Source: https://www.insurancelawhawaii.com/insurance_law_hawaii/2017/12/index.html
Timestamp: 2019-04-22 05:59:08+00:00

Document:
The insured general contractor was not covered for alleged faulty workmanship in constructing a home. Allstate Ins. Co. v. Luu, 2017 U.S. Dist. LEXIS 190983 (N.D. Ga. Nov. 17, 2017).
Luu, the homeowner, contracted with Diamond for the purchase of a lot and building of a new home. After the closing and construction, Luu noticed a number of alleged code violations on the property and began having problems with the house. Diamond denied liability, claiming Luu purchased the home "as is." Luu filed suit.
Allstate insured Diamond under a CGL/ Businessowners policy. Allstate denied tender of the Luu suit and sought a declaratory judgment confirming that it had no duty to defend Diamond.
Diamond did not respond to Allstate's motion for summary judgment. The underlying complaint alleged that Diamond's alleged negligence and incompetence were the cause of defects in Luu's home. The policy exempted such damage from coverage. The Georgia Supreme Court had held that "property damage" must refer to property that is nondefective, and to damage beyond mere faulty workmanship. Thus, any claims arising as a result of faulty workmanship would not be covered.
Further, the Builder's Risk Exclusions for Damage to Property, Damage to Your Product; Damage to Your Work; Damage to Impaired Property Not Physically Injured; and Recall of Products were all designed to exclude coverage for defective workmanship by the insured builder causing damage to the construction project itself. Because the damages alleged were to Luu's house, Luu's claims based on the faulty workmanship were not covered by the policy.
Therefore, Allstate's motion was granted.
The insured's claim for fire loss was rejected based upon an endorsement requiring sprinkler systems be installed in all buildings. Illinois Union Ins. Co. v. Grandview Palace Condo. Assn., 2017 N.Y. App. Div. LEXIS 8023 (N.Y. App. Div. Nov. 14, 2017).
The policy issued to the insured included a protective safeguards endorsement (PSE) that required the insured to maintain automatic sprinkler systems in all buildings of its multi-building condominium complex. After a fire at the complex, an investigation determined that some of the buildings did not have sprinkler systems and others had only limited sprinkler systems, some of which were not working properly. Coverage was denied for failing to comply with the PSE.
The insured argued the PSE was ambiguous. For example, the multiple buildings in the complex were actually multiple coverage locations, so that the absence of sprinklers in one building did not mean that coverage was excused for all buildings with sprinklers. The court rejected the insured's attempt to create an ambiguity where none existed. Therefore, the insurer properly denied coverage for failing to comply with the PSE.
The Tennessee Court of Appeals reversed the trial court's determination that the seller's alleged negligent misrepresentation regarding the propensity of the property to flood was covered. Erie Ins. Exh. v. Maxwell, 2017 Tenn. App. LEXIS 746 (Tenn. Ct. App. Nov. 15, 2017).
The Chapmans purchased a residence from the Maxwells on March 7, 2014. Prior to the sale, the Maxwells completed a residential property disclosure in which they allegedly misrepresented the propensity of the property to flood. Five months after the purchase, the residence sustained damage as a result of two floods within three days. The Chapmans sued, alleging they relied on the Maxwells' representations regarding the propensity of the property to flood. The Chapmans further alleged that they sustained property damage as a result of the Maxwells' negligence and negligent misrepresentations.
The Maxwells notified their insurer, Erie. Erie then filed an action for declaratory judgment, alleging that the policy offered no coverage for the claims asserted in the underlying lawsuit. Erie filed a motion for summary judgment, arguing that none of the claims asserted in the Chapman complaint alleged an "occurrence." The trial court denied the motion.
The appellate court reversed because the alleged misrepresentations did not cause the damage to the property. Under the policy, property damage was covered only if it was caused by an occurrence. Under the Chapman complaint, the property damage sustained by the Chapmans was caused by flooding, not by the alleged misrepresentation of the Maxwells. The court emphasized it was not determining whether a negligent misrepresentation was an accident, but rather, whether the alleged misrepresentations by the Maxwells caused the damage to the property. The court determined that the misrepresentations did not cause the damage.
Although the homeowners did not own their homes when the subcontractors completed their work, the general contractor was still covered as an additional insured for the homeowners' suits based on the ongoing operations endorsement in the subcontractors' policies. McMillin Mgmt. Servs. v. Fin. Pac. Ins. Co., 2017 Cal. App. LEXIS 1000 (Cal. Ct. App. Nov. 14, 2017).
