Source: https://www.insurancelawhawaii.com/insurance_law_hawaii/2008/03/index.html
Timestamp: 2019-04-23 12:11:37+00:00

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How often does a court take on the doctrine of uberrimae fidei? The Hawaii appellate courts have never confronted uberrimae fidei. The Ninth Circuit, however, has addressed the doctrine twice in a little more than a month. We addressed in a prior post the Ninth Circuit’s prior handling of the doctrine in Certain Underwrites at Lloyds, London v. Inlet Fisheries Inc., 2008 U.S. App. LEXIS 2951 (9th Cir. Feb. 11, 2008). Uberrimae fidei is a longstanding federal maritime doctrine that applies to marine insurance contracts. The doctrine imposes a duty of good faith.
In the latest decision, Judge Kozinski opens his opinion with the captivating sentence, “We consider the doctrine that’s on everyone’s lips: uberrimae fidei.” See New Hampshire Ins. v. C’Est Moi, Inc., No. 06-55031 (9th Cir. March 20, 2008).
The insured boat owner collected $450,000 from Washington International when the C’Est Moi was destroyed by fire in 1992. The insured restored the yacht, but it was uninsured until 2001, when a policy was obtained from New Hampshire Insurance Company.
In 2004, the yacht sank in calm waters and the insured filed a claim. New Hampshire sued to rescind the policy. The district court held uberrimae fidei applied and granted summary judgment to New Hampshire. In the insurance application, the insured had misrepresented the purchase price and had erroneously stated the yacht was insured by Washington International.
On appeal, the insured argued the policy expressly voided coverage for intentional misrepresentations, thereby replacing uberrimae fidei. An Eleventh Circuit decision, King v. Allstate Ins. Co., 906 F.2d 1537 (11th Cir. 1990), held a policy excluding coverage for intentional misrepresentations supersedes the insured’s duty under uberrimae fidei. Judge Kozinski was unpersuaded, however, and hoped the Eleventh Circuit would reconsider. Nothing in the New Hampshire policy indicated it was meant to displace rights or responsibilities imposed by uberrimae fidei.
As noted in our prior post, uberrimae fidei, not state law, applies to marine insurance contracts. Consequently, the Ninth Circuit decisions could impact a Hawaii case involving marine insurance and breach of the duty of utmost good faith.
The Big, Bad Bear of Wall Street disintegrated earlier this week. Shortly before its demise, the Bear suffered a significant insurance loss at the hands of the New York Court of Appeals. Vigilant Ins. Co. v. The Bear Stearns Companies, Inc., No. 25 (N.Y. March 13, 2008).
You may recall in 2002, the SEC and the NYSE started investigating practices of research analysts and the potential conflicts that could arise from the relationship between research functions and investment banking objectives. Bear Stearns was one of the financial service firms under investigation and was ultimately sued by the SEC. On December 20, 2002, Bear Stearns signed a settlement document agreeing to pay $80 million, including a $25 million penalty. A few months later, the Bear executed a consent agreement acceding to entry of a final judgment. The Bear agreed not to seek insurance coverage for the $25 million penalty.
Three days after executing the settlement agreement, Bear notified its insurers. The insurers disclaimed coverage and filed for a declaratory judgment that the $45 million sought by Bear was not covered. The policy prohibited the insured from settling any claim over $5 million without the insurer’s consent. The insurers argued Bear breached this provision. The lower court denied the insurers’ motion for summary judgment, finding issues of fact as to whether Bear breached the policy.
The Court of Appeals disagreed, determining Bear breached the provision by settling before notifying the insurers or obtaining their approval. Bear elected to finalize the settlement and execute a consent agreement before informing its carriers of the terms of the settlement.
The Hawaii Supreme Court has favored the insured where an insurer unreasonably refuses to consent to settlement. See, e.g., Granger v. Gov’t Employees Ins. Co., 111 Ha. 160, 140 P.3d 393 (2006); Taylor v. Gov’t Employees Ins. Co. v. Taylor, 90 Haw. 302, 978 P.2d 740 (1999). The insureds in these cases at least complied with policy requirements by giving notice and seeking consent of the insurers. Bear may have obtained a similar result and coverage had it bothered to follow the policy and notify its insurers of the pending settlement.
