Source: https://www.insurancelawhawaii.com/insurance_law_hawaii/2009/07/index.html
Timestamp: 2019-04-22 10:07:29+00:00

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The Fifth Circuit vacated and remanded the district court's conclusion that the insurer was not obligated to defend or indemnify an additional insured after sued by a person allegedly injured in the insured's casino when falling off a stool. See Barden Mississippi Gaming LLC v. Great Northern Ins. Co., No. 08-60521, 2009 U.S. App. LEXIS 15861 (5th Cir. July 16, 2009).
Before the accident, Barden, the additional insured, had sued the manufacturer of the stools. The matter settled when the manufacturer agreed to repair 100 of the 800 stools. As to the remaining 700 stools, the manufacturer agreed to name Barden as an additional insured in its liability policies. The settlement incorporated a Certificate of Insurance, which named Barden as an additional insured, but only with respect to its liability for bodily injury caused by the sole negligence of the manufacturer.
In June 2004, Barden and the manufacturer were sued for personal injuries allegedly caused when the plaintiff fell from one of the stools. Barden requested the manufacturer's insurer, Great Northern, to defend and indemnify. Great Northern refused coverage.
Barden sued Great Northern. The district court granted summary judgment to Great Northern, finding no genuine issue of material fact existed as to whether Great Northern had met its obligations to Barden.
The Fifth Circuit agreed the policy unambiguously limited the duty to defend and indemnify to claims involving the "sole negligence " of the manufacturer based on the language of the settlement agreement and the Certificate of Insurance. The district court's determination that the undisputed facts showed that the manufacturer was not solely negligent in the Baier case was premature, however. Until the underlying case was resolved, the court would not know whether the manufacturer was solely negligent. The need for a defense arose long before the precise allocation of liability could be determined at trial. The manufacturer could be found 100% negligent, meaning the policy arguably covered the claim as alleged in the underlying complaint. Therefore, the duty to defend attached.
The duty to indemnify could only attach once the manufacturer was ultimately found 100% negligent. Therefore, no determination could be made on the duty to indemnify until the conclusion of the Baier case.
In Cecilia Schwaber Trust Two v. Hartford Accident and Indemn. Co., No. JFM-06-0956, 2009 U.S. Dist. LEXIS 59788 (D. Md. July 14, 2009), Hartford unsuccessfully moved to dispose of the insured's claim for failure to act in good faith.
Hartford's policy covered the insured's warehouse for the period March 1, 2002, through March 1, 2003. In February 2003, a large snowstorm caused snow and ice to accumulate on the roof. In March 2003, the roof sprung a series of leaks. Hartford initially denied the claim, stating the damage was excluded based on faulty workmanship, maintenance, and wear and tear. Later, Hartford agreed that approximately five percent of the loss was covered.
The insured sued and Hartford moved to dismiss the good faith claim. A new Maryland statute provided the insured could recover expenses and litigation costs in an action for coverage under a policy if it could be shown "the insurer failed to act in good faith." "Good faith" was defined as making "an informed judgment based on honesty and diligence supported by evidence the insurer knew or should have known at the time the insurer made a decision on a claim."
Despite the language of the statute, Hartford argued the "fairly debatable" standard should be adopted. Under this standard, where a claim was not fairly debatable, an insurer's refusal to pay would be bad faith. The court determined, however, that the fairly debatable standard did not comport with the language of the Maryland statute. Moreover, the claim here was for failure to act in "good faith," which the Maryland courts had indicated was different from an action for bad faith. Therefore, it would be inappropriate to apply the "fairly debatable" standard.
Hartford further argued the new statute could not be applied retroactively. The court disagreed, however, because the legislature intended to give the statute retroactive effect.
In East Texas Medical Ctr. Regional Health Sys. v. Lexington Ins. Co., No. 07-40904 (5th Cir. July 10, 2009) [here], the Fifth Circuit determined Lexington received proper notice from the insured of a claim by a computer-generated loss run.
