Gemini Insurance Company v. Kukui'ula Development Company (Hawaii), LLC.
Filing
206
ORDER GRANTING IN PART AND DENYING IN PART 54 INDIAN HARBOR INSURANCE COMPANY'S MOTION FOR SUMMARY JUDGMENT OR, IN THE ALTERNATIVE, PARTIAL SUMMARY JUDGMENT AGAINST KDC AND GEMINI INSURANCE COMPANY; AND DENYING 59 PLAINTIFF GEMINI INSURANCE COMPANYS MOTION FOR PARTIAL SUMMARY JUDGMENT: "On the basis of the foregoing, Indian Harbor Insurance Company's Motion for Summary Judgment or, in the Alternative, Partial Summary Judgment Against KDC and Gemini Insurance Company, filed on July 1, 2011 [dkt. no. 54], is HEREBY GRANTED IN PART AND DENIED IN PART. The Indian Harbor Motion is GRANTED IN PART as to (1) its duty to defend two KDC entities that are not named insureds under the Indian Harbor Policy, and (2) as to Gemini 39;s duty to defend based on the pollution exclusion. The Indian Harbor Motion is DENIED in all other respects. Plaintiff Gemini Insurance Company's Motion for Partial Summary Judgment, filed on July 5, 2011 [dkt. no. 59], is HEREBY DENIED. IT I S SO ORDERED." Signed by District JUDGE LESLIE E. KOBAYASHI on February 29, 2012. (bbb, )CERTIFICATE OF SERVICEParticipants registered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). Participants not registered to receive electronic notifications were served by first class mail on the date of this docket entry
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
GEMINI INSURANCE COMPANY,
Plaintiff,
vs.
KUKUI`ULA DEVELOPMENT COMPANY
(HAWAII), LLC; DMB KUKUI`ULA,
LLC; KDC, LLC; DMB ASSOCIATES
(HAWAII), INC.; and A & B
PROPERTIES, INC., et al.,
Defendants.
_____________________________
CIVIL NO. 10-00637 LEK-BMK
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ORDER GRANTING IN PART AND DENYING IN PART
INDIAN HARBOR INSURANCE COMPANY’S MOTION FOR SUMMARY JUDGMENT
OR, IN THE ALTERNATIVE, PARTIAL SUMMARY JUDGMENT AGAINST KDC
AND GEMINI INSURANCE COMPANY; AND DENYING PLAINTIFF
GEMINI INSURANCE COMPANY’S MOTION FOR PARTIAL SUMMARY JUDGMENT
Before the Court are two motions for summary judgment:
(1) Indian Harbor Insurance Company’s (“Indian Harbor”) Motion
for Summary Judgment or, in the Alternative, Partial Summary
Judgment Against KDC and Gemini Insurance Company, filed on
July 1, 2011 (“Indian Harbor Motion”) [dkt. no. 54]; and (2)
Plaintiff Gemini Insurance Company’s (“Plaintiff” or “Gemini”)
Motion for Partial Summary Judgment, filed on July 5, 2011
(“Gemini Motion”) [dkt. no. 59].
The parties filed their
respective memoranda in opposition on November 21, 2011, and
their replies on November 28, 2011.
hearing on January 30, 2012.
These matters came on for
Appearing on behalf of Gemini was
J. Patrick Gallagher, Esq., and appearing on behalf of Indian
Harbor were Michael Tanoue, Esq., and Max Stern, Esq., appearing
on behalf of Kukui‘ula Development Company (Hawaii), LLC; DMB
Kukui‘ula, LLC; KDC, LLC; DMB Associates (Hawaii), and A&B
Properties, Inc. (collectively “KDC” or “Defendants”) were
James C. McWhinnie, Esq., and Joseph Oliva, Esq., and appearing
on behalf of Certain Underwriters at Lloyds (“Lloyds”) was
Richard Miller, Esq.,
After careful consideration of the
motions, supporting and opposing memoranda, and the arguments of
counsel, the Indian Harbor Motion is HEREBY GRANTED IN PART AND
DENIED IN PART1 and the Gemini Motion is HEREBY DENIED for the
reasons set forth below.
