Insurance Law Hawaii

Ninth Circuit Affirms Reimbursement and Prejudgment Interest to Insurer

    The Ninth Circuit recently affirmed the district court's decision granting reimbursement and prejudgment interest on amounts paid to the insured for defense and settlement pursuant to a reservation of rights.  See Evanston Ins. Co. v. OEA, Inc., No. 07-15316 (9th Cir. May 21, 2009)[here]. 

    OEA acquired a claims-made policy from Evanston Insurance Company in 1998.  The policy period ran from May 1, 1998, to May 1, 1999. 

    OEA and its wholly owned subsidiary, OEA Aerospace, Inc., were sued by two employees in late 1996 and early 1997 for injuries suffered in Aerospace's plant.  Although Aerospace was served with the complaints in 1997, OEA was not served until over a year later in October 1998.  OEA notified Aerospace's worker's compensation carrier of the claims, but did not provide notice to Evanston because it did not think the employees intended to hold OEA liable.

    Aerospace was ultimately dismissed from the actions because the claims were barred under the worker's compensation laws.  OEA eventually settled both suits.  Under a reservation of rights, Evanston paid over $1.5 million to defend and settle the two cases.  Evanston then filed suit, alleging there was no coverage under the claims-made policy and seeking reimbursement of amounts paid with prejudgment interest.  The district court granted summary judgment to Evanston. 

    The Ninth Circuit affirmed.  Although OEA contended it was not aware of the employees' intention to hold OEA liable for their injuries until October 1998 (during the policy period), the complaints clearly established such an intent.  Therefore, the district court correctly held that the claims were first made in 1997 and prior to the policy period.  OEA did not pay premiums to cover these claims.  Evanston's payments for the  defense and settlement gave OEA more than its bargained-for coverage.  Therefore, Evanston was entitled to reimbursement of $1.5 million in defense and settlement costs.

    The Ninth Circuit also affirmed the district court's award of prejudgment interest.  California law permitted prejudgment interest in the insurer-insured situation where the amounts of damages were certain instead of restricting plaintiffs to postjudgment interest. 

Coverage Denied for Subcontractor's Defective Work

    Coverage for a subcontractor's defective work was the issue presented in Westfield Ins. Co. v. Sheehan Constr. Co., No. 08-3463, 2009 U.S. App. LEXIS 9021 (7th Cir. April 29, 2009). 

    Moisture problems were found in a residential subdivision for which Sheehan was the general contractor.  An investigation determined defective work by one of Sheehan's subcontractors caused the problem.  In the underlying suit, Sheehan settled for $2.8 million and then sought indemnity from Westfield.  The district court found there was no coverage.

    The CGL policy did not cover property damage to a contractor's own work, denoted in the policy as "your work."  Sheehan argued the problem stemmed not from its work but from the subcontractor's work.  Further, the standard CGL form was revised in 1986 to remove subcontractors' work from the definition of "your work." 

    The Seventh Circuit agreed the standard form changed in 1986 by adding the phrase, "[t]his exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor."  Sheehan, however, did not purchase a policy with this language.  It bought a policy that lacked the "does not apply to subcontractors' work" language.  Instead, Sheehan's policy defined "your work" to include, "[w]ork or operations performed by you or on your behalf."  Sheehan's premiums presumably reflected the difference in language.

    Thanks once again to my Damon Key colleague and fellow blogger, Robert Thomas (inversecondemnation.com), for sending me this case.

Business Risk Exclusions Not Applicable For Damage To Building Caused By Installation of Carpet

    Exclusions (k) and (m) in comprehensive general liability policies were the focus of a recent decision from the First Circuit.  See Essex Ins. Co. v. BloomSouth Flooring Corp., No. 06-2750, 2009 U.S. App. LEXIS 7896 (1st Cir. April 16, 2009) [here]. 

    Boston Financial Data Services (BFDS) hired Suffolk Construction Corporation as general contractor for a tenant improvement project.  Suffolk subcontracted with BloomSouth to install carpet throughout the building.  The subcontract required BloomSouth to perform minor preparation work on the concrete floor before laying the carpet.

