Insurance Law Hawaii

Affordable, Comprehensive Earthquake Coverage Difficult to Obtain in Hawaii

     Having experienced an earthquake of 6.8 magnitude in October 2006, resulting in extensive property damage, many Big Island homeowners would appreciate a policy offering coverage for loss due to earthquake.  Earthquake coverage is hard to come by, however, and when it is available, it is expensive.

     I recently reviewed an all risk policy purporting to extend coverage for property damage to a development caused by earthquake and other perils on the Big Island.  The policy limits were $15,000,000, but the deductible for earthquake damage was $750,000.  It was questionable whether loss due to earthquake would ever be covered by the policy, however.

     Although the policy covered loss caused by earthquake, it did not cover loss caused by "earth movement."  "Earth movement" included loss caused by "landslide, mudslide, mudflow, rockslide, and earth sinking, rising, shifting or settling."  How could damage caused by earthquake not include earth sinking, rising, shifting or settling?  The policy also included anti-concurrent cause language.  If the loss was caused concurrently or sequentially by both a covered peril (i.e., earthquake) and a non-covered peril (i.e., "earth movement"), the loss attributable to the non-covered peril was not insured.  Therefore, if an earthquake caused property damage, the insurance company would undoubtedly argue some, or most, of the loss was caused by "earth sinking, rising, shifting or settling," thereby eliminating coverage for such loss.

     My research uncovered only a couple of cases addressing policies that excluded "earth movement" other than earthquake.  The policy in a California case, Strubble v. United Services Automobile Assoc., 110 Cal. Rptr. 828 (Cal. Ct. App. 1973), excluded loss due to earth movement, other than earthquake.  In Strubble, an earthquake caused a landslide, which damaged the policyholder's home.  The insurance company argued even though an earthquake occurred, loss caused by the landslide was not covered.  The California Court of Appeal relied on the efficient proximate cause doctrine and found coverage because the cause of the landslide that destroyed the home was the included peril of earthquake.

     The Big Island policy I reviewed would not have allowed the same result as in Strubble.   Under the Big Island policy, damage due to a landslide would not be covered, even if the earthquake caused the landslide.  To the extent possible, an apportionment would have to be made between damage caused by the landslide and damage caused by the earthquake.

     The Big Island policy also excluded loss caused by fire, weather, subsidence, flood, leakage of water, and the negligent act or omission of any.  Further, coverage for such things as walks, walkways, foundations of buildings below ground surface, and retaining walls were excluded.

     Therefore, Hawaii residents are in need of earthquake coverage, but finding a comprehensive, affordable policy is not easy.

Apportionment Issue Addressed by 7th Circuit

     In Sentinel Insurance Company, Ltd. v. First Ins. Co. of Hawaii, Ltd., 76 Haw. 277, 875 P.2d 894 (Haw. 1994), the Hawaii Supreme Court addressed equitable apportionment of liability among two insurers who provided coverage at various times over a number of years during which property damage occurred.  In Sentinel, the Hawaii Supreme Court determined contribution among the insurers should be allocated in proportion to the time periods their policies were in effect.

     A similar result was recently reached in Wausau Underwriters Ins. Co. v. United Plastics Group, Inc., No. 06-3790, 06-4006 (7th Cir. Jan. 15, 2008).  In the underlying suit, a manufacturer of water heaters obtained judgment for $26.5 million against the supplier of water chambers installed in the water heaters, United Plastics Group (“UPG”).  The water chambers in 600 of the water heaters sold by the manufacturer ruptured.  The bulk of the damages awarded were for lost profits resulting form customer’s anger at the manufacturer.

     Contesting coverage, Ohio Casualty, UPG’s comprehensive general liability insurer, sued UPG for declaratory relief.  The District Court ruled Ohio Casualty was liable for up to the $25 million policy limit. The 7th Circuit reversed.  Only 65 to 75 of the 600 chambers had ruptured while Ohio Casualty’s policy was in force.   The business losses resulting from those 65 to 75 failures were less than 2 percent of the total 3,900 water heaters sold with UPG’s water chambers and unlikely to have amounted to $25 million in damages, the approximate amount awarded in the underlying case for business losses resulting from the defective water chambers.  The jury did not apportion the business losses incurred by the manufacturer between the policy period in which a handful of failures occurred and the subsequent policy periods when the majority of the failures happened.  Instead, the verdict was based on all 600 water heater failures, most of which occurred after Ohio Casualty’s policy expired.

     Therefore, the case was remanded to the District Court to determine what, if any, part of the damages assessed against UPG in the underlying suit should be apportioned to Ohio Casualty.

Allstate Suspended from Writing Auto Policies in Florida

     Reuters reports that Florida insurance regulators have suspended Allstate from writing auto policies because of its failure to cooperate with an investigation regarding the company’s property insurance policies.  Allstate was scheduled to testify for two days before regulators regarding a proposed rate increase of 41% for property insurance.  The hearing was cancelled after less than three hours, however, when Allstate refused to answer questions and provide specific documents.

