Insurance Law Hawaii

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  The complaint requested the policy be rescinded for misrepresentation or a declaration that there was no coverage.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. 

Policy Covers Damaged Inventory Protected By Tarp In Outside Location

   A typical "open peril" policy excludes payment for loss of personal property left "in the open."  In Twenhafel v. State Auto Prop. and Cas. Ins. Co., No. 08-4275, 2009 U.S. App. LEXIS 20373 (7th Cir. Sept. 14, 2009), the court determined that storm-caused damage to insured's raw wood inventory stored outside under a tarp was not excluded by the policy.

   The insured manufactured kitchen and bathroom cabinets.  Wood used to make cabinets was stored outside under a heavy, industrial tarp.  The tarp was secured with six-by-six oak beams and large concrete blocks weighing ninety pounds each placed on top of the tarp.  A violent storm lifted the tarp and dropped the beams and blocks on the roof of a building 150 feet away.  The exposed wood inventory was damaged by the rain. 

   The insured submitted a claim to State Auto.  The claim was denied under an exclusion stating the insurer would not pay for loss or damage caused by or resulting from "rain, snow, ice or sleet to personal property in the open."  The phrase "in the open" was not defined in the policy.

    The insured sued.  The district court determined because the inventory was covered by an industrial tarp, it was not exposed the elements and not in the open.  Summary judgment was granted to the insured. 

   On appeal, it was noted the case presented an issue of first impression in the Seventh Circuit.  State Auto relied on Victory Peach Group, Inc. v. Greater N.Y. Mut. Ins. Co., 707 A.2d 1383 (N.J. Super. Ct. App. Div. 1998), where the phrase "in the open" was equated with being left outdoors without protection from the elements.  There, personal property was stored in a building in which the roof was being repaired.  The workers nailed three large tarps over portions of the damaged roof for protection during the night.  Nevertheless, the personal property was damaged by rain when the tarps blew off the roof.  The damaged property was covered because it was in the building and not outside, exposed to the elements.

    The Seventh Circuit disagreed that Victory Peach meant only property stored inside a building was entitled to coverage.  The phrase "in the open" meant being left exposed to the elements, or, in other words, being unprotected from the elements.  Therefore, the loss to the wood inventory was covered under the terms of the policy.

Assignment Policy's Rights, as Opposed to Policy Itself, Upheld

  The validity of an assignment of policy rights was at issue in Isles Wellness, Inc. v. Progressive Ins. Co., A09-0119, 2009 Minn. App. Unpub. LEXIS 1051 (Minn. Ct. App. Sept. 15, 2009). 

   The plaintiff clinics provided treatment to the insured patients who had automobile coverage with Progressive and Allstate.  In 2003, the clinics sued the insurers on behalf of the insureds for alleged breach of contract due to failure to pay for the treatment. The trial court ruled that the clinics had standing even though they were not the policyholders.

    On appeal, the insurers argued the clinics could not assert the insureds' claims because the policies provided they could not be transferred to another person without the insurer's consent.  The appellate court noted that under Minnesota law, anti-assignment provisions that barred assignment of the policy did not prohibit the insured from assigning to another the rights to the proceeds of a claim.  Because the contracts here only prohibited the assignment of the policies themselves, the insureds were not prohibited from assigning their rights to receive benefits to the clinics. 

   In Del Monte Fresh Produce (Hawaii), Inc. v. Fireman's Fund Insurance Company, 117 Hawaii 357, 183 P.3d 734 (2007) [reviewed here], the Hawai`i Supreme Court determined the insured could not assign liability policies through a bill of sale or assumption agreement without the insurer's consent.

Termination of Benefits Under ERISA Reversed Where Insurer Has Conflict of Interest

   What steps should a reviewing court take when the administrator of an employee benefits plan governed by ERISA denies benefits, but has a conflict of interest?  In Montour v. Hartford Life & Accident Ins. Co., No. 08-55803, 2009 U.S. App. LEXIS 20378 (9th Cir. Sept. 14, 2009)(authored by Hawai`i's Judge Clifton), the Ninth Circuit held that a reviewing court must take into account the conflict and utilize a more complex application of the abuse of discretion standard.

   Montour was an employee of Conexant Systems, Inc. for thirty-seven years.  He participated in his employer's group long-term disability insurance plan, which was governed by ERISA.  Hartford was both the insurer and administrator of the Plan.  The Plan granted Hartford, as the administrator, discretionary authority to interpret Plan terms and to determine eligibility for benefits.

   Hartford initially accepted Montour's application and began paying benefits in January 2004.  In August 2006, Hartford informed Montour that his benefits were being terminated because he no longer met the policy's definition of disability.  After an unsuccessful internal review, Montour filed suit.  The district court ordered judgment in favor of Hartford.  Although the district court concluded Hartford had a conflict of interest in its position as both the administrator and payor of benefits, the insurer did not abuse its discretion in determining that Montour failed to prove disability under the policy.