McMillin was the developer and general contractor for the project. Among the subcontractors were Martinez Construction Concrete Contractor, Inc. and Rozema Corporation. Martinez performed concrete flatwork between 2003 and November 2005. Rozema performed lath and stucco work between March 2003 and October 2005.
Lexington issued CGL policies to Martinez and Rozema. McMillin was an additional insured under both policies, "but only with respect to liability arising out of your [i.e., Martinez's or Rozema's] ongoing operations performed for [McMillin]." An exclusion provided that the insurance did not apply to property damage occurring after the insured subcontractor had completed operations on behalf of the additional insured.
McMillin completed construction of the homes in June 2005. In June 2010, several homeowners sued McMillin, alleging defective conditions in their homes arising out of the construction. McMillin tendered its defense to Lexington, who refused to defend. McMillin sued for declaratory relief. Lexington successfully moved for summary judgment. Because there were no homeowners in existence until after the subcontractors' work was completed, any potential liability to the homeowners arising out of the subcontractors' work must have arisen out of the subcontractor's completed operations.
On appeal, the appellate court reversed. Even if McMillin did not face any liability to homeowners during the subcontractors' ongoing operations, the endorsement did not state that Lexington would provide coverage solely for liability occurring during the subcontractors' ongoing operations performed for McMillin. Rather, the endorsements stated that Lexington would provide coverage to McMillin for liability "arising out of" such ongoing operations. The term "arising out of" was not synonymous with "during." Instead, the phrase "arising out of" was given a broad interpretation in the context of additional insured endorsements. The fact that there were no homeowners at the time of Martinez's and Rozema's ongoing operations did not establish that McMillin could suffer no liability arising out of such ongoing operations.
The court did not decide whether an ongoing operations additional insured endorsement provided coverage to the additional insured only for damages that occurred before the completion of the name insured's ongoing operations. Rather, the court only needed to decide whether Lexington and the trial court were correct that the nonexistence of homeowners at the time Martinez and Rozema ceased ongoing operations established as a matter of law the lack of potential for coverage for McMillin under the policies.
The Tenth Circuit held that inquiry notices sent to the insured by the Securities and Exchange Commission were not a claim under a claims-made Directors' and Officers' policy. MusclePharm Corp. v. Liberty Ins. Underwriters, Inc., 2017 U.S. App. LEXIS 20233 (10th Cir. Oct. 17 2017).
The SEC mailed a letter to MusclePharm stating it was "conducting an inquiry" and requested that MusclePharm voluntarily provide documents. SEC later issued an "Order Directing Private Investigation and Designating Officers to Take Testimony" to MusclePharm. The Order stated that the SEC had information tending to show that MusclePharm violated provisions of the Securities Act of 1933 and the Exchange Act of 1934 Then, the SEC issued 21 subpoenas to MusclePharm and to individual officers and directors. The subpoenas instructed MusclePharm to produce documents.
Finally, on February 13, 2015, the SEC issued a "Wells Notice" to MusclePharm officers. The Wells Notice stated that the SEC's Enforcement Division was close to recommending to the full Commission that an action be taken against the recipient. The parties eventually settled, but not before MusclePharm spent more than $3 million responding to the investigation, including more than $1.3 million in defense costs.
Liberty denied coverage except for the post-Wells notice costs. MusclePharm filed suit, asserting that the entire SEC investigation was a "claim" under the policy. The parties filed cross motions for summary judgment. The district court granted Liberty's motion, denied MusclePharm's motion, and dismissed its claims. The district court ruled that the notices prior to the Wells' notice did not allege a "wrongful act" within the meaning of the policy.
The Tenth Circuit affirmed. To obtain coverage under the policy, (i) there had to be a claim; (ii) the claim had to be made during the policy period; (iii) the claim had to be lodged against an insured; and (iv) the claim had to be for a wrongful act. Here, the four requirements were not met until the SEC issued the Wells notice. Prior to that time, the SEC had not alleged a "wrongful act."
MusclePharm argued that the SEC subpoenas were covered because they were written demands for non-monetary relief. The court disagreed. The SEC sought to determine, through documents and testimony, whether there would ultimately be any basis for seeking monetary and/or non-monetary relief from MusclePharm. By this action, the SEC was not seeking relief, but was only gathering information.
