Insurance Law Hawaii

Insurer Must Defend Claims for Diminution in Value of Damaged Property

   The insurer's duty to defend a developer sued by purchasers of homes for damages for diminution in value of homes was at issue in Mid-Continent Cas. Co. v. Academy Dev., Inc., 2012 WL 1382459 (5th Cir. April 20, 2012).

   In the underlying action, plaintiffs alleged the developer knew when it sold the homes that the lake walls were falling and that water was leaking from the lakes onto adjacent home sites. They sought damages for diminution in the value of their homes resulting from the defective lakes. The action was tried in 2008, and the jury returned a verdict for the developer.

   Mid-Continent initially defended under a reservation of rights. But believing that the ninth amended petition no longer alleged "property damage" as defined in the policy, Mid-Continent refused to continue defending.

   Mid-Continent filed for a declaratory judgment that it had no duty to defend. The district court granted summary judgment to the developer, concluding the ninth amended petition's allegation of diminution in the value of their homes caused by defective lakes constituted "damages because of . . . 'property damage'".

   On appeal, the Fifth Circuit affirmed. The duty to defend was triggered because the alleged diminution in value was attributable to "property damage." The underlying ninth amended petition alleged the lakes and wall were not properly designed and constructed, allowing water to escape through cracks in the walls.

   Under Texas law, allegations of unintended construction defects or faulty-workmanship constituted allegations of "property damage" sufficient to trigger an insurer's duty to defend. Therefore, the petition alleged property damage to the lakes that resulted in diminution in the value of the homes. The policy did not require the underlying plaintiffs to have an ownership interest in the property allegedly damages in order for Mid-Continent to have a duty to defend.

Ensuing Loss Provision Does not Preserve Coverage For Damage Caused by Fire

  The court determined the vandalism exclusion barred coverage and that the ensuing loss provision was not applicable. See New London County Mut. Ins. Co. v. Zachem, 2012 Conn. Super. LEXIS 850 (Conn. Super. Ct. March 29, 2012).

   A fire caused by an explosion occurred at the insured's property on September 11, 2008. The fire inspector determined that a propane copper pipe was broken by an intruder, causing a gas explosion. The fire inspector's report concluded that the fire and explosion were a direct result from the intentional act of removing the copper propane lines. No one was living on the property. Instead, the insured did remodeling and maintenance work on the property and stored equipment and materials there.

   The insured sought coverage under its property policy with New London. The policy insured against risk of direct loss to property, but excluded loss caused by vandalism and malicious mischief if the dwelling was vacant for more than 30 consecutive days immediately before the loss. The policy further provided, however, any ensuing loss to property described in the policy not excluded or excepted was covered.

   The court first considered the vandalism exclusion. The insured argued the term "vacant" was void and that he had made periodic visits to the property. But no one had lived on the property since July 2007 and the dwelling did not contain any items suitable for habitation. Therefore, the vandalism exclusion applied.

   The insured argued the loss resulted from an explosion caused by a spark from a water heater which could not have been expected, and the ignition was an intervening cause that caused damage to the home, not the removal of the copper pipes. Therefore, the insured argued, the loss was ensuing. The court disagreed. Here the spark that set the explosion did not constitute a separate and independent hazard from which the insured's loss ensued. Therefore, the ensuing loss provision did not apply.

  

Coverage Granted to Remediate Loss of Marijuana Crop Caused By Fire

   Tenants renting a house from the insured caused a fire by tapping into neighbor's electrical system to operate and conceal a marijuana crop. See Kochendorfer v. Metro. Prop. & Cas. Ins Co., 2012 U.S. Dist. LEXIS 51032 (W.D. Wash. April 11, 2012).

  The insurer made an initial payment of $30,052.83 for the loss. The insured submitted a proof of loss in the amount of $323,823.49. An appraisal panel eventually awarded to the insured a total of $311,270 in replacement cost value and $240,077 in actual cash value. The award accounted for structure repairs, clean-up/remediation, code upgrades and temporary repairs. The insurer paid actual cash value for the structure and temporary repairs, but denied coverage for code upgrades and clean/up remediation awards.