Lexington's claims-made medical malpractice policy ran from June 8, 2002, to June 8, 2003. The policy provided excess liability coverage to the Medical Center, covering claims above a self-insured retention of $2 million per claim. Under the policy, the Medical Center had discretion to resolve any claim within its $2 million retention. If the Medical Center wanted coverage, it was required to provide "written notice" to Lexington of medical incidents, claims, and lawsuits.
In March 2003, the Medical Center received a medical malpractice claim on behalf of David Wayne Cornelius. The letter indicated that Cornelius had suffered unspecified personal injuries at the Medical Center. In April 2003, the Medical Center entered information about the Cornelius claim on a computer-generated spreadsheet, known as a "loss run." At the end of the policy period, the loss run remained the only notice of the Cornelius claim given Lexington. There was evidence that Lexington previously acknowledged receipt of three other claims submitted on loss runs.
On May 27, 2003, Cornelius filed a medical malpractice suit against the Medical Center. The policy period expired on June 8, 2003, shortly after the Medical Center filed its answer. Not until depositions were taken in the Cornelius suit in December 2003 did the Medical Center realize the claim was likely to exceed the $2 million self-insured retention. In January 2004, the Medical Center gave its first written notice to Lexington of the Cornelius lawsuit. Lexington denied the claim due to the Medical Center's late notice.
At trial, a jury returned a verdict in favor of the Medical Center and awarded $1.7 million in damages. The district court, however, granted Lexington's motion for judgment as a matter of law due to lack of sufficient evidence.
On appeal, the Fifth Circuit vacated and remanded. First, the Fifth Circuit agreed with the jury's determination that the loss runs provided adequate notice. Of significance were Lexington's letters accepting loss runs as notice of claims in prior cases.
Next, the Fifth Circuit ruled that the policy required separate notice of claim and of suit. The Medical Center was obligated to notify Lexington of the claim in March 2003, and then again report the filing of the lawsuit in May. Because notice of the suit was required, notification seven months after suit was filed was not given "as soon as practicable," as required by the policy. Nevertheless, on remand, Lexington had to show prejudice as a result of the Medical Center's failure to send notification as soon as practicable.
Finally, the district court found that Lexington waived the entitlement of immediate receipt of the suit papers as required by the policy. The Fifth Circuit disagreed, finding there was no waiver, but Lexington would still have to show it was prejudiced by the Medical Center's failure to provide proper notice.
The "insured versus insured" exclusion in a Directors and Officers Liability policy was at issue in Biltmore Assoc., LLC v. Twin City Fire Ins. Co., No. 06-16417, 2009 U.S. LEXIS 15322 (9th Cir. July 11, 2009).
The policy named Visitalk.com, Inc. and its directors and officers as insureds, and promised to pay losses that the insureds became liable to pay as a result of covered claims. Under the "insured versus insured" exclusion, there was no liability coverage if Visitalk sued its directors or officers. Specifically, there was no coverage for loss "in connection with any Claim made against the Directors and Officers . . . brought or maintained by or on behalf of an Insured in any capacity."
Visitalk filed a chapter 11 bankruptcy petition. As a "debtor and debtor in possession," Visitalk sued its discharged officers and directors for breach of their fiduciary duties, including looting of the company. Twin City, the insurer, refused to cover the claims.
In its reorganization plan, Visitalk assigned its claims against the directors and officers to a trust established for its creditors, with Biltmore named as trustee. Biltmore settled with four directors and officers for $175 million. The four directors and officers then assigned to the trust their rights against the liability insurers. Biltmore sued Twin City, but the suit was dismissed by the district court.
The Ninth Circuit affirmed. Biltmore argued the claim against directors and officers was on behalf of the creditors and brought by the creditors' trustee. Therefore, it was not brought or maintained on behalf of "an Insured." The Ninth Circuit disagreed. The insured versus insured exclusion barred coverage for Biltmore's claims because a post-bankruptcy debtor in possession acts in the same capacity as the pre-bankruptcy debtor for the purpose of directors and officers liability insurance. Biltmore also argued that Visitalk, the chapter 11 debtor in possession that brought the underlying suit, was not the same entity as Visitalk, the insured corporation. Again disagreeing, the Ninth Circuit determined the prefiling company and the company as debtor in possession in chapter 11 were the same entity.