   On appeal, the Ninth Circuit first noted that when the plan gave the administrator discretionary authority, review of the administrator's decision was for abuse of discretion.  Where, however, a conflict of interest existed because the same entity that funded the ERISA benefits plan also evaluated the claims, the abuse of discretion standard required a more complex analysis.  In such a case, the court had to consider numerous case-specific factors, including the administrator's conflict of interest, and decide whether discretion had been abused by weighing and balancing the factors together.

   Here, Hartford's bias in trying to terminate benefits for Montour infiltrated the entire administrative decision-making process.  For example, although Hartford's decision was contrary to the Social Security Administration's determination of Montour's disability, Hartford failed to explain why it reached a different conclusion. 

   The Ninth Circuit concluded that Hartford's conflict of interest improperly motivated its decision to terminate Montour's benefits and was an abuse of its administrative discretion.  The case was remanded with instructions for the district court to order reinstatement of long-term disability benefits.

Insurance Agent Negligent for Failing to Secure Workers Compensation Coverage

   The liability of an insurance agent for failure to include coverage for workers compensation in the insured's policy was the issue in Williams v. HILB, Rogal and Hobbs Ins. Serv. of California, Inc., B203691, 2009 Cal. App. LEXIS 1496 (Cal. Ct. App. Sept. 9, 2009). 

   John Williams and Steve Simon obtained a dealership from Rhino USA to operate in California.  Rhino installed spray-on linings onto the beds of pickup trucks.  Rhino USA referred Williams to Robyn Thaw, an insurance agent who held herself out as the expert on the insurance needed for Rhino dealerships.  Williams did not request any specific type of insurance, but asked Thaw for whatever insurance was needed to operate the business.  Thaw was aware that sprayers had a dangerous job and it would be important for an employer to know if it had no coverage for a sprayer's on-the-job injuries.  She also knew that workers compensation insurance was mandatory in California.

   A policy with Travelers was sent to Williams, who scanned it briefly and assumed it contained all the insurance he needed to operate the business.  No workers compensation was included, however.  A year later, the policy was renewed with Hartford Casualty Insurance Company, but again it did not contain workers compensation coverage.

   Subsequently, employee Kendall Mann suffered severe burn injuries in a fire at the Rhino dealership.  When Williams called Thaw to report the accident, he learned for the first time that his Rhino dealership did not have workers compensation coverage.  Mann sued and secured a judgment for $11 million, $6.8 of which the Rhino dealership was responsible.  Hartford paid $1 million in partial satisfaction, leaving $5.8 million outstanding on the judgment. 

   Williams and Simon sued Thaw's employer, HRH, for negligence.  Thaw testified that she discussed workers compensation coverage with Williams and told him the premium would be $6,204.  Thaw wrote no memorandum to the file, however, to indicate that workers compensation coverage had been offered and declined.  Her employer had a form entitled "telephone discussion record" which was to be completed for every call, but it was not used to memorialize Thaw's conversation with Williams.  The trial court found William's testimony that he was never advised about workers compensation coverage more credible than that of Thaw.  The trial court determined that That was negligent "as she failed to use the skill and care that a reasonably careful insurance professionals would have used in similar circumstances."  Judgment was entered against HRH for $5.8 million.

   The Court of Appeal affirmed.  Thaw's failure to advise Williams of the necessity for workers compensation insurance, which was mandatory in California, and not include such coverage in the policy breached the duty she assumed by holding herself out as the expert to satisfy Rhino's insurance needs.

Business Interruption Coverage Properly Denied

   The insured's claim for Business Interruption coverage failed to survive a motion to dismiss in Kushner Lagraize, LLC v. Phoenix Ins. Co., 2009 U.S. Dist. LEXIS 81576 (E. D. La. Sept. 9, 2009).

   The policy provided "property, liability, business income and extra expenses coverages" at the insured's business location.  The policy further stated coverage would begin twenty-four hours after damage occurred within 100 miles of the premises that was subject to the evacuation order.  On August 31, 2008, the county issued a mandatory evacuation order before Hurricane Gustav made landfall on September 1, 2008.  The evacuation order was lifted September 3, 2008.  The insured alleged it was unable to resume business operations until September 8, 2008.

   The insured charged that Phoenix refused to pay adequate business interruption expenses and loss of business income under the "Civil Authority" provisions of the policy.  Although Phoenix paid for civil authority business interruption for September 2 and 3, the insured argued it was entitled to payments for September 1, and September 4 and 5, 2008.   

   Hurricane Gustav made landfall on September 1, 2008.  Therefore, the insured's claim for coverage on or prior to September 1 failed because the policy was not effective until after twenty-four hours after the hurricane struck.  The insured also claimed that civil authority coverage should last for three weeks after the evacuation order because the policy stated coverage "will apply for a period of three consecutive weeks after coverage begins."  The court disagreed with this interpretation.  A more logical interpretation was that civil authority coverage could last no longer than three weeks.