   The insured sued and filed for partial summary judgment. Regarding the code upgrade, the insurer conceded some level of repair was required, but argued a lesser amount was owed than the value set by the appraisal panel. The court rejected this argument in the absence of some showing of unfairness in the appraisal process. No such showing had been made.

   Regarding the clean-up/remediation award, the insured relied on the efficient proximate cause doctrine. Because tenant vandalism was a covered cause of loss under the policy and because the vandalism of the property was the efficient proximate cause of the loss, the insured was entitled to the cost of clean-up and remediation associated with the marijuana grow operation and fire. The insurer presented no argument that the clean-up/remediation due to tenant vandalism was not a covered even under the policy. Therefore, the insured was entitled to partial summary judgment on the issue of clean-up costs/remediation.

Ninth Circuit Certifies Question on Reach of Pollution Exclusion

   The case before the Ninth Circuit asked whether the pollution exclusion applied to carbon monoxide poisoning.  See Cent. Sur. Co. v. Casino West., Inc., 2012 U.S. App. LEXIS 56958 (9th Cir. April 6, 2012). The accident occurred in a Nevada casino and hotel owed by Casino West.

   The fumes were created by a hotel's heater room which permeated into the deceaseds' rooms. Century issued a CGL policy to Casino West with a pollution exclusion, barring coverage for bodily injury arising out of the release or escape of "pollutants." The policy defined pollutants as "any solid, liquid, gaseous or thermal irritant contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste."

   When Casino West was sued for wrongful death, Century refused to defend based upon the pollution exclusion. Century filed suit for a declaratory judgment. The district court denied Century's motion for summary judgment, determining the pollution exclusion was ambiguous. The district court reasoned that an ordinary policyholder may not reasonably characterize carbon monoxide from a motel pool heater as pollution.

   The Ninth Circuit surveyed the different interpretations of the pollution exclusion. Some courts applied the exclusion literally because the terms were found to be clear and unambiguous when applied to carbon monoxide poisoning. Other courts limited the exclusion to situations involving traditional environmental pollution, either because they found the terms of the exclusion to be ambiguous or because they found that the exclusion contradicted policyholders' reasonable expectations.

   Nevada had never decided the scope of the pollution exclusion. Therefore, the Ninth Circuit certified the following question to the Nevada Supreme Court: "Does the pollution exclusion in Century's insurance policy exclude coverage of claims arising from carbon monoxide exposure?"

Federal District Court Continues to Find Construction Defects do Not Arise From An Occurrence

   Coverage for construction defects continues to be hotly contested in Hawaii state and federal courts. In a recent decision, Judge Mollway felt bound to follow the Ninth Circuit's decision in Burlington Ins. Co. v. Oceanic Design & Constr., Inc., 383 F.3d 940, 944 (9th Cir. 2004), where the court found construction defect claims arise from breach of contract, not from an occurrence. Judge Mollway's most recent decision on the issue is Illinois Nat. Ins. Co. v. Nordic PCL Constr., Inc., 2012 U.S. Dist. LEXIS 58464 (D. Haw. April 26, 2012).

   Nordic constructed a grocery store for Safeway. In addition to the grocery store, Nordic built a 165-space rooftop parking deck, retail shops and related improvements. After opening for business in 2007, Safeway experienced significant leaks. Safeway demanded that Nordic repair the parking deck. Nordic sent the demand letter to the insurer, who agreed to appoint counsel subject to a reservation of rights.

   Safeway filed suit against Nordic in state court alleging, among other things, breach of contract and negligence. The insurer provided Nordic with a defense, but Nordic hired independent counsel.

