Source: https://www.insurancelawhawaii.com/insurance_law_hawaii/2012/07/index.html
Timestamp: 2019-04-23 11:54:06+00:00

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Southgate Gardens Condominium had buildings damaged by Hurricane Wilma in 2005. See Mid-Continent Cas. Co. v. Basedeo, 2012 U.S. App. LEXIS 11864 (11th Cir. June 12, 2012). First State Development Corporation was hired by Southgate to do repairs.
On November 1, 2005, First State completed tarping on the buildings. Thereafter, on November 11, 2005, First State contracted with Southgate to remove and replace the roofs of the Southgate Buildings.
The tarps placed by First State were inadequate and allowed water to enter the unit of Wayne Basdeo and cause damage. Further, when it attached the tarps, First State caused holes to be made in the roofs of buildings, leading to additional damage. First State also left open the mansards (a type of roof which has two slopes on all all sides, but with the lower slope steeper that the upper one). Finally, the peeled-back condition of the roofing allowed rain to enter.
Basdeo filed a claim with Mid-Continent. Mid-Continent could not get First State to cooperate in the investigation. By the end of 2006, Southgate had fired First State. On July 18, 2007, Basdeo and other residents of Southgate sued First State. First State never notified Mid-Continent of the suit and never requested a defense. Southgate also filed suit against First State. Mid-Continent was still unable to communicate with First State. Default judgments were entered against First State in both actions. Subsequently, Mid-Continent formally informed First State it would deny coverage for both cases.
Mid-Continent filed a declaratory judgment action to determine its obligations with the non-cooperative insured. The district court first determined that Mid-Continent could not avoid its duty to defend based on lack of cooperation under Florida law. Second, the district court found there were three occurrences.
The Eleventh Circuit affirmed. This post does not address the lack of cooperation issue, but instead focuses on the number of occurrences issue.
Both parties agreed that the faulty tarping performed by First State constituted an occurrence. But they disagreed on whether the roof repair work performed by First State constituted a single occurrence or two separate occurrences.
Florida used the "cause theory," under which the act which caused the damage, which was neither expected nor intended from the standpoint of the insured, constituted an "occurrence." Mid-Continent argued that the damage caused by work on the flat-top portion of the roofs was not a separate occurrence from the damage caused in connection with First State's work on the mansards. Both the mansards and flat-top portion of the roof were performed under the same contract., Accordingly, the real cause of the damage was the contract with Southgate, which indicated a single occurrence.
The court disagreed. Mid-Continent's argument would redefine an "occurrence" to mean all damages caused by the breach of a contract. Instead, three occurrences transpired: one in connection with the tarping and two in relation to the contracted roof repairs.
The Fifth Circuit rejected the insured's argument that under Texas law it had a right to select its own counsel after the insurer agreed to defend, but under a reservation of rights. Navigator v. Nautilus Ins. Co., 2012 U.S. App. LEXIS 13342 (5th Cir. June 20, 2012).
The insured serviced the oil drilling industry. A oil well operator hired the insured to help redirect an oil well toward a more promising location. The insured developed the plans to conduct the deviation and participated in the deviation process. But the insured allegedly executed the deviation plan in a negligent manner, causing damage to the well. The oil well operator sued.
The insured tendered under its CGL policy with Nautilus. Pursuant to a reservation of rights, Nautilus agreed to defend. Nautilus reserved its right to decline indemnity coverage if, after further investigation, the underlying suit fell within one of three policy exclusions: (1) the "expected or intended injury" exclusion; (2) the "property damage" exclusion; and (3) the "testing or consulting" exclusion.
The insured notified Nautilus that it was rejecting the defense, contending that defending under a reservation of rights created a conflict of interest with respect to selection of counsel. The insured added that it expected Nautilus to cover all damages related to the claim, including attorney fees for defending the underlying suit.
The insured filed suit seeking a declaratory judgment that Nautilus had a duty to defend and cover the cost of independent counsel. The lower court granted summary judgment to Nautilus, establishing that Nautilus was not required to reimburse the insured for the cost of hiring independent counsel to defend the insured.