The Hawaii Intermediate Court of Appeals previously held an insurer faces a difficult burden justifying on summary judgment a denial of coverage due to incorrect information stated in an insurance application. See First Ins. Co. of Hawaii, Ltd. v. Sariaslani, 80 Haw. 491, 911 P.2d 126 (Haw. Ct. App. 1996). The ICA determined there were genuine issues of material fact whether the insurer would have denied insurance had it been aware the insured had made incorrect statements in its application. Id., 80 Haw. at 496, 911 P.2d at 131.
The Ninth Circuit reached a similar result last week regarding statements in an application for insurance. See James River Ins. Co. v. Herbert Schenk, P.C., No. 06-15622 (9th Cir. March 18, 2008). The insured, Herbert Schenk, was a law firm. The Nolans were clients, but grew increasing frustrated with the firm’s failure to return phone calls over several months. The Nolans finally wrote the firm and terminated the relationship.
Shortly before receiving the letter, Herbert Schenk applied for a professional liability policy with James River. The application asked whether the firm was aware of any potential claims being made against it? The firm answered yes and listed several actual and potential claims, but failed to mention a potential claim by the Nolans. Two weeks after the Nolans’ letter, James River sent an insurance quote to Herbert Schenk that again inquired about known claims. Herbert Schenk reported it had no additional claims to report, and James River issued the policy.
The Nolans subsequently sued Herbert Schenk. James River defended under a reservation of rights and filed for declaratory relief. James River argued its policy excluded coverage for claims arising from legal services rendered prior to the policy if the insured knew or could have reasonably foreseen the services could give rise to a claim. The district court granted James Rivers’ motion for summary judgment.
The Ninth Circuit reversed based on reasoning similar to the Hawaii appellate court in Sariaslani. Summary judgment was unwarranted because it was unclear that the Nolan claim was reasonably foreseeable. The Nolans never suggested in the communications with Herbert Schenk they would bring a claim.
Reading many Katrina-related cases and the onset of National Flood Safety Awareness Week this week forces me to ponder the purchase of flood insurance. Every article and relevant website on the subject advocates the purchase of flood insurance. Still, our Honolulu home is on high ground, a mile and a half from the coast, in an unlikely area for flash flood, and survived the heavy rains during the spring of 2006 without incident.
I recently contacted my broker for a quote on flood insurance. I was surprised the premium for maximum coverage was three times the premium we pay for homeowner’s insurance. Further, maximum coverage for residential property is only $250,000 for structure, and $100,000 for contents, which may work in Kansas, but does not go very far in Hawaii. Additionally, once you purchase the insurance, it is not effective for thirty days, preventing the purchase of coverage during the onset of a major storm.
After typing in my address, I learned why premiums are high in my neighborhood despite what would appear to be a good geographic location. No digital map is available at this time, so the risk is designated as Zone D. According to the cite, our area has possible but undetermined flood risk, so the flood insurance rates reflect the uncertainty of the flood risk. Zone D has the third highest premium rate.
What if I had a deductible of $25,000 or $50,000, I asked my broker? Surprisingly, the maximum deductible is $5,000, which brought the premium down a third, now just a little over twice the cost of my homeowner’s premium.
I am discouraged the premiums are so high for what appears to be a low risk area. Still, Hawaii is prone to occasional hurricanes and when the next one may hit is impossible to predict. So continue to ponder the purchase of flood insurance.
Hawaii courts have yet to determine the impact of an anti-concurrent cause provision when a property owner suffers damage caused by wind and rain. The U.S. District Court for the District of Maryland recently found such a provision in a homeowner’s policy barred coverage where both wind and rain caused damage. Bao v. Liberty Mutual First Ins .Co., 2008 U.S. Dist. LEXIS 15168 (D. Md. Feb. 27, 2008).