No Hawai`i appellate court has ever interpreted the meaning of the CGL policy's pollution exclusion. The Ninth Circuit recently issued an Order certifying a question to the the Hawai`i Supreme Court regarding its interpretation of the pollution exclusion. See Apana v. TIG Ins. Co., No. 08-15369 (9th Cir. July 15, 2009) [here].
The underlying case involved an insured plumber who was called upon by Walmart to service a clogged floor drain. An alleged "strong drain cleaner" was used, emitting "noxious fumes" within the store. A Walmart employee breathed in the fumes and left the store bleeding from her nose and mouth. The employee sued the plumber.
The insured tendered the defense to TIG. TIG rejected the claim based on the policy's Total Pollution Exclusion. The employee and insured went to arbitration, where the employee was awarded $87,770.27 in damages. The insured plumber then assigned his rights under the policy to the employee.
The policy excluded coverage for bodily injury resulting from the "discharge, dispersal, seepage, migration, release or escape" of "any solid liquid, gaseous or thermal irritant or contaminant, including smoke vapor, soot fumes, acids, alkalis, chemicals and waste." The district court held TIG had no duty to indemnify but did have a duty to defend. Both parties appealed.
The Ninth Circuit noted there was a split of authority nationwide on the meaning of the pollution exclusion. On one side, courts applied the exclusion literally because they found their terms to be clear and ambiguous. On the other side, courts limited the exclusion to situations involving traditional environmental pollution, either because they found the terms of the exclusion to be ambiguous or because the exclusion contradicted policyholders' reasonable expectations.
Hawai`i's case law did not indicate a preference for either mode of analysis. Some Hawai`i cases enforced a lay person's reasonable expectations, even if "painstaking study" of the pollution exclusion would require a different result. See, e.g., Del Monte Fresh Produce (Hawaii), Inc. v. Fireman's Fund Ins. Co., 183 P.3d 734, 745 (2007). Other cases indicated Hawai`i courts might not apply the policyholder's reasonable expectations to the total pollution exclusion because its terms are unambiguous. See, e.g., Dairy Rd. Partners v. Island Ins. Co., 992 P.2d 93, 106 (2000).
Does a total pollution exclusion provision in a standard commercial general liability insurance policy apply to localized uses of toxic substances in the ordinary course of business (such as when a plumber uses chemicals to open a clogged drain and an employee working nearby inhales the fumes and suffers injuries, or is it limited to situations that a reasonable layperson would consider traditional environmental pollution?
The Insurance Coverage Group of the Hawai`i State Bar Association recently met with Hawai`i Insurance Commissioner, J. P. Schmidt. The Commissioner gave his insight on the state of the Insurance industry on both the mainland and in Hawai`i.
At the national level, the Commissioner reported there are several bills before Congress to federalize the insurance industry. The Commissioner reported that Hawai`i is opposed to federal regulation of the industry, with the exception of reinsurance. Currently, insurance companies are regulated by 50 different state regulators. The Commissioner felt that given the current economic crises, state regulation of the insurance industry is working well. State commissioners work together on issues of common interest through the National Association of Insurance Commissioners. This Association has worked hard to develop a working relationship with Congress.
Turning to Hawai`i, the Commissioner believes insurance companies are in good shape and competition is thriving. The problem areas are commercial liability, especially construction and medical malpractice because no insurers providemalpractice coverage for hospitals. Further, health insurance remains a challenge as the two largest insurers, Hawaii Medical Service Association and Kaiser Permanente, control about 85 per cent of the market.
The Commissioner believes auto insurance in Hawai`i is competitive and the most profitable in the nation. For workers compensation, Hawai`i has enjoyed one of the largest reductions in premium rates in the country. There has been a reduction in premiums for life insurance. The Commissioner has had to revoke licenses, however, from life insurance agents who have taken advantage of seniors.
Regarding hurricane insurance, a number of new companies have entered the market. A hurricane insurer needs significant capital that may be due suddenly in the event of a catastrophic hurricane. Three insurers were approved to issue hurricane policies in Hawai`i a couple of years ago; subsequently, three more entered; and last year four new hurricane insurers came on board. Since meeting with our group, the Commissioner announced that Universal Insurance Holdings of North American was approved to buy ICAT Specialty Insurance Company, which has provided hurricane policies in Hawai`i since 2006. See coverage provided by the Pacific Business News here.