The Fifth Circuit affirmed. Under Texas law, only when the facts to be adjudicated in the liability lawsuit were the same facts upon which coverage depended would a conflict of interest prevent the insurer from conducting the defense. The "facts to be adjudicated" in the underlying suit were not the same "facts upon which coverage depended." The underlying litigation concerned whether the insured negligently performed its work. The alleged negligence was not a coverage issue int he litigation between the insured and Nautilus.
Likewise, the underlying facts would not decide whether the insured's work constituted "testing" or "consulting." Whether the insured provided "professional" or "data processing" services, whether the insured should have expected the damage resulting from its work, or whether the insured was occupying the property while providing its services could be critical issues in the coverage matter, but were irrelevent to whether the insured acted negligently.
The Minnesota Court of Appeals affirmed the trial court's decision finding no coverage due to exclusions from the all-risk policy for losses related to mold, rot and condensation. Koskovich v. Am Family Mut. Ins. Co., 2012 Minn. App. Unpub. LEXIS 581 (Minn. Ct. App. June 25, 2012).
In 1978, the insureds purchased a home that was built in 1904. From 1991 to 1995, they remodeled, which included rotating the house 45 degress, removing a wing and adding a new section. Polypropylene vapor barriers were installed, with pinholes for ventilation.
In 2008, water was observed on an interior floor. An investigation revealed that the sheathing under the siding and the house's framing were wet and rottten, requiring removal and replacement of the siding and studs. Repairs were made and a claim was submitted to American Family Mutual Insurance Company.
American's structural engineer inspected and determined that moisture was likely caused by condensation of water vapor where the vapor barrier was held tight to the sheathing and by inward water migration from wet siding during rainy periods through the vapor-barrier perforations. The structural engineer opined that, although the home's framing was deteriorated and structurally compromised, it did not appear as though the home was in imminent danger of collapse.
American denied coverage. The insureds sued. The trial court found in favor of American based upon exclusions for damage caused directly or indirectly by condensation, mold, wet or dry rot. The damage which was excluded under the policy was not separate from damage resulting from moisture. Accordingly, the ensuing loss provision did not provide coverage.
On appeal, the insureds argued that because their water-related damage did not result from one of the exclusions relied upon by American, but rather from the installation of the vapor barriers. Because damages flowed from a covered event, there was coverage.
The Court of Appeals first determined that the policy excluded losses resulting from the named exclusions, regardless of whether other causes contributed concurrently to those losses. Therefore, damage from mold, rot, insects, and deterioration was excluded, even if water damage caused or contributed to those damages.
The Court then turned to the ensuing loss provision, which stated, "we do cover any resulitng loss to property . . . not excluded or excepted in this policy." The insureds argued that the water damage was distinct from the excluded mold-and-rot related loss, and was therefore covered under the ensuing loss provision. The Court, however, disagreed. The water damage and resulting mold, rot, and deterioration did not operate as separable and distinct losses within the ensuing loss clause.
Finally, the policy covered threats of imminent collapse. American's engineering expert found that the home was not in danger of collapse, however, when the damage was discovered. Even the insureds' expert agreed that when a collapse might occur was "speculative."
The Seventh Circuit predicted that the Wisconsin Supreme Court would adopt the continuous injury trigger for first party property loss that extends over several policy periods. Miller v. Safeco Ins. Co. of Am., 2012 U.S. App. LEXIS 12940 (7th Cir. June 25, 2012).
A home inspection report performed before the Millers purchased their home showed a soft spot on the roof. The stucco's finish color was also uneven and stained. Further, some water damage was found in the study and skylights above the kitchen sink. But the report advised that the exterior walls, chimney, grass roof, flashings, floor joists/beams and columns, garage walls and floor appeared serviceable. A roof specialist determined the soft spot was not significant and could be repaired for $1,500.
The Millers purchased a homeowner's policy from Safeco on June 30, 2005. The policy went into effect the next day when the Millers closed on the property. But the Millers did not see the policy's terms until Safeco mailed them a copy of the policy at the end of July.
