Insurance Law Hawaii

Default Judgment Against Insured Does Not Bar Injured Party from Pursing Coverage Case

   A default judgment against the insured should not deprive the injured party from pursuing the coverage litigation according to the Ninth Circuit's decision in Westchester Fire Ins. Co. v. Northwest Airlines, Inc., No. 07-17383, 2009 U.S. App. LEXIS 23718 (9th Cir. Oct. 28, 2009).  

    The insured provided maintenance services for Northwest Airlines at the McCarran International Airport in Las Vegas.  The insured's liability policy required prompt notice of any possible claim be given the insurer.

   In February 2002, an aircraft owned by Northwest was damaged when it rolled down an embankment.  An employee of the insured was in the cockpit at the time of the incident.  The insured did not report the incident to Westchester.  A few months later, Northwest wrote and notifiedthe insured of Northwest's claim and requesting that the insured forward the correspondence to Westchester.  The insured still did not notify Westchester.

   In November 2003, Northwest directly notified Westchester of the accident and the claim against the insured.  This was Westchester's first notice of the claim.  Westchester commenced efforts to contact the insured and remind it of obligations under the policy.  When the insured was finally contacted, it promised to send to Westchester documents related to the claim, but the documents were never provided. 

   Northwest filed suit in Minnesota and secured an default judgment against the insured for $10.6 million.  Westchester issued a denial of coverage letter to the insured based on failure to cooperate and failure to notify Westchester of the Minnesota lawsuit.

   Westchester then filed an action for declaratory judgment that the insured had breached its duties under the policy and the insurer had no duty to defend or indemnify.  Northwest was allowed to intervene.  Westchester made repeated attempts to depose the insured, but the insured never attended the scheduled depositions.  Westchester moved to strike the insured's answer or compel the deposition.  The court granted the motion to compel, but denied the motion to strike.  When the insured still failed to attend scheduled depositions, however, the court granted the motion to strike and entered a default judgment against the insured under Rule 37 (d) for failure to respond to discovery.  Subsequently, an order entered judgment in favor of Westchester and against all defendants, including Northwest.

   Northwest appealed.  Northwest argued it was entitled to defend against Westchester's declaratory judgment action in its own right and that the district court should not have entered a default judgment against all defendants based on the insured's failure to appear for a deposition. 

   In an opinion by Judge Clifton (of Hawai`i), the Ninth Circuit agreed.  A default entered against an insured should not prevent an injured third party from proceeding on its own behalf.  Northwest was not responsible for the insured's failure to appear for the deposition.  

   Westchester argued that Northwest could not prevail because the insured failed to give proper notice of the claim as required under the policy.  Although this argument might eventually prevail, the default and subsequent judgment did not result from a determination that the insured's failure to notify the insurer about a potential claim relieved the insurer from liability.  Northwest was entitled to present arguments to establish coverage and have them adjudicated on the merits.

   

Insurer Must Defend Claims for Emotional Distress

   In Kreger v. General Steel Corp, No. 07-575, 2009 U.S. Dist. LEXIS 88074 (E.D. La. Sept. 23, 2009), the federal district court in Louisiana was placed in a difficult position of predicting whether a Colorado Supreme Court would find a duty to defend a claim for emotional distress.

   In the underlying suit, plaintiff sought damages from the insured for fraud, unfair and deceptive trade practices, conspiracy, negligence, negligent misrepresentation, fraud in the inducement, breach of contract and detrimental reliance. The complaint alleged no physical harm, but included a claim for damages for "severe mental anguish and emotional damages."  The plaintiff claimed in his deposition that the stress of the dispute caused him to lose sleep for eight months.  The insurer denied a defense, contending none of the allegations triggered coverage under the CGL policy.  

   The Louisiana court first had to decide whether Louisiana or Colorado law controlled.  Relying on Louisiana choice of law rules, it was determined this dispute between a Colorado insurer and Colorado insured over a policy issued in Colorado was properly determined by Colorado law.

