Insurance Law Hawaii

Insured Not Entitled to Independent Counsel Based on Speculative Conflict

    The insured's right to independent counsel after the insurer agreed to defend under a reservation of rights was the issue presented in National Casualty Co. v. Forge Indus. Staffing Inc., No. 08-3110 (7th Cir. June 3, 2009) [here].

    Forge was a staffing agency that placed temporary employees at companies throughout the United States.  NCC issued a policy insuring Forge against any legal damages stemming from intentional acts, including intentionally discriminating against any of its employees.  The policy did not cover, however, punitive damages nor "willful failure to comply with any law relating to employment practices."  Willful was defined as "acting with intentional or reckless disregard for such employment-related laws . . . ."

    Four employees filed anti-discrimination charges with the EEOC against Forge based on race, gender and retaliation.  NCC defended Forge and appointed counsel.  NCC, however, reserved the right to later deny coverage for willful acts and punitive damages.  Forge then insisted that NCC provide independent counsel because a purported conflict of interest existed based on the reservation of rights.   Forge asserted that indemnity under the policy depended on how the EEOC charges were defended with respect to Forge's knowledge of the applicable anti-discrimination laws.  When NCC refused to provide independent counsel, Forge hired its own counsel.

    NCC then filed for declaratory relief to resolve the conflict of interest issue.  The district court found no actual conflict existed and determined that Forge had to bear the cost of retaining its own counsel. 

    The Seventh Circuit affirmed.  The Court acknowledged that Illinois courts hold that conflict counsel must be appointed when the underlying complaint contains two mutually exclusive theories of liability, one which is covered and one which is not.  This situation typically arises when the policy covers negligent but not intentional conduct.

    Here, the specter of punitive damages was merely speculative and did not create an actual conflict.  Not until punitive damages were actually requested and upon a determination that the nature of the damages created a conflict was it necessary for a court to order appointment of independent counsel.

    Further, the EEOC charges did not contain any claims that Forge willfully violated the law nor were there any fact allegations regarding Forge's knowledge of anti-discrimination laws.  Only one theory was presented by the EEOC - that Forge committed an intentional tort by intentionally discriminating against its employees based on race and gender.  Only if the EEOC charges were amended to include allegations of willfulness, or evolved into a suit with allegations regarding Forge's willfulness, would an actual conflict arise, authorizing the appointment of independent counsel.

Insured Gives Timely Notice under Claims-Made Policy

     When the insured, Matkin, an architectural firm, was sued by GEWAC, Inc., shopping center owner, for improper drainage in a parking lot designed by Matkin, Everest, the insurer, refused to defend, contending Matkin had not given timely notice under the claims-made policy.  Matkin-Hoover Engineering, Inc. v. Everest National Ins. Co., No. 08-CV-0451, 2009 U.S. Dist. LEXIS 44057 (W.D. Texas May 26, 2009).  

    Everest issued two policies to Matkin, one with a policy period from April 15, 2005 to April 15, 2006 (2005 policy) and the second from April 15, 2006 to April 15, 2007 (2006 policy).  The policies required a claim first be made and reported within the same policy period.  The policies defined "claim" as a "demand for money or professional services received by the Insured for damages . . . alleging a wrongful act arising out of the performance of professional services."

    Matkin sued and Everest moved for summary judgment on its duty to defend.  The issue focused on a letter Matkin received from GEWAC on March 19, 2006, but not reported to Everest until August 30, 2006.  Matkin argued the letter was not a "claim" because it did not clearly indicate that GEWAC expected Matkin to pay to fix the defects.  Everest argued GEWAC's March 19, 2006 letter was a claim that should have been reported in the 2005 policy period because it: (1) demanded Matkin to perform professional services to repair the drainage problems; and (2) it alleged Matkin committed a "wrongful act" that arose out of the performance of a professional service. 

    The court disagreed.  Considering the circumstances known to the insured, the March 19, 2006 letter could be interpreted not as a demand but as a request for additional engineering services to help correct a construction defect for which Matkin was not responsible.  Because a reasonable person may not have viewed the letter as a demand for professional services for damages, a question of fact existed, precluding summary judgment.

     

Construction Defects "Expected and Intended" Despite Insured's Claim of Ignorance

    Whether the insured  had sufficient knowledge of a construction defect to justify the insurer's denial of coverage was the issue in Far Northwest Dev. Co., LLC v. Cmty. Ass'n of Underwriters of Am., Inc., Case. No. C-05-2134, 2009 U.S. Dist. LEXIS 34521 (W.D. Wa. April 22, 2009).

    In the underlying case, the Homeowner's Association claimed Mr. Ghoddoussi, the condominium manager, failed to adequately investigate defects during the development of the complex, resulting in significant damage to the condominiums.  Ghoddousi tendered the defense to the insurer.  The tender was denied because the policy excluded coverage for "'property damage' expected or intended from the standpoint of the insured."

    Ghoddousi sued the insurer.  On the insurer's motion for summary judgment, the court determined the loss was "expected or intended" from the standpoint of Ghoddousi, thereby precluding coverage.  Ghoddousi acknowledged he was aware of the many problems that arose during the development.  Nevertheless, Ghoddousi argued he not an intentional wrongdoer.  Further, he was unaware of his fiduciary duties and was inexperienced in the construction industry.  Therefore, he could not have the subjective intent to cause property damage.