     Allstate avoided questions regarding its compliance with a Florida law passed in January 2007 to give consumers premium relief.  The panel was investigating a new hurricane model that Allstate began using to calculate its rates.  Under the model, rates went up, although the company said increases were not intended.  The model was not approved by the state.

     The Florida Insurance Commissioner intends to bring Allstate back for a continued hearing later this year.  Allstate faces severe sanctions, including the possibility of losing its license to operate its four Florida companies if it continues to refuse to cooperate.

HMSA to Raise Rates 9.2%

     The Honolulu Star Bulletin reports Hawaii Medical Service Association (“HMSA”) will increase its rates for large-employer groups of 100 or more employees by 9.2 percent, the steepest increase since 2002 when the rates were raised 12.9 percent.  HMSA, the state’s largest health insurers, says although hospital admissions are not increasing, medical payments to hospitals and physicians substantially increased last year.

     Insurance Commissioner J.P. Schmidt said he is concerned about inadequate reimbursements to providers.  Schmidt believes HMSA has one of the lowest reimbursements levels in the country for hospitals.  Reimbursements are typically a percentage above Medicare rates, but Schmidt believes the federal government gives Hawaii an unfairly low Medicare reimbursement rate.  By using Medicare rates as a guide, HMSA’s payments are low.  Some doctors believe HMSA is shifting money to pay for certain procedures while decreasing the amount of reimbursement for other procedures.

Allstate Faces Inquiries in Louisiana

     We recently reported on Florida’s investigation of Allstate’s charging increased premiums.  Today’s Times Picayune reports Allstate is also in hot water with Louisiana regulators.

     Policyholders have filed recent complaints with the Louisiana Department of Insurance because Allstate has been encouraging homeowners to re-write their policies with cheaper premiums but without hurricane coverage.  Allstate claims its policyholders were taking out new policies and no longer eligible for state consumer protection rules that apply when the insurer has covered the insured for more than three years.  Allstate submits the policyholder can obtain wind and hail coverage in a separate, more expensive policy from Louisiana Citizens Property Insurance Corp.  This policy offers only depreciated value coverage instead of replacement value, and does not cover living expenses for policyholders who are displaced from their homes after a storm.

     On December 19, 2007, the state regulators ordered Allstate to reinstate wind and hail coverage for seventeen customers who lost this coverage when they obtained new policies with discounted premiums.  Allstate has been ordered to respond to the state’s inquiries by January 25, 2008.

Insuring Sub-Contractor’s Indemnity for Contractor’s Negligence

     The Fifth Circuit Court of Appeals recently considered whether an insurer must cover a subcontractor’s contractual obligation to indemnify the contractor for the contractor’s negligence.  XL Specialty Ins. Co. v. Kiewit Offshore Services, Ltd., No. 06-41785 (5th Cir. Jan. 2, 2008).  The subcontractor’s employee was killed at a job site explosion while welding in an unventilated area.  The employee’s family sued the subcontractor and contractor for negligence.  The contractor demanded that the subcontractor’s insurer defend and indemnify it as an additional insured based on the indemnification provision in the contract.  The insurer refused and filed a declaratory judgment action.  The district court held the insurer must provide coverage for the subcontractor’s contractual duty to indemnify.

     The Fifth Circuit noted that under Texas law, an agreement to indemnify another party for the consequences of that party’s own negligence is valid if there is an express intent in specific terms.  The rule was strictly applied because it was an extraordinary shifting of risk.

     The contract at issue provided that the subcontractor would defend and indemnify the contract whether or not caused by the negligence of the contractor. The court determined this provision was valid under Texas law.  Therefore, the insurer had to provide coverage for the contractual indemnity obligation to the contractor.

     Hawaii law apparently differs from Texas law regarding securing indemnification for one’s own negligence.  Under Hawaii law, an indemnitor may not indemnify an indemnitee for the sole negligence of the indemnitee.  See Kole v. AMFAC, Inc., 69 Haw. 530 (1988) (interpreting Haw. Rev. Stat. 431:10-222).

Professional Liability Insurance for CIA Employees

     The New York Times reported on Sunday on profession liability policies available to CIA employees through Wright and Company.  The polices are becoming increasingly important while the investigation of the destruction of the interrogation videotapes heats up.

     The standard policy costs $300 annually, with the government typically paying half the premiums for all supervisors and other high-risk employees. The policy provides up to $200,000 in defense costs for administrative matters such as Congressional investigations.  An additional $100,000 is available for defense costs in criminal investigations, and the policy covers up to $1 million in liability.

     The 2006 Military Commissions Act requires the government to pay for defense costs for CIA employees and military officers facing civil suits or criminal investigations for “authorized” actions involving detention of suspected terrorists.  Coverage under the Act for the destruction of the videotapes is unclear.

Allstate Gets Temporary Reprieve in Florida

     Last week, we reported the Florida Insurance Commissioner had suspended Allstate from writing new policies after it failed to comply with the Commissioners’ subpoena regarding Allstate’s steep increase in property insurance premiums.  Reuters reports that on Friday, the Florida Court of Appeal stayed the Commissioner’s order for ten days, allowing Allstate’s 1,100 Florida agents to continue doing business there.