In June 2006, a strong wind and rainstorm hit the Baltimore area and a substantial amount of water entered plaintiff’s home. It was determined that water damage was directly or indirectly the cause of plaintiff’s loss. Plaintiff held an all risk policy with Liberty Mutual but it did not insure for water damage. Such loss was excluded regardless of any other cause or event contributing concurrently or in any sequence of loss.
Plaintiff urged the court to adopt the efficient proximate cause analysis. Under this doctrine, if there were two causes for a loss, the predominant cause would be the cause to which the loss would be attributed. Plaintiff argued there was coverage for the loss notwithstanding the applicability of the anti-concurrent cause provision because the direct force of wind was the efficient proximate cause. This argument would require rejection of the concurrent causation clause in the policy.
Plaintiff cited cased law from California, West Virginia and Washington supporting the application of the efficient proximate cause analysis. The District Court noted, however, that the policies in these cases did not have an anti-concurrent cause provision like the one in the instant case. Therefore, the District Court predicted the Maryland courts would not apply the efficient proximate cause doctrine. Regardless of whether wind or water damage was the efficient proximate cause, Liberty was correct in denying coverage of plaintiff’s loss based on the concurrent cause provision.
Consequently, the efficient proximate cause doctrine could still be applicable if the policy does not have an anti-concurrent cause provision. Most policies written today, however, have such a provision.
As a former resident of Alaska, I keep close tabs this time of year on the progress of the Iditarod, a sled dog race from Anchorage to Nome, covering 1100 miles. Six days into the race, the leaders reached Cripple, Alaska today, the halfway point.
I cannot think of a Hawaii connection to justify this post, but there are insurance connections to the Iditarod. First, a major sponsor of the race is the largest independent insurance brokerage in Alaska, Alaska USA Insurance Brokers. Alaska USA also arranges insurance for the Iditarod operations throughout the year, including coverage for a fleet of 25 volunteer aircraft and the 2,000 who work the course.
Second, Standard Insurance Company, a subsidiary of StanCorp Financial Group, sponsors the Iditarod’s first blind participant, Rachael Scdoris from Oregon. Ms. Scdoris is the youngest musher to complete a 500-mile race and twice honored as one of the 100 Most Outstanding Female Athletes in the nation.
The current leader in the Iditarod is Dee Dee Jonrowe from Bethel, Alaska, my former hometown. Rachael Scdoris sits in 71st place, with a total of 93 mushers still competing in the race.
A recent post noted the Hawaii legislature’s resurrection of the medical malpractice liability bill. The Honolulu Advertiser reports the bill was effectively killed two days later.
The Hawaii Medical Association promoted the reform legislation, contending a cap on non-economic damages would lower malpractice premiums and reduce some of the uncertainty about malpractice suits.
Failure to pass this measure at this time was probably a good thing. The bill would have capped non-economic damages for catastrophic injury at $3 million. While $3 million may be justified in many cases, it seems a low figure to apply across the board. For example, $3 million in non-economic damages for a life-changing injury suffered by a young child seems woefully inadequate.
The New York Court of Appeals recently ruled that commercial property owners can seek “consequential damages” against their insurers who breach the policy. In reaching its decision, the Court relied, in part, on a decision by the Hawaii Court of Appeals, The Best Place, Inc. v. Penn Am. Ins. Co., 82 Haw. 120, 920 P.2d 334 (1996).
In the New York case, Bi-Economy Market, Inc. v. Harleysville Ins. Co. of New York, 2008 N.Y. LEXIS 278 (N. Y. Ct. App. Feb. 19, 2008), Bi-Economy suffered a major fire, causing heavy structural damage to the building and equipment. Bi-Economy submitted a claim to its insurer, Harleysville. The commercial property policy covered replacement cost on the building and business property. Further, the policy provided coverage for lost business income, or business interruption insurance, for up to one year from the date of the fire.
Harleysville disputed Bi-Economy’s claims for actual damages, and paid only $163,161. After submitting the dispute to alternative dispute resolution, Bi-Economy was awarded $407,181 a year later.