    After BloomSouth installed the carpet, BFDS employees moved back into the building.  The employees, however, noticed an odor.  BloomSouth scraped up the original carpet adhesive and re-carpeted the floor.  The odor, however, spread to other parts of the building.  BFDS presented a claim to Suffolk and demanded that the carpet be removed and the smell be eliminated.  Suffolk, in turn, demanded that BloomSouth respond to BFDS's claim.  When BloomSouth refused, Suffolk paid BFDS $1.4 million for remediation efforts. 

    BloomSouth had commercial general liability policies with Essex.  Suffolk was an additional insured on the policies.  Suffolk notified Essex of BFDS's claim and demanded that Essex defend and indemnify.  Essex denied coverage.

    Suffolk sued BloomSouth, alleging BloomSouth's negligent and defective work caused Suffolk to spend money in an attempt to eliminate the alleged odor.  Essex then sued Suffolk and BloomSouth for a declaratory judgment on its coverage obligations. 

     The district court granted Essex's motion for summary judgment.  The court agreed Suffolk's underlying complaint alleged property damage.  But Exclusion (m) barred coverage for property damage to "impaired property," defined as property that had not been physically injured.  This exclusion barred coverage because Suffolk's allegation that an unwanted odor permeated the building was an allegation of "impaired property."  Exclusion (k) excluded coverage for property damage to the insured's own product.  This exclusion applied to Suffolk's allegation that the concrete floor had to bead-blasted prior to the installation of the replacement carpet.  

    The First Circuit reversed, finding neither exclusion barred coverage.  First, Exclusion (m) was not applicable because Suffolk's complaint alleged that odor "permeated the building," which could reasonably be interpreted to mean the odor physically injured the property.  Further, property could only be "impaired property" if it could not be restored to use by "the repair, replacement, adjustment or removal of [the insured's] product or work."  A fair reading of Suffolk's complaint suggested the property could not be restored to use simply by repairing, replacing, adjusting, or removing BloomSouth's product or work. 

    Second, Exclusion (k) eliminated coverage for "property damage to 'your product' arising out of it or any part of it."  "Your Product" meant "[a]ny good or products, other than real property, manufactured, sold, handled or distributed or disposed of by . . . You . . . ."  Here, Suffolk's complaint alleged damage to "real property," BFDS's concrete floor.  Further, there was no indication that BloomSouth "manufactured, sold, handled, or distributed or disposed of" the concrete floor.

    Finally, BloomSouth was entitled to attorney's fees.  In Massachusetts, an insured could recover attorney fees incurred in establishing that the insurer breached its duty to defend.  Therefore, Massachusetts law on the insured's recovery of fees after successfully establishing coverage is similar to Hawai`i statute on fees.  See Haw. Rev. Stat. 431:10-242.

    

     

No Duty to Defend Excavation Damage Under Contractor-Subcontractor Exclusion

    In Nautilus Ins. Co. v. 1452 N. Milwaukee Avenue, LLC, No. 07-3147 (7th Cir. April 7, 2009) [here], the Seventh Circuit found there was no duty to defend a land owner causing property damage based on the contractor-subcontractor exclusion.

    When excavating its property and demolishing a building thereon, 1452 LLC damaged a neighboring building.  Suit was filed against 1452 LLC, the general contractor, project manager and subcontractor hired by 1452 LLC to perform the excavation.  The suit alleged the general contractor, project manager and subcontractor failed to properly reinforce the neighboring property; ran a backhoe into the side of a restaurant, causing structural damage; and committed various other errors and omissions during the course of the work.  The complaint asserted various claims against the general contractor, project manager and subcontractor.  Moreover, claims asserted against 1452 LLC included negligence, negligent hiring and supervision, res ipsa loquitur, and violation of a state statute requiring notice to the owner of neighboring land before excavation.