Before receiving the policy, the Millers discovered severe inner wall water leaks and significant water infiltration on three of the home's exterior walls. A new specialist found that the home had numerous construction deficiencies that existed long before the Millers purchased the house. These deficiencies resulted in chronic water intrusion, damaging the interior finished walls, insulation, external plywood sheathing and other parts of the structure. The Millers submitted a claim to Safeco for the water damage, mold and lost use of the home. Safeco denied the claim.
The Millers sued and moved for summary judgment. The court held that Safeco was precluded from raising the policy's exclusions because it did not notify the Millers of the exclusions until after they discovered the damage. The court awarded $468,164.00 in damages. Safeco was also found to have acted in bad faith.
The Seventh Circuit may not have realized its holding was significant. The court held the continuous injury trigger theory was properly used to determined the date of harm based on the policy's language limiting coverage to "losses occurring during the policy period." The Seventh Circuit noted the Wisconsin applied the continuous trigger theory to determine the date of injury in cases where the exact date of harm is uncertain and potentially occurring over several policy periods. The court cited Soc'y Ins. v. Town of Franklin, 607 N.W. 2d 342, 346 (Wis. Ct. App. 2000). But Franklin involves a third party policy, not a first party policy. Only a few courts have adopted the continuous injury trigger in first party policies.
The Seventh Circuit agreed that various exclusions could not be used to deny coverage because the Millers did not know about themuntil after the loss was discovered and when they received the Safeco policy in the mail.
Finally, Safeco acted in bad faith. Safeco argued that the issue of coverage was at least "fairly debatable." The Seventh Circuit disagreed. First, Safeco asserted that the damage was a preexisting condition the Millers knew about. There was no evidence, however, that the Millers knew about the extent of the damage until after closing. Second, Safeco argued the Millers took four months between discovering the damage and filing a claim. The court noted that the Millers were preparing their claim by contacting an attorney and have professionals assess the damage. Third, Safeco felt the Millers failed to protect the home after discovery. Again, the court disagreed. The Millers did what they could to mitigate the damage. Further, the home was a total loss. Therefore, there was no basis for finding the coverage was fairly debatable.
The Fifth Circuit Court of Appeals considered whether coverage existed for a defectively built tennis court in light of a contractual liability exclusion. Ewing Construction Company, Inc. v. Amerisure Ins. Co., 2012 U.S. App. LEXIS 12154 (5th Cir. June 15, 2012).
Ewing Construction Company entered a contract with the School District to construct tennis courts at a school. After completion, the School District complained that the courts were cracking and flaking, rendering them unfit for playing tennis. The School District filed suit, seeking damages for defective construction. It alleged that Ewing breached its contract and performed negligently.
(1) That the insured would have in the absence of the contract or agreement . . .
The Fifth Circuit agreed there was no duty to defend under the exclusion. The School District's complaint reflected that Ewing assumed liability for defective construction by agreeing in a contract to complete a construction project, specifically to build tennis courts. The CGL policy's contractual liability exclusion excluded coverage here.
The court next considered whether the exception to the exclusion restored coverage. The court looked to the substance of the School District's petition to determine whether it alleged an action in contract, tort, or both. Ewing's contract with the School District was the source of its potential liability because Ewing's duty to construct usable tennis courts arose out of a contract. The exception, therefore did not apply and coverage remained excluded.
A U.S. District Court in Washington found coverage in what it described as a text book study of the efficient proximate cause rule. Hiller v. Allstate Pro. & Cas. Ins. Co., 2012 U.S. Dist. LEXIS 84862 (E.D. Wash. June 19, 2012).
The Hillers purchased a newly constructed home in December 2006. They also purchased an all-risk homeowner's policy from Allstate.
In July 2010, the Hillers discovered that the carpet in the basement of the residence was saturated with water. Allstate was immediately notified. Hiller began an investigation to attempt to determine the source of the water. He poured water into a downspout drain at the northwest corner of the residence. This caused water to leak into the northwest corner of the home's basement.