Bi-Economy sued, asserting causes of action for bad faith claims handling, tortious interference with business relations and breach of contract, seeking consequential damages for the complete demise of its business operation. Bi-Economy alleged that as a result of Harleysville’s breach of contract, its business collapsed. Therefore, liability for such consequential damages was reasonably foreseeable and contemplated by the parties at the time of contracting. The Supreme Court granted Harleysville’s Motion and the Appellate Division affirmed.
The Court of Appeals reversed. Relying on Best Place, the Court of Appeal noted insurance frequently is purchased not only to provide funds in case of loss, but also to provide peace of mind for the insured. Similarly, the purpose of business interruption coverage was to ensure Bi-Economy had the financial support necessary to sustain its business operation in the event disaster occurred. Further, the purpose of business interruption coverage would have made Harleysville aware that if it breached its obligations under the contract to investigate in good faith and pay covered claims, it would have to respond in damages to Bi-Economy for the loss of its business as a result of the breach.
Therefore, Bi-Economy’s claim for consequential damages including the demise of its business was reasonably foreseeable and contemplated by the parties.
Under Hawaii law, a party to a construction contract cannot exempt itself from liability for bodily injury caused by its “sole negligence or willful misconduct.” Haw. Rev. Stat. §431:10-222. Texas is similar in that it does not allow an indemnity agreement to cover an indemnitee’s sole negligence, but provides an exception if the contract expressly provides otherwise provides otherwise.
The Texas Supreme Court recently examined whether a contractual bar against indemnifying a party for its own negligence should also apply to the party’s additional insured status in an insurance policy. Evanston Ins. Co. v. Atofina Petrochemicals, Inc., 2008 Tex. LEXIS 122 (Tex. Sup. Ct. Feb. 15, 2008). In Evanston, Atofina Petrochemicals contracted with Triple S Industrial Corporation to perform maintenance at a refinery. The contract provided Triple S would indemnify Atofina from all personal injuries sustained during performance of the contract, except to the extent the injury was caused by Atofina’s negligence. Triple S also agreed to provide primary comprehensive general liability and excess liability coverage, naming Atofina as an additional insured in each policy.
An employee of Triple S was killed at the Atofina facility when he fell through a corroded roof. When the employee’s survivors sued Atofina and Triple S, the CGL policy limits were tendered. Atofina then demanded coverage as an additional insured from the excess carrier, Evanston. Evanston denied the claim and Atofina sued. The trial court granted summary judgment in favor of Evanston, but the Texas Court of Appeals reversed, holding the excess policy covered Atofina.
On appeal to the Texas Supreme Court, Evanston argued Atofina agreed in its contract with Triple S that it would not seek indemnity for losses resulting from its negligence. Evanston claimed the language of its policy similarly excluded coverage for losses caused by Atofina’s negligence.
The Texas Supreme Court affirmed the Court of Appeals. Where an additional insured provision is separate from an indemnity provision, the scope of the insurance requirement is not limited by the indemnity clause. Under the contract, Atofina was not entitled to indemnification by Triple S if the loss was occasioned by Atofina’s negligence. But Atofina did not seek indemnity from Triple S; instead, it claimed indemnification from Evanston as an additional insured under the policy. Even if Atofina’s negligence alone caused the employee’s death, the Evanston policy provided direct insurance coverage to Atofina.
Given the facts in Evanston, Hawaii courts would likely also find coverage regardless of Haw. Rev. Stat. §431:10-222.
The Honolulu Advertiser reports that the Hawaii Department of Commerce and Consumer Affairs has issued ten licenses to new captive insurance companies, bringing the total of approved licenses to 212 since the industry was established in 1986.
Captive insurance is a type of self-insurance whereby a company establishes a separate, licensed legal entity to provide insurance to the company. The new licenses include companies from the United States and Japan that are involved in real estate development, construction, energy, transportation and financial services. The DCCA reports that the captive insurance industry contributes to the local economy with combined assets of $6.4 billion and employs 100 full-time workers in Hawaii.

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