    1452 LLC tendered the suit to its CGL carrier, Nautilus, who denied coverage and filed a declaratory relief action.  The district court rejected arguments that Nautilus had no duty to defend based on the policy's contractors and subcontractors exclusion or the "classification limitation" exclusion.  Although the alleged property damage was caused by 1452 LLC's contractors' operations, the statutory notice claim fell outside the exclusion.  1452 LLC could be liable based on its own conduct, not that of contractors or subcontractors.   Further, the classification-limitation exclusion, which limited coverage to "vacant Land' and a "vacant building" was not applicable. Although Nautilus argued it was possible the building was being used in some capacity, the underlying complaint did not support this speculation.  Therefore, Nautilus had a duty to defend.

    The Seventh Circuit reversed on the basis of the contractor-subcontractor exclusion.  The claims against 1452 LLC did not allege any property damage independent of the property damage caused by the contractors and subcontractor.  Instead, there were allegations that 1452 LLC was liable for the sameproperty damage by virtue of having failed to give the statutorily required notice.  Because the alleged property damage fell within the terms of the contractor-subcontractor exclusion, the alternative theory of relief against 1452 LLC did not trigger coverage.

    Finally, the applicability of the classifications limitation was academic.  Nevertheless, the court noted Nautilus' arguments were weak.  The underlying compliant did not allege that the building was being used or was anything but vacant.  Describing excavation of the property in the complaint suggested the building was consistent with the "vacant land" and "vacant building" classification in the policy.

    No Hawai`i appellate court has considered either the contractor-subcontractor exclusion or the classification limitation exclusion.

Tenth Circuit Enforces Anti-Assignment Provision

    Our last post [here] summarized a case in which the Ninth Circuit found the anti-concurrent provision to be ambiguous.  See Alexander Mfg., Inc. v. Illinois Union Ins. Co., No. 07-35812 (9th Cir. March 25, 2009) [here].  Today we review a case in which the anti-assignment provision was strictly construed by the Tenth Circuit.  See Manchester v. Certain Underwriters at Lloyds, London, No. 08-6119, 2009 U.S. App. LEXIS 6033 (10th Cir. March 23, 2009).

    The insureds, the Rutzes, owned a water park, operated as Sun 'N Fun Family Recreation, Inc. ("Inc.").  In mid-June 2005, they decided to sell the water park to the Behars.  Inc. held a liability policy with Underwriters that was set to expire on June 25, 2005.  On June 25, 2005, Inc. mailed a premium check to Underwriters.  On July 27, 2005, Underwriters issued and mailed to Inc. a renewal policy.  The policy listed Inc. as the insured.  The policy included a non-assignment provision which provided the policy could not "be assigned without the prior written consent of the Insurer."  During the negotiations for the sale of the water park, the parties had discussed having Inc.'s policy transferred to the Behars.  This never took place, however, nor did Underwriters ever approve transfer of the policy to the Behars.

    The Behars took over operation of the water park on June 29, 2005.  On July 14, 2005, an employee fell from one of the water slides and died.  On July 25, 2005, a payment was due on the policy.  The Behars sent a premium payment to Underwriters, using the checking account that had previously been used by Inc. and the Rutzes.  In October 2005, Underwriters returned the payment to the Behars. 

    When the victim's family sued, the Behars tendered to Underwriters.  Coverage was denied and suit was filed.  The district court found there was no coverage under the policy.

    On appeal, the Tenth Circuit affirmed.  The Court determined Underwriters had neither waived nor was estopped from asserting the non-assignment provision.  Underwriters could not waive the requirement because they were never provided with notice that Inc. wanted to transfer the policy to the Behars.  Nor was there evidence of any statement or admissions by Underwriters that could reasonably be considered inconsistent with its reliance on the non-assignment provision.

Insurer Must Defend Until Jury Determines No Duty to Indemnify

      In Emhart Indus., Inc. v. Century Indemn. Co., No. 07-2806 (1st Cir. March 13, 2009)[here], the First Circuit found a duty to defend a CERCLA case until the point at which it was determined there was no duty to indemnify.