   The insurer filed for declaratory relief in federal district court. Nordic counterclaimed for breach of contract, breach of the covenant of good faith and fair dealing, misrepresentations and omissions of material fact, and bad faith. The insurer moved to dismiss the counterclaim.

   Regarding the breach of contract claim, the court was bound by Burlington. Consequently, the court agreed with the insurer that the underlying damage was not caused by an "occurrence" as defined in the policy and was therefore not covered. In response to the argument that Burlington and the Hawaii Intermediate Court of Appeals decision, Group Builders, Inc. v. Admiral Ins. Co., 123 Haw. 142, 231 P.3d 67 (Ct. App. 2010), failed to follow a trilogy of Hawaii Supreme Court cases - Sentinel Ins. Co., Ltd v. First Ins. Co. of Haw., Ltd., 76 Haw. 277, 875 P.2d 894 (1994);Hurtig v. Terminix Wood Treating & Contracting, Co., 67 Haw. 480, 692 P.2d 1153 (1984); and Sturla, Inc v. Fireman's Fund Ins. Co., 67 Haw. 203, 684 P.2d 960 (1984) - the court merely presumed that Burlington and Group Builders took the Supreme Court cases into account.

   Nor was the court influenced by H.B. 924, which said "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 policy here was issued in 2007, after the Burlington decision in 2004. Therefore, the breach of contract claim was dismissed. With respect to the "occurrence" based portion of that claim, the dismissal was with prejudice.

   Count II, alleging a breach of the covenant of good faith and fair dealing, was dismissed with leave to amend. Count III, alleging fraud and negligent misrepresentation, was also dismissed with leave to amend. Count IV, the bad faith count, was dismissed only to the extent it was based on fraud.

Claims for Breach of Contract, Breach of Implied Covenant of Good Faith And Fair Dealing Can Be Based on Same Conduct

   The insured's claim for breach of the implied covenant of good faith and fair dealing was dismissed by the trial court because it was based on the same conduct as the breach of contract claim. See Columbia Cas. Co. v. 3M Co., 2012 Minn. App. LEXIS 23 (Minn. Ct. App. March 26, 2012).

   The insurer filed a declaratory judgment action against 3M Company regarding coverage for certain claims against 3M. 3M counterclaimed, alleging breach of contract and breach of the implied covenant of good faith and fair dealing. 3M alleged that the insurer breached the terms of the polices by refusing to reimburse or indemnify 3M for the costs of defending or resolving certain products-liability claims. 3M also alleged that the insurer breached the implied covenant of good faith and fair dealing by engaging in subterfuges and evasions.

   The trial court dismissed 3M's claim for breach of the implied covenant of good faith and fair dealing. The dismissal was primarily based on the district court's conclusion that 3M could not simultaneously maintain its claims for breach of contract and breach of the implied covenant of good faith and fair dealing because the claims  were based on the same conduct. A judgment was entered and 3M appealed.

   On appeal, 3M argued it sought contractual damages on alternative theories: (1) breach of the express terms of the insurance policies; and (2) breach of the implied covenant of good faith and fair dealing that was read into most contracts.

   The court of appeals agreed that Minnesota precedent did not preclude 3M form pleading both theories. Therefore, 3M's claims for breach of the implied covenant of good faith and fair dealing were permissible even if they were based on the same conduct as 3M's claims for breach of the express terms of the insurance policies.

Ensuing Losses From Faulty Workmanship Must be Covered

   Coverage for damages resulting from faulty workmanship in the construction of an apartment complex was at issue in The Bartram, LLC v. Landmark Am. Ins. Co., 2012 U.S. Dist. LEXIS 44535 (N.D. Fla. March 30, 2012).

   The owner of the apartments, Bartram, had primary coverage and three layers of excess coverage. Each contract excluded loss from faulty workmanship. The policies provided, however, "if loss or damage by a Covered Cause of Loss results, we will pay for that resulting loss or damage."