    The evidence showed, however, that Ghoddoussi was fully aware of the problems that arose during the development of the condominiums.  His declaration stated, among other things, the general contractor failed to supervise the framing and mistakes were made in installation of siding and framing.  As a result, Ghoddoussi had a thorough understanding of the problems that arose during the development stage, but chose to ignore them.  Therefore, the damage was "expected or intended" from the standpoint of the insured, precluding coverage.

Veternarian Entitled to Defense Under Liability Policy

    A veterinarian was entitled to a defense under his Veterinarian's Professional Liability Policy when sued for testimony given in an animal cruelty proceeding.  See Centennial Ins. Co. v. Patterson, No. 08-1521, 2009 U.S. App. LEXIS 8402 (1st Cir. April 23, 2009).

    The insured was sued with eighty other defendants by Carol Murphy.  Ms. Murphy's suit was based on the insured's alleged testimony against her at an Animal Possession Hearing and his alleged examination of her animals in connection with those proceedings.

    The insured sought a defense from Centennial, which denied the claim and filed suit for declaratory relief.  Centennial argued it had no duty to defend because the Murphy complaint did not allege a "veterinary incident."  The policy defined "veterinary incident as "any malpractice, negligent act or omission, utterance, or publication of a libel or slander, or other defamatory or disparaging material . . . in the furnishing of professional veterinary services."  The district court found Centennial had a duty to defend.

    The First Circuit affirmed.  The underlying complaint contained several allegations of wrongful conduct that could potentially be construed as negligence or malpractice.  For example, Murphy alleged the insured "testified two calves that died expired because they had no food and water."  Murphy's's allegations suggested the insured not only testified against her, but performed some type of professional veterinary service on the animals which Murphy regarded as wrongful and without her authorization. 

    Centennial also argued it was relieved of its duty to defend by an exclusion for any suit arising out of "any actual or alleged dishonest, fraudulent, criminal, malicious act or malicious omission" or any "willful violation" by the insured.  Centennial contended there was no potential that the insured's alleged conduct did not involve a dishonest, fraudulent, criminal, malicious act, or malicious omission.   Murphy's conclusory allegations claimed the insured committed various crimes, such as racketeering and perjury, which if proved, would fall within the exclusion.  Nevertheless, it was not necessary that all claims against the insured raise the possibility of coverage to trigger the insurer's duty to defend. 

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.

    

     

Ninth Circuit Certifies Question on Severability of Interests

    The Ninth Circuit has certified a question to the California Supreme Court regarding a policy's severability-of-interests clause.  See Minkler v. Safeco Ins. Co., No. 07-56689 (9th Cir. April 8, 2009) [here].

    Minkler sued Betty Schwartz and her son, David, who allegedly molested Minkler over a period of years while serving as Minkler's little league coach.  Minkler asserted multiple causes of action against David and sued Betty for negligent supervision, alleging David molested Minkler in Betty's home with Betty's knowledge.

    Betty sought a defense under her homeowner's policy with Safeco.  The policy excluded coverage for intentional acts.  The policy also had a severability-of-interests clause providing, "This insurance applies separately to each insured.  This condition will not increase our limit of liability for any one occurrence."  Safeco refused to defend both Betty and David based on the intentional acts exclusion.  Betty entered a settlement with Minkler and assigned her claims against Safeco to Minkler.

    Minkler then sued Safeco.  Minkler contended the severability-of-interests clause excepted Betty's coverage from the exclusion either expressly or because the policy was ambiguous.  The district court dismissed the suit.

    On appeal, the Ninth Circuit certified the following issue to the California Supreme Court:

Where a contract of liability insurance covering multiple insureds contains a severability-of-interests clause in the "Conditions" section of the policy, does an exclusion barring coverage for injuries arising out of the intentional acts of "an insured" bar coverage for claims that one insured negligently failed to prevent the intentional acts of another insured?

    The Ninth Circuit noted the California Supreme Court had never addressed this issue, which was of exceptional importance.  To date, the California Supreme Court has not acted on the petition.

 

 

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.

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. 

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.

    

Hawai`i Court Finds Duty to Defend Allegations of Defamation, Assault and Battery

     In Allstate Ins. Co. v. Gadiel, Civ. No. 07-00565, 2008 U.S. Dist. LEXIS 90923 (D. Haw. Nov. 7, 2008), the court considered whether Allstate must defend a landlord in an action filed by his tenant. 

     The tenant alleged assault and battery, defamation, and intentional and negligent infliction of emotional distress.  Based on the homeowner's policy, Allstate defended under a reservation of rights, but filed an action for declaratory relief to establish there was no duty to defend.  Allstate argued that because a reasonable insured would have anticipated harm resulting from intentional conduct, the conduct did not constitute an "occurrence."

    The district court determined the record did not establish that the alleged injuries were a foreseeable result of the landlord's disputed conduct.  The insured provided evidence that he believed the alleged defamatory statements made about the tenant were true.  Consequently, at minimum there was a question of fact as to whether the allegedly defamatory statements constituted an "occurrence."  Further, the policy's intentional act exclusion, excluding coverage for any bodily injury that was intended or should have been expected by the insured, did not bar coverage because there remained a question of fact as to the insured's intent regarding his conduct as alleged in the complaint.