    From 1944 to 1968, Metro-Atlantic operated a chemical plant at the nine acre site.  In 1964, Metro-Atlantic manufactured hexachlorophene for less than one year.  Dixon is a byproduct of the hexachlorophene manufacturing process.  In 1968, Metro-Atlantic merged with Crown Chemical Corporation to form Crown-Metro and thereafter ceased operations at the site.  Emhart eventually became the corporate successor to Crown Metro. 

    The EPA discovered dioxin on the site in 1998.  In 2000, it issued a Notice of Potential Liability under CERCLA, identifying Emhart as a Potentially Responsible Party.  The Notice required Emhart to pay costs of $947,140 incurred to date, as well as future costs, and to remove contaminated soil and river sediments.  The EPA also issued three Unilateral Administrative Orders for Removal Action requiring certain remedial work be performed on the site.  The anticipated costs of remediation were likely to exceed $100 million.

    Emhart sought coverage from Century under policies issued to Crown-Metro.  Eventually, Century located a primary policy issued to Crown-Metro in February 1969 and an excess policy in effect from December 1, 1969 to January 1, 1970.  Emhart sued when coverage was denied.  A six week trial was conducted on the issue of indemnity.  The jury entered a verdict that there was no duty to indemnify.

     Thereafter, the district court awarded summary judgment to Emhart on Century's duty to defend under both the primary and excess policies.  Under the "pleadings test" applicable in Rhode Island, the EPA's charging documents alleged claims that were potentially covered.  The district court further found that Century had breached its duty, and damages in the amount of $4.2 million, the total defense costs of the underlying EPA action, were awarded.  The district court ruled, however, that Century's duty to defend ceased as of the October 19, 2006 jury verdict.  Further, Emhart was not entitled to total indemnity costs as damages for Century's breach of its  duty to defend.

    The First Circuit affirmed in all respects.  The Court agreed that the pleadings test was applicable despite Century's argument to the contrary. 

    Century also argued the district court erred in allocating to Century the total defense costs incurred prior the jury verdict.  Century advocated use of the "time-on-the-risk" scheme of allocation, which would limit the defense costs based on the ratio between the periods of Century's coverage (approximately one year) and the entire period of dioxin exposure alleged by the EPA (approximately fifty-eight years).  The First Circuit agreed with the district court that the "all sums" language in the primary policy and the "ultimate net loss" language on the excess policy placed no limit on the amount of defense costs that could be allocated to Century. 

    Next, the Court considered Emhart's cross-appeal, contending the district court erred in limiting the damages to only those defense costs accrued as of the date of the jury verdict.  The First Circuit agreed the jury's findings of fact proved there was no duty to indemnify under the policies, thereby negating any duty to defend.  Emhart also argued it was entitled to full indemnity costs as damages.  The First Circuit disagreed because Emhart had not proven any contract damages beyond the costs of defense.

    Finally, the First Circuit rejected Emhart's challenge to jury instructions on the applicable trigger. Emhart contended the jury should have been instructed using either the "continuous trigger" or "injury-in-fact" standard.  The issue on the verdict form read, "Was dioxin contamination discoverable in the exercise of reasonable diligence during the policy periods?"  The First Circuit determined the "injury-in-fact theory" and "continuous  trigger" were incorporated in the instructions and verdict form. 

Insurers Must Idemnify Where Inability to Allocate Between Covered and Uncovered Losses

    Revisiting the longstanding Stringfellow Acid Pits coverage litigation, the California Supreme Court relied on the doctrine of concurrent proximate cause as applied to the pollution exclusion to determine the insurer must indemnify for covered and uncovered claims.  See State of California v. Allstate Ins. Co., S149988 (Cal. March 9, 2009)[here].

    In the 1950's, the State constructed the Stringfellow Acid Pits, a hazardous waste disposal site. The State's geologist determined the site was suitable because it had an impermeable layer of rock, which he assumed had no water in it.  Therefore, it was believed the site posed no threat of environmental pollution.