   Making its best judgment on how the Colorado Supreme Court would rule on whether the insurer must defend a claim for emotional distress, the Louisiana court noted Colorado sets a high bar for insurance companies seeking to avoid their duty to defend.  Accordingly, the alleged negligence claim constituted an occurrence under the policy for purposes of determining whether there was a duty to defend.  The alleged loss of sleep causing the physical manifestation of emotional distress was enough to trigger a duty to defend.

Federal Court Without Jurisdiction Where Policy is not a Maritime Contract

    Whether the federal court has jurisdiction over a coverage dispute of a purported maritime policy was the issue in New Hampshire Ins. Co. v. Home Savings and Loan Co. of Youngstown, Ohio, No. 08-3902, 2009 U.S. App. LEXIS 21133 (6th Cir. Sept. 24, 2009). 

   National Marine, a yacht dealer and marina operator, purchased a "Yacht Dealer/Mariana Operator's" general liability policy from New Hampshire Insurance Company ("NHIC").  The policy insured National Marine against loss or damage to its inventory, loss or damage to third-party property while in its custody, personal injury or property damage occurring on its boats or at its marina, and loss or damage to its tools and equipment.  The policy also had "Truth in Lending Errors and Omissions Liability Coverage," to insure against "damage due to the unintentional violation of any Federal or State Consumer Credit Act."

   National Marine was sued in state court for fraudulent misrepresentations and failure to deliver boats with clean title.  National Marine sought coverage under the "Truth in Lending" provision of the policy.  NHIC provided coverage under a reservation of rights, but then sued in federal court to resolve the coverage issues.  NHIC asserted jurisdiction under 28 U.S.C. 1333(1), federal maritime jurisdiction.  The complaint requested the policy be rescinded for misrepresentation or a declaration that there was no coverage.  The district court assumed jurisdiction under 1333(1), but dismissed NHIC's action, concluding it had discretion to accept or deny jurisdiction under the Declaratory Judgment Act. 

   The Sixth Circuit questioned whether federal jurisdiction existed under 28 U.S.C. 1333(1) and whether the underlying claims arose under a "maritime contract."  Ultimately, the court determined the policy was not a maritime contract because its primary object did not relate to maritime commerce.  Instead, the policy related to boats as objects of commerce, i.e., "stock for sale", and not as agents of maritime commerce.  Further, the marina operations portion of the policy related to fixed structures such as wharves instead of particular vessels.  Consequently, although the district court properly dismissed the case, dismissal was appropriate due to lack of subject matter jurisdiction. 

Fifth Circuit Considers Subsidence and "Your Work" Exclusions

   The subsidence and "your work" exclusions were before the court in Wilshire Ins. Co. v. RJT Construction, LLC, No. 08-50925, 2009 U.S. App. LEXIS 19409 (5th Cir. Aug. 26, 2009).

   Wilshire insured RJT under two consecutive CGL policies from June 2004 to June 2006.  In 1999, RJT repaired the foundation of the home after it was damaged by an accidental discharge of plumbing water.  In 2005, the homeowner alleged that cracks in the walls and ceilings suddenly appeared in his home, which was allegedly caused by RJT's negligently performing the foundation repair.

   When the homeowner sued, RJT sought a defense from Wilshire.  The district court granted summary judgment to Wilshire, finding that because the alleged property damage was the result of foundation movement, the policy's subsidence exclusion precluded coverage.

   The Fifth Circuit reversed.  The court first determined there was an occurrence within the policy period to trigger coverage.  The complaint alleged property damage, such as cracks in the walls and ceilings, which suddenly appeared in 2005.  It did not matter that the faulty foundation work occurred in 1999, or that the damage was discovered in 2005.  It only mattered that damage was alleged to have occurred in 2005. 

   Turning to the subsidence exclusion, the Fifth Circuit decided it did not apply.  The policy excluded any claim caused by the subsidence of land as a result of "landslide, mudflow, earth sinking or shifting . . . ."  Accordingly, the exclusion focused on the movement of land, not of the foundation.  The complaint did not allege that RJT's operations resulted in subsidence or movement of the earth, but alleged RJT failed to repair the foundation to withstand subsidence.