     Florida has been investigating whether Allstate and other insurers colluded to prevent property insurance rates from declining despite legislation last year to reduce premiums.  Insurers paid about $35 billion in claims for property damage related to the eight hurricanes in 2004 and 2005.

California Court Finds Efficient Proximate Cause Doctrine Not Applicable in Denying Coverage

     The California Court of Appeal issued a decision this week analyzing the applicability of the Efficient Proximate Cause Doctrine in denying coverage under a homeowners policy.  De Bruyn v. The Superior Court, B198622, Court of Appeal of the State of California, Second Appellate District.

     California has codified the Efficient Proximate Cause Doctrine.  Under the doctrine, when a loss is caused by a combination of a covered and specifically excluded risk, the loss is covered if the covered risk was the efficient proximate cause of the loss.  Conversely, the loss is not covered if the covered risk was only a remote cause of the loss, or the excluded risk was the efficient proximate, or predominate, cause.

     In De Bruyn, the insured returned from vacation to find a toilet had overflowed, causing significant water damage to his home.  As a result of the water damage, the house became contaminated by mold.  The policy covered water damage from sudden and accidental discharge of water from within a plumbing system.  Mold, however, was not covered, even if resulting from water damage.  Consequently, the insurer denied coverage for mold damage.

     The issue was whether the insurer could rely on the absolute mold exclusion to deny coverage for mold damage resulting from the covered discharge of water in light of the Efficient Proximate Cause Doctrine.  The insurer argued the doctrine did not apply because an insurance company could limit coverage for some, but not all, manifestations of water damage.  The Court of Appeal agreed.  The policy expressly provided there was no coverage for losses caused by mold resulting from a sudden and accidental discharge of water.  The exclusion of mold resulting from a sudden release of water did not violate the Efficient Proximate Cause Doctrine.

     Hawaii has never codified the Efficient Proximate Cause Doctrine.  Further, the Hawaii appellate courts have never applied the doctrine.

Florida Supreme Court Departs from Burlington Reasoning in Construction Defect Case

     In an earlier post, Robert discussed the impact of the Ninth Circuit’s decision in Burlington Ins. Co. v. Oceanic Design & Constr., 383 F.3d 940 (9th Cir. 2004) on Hawaii insurance law. Robert pointed out in Burlington, the Ninth Circuit predicted that under Hawaii insurance law, the Hawaii Supreme Court would find that claims related to a contract would not trigger coverage unless an independent basis sounding in tort was alleged.  The post pointed out the distinction between the Weedo v. Stone-E-Brick, Inc. line of cases, finding that a construction defect constitutes an “occurrence” only if there is damage to “other property” and the American Family Mut. Ins. Co. v. American Girl, Inc. analysis, holding that damage caused by a soil engineer was “property damage” caused by an “occurrence” as defined by CGL policies.

     Hawaii insurance practitioners will want to take note of a recent construction defect case in which the Florida Supreme Court adopted the American Girl line of cases.  See United States Fire Ins. Co. v. J.S.U.B., Inc., No. SC05-1295 (Fla. Sup. Ct., Dec. 20, 2007).  The court determined that defective work performed by a soil compacting subcontractor that causes damage to the contractor’s completed project and is neither expected nor intended from the standpoint of the contractor can constitute “property damage” caused by an “occurrence” under a standard commercial general liability policy.

     Relying on American Girl, the Florida Supreme Court rejected U.S. Fire’s argument that a breach of contract can never result in an “accident” because this was not supported by the language of the policies.   U.S. Fire’s assertion that damage resulting from a breach of contract is expected was also unpersuasive.  This position would make the definition of “occurrence” dependent on whether the property damage is part of the construction contract or the homeowner’s separate property.  The appropriate analysis focused on whether the damage was expected or intended from the standpoint of the insured, not whose property was damaged.

     Further, reading the business risk exclusions, including the “your work” and “your product”, in conjunction with the insuring agreement supported the conclusion that a subcontractor’s defective work resulting in damage to the completed project can constitute an “occurrence.”  Therefore, faulty workmanship that is neither intended nor expected from the standpoint of the contractor can constitute an “accident” and, thus, an ‘occurrence.”  In the Florida case, the subcontractor’s defective soil preparation, which the insured contractor did not intend or expect, was an “occurrence.”

     Finally, the Florida Supreme Court rejected U.S. Fire’s argument that faulty workmanship injuring only the work product itself does not result in “property damage.”   Again relying on American Girl, the court determined the claim was not for the cost of repairing the subcontractor’s defective work, but rather a claim for repairing the structural damage to the completed homes caused by the subcontractor’s defective work.  It was the subsequent soil settlement due to the subcontractor’s faulty workmanship that caused the structural damage to the homes.  Because there was “physical injury to tangible property,” the court concluded that the structural damage to the homes was “property damage.”