    Consequently, after the site was opened in 1956, more than 30 million gallons of liquid industrial waste were deposited in the Stringfellow ponds.  The site was closed in 1972 after groundwater contamination was discovered.  Under the site was decomposed granite and fractured bedrock, through which an underground alluvial channel ran.  Chemical pollution was seeping into the groundwater around the ends of the barrier dam, which was negligently constructed.  Further, two major rain storms, one in 1969 and one in 1978, caused overflow and allowed polluted water to run down the canyon. 

    The state sought coverage for liability imposed in a federal court suit.  The policies issued by four insurers excluded liability resulting from environmental pollution.  The exclusion was qualified, however, by a "sudden and accidental" exception. 

    The insurers denied coverage for the federal court liability.  The state sued.  The trial court granted summary judgment to the insurers based on the pollution exclusion.  The Court of Appeal reversed, relying on State Farm Mut. Auto. Ins. Co. v. Partridge, 10 Cal. 3d 94 (1973) and finding the policies covered the State's liability for indivisible damage caused partly by covered causes and partly by excluded causes.

    The Supreme Court affirmed in part and reversed in part.  First, the Supreme Court agreed with the Court of Appeal that the relevant discharges for application of the pollution exclusion were those in which, due to the State's negligence, pollutants were released form the Stringfellow ponds into the surrounding soils and groundwater.  The Court rejected the insurers' contention that the relevant discharges were the initial disposals of wastes in the the unlined ponds, which would be neither sudden or accidental. 

    Next, the Supreme Court reversed the Court of Appeal's finding that because the 1978 flooding followed the 1969 overflow, the 1978 event was nonaccidental.  The Supreme Court determined there was a triable issue of fact because the rains preceding the 1969 and 1978 discharges were extraordinary and unpredictable.  On this evidence, a trier of fact could reasonably find the State did not expect the discharges.

    Finally, the Supreme Court considered whether the State must prove how much of the property damage was caused by the sudden and accidental releases.  Under the policies, liability for property damage caused by an accident was covered, while that caused by gradual or nonaccidental release of pollutants was excluded.  The summary judgment record showed at least a triable issue of fact as to whether the 1969 and 1978 discharges were substantial factors in causing contamination of soils and groundwater. 

    Under Partridge, when there were concurrent proximate causes of an accident, the insurer was liable so long as one of the causes was covered by the policy.  The 1969 and 1978 releases would have rendered the State fully liable for contamination, without consideration of the subsurface leakage, if they were substantial factors in causing the damage.  Although subsurface leakage from the site, an excluded cause of property damage, also contributed to the contamination, this was insufficient to defeat coverage under Partridge because liability coverage exists when an insured risk constitutes a proximate cause of an accident, even if an excluded risk is a concurrent proximate cause.  If the insured proved that multiple events had contributed to cause a single injury or an indivisible amount of property damage, such that one or more of the covered causes would have rendered the insured liable for the entirety of the damages, the insured's inability to allocate the damages by cause did not excuse the insurer from its duty to indemnify. 

    In sum, summary judgment for the insurers based on the policies' qualified pollution exclusion was improper.

    Once again, thanks to my Damon Key colleague and veteran blogger, Robert Thomas (inversecomdemnation.com) for giving me early notice of this case.

Outline on Transfer of Liabilty Policies When No-Assignment Clause

    The outline on transfer of liability policies to a successor created by Rina Carmel and me for our round table presentation last week at the ABA Section of Litigation, Insurance Coverage Litigation Committee in Tucson, is here.  Materials from the plenary and breakout sessions are available at the ABA Section of Litigation website.