   Bartram contended water intrusion occurred because of faulty workmanship, which caused damage to the buildings' exterior and interior finishes, wood sheathing, framing, balcony systems, drywall ceilings and stucco walls. This damage was separate from the work needed to simply fix the faulty workmanship. Therefore, Bartram argued, the ensuing losses that resulted from the water intrusion was covered.

   The insurer argued the ensuing loss exception was not applicable if the ensuing loss was directly related to the original excluded loss. Since the faulty workmanship naturally and foreseeably led to water intrusion without any new, independent cause, there was no ensuing loss. Therefore, coverage was barred by the faulty workmanship exclusion. The insurer cited cases finding no coverage for water damage resulting from faulty workmanship where the ensuing loss provision provided the faulty workmanship "exclusion does not apply to ensuing loss or damage caused by or resulting from a peril not otherwise excluded."

   The policy exclusions here did not require reading a proximate cause element into the policy. Instead, if ensuing losses resulted from a covered cause, they were covered under the policy regardless of whether the loss was naturally set in motion by an excluded cause or loss. Therefore, if the faulty workmanship resulted in water intrusion that subsequently resulted in ensuing losses, the cost to repair the faulty workmanship was excluded, but the ensuing losses from the water intrusion were covered.

Ensuing Loss Provision Found Ambiguous

   After the insurer denied coverage in a homeowner's policy for construction defects under various exclusions, the court found the ensuing loss provision was ambiguous. Kesling v. Am. Family Mut. Ins. Co., 2012 U.S. Dist. LEXIS 38857 (D. Colo. March 22, 2012).

   After purchasing a home from the sellers, the insureds noticed problems with the deck of the home. Massive cracking appeared, causing lifting and leaking on the deck and water running through the exterior foundation wall into the home. There was also damage to the roof and crawlspace.

   The insureds had a homeowner's policy with American Family, which covered accidental direct physical loss to property described in the policy unless the loss was excluded. They requested coverage for "conditions, defects and damages." American Family denied coverage because wear and tear, as well as damage to foundations, floors and roofs were excluded. The policy did provide coverage, however, for "any resulting loss to property described . . . above, not excluded or excepted in this policy.

   When coverage was denied, the insureds sued American Family. On American Family's motion for summary judgment, the court agreed that the damages claimed fell within the policy's exclusion for loss caused by faulty, inadequate or defective construction or design. But the question remained as to what, if anything, was removed from the exclusion by the resulting loss provision?

   The exception was broadly worded. "Any resulting loss" could be interpreted to mean just that - any loss, other than the repair or replacement of the defective construction, that resulted from that defective construction. This would mean damage to parts of the home other than the defective construction that resulted from water or moisture infiltration resulting from the defective construction would be covered. On the other hand, "any resulting damage" could be limited to damage that was separate and independent from that which was directly caused by the defective construction.

   Because there were two reasonable interpretations of the resulting loss provision, the court found there was an ambiguity to be construed against the insurer.

   This was not the end of the analysis, however. The "any resulting damage" exception was itself subject to the proviso that no other exclusion or exception applied. Only damage to parts of the house other than the deck, the roof and the crawlspace resulting from water or moisture infiltration caused by defective construction would amount to "resulting damage" within the meaning of the exception to the exclusion. There were still genuine issues of material fact concerning the existence of such damage or whether any such damage fell within another exclusion or exception in the policy. Therefore, American Family's motion for summary judgment was denied.

Insurer's Motion to Deny Claim Based on Judicial Estoppel Fails

   The insurer's attempt to reject a claim due to inconsistent positions taken by the insured in two different matters failed in Rice v. Certain Underwriters at Lloyds, 2012, U.S. Dist. LEXIS 36445 (S.D. Tex. March 19, 2012).

   The insured's home was damaged in 2008 during Hurricane Ike. The insured submitted a claim to Lloyds, but no decision was made on coverage.  In 2010, the insured filed for Chapter 13 bankruptcy. On Schedule B, the insured was asked to list his interests in insurance policies and other unliquidated claims. The insured failed to mention any claim against Lloyds.