An area was excavated around the northwest downspout drain. The end of the drain pipe was partially blocked by rocks and had been wrapped with fabric landscaping material. Further, a "T" pipe installed at the foot of the drain was directing water toward the house's concrete foundation. Hiller notified Allstate that the problems with the drain was due to construction defects and the system was designed to fail.
Allstate denied the claim. Based upon Hiller's information, coverage was excluded under the policy's surface water, subsurface water, inherent vice, and latent defect exclusions. Nevertheless, Allstate hired a forensic engineer to do an inspection. He concluded the failure of the foundation perimeter and roof drainage systems were due to improper construction of the original perimeter foundation drain lines, foundation water proofing, downspout drain lines, and gravel dry wells. Based on these findings, Allstate again denied the Hillers' claim.
The Hiller's sued for a declaratory judgment to establish that the loss was covered under the policy. Cross-motions for summary judgment were filed. Both parties agreed that the water damage to the basement was caused by defective construction of the rainwater drainage system. The issue was whether a loss caused by defective construction was covered under the policy. To answer the question, the court turned to the efficient proximate cause rule. Under the rule, a covered loss which directly caused a non-covered loss resulted in the loss being covered.
The Hillers argued the water damage was directly caused by defective construction - a covered risk. Allstate argued the efficient proximate cause rule did not apply because "all potential causes of damage caused by water leaking into the basement fall within policy exclusions." There was no dispute about the efficient proximate cause of the loss. Experts retained by both sides agreed that the loss was caused by construction defects of (1) the rainwater drain system that was improperly designed; and (2) the absence of waterproof sealant on the home's concrete foundation. Therefore, the issue under the efficient proximate cause analysis was whether a loss caused by defective construction was a covered peril under the policy.
The Court found such a loss was covered because defective construction was not specifically excluded from the all-risk policy. Because there was no dispute that the construction defects were the predominant cause of the loss, the water damage to the residence was a covered peril under the efficient proximate cause rule.
My Damon Key blogging colleague, Rebecca Copeland at www.Recordonappeal.com., reports here that the Hawaii Supreme Court accepted certiorari in Willis v.Swain, First Insurance Company of Hawaii, Ltd., No. SCWC-29539. Our post on the Hawaii Intermediate Court decision is here. The case involves whether the insurance company owes a duty of good faith in the absence of a contractual relationship related to a claim under the Hawaii Joint Underwriting Program.
The insured was involved in an accident, causing injury to the four occupants of the second vehicle. The insured's auto policy had a liability limit of $100,000 for each individual claim, with an aggregate maximum of $300,000 for any one accident.
The insurer unsuccessfully attempted to obtain medical documentation from one injured passenger, Du. The insurer, however, was aware of serious injury and accepted the liability of its insured. Du's lawyer submitted a $300,000 global demand for all four plaintiffs. For the first time, Du documented her medical costs at $108,742.92. The insurer refused to settle all four claims at once because there was insufficient information about injuries to the other three victims. The insurer offered to settle with Du for $100,000, but Du's lawyer rejected the offer.
Du then filed a personal injury lawsuit against the insured and received a jury verdict of $4.1 million. The insurer paid the $100,000 available against the policy to partially satisfy the judgment. The insured then assigned his bad faith claim to Du in exchange for a covenant not to execute.
Du sued the insurer, alleging it acted in bad faith by failing to settle the claim within policy limits even after the insured's liability for a judgment in excess of the policy limits after Du's medical records became available. The trial court concluded that an insurer had no duty to initiate settlement discussions in the absence of a settlement demand from a third-party claimant.
The Ninth Circuit affirmed the result, but held that an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand. Here, however, the insurer did not act in bad faith. The insurer initiated settlement talks in a timely fashion. Initially, all the insurer had regarding Du's injuries were uncorroborated and conflicting assertions by Du and her counsel. Further, the insurer had no proof of the injuries of the three other individuals involved in the accident.
Therefore, there was no evidence that the insurer could have made an earlier settlement offer to Du. Accordingly, the insurer did not act in bad faith.

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