   Finally, the court noted that the "your work" exclusion prevented a CGL policy from morphing into a performance bond covering an insured's own work.  Here, the foundation was RJT's own work, so the exclusion precluded coverage for repairing the foundation.  The exclusion, however, only precluded coverage for liability for repairing or replacing the insured's own defective work, not for damage to other property resulting from the defective work.  Therefore, the exclusion did not preclude coverage for damage to the parts of the house resulting from the allegedly faulty foundation.  Because these damages presented a covered claim, Wilshire had to defend the entire suit.

No Occurrence Where Insured Has Knowledge of Defective Manufacturing Process

   Coverage for an underlying suit involving an alleged defective product was the issue in the detailed, narrative findings of fact and conclusions of law issued by the district court in National Union Fire Ins. Co. of Pittsburgh, Pa. v. Puget Plastics Corp., No. B-05-050, 2009 U.S. Dist. LEXIS 70723 (S.D. Tex. Aug. 12, 2009).

    Arctic Slope Regional Corporation held a Commercial Umbrella Policy with National Union.  Arctic Slope had a self-insured retention of $1 million per occurrence.  Arctic Slope's subsidiary, Puget Plastics Corporation, was an additional insured under the policy.  Puget also had an underlying primary policy from Wausau with limits of $1 million.

   In January 2000, Arctic Slope and Puget agreed with Microtherm, Inc. to mold chambers that would be incorporated into electronically controlled tankless water heaters manufactured and sold by Microtherm.  After Puget's repeated delays in production and concerns over the processing parameters used by Puget to mold the chambers, Microtherm terminated the agreement in late 2000. 

   Thereafter, the chambers began to malfunction.  In 2002, Microtherm sued Puget, Arctic Slope and others involved in the manufacture of the water heaters.  In December 2004, the jury reached a verdict in favor of Microtherm against Puget, but found that Arctic Slope was not responsible for the acts of Puget.  A final judgment of $36,081,807 was entered against Puget. 

    Wausau defended Puget under a reservation of rights.  National Union never defended either Puget or Arctic Slope.  Four days after entry of judgment in the underlying case, National Union filed a declaratory judgment action against Puget and Arctic Slope.  Meanwhile, the trial court in the underlying case ordered mediation between all parties and their insurers.  National Union refused to attend.  Puget and Arctic Slope reached an agreement with Microtherm under which Wausau would tender its $1 million limit to Microtherm and Arctic Slope would pay an additional $2 million to Microtherm.  In return, Microtherm agreed to release claims and issue a covenant not to execute against the assets of Puget and Arctic Slope.  Finally, Puget and Arctic Slope assigned their rights under the National Union policy to Microtherm.

   In the declaratory relief action, National Union argued the settlement was contrary to the insurance policy and to public policy, and it was therefore entitled to declaratory relief against Puget and Arctic Slope.  The district court went through a meticulous analysis of the facts and policy provisions to eventually decide National Union had no obligations under the policy.

   First, the district court found that by denying coverage prior to the mediation, National Union freed Puget and Arctic Slope from their duties under the policy, allowing them to take compromising actions during the negotiations with Microtherm that otherwise would have been barred by the policy.  Moreover, there was no collusion between Microtherm and Puget/Arctic Slope in settling the case. However, the policy had an anti-assignment provision, yet neither Puget nor Arctic Slope ever obtained National Union's written consent before assigning policy rights to Microtherm.  Such provisions were routinely enforced by Texas courts.  Therefore, unless National Union erroneously denied coverage, the assignment to Microtherm would be void.

   Next, the district court determined there was only one possible occurrence, meaning only one payment of the self-insured retention would be necessary prior to activating coverage obligations.  The single occurrence was Puget's improper molding of the chambers, which constituted a single occurrence under the policy. 

   Nevertheless, after a detailed analysis of the manufacturing process used by Puget, the district court determined there was no occurrence under the policy.  Puget deliberately used substandard processing and work conditions in molding the chambers, and it should have known its process in molding the chambers would make the chambers weak and likely to fail.  Consequently, National Union had no duty to defend or to indemnify either Puget or Arctic Slope.

