Insurance Law Hawaii

Coverage for Punitive Damages Does not Violate Public Policy in Texas

     Under Hawaii Insurance law, punitive damages are not insurable unless expressly provided for in an insurance policy.  Haw. Rev. Stat. §431:10-240.  A recent Texas case issued a surprising decision holding that public policy did not bar a liability insurer from covering punitive damage for an employer’s gross negligence.  See Fairfield Ins. Co. v. Stephens Martin Paving L.P., 2008 Tex. LEXIS 123 (Tex., Feb. 15, 2008).

     In Fairfield, an employee died in 2002 when a piece of equipment overturned.  Stephens Martin Paving was insured for workers compensation and liability by Fairfield at the time.  Fairfield paid workers compensation benefits to the employee’s family.  When the family later learned Stephens did not maintain a safe workplace, it sued for gross negligence.

     Fairfield moved for declaratory relief in federal court, seeking a determination on whether coverage was available for punitive damages due to the employer’s gross negligence.  The District Court determined Texas public policy did not prohibit coverage for punitive damages.  The Fifth Circuit Court of Appeals certified to the Texas Supreme Court whether state public policy prohibited a liability insurer from paying punitive damages for a policyholder’s gross negligence.

     The Texas Supreme Court responded by holding that state law did not prohibit indemnity coverage for punitive damages for gross negligence.  Given Hawaii’s statute, it seems doubtful the Hawaii Supreme Court would reach the same result unless the policy provided for punitive damages.

Allstate Agrees to Reinstate Hundreds of Homeowners' Policies in Louisiana

     We are in no hurry for another hurricane to strike Hawaii.  Hurricane Katrina, however, has created many interesting insurance-related issues.  if and when a hurricane strikes Hawaii again, resolution of these issues are bound to impact Hawaii insurance law.

     The Associated Press reports Allstate will restore coverage for hundreds of customers in Louisiana whose policies were cancelled after Hurricane Katrina.  Customers who sought to increase coverage after Hurricane Katrina were switched to a different Allstate division.  Louisiana law prohibits insurers from cancelling policies in effect for three years or longer.  Nevertheless, Allstate considered the increase in coverage and switch to a new division to be a new policy, justifying the cancellation of customers' wind and hail coverage.  The Illinois Insurance Commissioner investigated these actions by Allstate, whose home offices are in Northbrook, Illinois.

     Allstate also agreed to reinstate policies that were cancelled after "drive-by" inspections incorrectly determined policyholders' homes were abandoned after Hurricane Katrina.  Allstate did not admit fault, but agreed to pay $250,000 to the State Insurance Commission to avoid expenses that would have been generated by an administrative hearing on the cancellations.

Court Prevents Double Recovery for Flood and Wind Damage

     The interplay between wind and flood coverage after a catastrophic storm is always of interest to Hawaii insurance law because we live in a state prone to hurricane damage.  The latest case to address the dichotomy between wind and flood coverage is Ragas v. State Farm Fire and Casualty Co., 2008 U.S. Dist. LEXIS 10285 (D. La., Feb. 11, 2008).

     Hurricane Katrina’s high winds and flooding from damaged the insured’s home in New Orleans.  State Farm paid the limits of her flood policy, $105,000.  The insured also filed a claim under her homeowner’s policy, which covered wind damage.  After State Farm inspected, it paid $28,183.43 for wind damage.

     The insured then filed suit, claiming her home was rendered a total loss prior to any flooding.  She demanded the limits of her homeowner’s policy ($90,090 for structural damage and $61,425 for contents).  State Farm argued this would amount to a double recovery.  The insured’s complaint claimed her total damage was $112,450; State Farm had already paid a total of $133,183.43.

     The Court sided with State Farm, a determination that seems logical and correct.  The insured was not entitled to a windfall, double recovery by now re-characterizing as wind damage those losses for which she had already been compensated by previously attributing to flood waters.  The insured could not retain the flood payments while seeking damages under her homeowner’s policy for the very same losses for which she had already been compensated under her flood policy.  Therefore, the insured was precluded from claiming and receiving additional amounts for structural damage under her homeowner’s policy.

Vessel Owner’s Failure to Volunteer Pertinent Information Voids Vessel Pollution Policy

     The Ninth Circuit recently issued a decision regarding a vessel pollution insurance policy that could have implications for Hawaii.  In Certain Underwriters at Lloyds, London v. Inlet Fisheries Inc., No. 06-35383 (9th Cir., Feb. 11, 2008), the Court determined Lloyds was justified in voiding a policy because the insured did not volunteer important information.

     Prior to seeking a vessel pollution policy from Lloyd’s, the insured, Inlet, experienced two large oil spills in Bethel, Alaska, one at the city pier and the other in Steamboat Slough.  (As a former resident of Bethel, I passed through Steamboat Slough many times on boat, dog sled and skis.  The Slough acquired its name from steamboats abandoned there after traveling up the Kuskokwim River).  When applying for the policy, Inlet responded to the request for “pollution loss history” by writing “None.”  Inlet did not supply, and the application did not request, information about the condition of Inlet’s vessels or Inlet’s financial status.

