Insurance Law Hawaii

No Coverage Where Each Possible Efficient Proximate Cause Excluded

    Coverage under a homeowners' policy was denied by State Farm when corrosion surrounding a nail driven through a pipe caused a leak and extensive water damage many years later.  See Freedman v. State Farm Ins. Co., B202617 (Cal. Ct. App. May 5, 2009)[here].  The policy provided "all-risk" coverage, but excluded loss from: (1) corrosion, electrolysis or rust; and (2) "water damage, meaning continuous or repeated seepage or leakage of water from a plumbing system."  Further, the policy excluded negligent conduct and defective workmanship by third parties whenever they interacted with an excluded peril.

    The insureds argued the contractor's negligence in driving the nail through the pipe was a covered peril and was the efficient proximate cause of the loss.  State Farm contended the identity of the efficient proximate cause of the loss did not matter because each of the possible efficient proximate causes was an excluded peril - corrosion and seepage or leakage of water were excluded, and third-party negligence was excluded whenever it interacted with an excluded peril.  The trial court granted  State Farm's motion for summary judgment.

    The Court of Appeal was influenced by the California Supreme Court's decision in Julian v. Hartford Underwriters Ins. Co., 35 Cal. 4th 747 (2005).  There, the all-risk homeowner's policy excluded: (1) earth movement; and (2) weather conditions whenever they interacted with an excluded peril to cause loss.  When heavy rains caused a landslide, damaging the Julians' home, there was no coverage because the policy excluded each of the efficient possible proximate causes of the loss.  

    A similar analysis applied here.  The third-party negligence provisions of the homeowners' policy excluded third parties' negligent conduct and defective workmanship when they interacted with an excluded peril.  Thus, the policy excluded contractor-negligence-induced corrosion and contractor-negligence-induced continuous or repeated seepage or leakage of water, just as the Julians' policy excluded a rain-induced landslide.

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.

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.

ICA Oral Argument on Coverage Issues

An oral argument on coverage issues is scheduled before the ICA on November 12, 2008.  The brief description of the case (generally drafted by an ICA law clerk) states:

Chezray Hayes, a minor, died when the aircraft he was piloting crashed on Molokai.  His parents, Defendants-Appellees Mitchell and Natalie Hayes (the Hayes), filed a wrongful death action against the plane's owner, Plaintiffs-Appellees George's Aviation Services Inc., George Hanzawa, and Jennifer Oka (collectively, George's Aviation).  George's Aviation filed a declaratory judgment action against its insurer, Defendant-Appellant XL Specialty Insurance Company (XL), seeking a declaration that the total amount of coverage available under XL's policy was $300,000 ($100,000 each for claims by each of the Hayes, individually, and $100,000 for the Estate of Chezray Hayes).  On three summary judgment motions, the Second Circuit Court ruled in favor of George's Aviation and the Hayes and against XL.  XL timely filed this appeal.

On appeal, XL argues that the total amount of coverage available is limited by the "each person" limitation of $100,000 because the Hayes' claims are derivative of the Estate of Chezray Hayes, and not entitled to separate policy limits.  The appellees argue, inter alia, that XL's derivative claim analysis should be rejected, negligent infliction of emotional distress is an independent tort entitled to a separate policy limit, and XL's policy was ambiguous.

We hope to be there and will give you a blow-by-blow description (perhaps from our shiny iPhone?).  Thanks to the Supreme Court of Hawai`i Blog for posting about this upcoming oral argument.

Texas Allows Insurers to Indemnify Punitive Damages

The Texas Supreme Court recently held a liability insurer may indemnify an award of punitive damages imposed because of an insured's gross negligence.  Public policy, the court reasoned, favored freedom of contract.  The court, however, limited this decision to the workers' compensation context.

Of note, the Texas court noted that Hawaii has statutorily adopted the same conclusion.  See  Haw. Rev. Stat. § 431:10-240 (2007) (“Coverage under any policy of insurance issued in this State shall not be construed to provide coverage for punitive or exemplary damages unless specifically included.”)

See Fairfield Ins. Co. v. Stephens Martin Paving, LP, 246 S.W.3d 653 (Tex. 2008).

Ninth Circuit Ratifies Burlington's Mistake

Burlington Insurance Company wins again.  The Ninth Circuit of Appeals issued an unpublished decision a few months ago entitled Burlington Insurance v. Steve's Ag Services, which appears to perpetuate some of the logic flaws in the original Burlington decision.  Although the court refused to explain the underlying facts (instead simply stating "the parties are familiar with the facts . . . ."), the case stems from an administrative proceeding arising out of AG Service's logging without proper permits.  A second claim for indemnification was also filed against AG Service by the landowner.

The court noted that the damages sought in the administrative proceeding were for the "value of the timber taken."  The CGL policy had  an exclusion for property damage to any "particular part of any property that must be restored because 'your work' was incorrect performed on it."  Thus there was no duty to indemnify or duty to defend.

Further, the court concluded there was no obligation to indemnify the landowner because an occurrence is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."  Repeating the earlier Burlington logic and citing a Hawaii Supreme Court case, the court stated a "breach of contract claim precludes accidental conduct." 

This analysis is plainly wrong.  One could easily breach a contract through accidental conduct.  For example, one could show up to a construction site on the wrong date, order the wrong supplies, etc.  These "accidental" acts meet the policy definition of an "occurrence" regardless of whether they breach a contract or not.  What the court's holding really stands for is the proposition that a CGL policy will never have to cover a breach of contract claim -- language not contained in the policy and clearly contrary to the parties' intent.

The Ninth Circuit's citation to Hawaiian Holiday Macadamia Nut Co. v. Indus Indem. Co., 76 Hawaii 166, 872 P.2d 230, 233 (1994) also materially misstates the holding in that case.  The Macadamina Nut Co. decision held that "[t]he question of what is an 'accident' must be determined by addressing the question from the viewpoint of the insured."  The facts, in that case, stated that there was a breach of contract "based on intentional acts performed by Hawaiian Holiday to defraud" the plaintiffs."  Thus the Hawai`i Supreme Court actually analyzed the underlying acts and determined if there was an accident.  The allegations of a "breach of contract" was immaterial.  It was the "intentional" allegation that was relevant.