Insurer's Computer-Generated Summaries Admissible as Business Record

   The Ninth Circuit held an insurer's computer-generated summaries of payments were admissible as a business record in U-Haul International v. Lumbermens Mutual Cas. Co., No. 07-16187, 2009 U.S. App. LEXIS 17889 (9th Cir. Aug. 12, 2009).

   U-Haul had a primary policy with Republic Western up to a total limit of $7,000,000 per occurrence in excess of $25,000 in self-insurance.   An excess policy from Lumbermens became payable when the $25,000 self-insurance and $7,000,000 from the Republic Western policy were exhausted. 

   U-Haul settled three claims implicating these policies.  Republic Western and Lumbermens defended and paid settlement costs, but agreed under a reservation of rights to later address issues as to each party's coverage obligations.  A central issue was whether investigation, negotiation, and defense costs paid by Republic Western should be considered in determining whether its policies had been exhausted. 

   Republic Western sued Lumbermens.  After granting summary judgment to Republic Western on several issues, the district court held a bench trial to decide the amount Republic Western had paid on each claim.  This would determine when Lumbermens' excess policy was triggered and how much Lumbermens would be required to pay.

   At trial, a Republic Western claims manager, Thomas Matush, testified about exhibits which contained computer-generated summaries of payments for loss adjustment expenses made by Republic Western on the claims.  Lumbermens objected to the exhibits, arguing they were inadmissible hearsay and not subject to the business records exception in FRE 803 (6).  Further, Lumbermens argued the summaries were not properly authenticated pursuant to FRE 901.  The district court admitted the exhibits and entered judgment in favor of Republic Western in the amount of $1.9 million.

   On appeal, the Ninth Circuit affirmed.  Evidence compiled from a computer database was admissible as a business record, provided it met the criteria of Rule 803 (6).  Here, the exhibits summarizing loss adjustment expense payments for each claim fit squarely within the business records exception.  Matush testified that Republic Western employees input a record of each loss adjustment expense payment into a database at the time each payment was made.  Republic Western employees would then query the database to compile the payment information, generating a summary of the defense costs for each of the claims. 

   Further, the computer summaries were properly authenticated under Rule 901.  "Evidence describing a process or system used to produce a result and showing that the process or system produces an accurate result" was an example of a method of authenticating a process or system under Rule 901 (b)(9). The description of the process used to create the summaries was sufficient to authenticate the evidence. 

No Duty to Defend Registered Security Dealer Against Uncovered Claims

    Plaintiff was a registered representative with Legacy Financial Services.  See Ganim v. Columbia Casualty Co., No. 08-3945, 2009 U.S. App. LEXIS 16174 (6th Cir. July 23, 2009)[here].  Columbia insured Legacy and agreed to defend Legacy's registered representatives for negligence in "rendering or failure to render Professional Services."  Coverage was limited to "investment advisory services" and the "sale or attempted sale of or servicing of securities . . . approved by Legacy."  Claims involving products or services not approved by Legacy and/or registered with the SEC were excluded.

    Plaintiff was sued by Vincent Santalucia after a business venture between them soured.  Santalucia alleged plaintiff promised his "one stop" financial services business, "Carlyle Entities," was a good investment.  Based on this advice, Santalucia poured his money into Carlyle, an amount in excess of $500,000, which was subsequently deleted by poor investment decisions.  Columbia defended under a reservation of rights and the case ultimately settled.

    Santalucia then filed a claim for arbitration before the National Association of Security Dealers.  Columbia refused to defend in the arbitration.  Columbia asserted that because Santalucia's interest in Carlyle was neither a registered security nor a product approved by Legacy, his claim against plaintiff did not trigger a duty to defend.

    Plaintiff then sued Columbia.  The district court granted Columbia's motion for summary judgment on all of plaintiff's claims.

