as defined in the policies. National Union relied upon Group Builders, Inc. v. Admiral Ins. Co.,231 P.3d 67 (Haw. Ct. App. 2010), where the Hawaii appellate court held, "under Hawaii law, construction defect claims do not constitute an occurrence under a CGL policy." Id. 73.
Simpson moved to dismiss, urging the court to decline jurisdiction because of the four actions pending in Hawaii state court which would potentially address the existence of any property damage and the cause of such damage. Simpson also argued the court would have to untangle unsettled questions of Hawaii law, including the continued viability of Group Builders in the face of H.B. 924. This legislation stated that "the meaning of the term occurrence shall be construed in accordance with the law as it existed at the time that the insurance policy was issued."
The court agreed to stay the proceedings pending the outcome of certain state court cases that would resolve relevant factual and legal issues. The court noted that the state of Hawaii insurance law was very much in flux given Group Builders and H.B. 924. Therefore, a stay was appropriate.
Simpson argued, in the alternative to dismissal,that the case should be transferred to the Northern District of California, where a related case was pending. The court rejected this effort. Hawaii's strong public policy interest in insurance law in the construction context, which was expressly stated in H.B. 924, outweighed the risks and inefficiencies associated with parallel proceedings pending in California. Although not as clearly drafted as it might be, the court noted under H.B. 924,"the purpose of this Act is to restore the insurance coverage that construction industry professionals paid for and to ensure that the good-faith expectations of parties at the time they entered into the insurance contract are upheld."
As the state judiciary had not yet addressed the continuing viability of Group Builders and H.B. 924, and because Simpson had indicated it intended to seek to apply California law to the policies, Hawaii's public policy interest in the case provided compelling weight in favor of retaining the case.