Source: https://www.insurancelawhawaii.com/insurance_law_hawaii/2009/03/?asset_id=6a00e551d65ac78833011168f7829b970c
Timestamp: 2019-04-22 10:00:28+00:00

Document:
The insured moved for summary judgment on bad faith because of the insurer's alleged delayed and incomplete payments after Hurricane Katrina destroyed property. See Plaquemines Parish School Bd v. Indus. Risk Insurers, No. 06-7213, 2009 U.S. Dist. LEXIS 20004 (E.D. La. March 11, 2009).
School buildings operated by the insured School Board were damages by Hurricane Katrina in August 2005. Policy limits were $15 million, and the School Board was paid $11.7 million. The School Board filed suit against the insurer for additional proceeds under an "all risk" policy. The suit sought the remainder of the policy limits and damages for bad faith.
The insurer's adjusters had inspected the properties in September and October 2005, and provided detailed reports regarding the damage. Substantial payments were made. Nevertheless, the School Board argued the insurer failed to make timely payments once it had a sufficient proof of loss. The School Board further argued payments for wind damage were insufficient and untimely.
Noting the Fifth Circuit's decision in Dickerson v. Lexington Ins. Co., 2009 U.S. App. LEXIS 2902 (5th Cir. 2009) [reviewed here], the District Court noted whether the insurer acted in good faith required a factual determination. The School Board's evidence raised questions of material fact as to the timing and sufficiency of proof of loss in the insurer's possession and whether the insurer acted in good faith in delaying payment. Therefore, the School Board's motion for summary judgment was denied.
The court also considered whether the School Board's recovery from the insurer should be offset by amounts received from FEMA or in flood insurance proceeds to prevent a double recovery. By statute, duplicate funding received from FEMA had to be returned. The court held, however, that the School Board's receipt of FEMA funds had no bearing on the ability to recover from the insurer. Nevertheless, the insurer would be entitled to an offset for any flood proceeds received by the School Board which the insurer proved was excluded from coverage. At trail, the School Board would have the burden of proving the amount of damage caused by the covered peril of wind while the insurer would have the burden of proving the applicability of the exclusion for flood damage.
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.
In McCoy v. Progressive West Ins. Co., B199978 (Cal. Ct. App. Feb. 26, 2009) [here], the appellate court upheld the jury's verdict finding bad faith arising from Progressive's denial of the insured's vehicle theft claim.
In March 2004, the insured's Ford Mustang was stolen in Las Vegas. When recovered, the Mustang, having been burned and damaged, was of no value. Progressive denied the claim in March 2005, even though it had no specific evidence that the insured was involved in the theft of his own car. Progressive, however, relied on various factors to support its belief that the insured had orchestrated the theft of his car. The insured had told his brother he wanted to get rid of his car. He had also told his wife and brother he wanted to upgrade to a Cobra Mustang. The insured and a friend had driven two cars to Las Vegas. The wheels on the recovered Mustang appeared to be the originals. Finally, the ignition was unaltered, meaning a proper key must have been used to drive the car away.
The jury returned a verdict in favor of the insured, determining Progressive acted in bad faith, and the insured was entitled to punitive damages of $100,000.
On appeal, the Court of Appeal determined the trial court's failure to give jury instructions on "genuine dispute" was not error. The trial court found the genuine dispute doctrine was subsumed within the instructions given. Those instructions stated, among other things, that when an insurer unreasonably and in bad faith withholds payment on a claim of its insured, it is subject to liability in tort.
Further, evidence of a prior accident in which the insured was involved was properly excluded because it was more prejudicial than probative. Excluding the entire claims file was also upheld. The trial court allowed the parties to offer individual portions of the claims file into evidence. Finally, the finding of bad faith was supported because the jury had implicitly found the denial of the claim was unreasonable.
The First Circuit recently determined the efficient proximate cause doctrine would not apply under Maine law. See First Specialty Ins. Corp. v. Am. Home Assurance Co., 2009 U.S. App. LEXIS 3943 (Feb. 27, 2009 1st Cir.).
The insured was hired to deliver a construction barge on the Merrimack River using a tug. As he attempted to maneuver the tug and barge to enter the Merrimack River, strong winds pushed the barge alongside the tug and then pushed both vessels out of the channel, eventually grounding them on a island. The liability policy excluded "'property damage' arising out of the ownership, maintenance, use or entrustment to others of any . . . watercraft owned or operated by . . . any insured."
The First Circuit initially determined the barge was a watercraft under the policy. The insured, however, did not own or rent the barge. The insured did operate the barge, using the tug to attempt to maneuver the barge through the wind. Therefore, the barge fit within the watercraft exclusion of the policy.