     After acquiring a policy from Lloyds, an Inlet vessel again spilled oil and pollutants when it sank in Steamboat Slough (thereafter undoubtedly making passage through the Slough by boat, dog sled or skis problematic).  Inlet made a claim under its vessel pollution policy, prompting Lloyds to investigate both the incident and Inlet generally.  Upon learning of Inlet’s failure to disclose the prior incidents, the poor condition of its vessels, and its pending bankruptcy, and after Inlet refused to cooperate with the investigation, Lloyds filed suit seeking a declaratory judgment that it had a right to void the policy ab ignitio under the doctrine of uberrimae fidei.  The District Court granted summary judgment in favor of Lloyds.

     The doctrine of uberrimae fidei imposes a duty of utmost good faith and requires that an insured fully and voluntarily disclose to the insurer all facts material to a calculation of the insurance risk.  The doctrine was first recognized in 1766 and was codified in English law in 1906.  In 1828, the U.S. Supreme Court incorporated the doctrine into American maritime insurance law.  More recently, stand-alone coverage of maritime insurance referred to as vessel pollution insurance has emerged as a separate coverage of marine insurance in response to the 1990 Oil Pollution Act.

     The issue in this case was whether the vessel pollution insurance issued to Inlet was appropriately characterized as marine insurance and, therefore, whether the doctrine of uberrimae fidei was applicable.  The doctrine of uberrimae fidei requires a marine insurance applicant, even if not asked, to reveal every fact within its knowledge that is material to the risk.  An insurer can rescind a policy if it can show either intentional misrepresentation of a fact, regardless of materiality, or nondisclosure of a fact material to the risk, regardless of intent.

     Affirming the District Court, the Ninth Circuit held the federal maritime doctrine of uberrimae fidei, rather than state law, applies to marine insurance contracts. Further, for purposes of applying uberrimae fidei¸ the vessel pollution insurance issued to Inlet was appropriately characterized as marine insurance.  The facts undisclosed by Inlet were material to the insurance risk undertaken by Lloyds and voiding the policy was justified.

     Because the Ninth Circuit held that the doctrine of uberrimae fidei, rather than state law, applies to marine insurance contracts, this decision would presumably apply in a Hawaii case involving vessel pollution insurance.

Employer’s Mere Payment of Premiums Does not Create Employee Benefit Plan under ERISA

     Courts consistently strike down state laws that create claims for relief against ERISA-covered employee benefit plans, even if those state laws also regulate insurance.  In 2004, the Hawaii Supreme Court found that the Employee Retirement Income Security Act (ERISA) preempted Hawaii’s statute providing review by the Insurance Commissioner pursuant to the Patient’s Bill of Rights and Responsibilities Act (Haw. Rev. Stat. Chap. 432 E).  See Hawaii Management Alliance Assoc. v. The Insurance Commissioner, 106 Hawaii 21, 100 P.3d 952 (2004).  This ruling foreclosed a more favorable standard of review utilized by the Insurance Commissioner under state law for employees challenging denial of coverage under health plans.

     It is rare to find a health plan excluded from ERISA coverage.  The Fifth Circuit found such a plan, however, in a recent case, Shearer v. Southwest Service Life Ins. Co., No. 07-20646 (5th Cir., Jan 31, 2008).  There, the insured, a 50% owner of the company, obtained health insurance for himself and family from Defendant-Insurer.  Other employees were not covered by the plan.  The company paid the premiums for the insured’s policy.  The insured’s son required hospitalization and surgery, but the insurer refused to pay all of the claims.

     The insured sued in state court on state law claims of misrepresentation, breach of contract, unfair and deceptive trade practices, and unfair claim settlement practices.  The insurer removed the case to federal court and argued the policy was covered by ERISA, thereby preempting the insured’s state law claims.  The district court granted the insurer’s motion for summary judgment, ruling that the insured’s claims failed to meet the ERISA standard for relief.  The insured appealed, contending the district court lacked jurisdiction because the insurance policy was not an ERISA plan.

     Under ERISA, state law is preempted as it relates to any employee benefit plan.  Here, the evidence showed that the company did nothing more than pay premiums on the policy.  The company did not even issue a booklet regarding the plan.  Consequently, the company did not intend to establish and maintain a plan to benefit its employees.  The bare bones purchase of insurance was insufficient to create an ERISA plan.  Accordingly, the district court lacked jurisdiction.

Indiana Sends Insurance Agents Back to School for Flood Coverage

     The Frankfort, Indiana Times reports that as a consequence of heavy flooding this winter, state insurance regulators will require additional training for agents selling flood insurance.  Home insurance policies generally do not include coverage for flood damage.  Only one percent of Indiana’s 2.3 million homes have such insurance, while flood losses from 1998 to 2007 total $40 million.