    On appeal, plaintiff argued that based on Santalucia's allegations, the claim could potentially fall with the scope of coverage.  The Sixth Circuit disagreed.  Columbia's policy limited coverage to investments that were approved by Legacy and were SEC registered securities.  The district court properly concluded that Santalucia's allegations described how plaintiff solicited him to invest in plaintiff's own financial services business, Carlyle, and that relying on plaintiff's advice, Santalucia continued to put money into Carlyle.  Plaintiff admitted that all of the losses for which Santalucia was seeking recovery stemmed from recommendations plaintiff made to invest in Carlyle.  Thus, all of the alleged wrongdoings were specifically excluded from coverage under the policy and could not "potentially" fall within it.

Insurer Must Defend and Indemnify Trust Fund Established by Bankruptcy Court

      In National Union Fire Ins. Co. of Pittsburgh, Pa. v. Porter Hayden Co, No. AMD-03-23408, 2009 U.S. Dist. LEXIS 61992 (D. Md. July 7, 2009), National Union contended that its insured, Porter Hayden, a debtor in bankruptcy, was not entitled to a defense or indemnity for asbestos-related claims. 

    Porter Hayden sold and installed industrial insulation products containing asbestos fibers from the 1920s until the 1980s.  Porter Hayden held four consecutive CGL policies with National Union, which were in effect from April 1, 1984, to April 1, 1988.  When coverage was denied, Porter Hayden brought a declaratory judgment action seeking coverage for tens of thousands of asbestos-related claims under the policies. 

    Subsequently, Porter Hayden filed for reorganization under Chapter 11.  The Bankruptcy Court confirmed Porter Hayden's plan establishing the Asbestos Bodily Injury Trust to handle asbestos-related claims against Porter Hayden.  Under the Plan, asbestos claimants were enjoined from suing Porter Hayden, but could submit their claims to the Trust.  The Trust was funded by assets, including access to the proceeds from any insurance policy that covered asbestos claims. 

    The parties cross-moved for summary judgment.  National Union argued it had no legal obligation to pay damages for asbestos-related claims filed with the Trust because: (1) Porter Hayden was not legally obligated to the asbestos claimants; (2) Porter Hayden improperly assigned the policies to the Trust; (3) there was no "suit" against the insured; and (4) the "No action" provision precluded coverage.

    The district court rejected each argument.  First, Porter Hayden had an underlying, though contingent, legal obligation to the asbestos claimants because it committed tortuous acts.  Moreover, the bankruptcy court's discharge order did not eliminate Porter Hayden or National Union's legal obligation to asbestos claimants.  A discharge order from a bankruptcy court only released a debtor from personal liability.  Porter Hayden's discharge, however, did not release, i.e., surrender a cause of action against, National Union from liability to the asbestos claimants.

     Regarding assignments, each of the policies provided that "[a]n assignment of interest under this policy shall not bind the company until its consent is endorsed hereon."  The plain language of the Plan, however, did not indicate that Porter Hayden "assigned" any "interest" under the policies to the Trust.  Instead, under the Plan, Porter Hayden delegated to the Trust the management of the asbestos claims.  Nothing in the policies prohibited such a delegation.

    National Union contended it had no duty to defend because there was no "suit . . . seeking damages."  Porter Hayden argued the term "suit" was not limited to complaints filed in a court; rather, "suit" encompassed claims filed with the Trust.  The court agreed because claims submitted to the Trust sought damages for Porter Hayden's liability.

    Finally, National Union argued the "No action" clause barred coverage.  According to National Union, the "No action" clause required either: (1) a judgment against Porter Hayden after trial: or (2) a written agreement between Porter Hayden and National Union in order for an action to lie against National Union.  Again, the Court disagreed.  A claimant need not have obtained a judicial judgment against Porter Hayden as a condition precedent to a suit by Porter Hayden against National Union.  Further, National Union refused to enter an agreement with Porter Hayden consenting to an action for coverage.