The Commissioner also reported that the Hawai`i Hurricane Relief Fund is dormant at this point, but consists of $184 million. The Fund is created from a variety of sources, including premiums, assessments, fees and taxes. Currently, there is serious discussion on whether this is the time for the legislature to raid the fund to cover the State's budget deficit.
1) HB 262 - Expands the authority of the insurance fraud investigations unit.
2) SB 892 - Authorizes the Commissioner to conduct criminal history record checks for agents seeking licenses to do business.
3) SB 92 - A cleanup bill addressing various problems in the Insurance Code.
The Commissioner is obviously well versed in national and local insurance issues. We appreciated his taking time to meet with our group.
Acknowledging that the insured's cotton was damaged by an occurrence, the Eighth Circuit nonetheless affirmed the district court's denial of coverage based upon an exclusion. See Michigan Millers Mut. Ins. Co. v. DG&D Co., Inc., No. 08-2699, 2009 U.S. App. LEXIS 14236 (8th Cir. July 1, 2009).
The insured operated a cotton gin. After delivering 50,000 bales of cotton to warehouses, cotton brokers and purchasers asserted claims against the insured for losses caused by mold, mildew and hard spots found in the bales. The damage appeared after delivery of the cotton bales to the warehouses. Two brokers sued,alleging that excess moisture during the ginning process rendered the cotton unmerchantable. Michigan Millers agreed to defend under a reservation of rights and filed suit for declaratory relief.
The Commercial Agribusiness Policy covered damages the insured was legally obligated to pay because of property damage caused by an occurrence. The district court agreed damage to the cotton from excess moisture was "property damage." Further, plaintiffs in the underlying suit alleged an "occurrence" - the insured's alleged negligence in adding excess water to the cotton during the ginning and packing process. Nevertheless, there was no coverage because the policy excluded property damage to "personal property in the care, custody or control of the insured."
On appeal, the insured argued the property damage occurred, not while the cotton was in the insured's care, custody and control, but in the warehouses when the rot, mildew and hardening were discovered. The Eighth Circuit noted that the underlying suit alleged the insured's negligence at the cotton gin caused the excess moisture in the cotton. If damaged at the gin, it did not matter if the cotton developed significant additional damage after it left the gin. In cases of progressive damage, coverage issues were determined at the time the initial property damage occurred; progressive damage may affect the amount of the covered loss.
The policy expressly adopted this principle in its definition of property damage by providing that all loss "shall be deemed to occur at the time of the physical injury that caused it." Thus, if the cotton suffered any physical injury when in the insured's care, custody, and control at the gin, the entire loss was excluded, even if it was aggravated when the bales sat in warehouses while mold and mildew developed.
The scope of coverage for "real estate professional services" was at stake in St. Paul Fire and Marine Ins. Co. v. ERA Oxford Realty Co. Greystone, LLC., No. 07-00921-CV (11th Cir. June 23, 2009) [here].
The underlying suit alleged ERA employees approached two real estate brokers to discuss a merger. A verbal agreement was reached, but then allegedly breached by ERA. Subsequently, ERA entered a written agreement to merge with a realty company. Again, ERA allegedly breached the merger agreement. The underlying complaint alleged nine causes of action, including breach of contract and willful misrepresentations.
ERA was insured under a Real Estate Agents or Brokers Professional Liability Protection Policy with St. Paul, which covered loss resulting from the performance of, or failure to perform, real estate professional services caused by a wrongful act. "Real estate professional services" were defined as "those professional services performed, or failed to be performed, for others . . . in the capacity of a real estate agent or broker."
When ERA sought coverage for the underlying suit, St. Paul filed for declaratory relief. The district court ruled St. Paul must defend the allegations relating to losses resulting from the providing of "real estate professional services."
The Eleventh Circuit reversed. The entire policy indicated the parties intended for the term "professional services" to apply only to those services which require the specialized knowledge of a real estate agent in performing professional duties for others. The actions in connection with attempted mergers between real estate businesses was not part of the "professional services" provided by the real estate agents. Therefore, there was no coverage.