BACKGROUND
On November 2, 2009, Plaintiff filed a Complaint for
declaratory judgment against KDC.
KDC was engaged in the
planning, development, and construction of the Kukui‘ula
Residential Community Project on Kaua`i (“Project”).
KDC
purchased different insurance policies from the three carriers to
this action: (1) a Commercial General Liability (“CGL”) policy
from Gemini for September 23, 2005 to September 23, 2008 (“Gemini
Policy”); (2) a CGL policy from Lloyds for September 23, 2008 to
1
The Indian
to defend two KDC
policy, and as to
exclusion, and is
Harbor Motion is granted in part as to its duty
entities not named as insureds under the
Gemini’s duty to defend based on the pollution
denied in all other respects.
2
September 23, 2010 (“Lloyds Policy”); and (3) a Pollution Legal
Liability policy from Indian Harbor (“Indian Harbor Policy”).
The Gemini and Lloyds policies are both CGL policies, which were
issued for consecutive two and three-year periods, and both
contain similar exclusionary language regarding pollution claims.
The Indian Harbor Policy affords coverage for claims arising from
alleged polluting activities, and has a ten-year claims-made
policy period running concurrently with both the Gemini and
Lloyds policies, i.e., from December 31, 2003 to December 31,
2013.
In 2009, three lawsuits were filed against KDC, arising
out of the work performed on the Project: (1) Schredder v.
Kukui‘ula Development Co. (Hawaii), LLC, Civ. No. 09-1-0045,
Circuit Court of the Fifth Circuit, State of Hawai`i (“Schredder
Action”); (2) Hawaiian Insurance & Guaranty Co., Ltd. v.
Kukui‘ula Development Co. (Hawaii), LLC, Civ. No. 09-1-0046,
Circuit Court of the Fifth Circuit, State of Hawai`i (“HIG
Action”); and (3) Ass’n of Apartment Owners of Lawai Beach Resort
v. Kukui‘ula Development Co. (Hawaii), LLC, Civ. No. 09-1-0109,
Circuit Court of the Fifth Circuit, State of Hawai`i (“AOAO
Action”) (all three collectively “Underlying Actions”).
In
addition to the Underlying Actions, Patti Erickson (“Erickson”)
presented a claim to KDC for alleged damage to her property
caused by work performed on the Project (“Erickson claim”).
3
Erickson has not filed suit.
KDC tendered defense of the
Underlying Actions to both Gemini, Lloyds, and Indian Harbor;
Gemini is currently providing a defense, while Indian Harbor and
Lloyds are not.
Gemini filed a First Amended Complaint on March 7,
2011.
The First Amended Complaint seeks a declaration that there
is no coverage under the Gemini Policy, and, therefore, Gemini
does not have a duty to defend or indemnify KDC in the Underlying
Actions.
It alleges that: (1) there was no “bodily injury” or
“property damage”; (2) there was no “occurrence”; (3) the
“expected or intended injury” exclusion applies; (4) the
“pollution” exclusion applies; and (5) the “punitive damage”
exclusion applies.
[First Amended Complaint at ¶¶ 47, 96.]
KDC filed a Third-Party Complaint against Indian Harbor
Indian Harbor on March 29, 2011, seeking, among other things, a
declaration that Indian Harbor has a duty to defend and indemnify
KDC with respect to the Underlying Actions, and a determination
that Indian Harbor breached the implied covenant of good faith
and fair dealing.
[KDC’s Third-Party Complaint (dkt. no. 34) at
¶¶ 20, 27, 40.]
Indian Harbor filed a First Amended Counterclaim
against Gemini and KDC on May 10, 2011.
[Dkt. no. 46.]
The
First Amended Counterclaim asserts that Indian Harbor has no duty
to defend or indemnify Defendants because the Indian Harbor
4
Policy “provides only excess insurance by virtue of its ‘other
insurance’ clause . . . .”
[Indian Harbor’s First Amended
Counterclaim at ¶¶ 16, 21.]
I.