Auto Glass Repair Companies Seek Reimbursement from Insurers After Assignment of Policies

   The amount of reimbursement owed to auto glass repair companies by the insurer was the issue presented in Auto Glass Express, Inc. v. Hanover Ins. Co., 975 A.2d 1266 (Conn. Aug. 25, 2009). 

   The insureds' policies provided reimbursement of the "amount necessary to repair or replace broken glass of like kind and quality."  Hanover periodically issued pricing letters to the plaintiff repair companies, informing them of the insurer's "pricing standards" for glass repair services rendered to its insureds.  Plaintiffs agreed to repair glass for policyholders, who then assigned their policy rights of reimbursement from Hanover.  Plaintiffs submitted invoices for glass repair work to Hanover's third party administrator, Safelite Glass Corporation.  Safelite reimbursed Plaintiffs by checks written in amounts that were set forth in the pricing letters, but were less than what was stated in the invoices. 

   Plaintiffs sued Hanover.  The trial court ruled that Plaintiffs acceptance of Safelite's payments was an accord and satisfaction, and entered judgment for Hanover.  

   On appeal, the Connecticut Supreme Court  reversed.  The court agreed with Plaintiffs that merely performing the glass repairs did not constitute acceptance of the terms of the pricing letters.  The Supreme Court, however, remanded the issue of whether Hanover had breached the policies assigned to Plaintiffs by refusing to pay the amounts stated in the invoices.  The meaning of the term "amount necessary" for reimbursement was disputed.  Plaintiffs argued the phrase meant an amount that was reasonable in the marketplace.  Hanover countered by arguing "amount necessary" was the amount absolutely required to have the service performed.  The Court found the term ambiguous.  On remand the trial court was to consider whether Plaintiffs' invoices were reasonable in the marketplace and whether Hanover breached the terms of the policies by failing to pay the full amount of the invoices.

Galveston One Year After Hurricane Ike

   You first notice the trees.  Approaching Galveston on its main thoroughfare, Broadway Avenue, the trees still stand bare, stripped of all foliage after being seared all night one year ago by Ike's hurricane force winds.

    Another thing my wife and I observed driving through Galveston this past Labor Day was the number of houses, seemingly on every block, that appear uninhabitable a full year after Ike.  The commercial areas, especially the tourist shops in the historic Strand area, have recovered.  But progress in the residential areas, compose of stately homes with small yards, looks less encouraging.  The absence of property insurance, or delays in securing policy benefits, are undoubtedly factors.  Hundreds of Ike-related coverage lawsuits have been filed throughout southeastern Texas.  The outcome of these suits will be both interesting and educational.

    This story from Sunday's Houston Chronicle further captures the current situation on Galveston Island. 

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.

Flood Damage Not Covered Where Insured Fails to File Proof of Loss

   In Schubert v. Chertoff, No. 07-5075, 2009 U.S. Dist. LEXIS 75835 (E.D. La. Aug. 26, 2009), the court considered whether the insured's failure to file a proof of loss for flood damage should be excused because two previous, untimely proofs of loss were accepted.

   The insured had a Standard Flood Insurance Policy through Hartford Fire Insurance Company on his New Orleans home.  Coverage limits were $250,000.  The insured's home suffered flood damage from Hurricane Katrina.  An independent adjuster estimated damages to be $91,059.58.  Hartford issued a check for this amount to the insured.

   Thereafter, the insured sought additional coverage for structural damage to the property.   The structural damage was not covered because it was not flood related, but an additional payment of $20,369.30 was recommended by the adjuster for damages overlooked in the first estimate.  FEMA waived the policy's 60-day proof of loss provision, but limited the waiver to only the amount of the loss stated.  Hartford then approved this additional payment.  Subsequently, a third payment was recommended by the adjuster for an additional $40,432.92.  FEMA again granted a waiver of the 60-day period, but limited the waiver for only the amount of loss outlined in the request.  Thereafter, Hartford paid an additional  $40,432.92 to the insured.

   The insured then sued Hartford, seeking damages for various additional items including fees paid, depreciation and "other items not yet determined."  No proof of loss was submitted for these items, but after suit was filed the insured sent Hartford an estimate for $13,570.90 for repairs to the home.   Hartford moved for summary judgment, arguing the insured was not entitled to additional damages sought because she had failed to provide a proof of loss.

   The district court granted Hartford's motion.  Under the National Flood Insurance Program, a policyholder seeking payment under a flood policy had to submit a proof of loss within 60 days of the loss.  Failure to provide the proof of loss statement relieved the federal insurer's obligation to cover the loss.  Here, the insured had not proof of filing a third proof of loss for the damages for which she sued.  The two requests for waiver of the 60-day period which were granted were limited to the specific amounts recommended for payment by the adjuster .  Therefore, the insured failed to submit evidence establishing a genuine issue of material fact concerning whether she filed a proof of loss for damages sought in the suit.