The New York Court of Appeals considered whether a Landlord was an additional insured under a policy obtained by the Tenant. See Kassis v. The Ohio Casualty Ins. Co., No. 117 (N.Y. Ct. App. June 25, 2009).
The Landlord leased property to the insured, who, pursuant to the lease, obtained a commercial general liability insurance policy from The Ohio Casualty Insurance Company. The policy provided bodily injury coverage where "the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement" which falls within the definition of an "insured contract." The policy extended coverage not only to the named insured, but also to any person whom the named insured was required to name as an additional insured under a written contract or agreement.
There was no dispute that the lease was a insured contract. It obligated the insured to "indemnify, defend, and hold harmless" the Landlord from any liabilities arising out of occupancy of the premises caused by the Tenant. The lease further provided the Tenant was to obtain a general liability policy "for the mutual benefit of Landlord and Tenant."
When the insured's employee slipped on snow and ice outside the premises, injuring himself, he sued the Landlord. Ohio Casualty disclaimed coverage because the Landlord was not a named insured. In the coverage action, the Supreme Court found Ohio Casualty was obligated to defend. The Appellate Division reversed.
The Court of Appeals reversed the Appellate Division. An additional insured was entitled to the same protection as the named insured. Here, the insured was not required to complete and return to Ohio Casualty any notification forms listing the persons it intended to name as additional insureds. The intended meaning of "mutual benefit" in the lease was that Landlord and Tenant were intended to enjoy the same level of coverage. Because the Landlord was an additional insured, Ohio Casualty was obligated to defend.
Two issues were presented in Stewart Enterprises, Inc. v. RSUI Indem. Co., Inc., 2009 U.S. Dist. LEXIS 50156 (E.D. La. June 15 2009). First, was the excess carrier's following form policy was bound by the primary carrier's exception to the flood exclusion? Second, was the primary policy's anti-concurrent causation clause applicable?
The insured owed various cemeteries, funeral homes, and other commercial properties that were damaged during Hurricane Katrina. The insured held a primary layer of property insurance from Lexington Insurance Company with a limit of $10,000,000. The first excess layer of coverage was provided by Lloyd's, with $15,000,000 in excess of the primary limit. Finally, RSUI provided a second excess layer of coverage for $225,000,000 in excess of the $25,000,000 primary and first excess limits.
Lexington and Lloyd's paid policy limits, but RSUI only made a "good faith" advance of a little over one million dollars. The insured sued.
Because RSUI's policy was following form, Lexington's flood exclusion was critical. Lexington's policy excluded, "Flood, unless specified in Section 3, Sublimits of Liability, Paragraph H., and then only for such specified amount." Section 3, paragraph J then set forth a $10,000,000 sublimit of liability "in the aggregate for any one policy year for the peril of Flood." The Lexington policy, therefore, excluded the peril of flood, but in the same sentence created an exception to that exclusion by providing flood coverage up to $10,000,000.
RSUI argued its policy simply adopted the flood exclusion as a traditional exclusion, i.e., without the $10,000,000 sublimit exception in the Lexington policy. The court disagreed. Had RSUI desired to exclude flood coverage, it could have done so by an exclusion in its own policy rather than by complex and indirect reliance on Lexington's exclusion with an exception.
(3) any and all loss from any other cause when occurring concurrently or sequentially with . . . Flood . . . .
Regarding Paragraph P(2), the Court declined to enforce the anti-concurrent causation clause to preclude recovery for flood damage when the RSUI policy afforded coverage for that same peril.
A different result was reached under paragraph P(3), however. This paragraph contained anti-concurrent language independent of paragraph P(2) and the prefatory anti-concurrent causation language of the policy. Paragraph P(3) excluded damage caused by wind only "when occurring concurrently or sequentially with . . . Flood." Accordingly, the insured could recover for damage caused by wind which did not occur concurrently or sequentially with flood.
Because the decision involved controlling questions of law, the Court granted the right to an immediate appeal under 28 USC 1292 (b).

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