Indian Harbor Motion
Indian Harbor moves for summary judgment on the grounds
that: (1) Gemini has a duty to defend KDC; (2) Indian Harbor does
not have a duty to defend KDC because the Indian Harbor Policy is
excess to the Gemini Policy; (3) Indian Harbor is not liable to
KDC for breach of the implied covenant of good faith and fair
dealing; and (4) Indian Harbor has no obligation to two KDC
entities – DMB Associates (Hawaii), Inc. (“DMB Associates”) and
A&B Properties, Inc. (“A&B Properties”) – because they are not
“insureds” under the Indian Harbor Policy.
According to Indian
Harbor, it is entitled to a legal ruling that its “excess” clause
makes its policy excess for the defense of the underlying
lawsuits to the Gemini Policy, which contains a “primary/pro
rata” clause, such that Indian Harbor has no current duty to
defend KDC in the Underlying Actions.2
[Mem. in Supp. of Indian
Harbor Motion at 1.]
According to Indian Harbor, the Schredder Action
alleges that the plaintiffs in that action have been “physically
and emotionally injured,” that their home has been “physically
2
The Erickson claim is not a subject of the Indian Harbor
Motion. [Mem. in Supp. of Indian Harbor Motion at 3 n.2.]
5
damaged,” that they have suffered “loss of and damage to personal
property,” and that they have suffered various “economic
injuries,” as a result of KDC’s construction activities,
including from “dust, noise, dynamite blasts, toxic fumes, dirt,
rats and rodents, and other offensive nuisances.”
[Indian Harbor
Separate and Concise Statement of Facts (“CSF”), Declaration of
Max Stern (“Stern Decl.”), Exh. 4 (Shredder Complaint), at ¶¶
14-15, 17, 30, 32.]
The Schredder Action contains claims for
negligence/gross negligence, trespass, nuisance, and
negligent/intentional infliction of emotional distress.
¶¶ 21-32.]
[Id. at
The Schredder plaintiffs seek special, general, and
punitive damages.
The HIG Action alleges that KDC’s construction
activities have caused “an enormous amount of noise, dirt, dust,
toxic fumes and pests” to enter the Schredder plaintiffs’
property.
[Id., Exh. 6 (HIG Complaint), at ¶ 11.]
It asserts
causes of action for negligence, gross negligence, nuisance,
trespass, and loss of quiet enjoyment.
and punitive damages.
[Id.]
HIG seeks compensatory
Finally, the AOAO Action alleges
that KDC’s blasting activities have “resulted in approximately
eight (8) breaks in the underground water supply lines.”
Exh. 7 (AOAO Complaint), at ¶ 13.]
[Id.,
This action also alleges that
the construction activities “generated dust, red dirt and other
airborne participles” which traveled to plaintiffs’ properties.
[Id. at ¶ 14.]
The AOAO Action contains causes of action for
6
negligence, trespass/battery, nuisance, and punitive damages.
The AOAO plaintiffs also seek special, general, compensatory and
consequential damages.
Indian Harbor issued to Kukui’ula South Shore Community
Services, LLC a Pollution and Remediation Legal Liability policy
number PEC0015663, in effect between December 31, 2003 and
December 31, 2013.
[Id., Exh. 1 (Indian Harbor Policy).]
Kukui‘ula Development Company (Hawaii), LLC; DMB Kukui’ula LLC;
and KDC, LLC are Additional Named Insureds under the policy
pursuant to Endorsement Nos. 3 and 10.
[Id.]
The Indian Harbor
Policy contains the following Insuring Agreement:
I. INSURING AGREEMENT
A. Coverage A – POLLUTION LEGAL LIABILITY
The Company will pay on behalf of the INSURED
for LOSS from POLLUTION CONDITIONS on, at, under
or emanating from the location(s) stated in the
Pollution Legal Liability Schedule, which the
INSURED has or will become legally obligated to
pay as a result of a CLAIM first made against the
INSURED during the POLICY PERIOD, provided that
the INSURED reports the CLAIM to the Company, in
writing, during the POLICY PERIOD or, if
applicable, the Automatic or Optional Extended
Reporting Period.
. . . .