MusclePharm also contended that the prior Order seeking testimony was a formal administrative or regulatory proceeding covered under the policy. The policy did not define "investigation" or "proceeding." The dictionary definition of "proceeding" included "any procedural means for seeking regress from a tribunal or agency." "Investigation" was defined as "the activity of trying to find out the truth about something." The Order stated that it was an investigation "to determine whether any persons or entities had engaged in any of the reported acts or practices." This language made clear that the SEC was conducting an investigation, not a proceeding.
Therefore, the Wells Notice was covered, whereas costs for responding to the Order, which did not allege a "wrongful act," were not.
Thanks to Richard Mosher, Esq. for the heads-up on this case.
This blog reaches the ten year mark this week. We started in December 2007, 1143 posts ago. Blogging has served as a invaluable self-education on multiple coverage issues in an effort to keep abreast of the constantly changing landscape. We hope readers have found the posts to be useful and informative.
Two Damon Key blogs pre-date and continue to set the standard for this blog. Robert Thomas has long maintained www.inversecomdemnation.com [here]. And Mark Murakami started at www.oceanlawhawaiil.com [here] a couple of months before us. Anna Oshiro also blogs on construction related issues at www.hawaiiconstructionlaw.com [here].
Special thanks to Damon Key's Genie Kincaid who, for the past year, has checked every draft post to catch my numerous typos.
Thanks also to you the readers for your support and interest again this year. On to another year of blogging in 2018.
The California Court of Appeal upheld the trial court's award of summary judgment to the insurer who had denied a claim for failure to attend a second Examination Under Oath (EUO). Munoz v. State Farm General Ins. Co., 2017 Cal. App. Unpub. LEXIS 7728 (Cal. Ct. App. Nov. 9, 2017).
The insured, Tomasa Munoz, had a policy for her vacant commercial property through State Farm. On September 22, 2013, fire damaged her property. Munoz promptly reported the loss and submitted a claim. A fire investigation report concluded the fire was "suspicious in nature and potentially incendiary."
The policy provided that in the event of a loss, the insured, if requested, would permit State Farm to ask questions under oath. The policy further stated that no legal action could be filed against the insurer unless there had been full compliance with all terms of the policy.
State Farm took recorded statements of Munoz and her son who was designated by Munoz as her representative for making the insurance claim. The son advised he was alone on a Carnival cruise at the time of the fire and unable to use his cell phone while on the ship. He learned of the fire when he used the ship's phone to retrieve messages. Documents later showed, however, that the son's cell phone was used while he was on the cruise.
In January 2014, State Farm requested Munoz's EUO and her son's statement under oath (SUO). She was also asked to provide documents.The EUO and SUO took place on March 26, 2014. Over the next nine months, State Farm sought additional information to support the son's SUO testimony. The son responded that some of the documentation did not exist. Therefore, State Farm sent a letter to Munoz asking for a second EUO and SUO.
Shortly thereafter, an attorney representing Munoz contacted State Farm advising of his representation. State Farm renewed its request for a supplemental EUO and SUO in a letter to the attorney.
Munoz then filed a complaint against State Farm on January 30, 2015. State Farm again asked for the EUO and SUO, but counsel responded he preferred that Munoz and her son submit to depositions. Although State Farm scheduled the EUO and SUO, neither Munoz or her son appeared. State Farm wrote again, asking that Munoz and her son appear for the examinations, but the requests were ignored.
Consequently, State Farm denied the claim for fire loss based upon failure to appear for the examinations and to provide requested documentation. Munoz filed a first amended complaint asserting causes of action for breach of contract and breach of the duty of good faith and fair dealing. Munoz also sought punitive damages.
State Farm moved for summary judgment based upon the insured's failure to submit to a reasonable request for a second EUO and SUO. The trial court granted the motion and Munoz appealed.
The Court of Appeal affirmed. An insured's compliance with a policy requirement to submit to an examination under oath was a prerequisite to the right to receive benefits under the policy. There were no triable issues of material fact as to the reasonableness of State Farm's request for the supplemental examinations of Munoz and her designated representative. The court rejected Munoz's argument that there was no difference between an EUO and a deposition which she agreed to submit to. Finally, the punitive damages claim could not survive because without a viable cause of action to support an award of general damages, punitive damages could not be awarded.

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