Texas Court Determines Insured Cannot Rely On Extrinsic Evidence for Duty to Defend

    Under Dairy Road Partners v. Island Ins. Co., 92 Hawai`i 398, 414, 992 P.2d 93, 117 (2000), the Hawai`i Supreme Court determined an insured, but not the insurer, can rely on extrinsic evidence to clarify the underlying allegations and demonstrate the possibility of a claim being covered.  The Texas Supreme Court recently departed from this reasoning and held neither the insured nor the insurer can go beyond the eight corners of the underlying complaint and policy to trigger the duty to defend.  See Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., No. 06-0867, 2009 Tex. LEXIS 30 (Tex. Sup. Ct. Feb. 13, 2009).

    Pine Oaks, a home builder, sought a defense when sued by homeowners alleging their homes suffered water damage because of defective construction.  The trial court granted summary judgment for Great American and the court of appeals affirmed, reasoning that the alleged defective work was excluded under the "your work" exclusion.  This policy exclusion removed coverage for property damage to the insured's completed work.  An exception to the exclusion existed, however, if the damaged work or work out of which the damage arose was performed by a subcontractor. 

    The underlying complaint contained no allegation of defective work by a subcontractor.  Pine Oak submitted extrinsic evidence, however, that the alleged defective work was performed by subcontractors. 

    The Supreme Court first held that under Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W. 3d 1 (Tex. 2007), a claim of faulty workmanship against a homebuilder was a claim for property damage caused by an occurrence.  Further, under Don's Building Supply, Inc. v. OneBeacon Ins. Co., 267 S.W. 3d 20 (Tex. 2008), the actual injury rule, under which property damage occurs during the policy period if actual physical damage to property occurred during the policy period, applied.  So far, so good.

    The Supreme Court, however, strictly adhered to the eight-corners rule and determined there was no duty to defend.  Faulty workmanship by a subcontractor was not alleged in the underlying petition.  In deciding the duty to defend, the trial court should not consider extrinsic evidence from either the insurer or the insured that contradicts the allegations of the underlying petition.   Therefore, even though the pleading in the underlying case was apparently contradicted by extrinsic evidence, strict application of the eight-corners rule prevented a duty to defend.

    

Wisconsin Supreme Court Determines Each Exposure to Asbestos is an Occurrence

    If the manufacturer sells its asbestos-containing product without a warning, does this constitute one occurrence?  Or is each individual's exposure to asbestos, which results in injury, a single occurrence?  These were among the issues before the Wisconsin Supreme Court when faced with certified questions from the Seventh Circuit.  See Plastics Engineering Co. v. Liberty Mutual Ins. Co., No. 2008AP333-CQ (Wis. Jan. 29, 2009) [here].

        The insured manufactured and sold asbestos-containing products from 1950 to 1983.  The insured was named in a number of suits because of bodily injury or wrongful death allegedly related to exposure to its asbestos-containing products.  The insured held several primary and excess policies issued by Liberty Mutual during the years of alleged exposure and injury. 

    At trial, the federal district court concluded each person's injury resulting from exposure to asbestos constituted a separate occurrence.  Further, Liberty Mutual was obligated to pay all sums arising from an occurrence and was not entitled to a pro rata contribution from the insured.  On appeal, the Seventh Circuit determined the issues presented important unresolved questions under Wisconsin law, and certified questions to the Wisconsin Supreme Court.

    The Wisconsin Court first held that under the policy language, each individual's repeated exposure constituted an occurrence.  Under the cause theory, adopted in Wisconsin, where a single, uninterrupted cause results in all of the injuries and damage, there is one accident or occurrence.  Therefore, each claimant's repeated exposure was one occurrence.  The Illinois Supreme Court also recently addressed the issue of multiple occurrences.  [see post here].

    Next, the court held that once the policy was triggered, Liberty Mutual had to fully defend the lawsuit in its entirety and was responsible for "all sums," up to policy limits.  Under the all sums approach, the insurer was required to pay all sums that resulted from bodily injury that triggered a policy.  Accordingly, the Wisconsin Supreme Court decision on the "all sums" approach was consistent with the recent California Court of Appeal decision, State of California v. Continental Ins. Co.,  2009 Ca. App. LEXIS 1 (Cal. Ct. App. Jan. 5, 2009)[see post here].