C. Coverage C – LEGAL DEFENSE EXPENSE
The Company will pay on behalf of the INSURED
for LEGAL DEFENSE EXPENSE to defend a CLAIM for
LOSS or for REMEDIATION EXPENSE under Coverage A –
POLLUTION LEGAL LIABILITY, Coverage B –
REMEDIATION LEGAL LIABILITY or Coverage D –
CONTINGENT TRANSPORTATION COVERAGE, to which this
7
Policy applies. The Company shall have the right
and the duty to defend the INSURED against any
CLAIM seeking damages for a LOSS, or for
REMEDIATION EXPENSE. The Company will have no
duty to defend the INSURED against any CLAIM for
LOSS or for REMEDIATION EXPENSE to which this
policy does not apply.
[Id. at 1-2.]
The Indian Harbor Policy contains the following
Conditions:
IX. CONDITIONS
. . . .
I. OTHER INSURANCE – Subject to Section VI.,
Limits of Liability and Retention, this insurance
shall be in excess of the Retention Amount stated
in the Declarations and any other valid and
collectible insurance available to the INSURED,
whether such other insurance is stated to be
primary, pro rata, contributory, excess,
contingent or otherwise, unless such other
insurance is written only as specific excess
insurance over the limits of liability provided in
this Policy.
[Id. at 11.]
Indian Harbor states that the Gemini Policy includes
Commercial General Liability ISO form CG 00 01 10 01, which
provides in pertinent part as follows:
SECTION I – COVERAGES
COVERAGE A BODILY INJURY AND PROPERTY DAMAGE
LIABILITY
1. Insuring Agreement
a.
We will pay those sums that the insured
becomes legally obligated to pay as damages
because of “bodily injury” or “property damage” to
8
which this insurance applies. We will have the
right and duty to defend the insured against any
“suit” seeking those damages. . . .
b.
This insurance applies to “bodily
injury” and “property damage” only if:
(1) The “bodily injury” or “property
damage” is caused by an “occurrence”
. . . .
2. Exclusions
This insurance does not apply to:
a. Expected or Intended Injury
“Bodily injury” or “property damage” expected
or intended from the standpoint of the
insured. . . .
. . . .
f. Pollution
(1) “Bodily injury” or “property damage”
arising out of the actual, alleged or
threatened discharge, dispersal,
seepage, migration, release or escape of
“pollutants”: [in certain specified
situations].
. . . .
SECTION V – DEFINITIONS
. . . .
3. “Bodily injury” means bodily injury, sickness
or disease sustained by a person, including death
resulting from any of these at any time.
. . . .
13. “Occurrence” [as modified by Endorsement]
means an accident, including continuous or
repeated exposure to substantially the same
general harmful conditions that first happens
during the term of this insurance. “Property
damage” or “bodily injury” which commenced prior
to the effective date of this insurance will be
deemed to have happened prior to, and not during,
the term of this insurance.
9
. . . .
15. “Pollutants” means any solid, liquid, gaseous
or thermal irritant or contaminant, including
smoke, vapor, soot, fumes, acids, alkalis,
chemicals and waste. Waste includes materials to
be recycled, reconditioned or reclaimed.
. . . .
17. “Property damage” means:
a. Physical injury to tangible property,
including all resulting loss of use of that
property. All such loss of use shall be
deemed to occur at the time of the physical
injury that caused it; or
b. Loss of use of tangible property that is
not physically injured. All such loss of use
shall be deemed to occur at the time of the
“occurrence” that caused it.
[Id., Exh. 2 (Gemini Policy), at 1-3, 13-15 (alterations Indian
Harbor’s).]
The Gemini Policy also includes a “Punitive Damages
Exclusion” that provides: “It is agreed that the insurance
afforded by this policy does not apply to punitive or exemplary
damages awarded against the insured.”
9.]
[Id. at Endorsement. No.
In addition, the Gemini policy has an “other insurance”
provision that provides:
SECTION IV – COMMERCIAL GENERAL LIABILITY
CONDITIONS
. . . .
4. Other Insurance
If other valid and collectible insurance is
available to the insured for a loss we cover under
10
Coverages A or B of this Coverage Part, our
obligations are limited as follows:
a. Primary Insurance
This insurance is primary except when b.
below applies. If this insurance is primary,
our obligations are not affected unless any
of the other insurance is also primary.