   On September 12, 2010, the insured sued Lloyds for breach of contract and breach of the duty to good faith and fair dealing. In March 2011, the insured filed an amended Schedule B in the Bankruptcy proceeding, adding his claim against Lloyds for damage to his home caused by Hurricane Ike.

   Lloyds then filed a motion for summary judgment, arguing that the insured's previous failure to disclose his claims against Lloyds was a legal position inconsistent with his current action against Lloyds. Therefore, Lloyds argued, the insured was judicially estopped from pursuing his suit.

   The court noted that judicial estoppel was applied where an intentional self-contradiction was used as a means to obtain unfair advantage. Although the insured failed to disclose his potential claims against Lloyds at the time he filed for bankruptcy, he subsequently filed an amended schedule disclosing his pending claims. Further, the insured filed his amended schedule in the Bankruptcy Court before Lloyds filed its motion for summary judgment. Accordingly, judicial estoppel did not apply and Lloyds' motion was denied.

No Coverage for Property Damage That is Limited to Work Completed By Subcontractor

   The issue before the 11th Circuit was whether, under Florida law, a general contractor had coverage for a property damage claim limited to the defective work performed by a subcontractor, and not affecting any other portion of the project. The court found no coverage in Amerisure Mut. Ins. Co. v. Auchter Co., 2012 U.S. App. LEXIS 5412 (11th Cir. March 15, 2012).

   Amelia Island Company contracted with Auchter Company, a general contractor, for construction of an inn and conference room. Auchter subcontracted with Register Contracting Company to install the Inn's roof. Pursuant to the Florida Building Code, installation of the roof required that it be able to withstand 110 m.p.h. winds.

   Register completed installing the roof tiles in January 1998. Beginning in 2002, the tiles began dislodging from the roof. During the 2004 hurricane season, three hurricanes caused more tiles to come off the roof. Some of these tiles hit other tiles, cracking them.

   In 2006, the parties went to arbitration over the costs of repairs for the roof. Amellia alleged that Auchter breached its contract to perform in a workmanlike manner. Amelia did not allege that the falling roof tiles damaged any other property or part of the project. The entire roof had to be replaced because each tile had to be inspected to determine whether it was properly fastened. The arbitrator found Auchter liable for $2.1 million for the defective installation of the roof.

   Auchter had a CGL liability policy with Amerisure. Amerisure defended Auchter in the arbitration under a reservation of rights. Amerisure filed a declaratory judgment action against both Auchter and Amelia in federal court seeking a determination that Amelia's claim was not for "property damage." Amerisure argued that Amelia's claim was for recovery of the roof it had paid for but had not received, and any damage was limited to the roof itself. Amelia argued that the plain meaning of "property damage" under the CGL policy did not require that "other" property be damaged to trigger coverage. The district court agreed with Amerisure, granting its motion for summary judgment.

   The Eleventh Circuit surveyed Florida law, primarily two cases: United States Fire Ins. Co. v. J.S.U.B., Inc. 979 So.2d 871 (Fla. 2007) and Auto-Owners Ins. Co. v. Pozzi Window Co., 984 So. 2d 1241 (Fla. 2008). J.S.U.B.noted that claims solely for the costs of repairing and replacing the actual defects in construction were not covered under CGL policies. In Pozzi, the court held that defective installation of a window did not constitute property damage unless the defective component resulted in physical injury to some other tangible property.

   Here, Amelia's claims for the Inn's defective roof was not a claim for "property damage." Register's defective installation of the Inn's roof did not cause"physical injury to tangible property" as required to trigger coverage under the CGL policy. The only damages Amelia alleged were those to correct the faulty roof supplied by Auchter's subcontractor. Amelia's claim was simply a claim for the cost of repairing the subcontractor's defective work. Consequently, there was no allegation of "property damage."