     While visiting flood impacted areas this winter, state insurance regulators have responded to many questions about flood coverage and have realized people are under-informed about the coverage.  Therefore, after July 1, new agents will be required to take a three-hour course before selling policies.  Current agents must complete the course by 2010.

Condominiums Take Advantage of Florida Self Insurance Trust

     Florida enacted legislation last year to allow condominiums to take greater control over the costs and availability of hurricane coverage through the formation of self insurance trusts.  The Palm Beach Daily News reported last week that the Palm Beach Windstorm Self Insurance Trust was the first group in the state able to meet new hurricane-damage requirements.

     The trust now has 58 condominium and cooperative members.  The experimental program is meant for gibber buildings. All condominiums and cooperative associations taking part in the trust have values of more than $10 million.  To participate, each condo association has to select an agent.

     The rates are slightly lower that coverage offered by Citizens Property Insurance Corporation, and may become more attractive after an anticipated rate increased by Citizens Property  Palm Beach Windstorm Self Insurance Trust, with a 5 percent deductible, can have 35 percent lower rates that Citizens with a 3 percent deductible.

Falling Insurance Prices Mean Less Profit for Brokers

     Market Watch has reported that falling prices for commercial insurance and other coverage is beginning to affect insurance broker’s revenue growth.   Property and casualty insurance prices rise and fall in cycles.  When insurance companies are profiting from business, they compete more aggressively to win new business, driving prices down and cutting future profits.  When earnings fall and competition wanes, insurance prices start to climb again.

     Insurance brokers are affected by this cycle because they obtain a large portion of their revenues form commissions, usually charged as a percentage of premiums.  When prices are rising, the brokers’ revenues increase.  When prices fall, revenues stagnate or decline.  During the fourth quarter of 2007, commercial insurance prices dropped by 12 % on average.

Hawaii Settles Suit with AIG

     We previously reported on Hawaii’s settlement with Travelers in a suit filed in Florida.  Pacific Business News and the Honolulu Advertiser report that Hawaii and eight other states and the District of Columbia have settled its claims in the same suit against American International Group Inc.  AIG will pay Hawaii $12.5 million.

     The suit challenges a “pay-to-play” tactic used by Marsh & McLennan and other insurance brokers.  AIG and several of its subsidiaries allegedly conspired with March and other brokers by submitting fake bids to create the illusion of a competitive bidding process.

Excess Carrier not Entitled to Reimbursement of Settlement Funds

     The Hawaii Appellate Courts have never decided whether the insurer may seek reimbursement of defense or settlement costs if it is determined there is no duty to defend under the policy.  Federal District Court Judge Helen Gillmor, however, believes that Hawaii case law permits an insurer to obtain reimbursement of defense costs in a diversity case.  See Scottsdale Ins. Co. v. Sullivan Properties, Inc., 2007 U.S. Dist. Lexis 57021 (D. Haw., Aug. 2, 2007).

     Texas joins the majority of states and holds that an insurer that settles a claim against its insured when coverage is later determined not to exist may seek reimbursement if the insured has given its clear and unequivocal consent to the settlement and the insurer’s right to seek reimbursement.  See Tex. Ass’n of Counties County Gov’t Risk Mgmt. Pool v. Matagorda County, 52 S.W. 3d 128, 135 (Tex. 2000).  In a recent case, the Texas Supreme Court considered whether an excess insurer was entitled to reimbursement where there is no duty to defend and the insured demanded the insurer accept a reasonable settlement offer from the claimant, but the policy did not provide for reimbursement.  See Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., No. 02-0730 (Tex. Supr. Ct., Feb. 1, 2008).

     In Excess Underwriters, the insured was sued when the drilling platform it fabricated collapsed.  The insured had a $1 million primary liability policy and excess coverage up to $10 million with Excess Underwriters.  The claimant offered to settle for $7.5 million, an amount within the excess policy limits.  The insured felt the offer was reasonable and asked Excess Underwriters to accept.  The excess carrier agreed to fund the settlement if the insured would agree to reserve coverage issues and the right to reimbursement for resolution at a later date.  The insured declined.  Nevertheless, the excess carrier accepted the claimant’s offer to settle.

     Excess Underwriters then filed a coverage suit.  The trial court initially determined Excess Underwriters was entitled to reimbursement, but later reversed itself when the Texas Supreme Court issued the Matagorda County decision.  The court of appeals affirmed, and the Supreme Court agreed to decide whether Matagorda County allowed an excess carrier to assert a reimbursement right under the circumstances.

     The Supreme Court first refused the excess carrier’s invitation to overrule Matagorda County.  Next, the Court disagreed that the insured had impliedly agreed to reimburse the excess insurer by taking an active role in procuring the settlement offer and in demanding the excess carrier settle the claim. Finally, the Court refused to recognize an equitable right to reimbursement that would require re-writing the policy.  Accordingly, the excess carrier failed to establish a right to reimbursement.