Then, we will share with all that other
insurance by the method described in c.
below.
b. Excess Insurance
This insurance is excess over:
(1) Any of the other insurance, whether
primary, excess, contingent or on any
other basis:
(a) That is Fire, Extended
Coverage, Builder’s Risk,
Installation Risk or similar
coverage for “your work”;
(b) That is Fire Insurance for
premises rented to you or
temporarily occupied by you with
permission of the owner;
(c) That is insurance purchased by
you to cover your liability as a
tenant for “property damage” to
premises rented to you or
temporarily occupied by you with
permission of the owner; or
(d) If the loss arises out of the
maintenance or use of aircraft,
“autos” or watercraft to the extent
not subject to Exclusion g. of
Section I – Coverage A – Bodily
Injury And Property Damage
Liability.
(2) Any other primary insurance
available to you covering liability for
damages arising out of the premises or
operations for which you have been added
11
as an additional insured by attachment
or an endorsement.
When this insurance is excess, we will have
no duty under Coverages A or B to defend the
insured against any “suit” if any other
insurer has a duty to defend the insured
against that “suit.” If no other insurer
defends, we will undertake to do so, but we
will be entitled to the insured’s rights
against all those other insurers.
When this insurance is excess over other
insurance, we will pay only our share of the
amount of the loss, if any, that exceeds the
sum of:
(1) The total amount that all such other
insurance would pay for the loss in the
absence of this insurance; and
(2) The total of all deductible and
self-insured amounts under all that
other insurance.
We will share the remaining loss, if any,
with any other insurance that is not
described in this Excess Insurance provision
and was not brought specifically to apply in
excess of the Limits of Insurance shown in
the Declarations of this Coverage Part.
c. Method of Sharing
If all of the other insurance permits contribution
by equal shares, we will follow this method also.
Under this approach each insurer contributes equal
amounts until it has paid its applicable limit of
insurance or none of the loss remains, whichever
comes first.
If any of the other insurance does not permit
contribution by equal shares, we will contribute
by limits. Under this method, each insurer’s
share is based on the ratio of its applicable
limit of insurance to the total applicable limits
of insurance of all insurers.
[Id. at 11-12.]
12
In its argument, Indian Harbor first contends that New
York law governs the determination of its obligations to KDC
under the Indian Harbor Policy because the parties agreed to a
choice of law clause and because New York has at least some nexus
to Indian Harbor.
13.]
[Mem. in Supp. of Indian Harbor Motion at 12-
The Indian Harbor Policy has a choice of law provision in
the “Conditions” of its policy, which provides:
L.
CHOICE OF LAW – All matters arising hereunder
including questions related to the
validity[,] interpretation, performance and
enforcement of this Policy shall be
determined in accordance with the law and
practice of the State of New York
(notwithstanding New York’s conflicts of law
rules).
[Stern Decl., Exh. 1 (Indian Harbor Policy).]
Indian Harbor asserts that it has significant contacts
with New York, including: its corporate parent, XL Specialty
Insurance Company, which is in turn a subsidiary of XL
Reinsurance America Inc., is incorporated in New York; it
conducts the business of insurance out of multiple locations in
the U.S., including an office in New York; the following
directors, officers, and employees are located in this New York
office: the CEO/President/Chairman of Indian Harbor; the General
Counsel for Indian Harbor, and four of Indian Harbor’s eight
corporate directors, the Global Head of Claims for XL Insurance,
the ultimate head of the claims department and reporting chain
responsible for handling the claims at issue in this action, is
13
located in this New York office; and XL Environmental, the XL
Insurance business unit that underwrote this policy, has
underwriters located in this New York office.
[Indian Harbor
CSF, Declaration of J. Robert McMahon (“McMahon Decl.”), at ¶¶ 311.]
Next, Indian Harbor argues that it has no obligation to
defend KDC because the Indian Harbor policy is excess to the
Gemini Policy by virtue of Indian Harbor’s “other insurance”
clause, and because Gemini has a duty to defend.
Indian Harbor’s
policy has an “excess” clause, while Gemini’s policy has a
primary/“pro rata” clause.
It argues that, under New York and
Hawai‘i law, a policy with an “excess” clause is excess to a
policy with a primary/“pro rata” clause.