Allegations in Underlying Complaint Entitle Additional Insured to Defense

   The Fifth Circuit vacated and remanded the district court's conclusion that the insurer was not obligated to defend or indemnify an additional insured after sued by a person allegedly injured in the insured's casino when falling off a stool.  See Barden Mississippi Gaming LLC v. Great Northern Ins. Co., No. 08-60521, 2009 U.S. App. LEXIS 15861 (5th Cir. July 16, 2009).

   Before the accident, Barden, the additional insured, had sued the manufacturer of the stools.  The matter settled when the manufacturer agreed to repair 100 of the 800 stools.  As to the remaining 700 stools, the manufacturer agreed to name Barden as an additional insured in its liability policies.  The settlement incorporated a Certificate of Insurance, which named Barden as an additional insured, but only with respect to its liability for bodily injury caused by the sole negligence of the manufacturer.

   In June 2004, Barden and the manufacturer were sued for personal injuries allegedly caused when the plaintiff fell from one of the stools.  Barden requested the manufacturer's insurer, Great Northern, to defend and indemnify.  Great Northern refused coverage.

   Barden sued Great Northern.  The district court granted summary judgment to Great Northern, finding no genuine issue of material fact existed as to whether Great Northern had met its obligations to Barden.

   The Fifth Circuit agreed the policy unambiguously limited the duty to defend and indemnify to claims involving the "sole negligence " of the manufacturer based on the language of the settlement agreement and the Certificate of Insurance.  The district court's determination that the undisputed facts showed that the manufacturer was not solely negligent in the Baier case was premature, however.  Until the underlying case was resolved, the court would not know whether the manufacturer was solely negligent.  The need for a defense arose long before the precise allocation of liability could be determined at trial.  The manufacturer could be found 100% negligent, meaning the policy arguably covered the claim as alleged in the underlying complaint.  Therefore, the duty to defend attached. 

   The duty to indemnify could only attach once the manufacturer was ultimately found 100% negligent.  Therefore, no determination could be made on the duty to indemnify until the conclusion of the Baier case.

No Coverage for Damage to Cotton in Insured's Care, Custody and Control

    Acknowledging that the insured's cotton was damaged by an occurrence, the Eighth Circuit nonetheless affirmed the district court's denial of coverage based upon an exclusion.  See Michigan Millers Mut. Ins. Co. v. DG&D Co., Inc., No. 08-2699, 2009 U.S. App. LEXIS 14236 (8th Cir. July 1, 2009).

    The insured operated a cotton gin.  After delivering 50,000 bales of cotton to warehouses, cotton brokers and purchasers asserted claims against the insured for losses caused by mold, mildew and hard spots found in the bales.  The damage appeared after delivery of the cotton bales to the warehouses.  Two brokers sued,alleging that excess moisture during the ginning process rendered the cotton unmerchantable.  Michigan Millers agreed to defend under a reservation of rights and filed suit for declaratory relief.

    The Commercial Agribusiness Policy covered damages the insured was legally obligated to pay because of property damage caused by an occurrence. The district court agreed damage to the cotton from excess moisture was "property damage."  Further, plaintiffs in the underlying suit alleged an "occurrence" - the insured's alleged negligence in adding excess water to the cotton during the ginning and packing process.  Nevertheless, there was no coverage because the policy excluded property damage to "personal property in the care, custody or control of the insured."

    On appeal, the insured argued the property damage occurred, not while the cotton was in the insured's care, custody and control, but in the warehouses when the rot, mildew and hardening were discovered.  The Eighth Circuit noted that the underlying suit alleged the insured's negligence at the cotton gin caused the excess moisture in the cotton.  If damaged at the gin, it did not matter if the cotton developed significant additional damage after it left the gin.  In cases of progressive damage, coverage issues were determined at the time the initial property damage occurred; progressive damage may affect the amount of the covered loss. 

    The policy expressly adopted this principle in its definition of property damage by providing that all loss "shall be deemed to occur at the time of the physical injury that caused it."  Thus, if the cotton suffered any physical injury when in the insured's care, custody, and control at the gin, the entire loss was excluded, even if it was aggravated when the bales sat in warehouses while mold and mildew developed.