The court next considered whether the operation of the tugboat was theefficient proximate cause of the occurrence? The efficient proximate cause doctrine permitted coverage "when an insured peril sets other excluded perils into motion which in an unbroken sequence and connection between the act and final loss, produce the result for which recovery is sought." Kish v. Ins. Co. of N. Am.,883 P.2d 308, 311 (Wash. 1994). "In such a situation, the insured peril is considered the 'proximate cause' of the entire loss and the loss is covered despite the fact that other perils contributing to the loss were excluded." Id.
The First Circuit noted it was unclear whether Maine courts would apply the doctrine. Regardless, the doctrine was applicable here because the causes were not independent. The tug and barge were operated together, maneuvering the tug so as to move the barge as needed.
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.
At issue in Monistere v. State Farm Fire and Cas. Co., No. 07-31149 (5th Cir. Feb. 17, 2009) [here] was whether the insured homeowners recovered the appropriate amount under their flood policy for damage caused by Hurricane Katrina in August 2005.
The State Farm policy covered: (1) buildings for the amount of the "direct physical loss," up to $227,600; and (2) increased cost of compliance, which had a limit of $30,000. State Farm's adjuster initially estimated damage at $231,812.92, but this was later lowered to $133,212. State Farm paid the insured this amount, less a $500 deductible. The homeowner's submitted an estimate determining repairs would cost $154,843. This estimate was later increased to $171,638. State Farm never re-evaluated the premises nor paid any additional coverage for the building. The insureds eventually rebuilt their home for $535,000.
In January 2006, a state agency issued a "Substantial Damage Determination" letter, required the home to be rebuilt to a new height before flood insurance could be obtained. State Farm paid the full $30,000 in compliance coverage because compliance costs would far exceed this amount.
The homeowners sued in federal district court for inadequate coverage. The court had to determine the "direct physical loss", which the policy defined as "loss or damage to the insured property, directly caused by a flood." To determine "direct physical loss," the court used the judicially created "constructive total loss doctrine," and awarded the insureds their building coverage limits because there home was a constructive total loss by the flood damage. Judgment was entered on behalf of the insureds. The remainder of the amount available under the policy, or $86,787, was awarded.
The Fifth Circuit rejected use of the "constructive total loss doctrine." Although the home was a total loss, this was due to costs that regulatory authorities imposed for rebuilding, not damage to the property caused by flood. The compliance costs were capped in the policy at $30,000, and paid by State Farm. The district court could not attempt to balance the equities. Congress had determined the maximum amount that would be paid - $30,000.
Next, the court considered the amount of loss recovery to which the insureds were entitled under federal flood regulations. State Farm's adjuster testified that the insureds' repair estimates did not evaluate what amounts were paid for repairs below the floodwater level and what amounts for damage above. Other claims were also not well developed. Only "direct physical loss" caused by flood was covered. Therefore, recovery for the mold damage caused by water remaining in the home after flood waters receded was not covered. There was no basis on which the district court could have awarded a specific additional sum or even have determined that more was owed. Therefore, the Fifth Circuit reversed and judgment was rendered in favor of State Farm.
Whether an "all risk" policy covered a building severely damaged by hidden decay was the issue before the Second Circuit in Dalton v. Harleysville Worcester Mut. Ins. Co., No. 07-3545 (2nd Cir. Feb. 19, 2009).
During the policy period, damage to an interior wall between the insureds' building and the adjacent building was discovered. The city inspector ordered the building be vacated. An engineer hired by the insureds concluded the structural failure of the wall resulted from deteriorated mortar joints. The deterioration that led to the collapse of the party wall was hidden from view.
The insurer denied coverage. The policy excluded coverage for "decay, deterioration, . . . or any quality in the property that causes it to damage or destroy itself." Elsewhere, the policy excluded coverage for collapse,"except as provided in the Additional Coverage for Collapse" provision. This provision stated the insurer would pay for damage resulting from risks of direct physical loss involving collapse of a building caused by hidden decay. Collapse, however, did not included bulging.
The district court granted the insurer's motion for summary judgment and dismissed the suit. It construed the insured's expert report as finding the damage consisted of "bulging," which was excluded. Further, the district court found New York case law held that "collapse" coverage applied only to total or near total destruction. The insured's building here was only structurally unsound.
The Second Circuit reversed. First, the insured's expert found the cause of the collapse was not "bulging," but hidden deterioration. "Collapse" was covered if caused by "hidden decay." Second, New York case law was unclear on whether coverage for "collapse" caused by "hidden decay" included a building whose structural integrity was impaired by deteriorated mortar joints that were hidden from view. If New York law determined "collapse" to require a sudden destructive force, the policy did not require suddenness.
Therefore the policy was ambiguous and susceptible of two reasonable interpretations. The policy did not resolve whether "total or near total destruction" was required and the New York case law did not supply a clear definition of "collapse" that might clarify the ambiguity.
Thanks once again to my Damon Key colleague and fellow blogger, Robert Thomas, for sending me this case. Robert's well-traveled blog is at inversecomdemnation.com.

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