That is, Indian Harbor
has no obligation to defend KDC unless and until the Gemini
Policy is no longer valid and collectible for KDC’s defense
(e.g., until the Gemini Policy limits are exhausted).
[Mem. in
Supp. of Indian Harbor Motion at 14.]
Indian Harbor argues that, under applicable Hawai‘i
law, Gemini does have a duty to defend in the Underlying Actions
because: (1) the Shredder Action includes claims involving
“bodily injury,” and “property damage”; (2) neither the
“occurrence” definition nor the “expected or intended injury”
exclusion apply where KDC’s intent is a fact that will be
litigated in the Underlying Actions, and there are also
14
allegations of unintended injury, inter alia, negligence,
nuisance, and negligent infliction of emotional distress
(“NIED”); (3) the pollution exclusion does not apply because
there are allegations regarding dynamite blasts, rodents, pests,
noise, and underground water supply lines that do not qualify as
“pollutants,” and are potentially covered claims; (4) the
punitive damages exclusion does not apply because the Underlying
Actions seek non-punitive, compensatory damages as well, and are
potentially covered damages.
In sum, Indian Harbor argues that
there are allegations in each of the Underlying Actions that are
potentially covered by the Gemini Policy, and, therefore, Gemini
has a duty to defend KDC in each of these lawsuits, and Indian
Harbor’s policy is excess for purposes of defense, with no
current obligation to pay defense costs.
[Id. at 20-26.]
Next, Indian Harbor asserts that it is not liable to
KDC for breach of the implied covenant of good faith and fair
dealing because, if it has no current duty to defend, it cannot
be liable in bad faith as a mater of law.
Further, under New
York law, there is no bad faith as a matter of law when “the
insurer has an arguable basis for denying coverage.”
[Id. at 27
(quoting Redcross v. Aetna Cas. &Sur. Co., 688 N.Y.S.2d 817, 821
(N.Y. App. 1999)).]
Here, whether Indian Harbor’s “excess”
provision operates to make Indian Harbor’s policy excess is at
least an open question of law and qualifies as a “reasonable
15
question” and an “arguable basis” for declining to defend KDC at
this time.
Indian Harbor argues that it reasonably relied on
clear New York authority that dictates that its policy is excess
and the majority of jurisdictions that have so held.
[Id. at
28.]
A.
Gemini Memorandum in Opposition
Gemini argues that Indian Harbor is not entitled to
summary judgment because the Indian Harbor policy is not
“excess,” but is KDC’s primary policy for pollution claims.
Gemini states that, even if its own motion for summary judgment
is denied, Indian Harbor nevertheless owes a duty to defend
because of the possibility of coverage under its policy for the
pollution claims against KDC.
[Gemini Mem. in Opp. to Indian
Harbor Motion at 2-3.]
Gemini asserts that, because the damages alleged in the
Underlying Actions arise from dirt, dust, toxic fumes, and other
substances which satisfy the definition of “pollutants” within
the Gemini Policy, coverage is precluded for the Underlying
Actions.
[Id. at 13.]
The alleged red dirt, dust and other
airborne particles, toxic fumes, toxic dust, diesel fumes,
pesticides and other poisons generated by KDC’s construction
activities constitute alleged “pollutants” within the plain
meaning of the Gemini Policy exclusion.
Where no coverage is
afforded under the Gemini Policy, such insurance plainly does not
16
constitute “other valid and collectible insurance” available to
the insureds.
Moreover, language contained in the Gemini
pollution exclusion roughly mirrors that found in the insuring
provisions of the Indian Harbor Policy.
As such, the same
analysis resulting in a finding that the pollution exclusion bars
coverage under the Gemini Policy will result in a finding of
coverage under the Indian Harbor Policy.
[Id.]
Gemini argues
that coverage is, therefore, triggered under the Indian Harbor
Policy and excluded by the pollution exclusion of the Gemini
Policy.
[Id. at 23.]
With respect to the choice of law, Gemini states that
the Court’s analysis of an insurer’s duty to defend is
substantially similar under both Hawai‘i and New York law.
It
argues that the Indian Harbor Policy is not “excess” because it
did not insure the same risk as the Gemini Policy.
Further,
because coverage is precluded by the pollution exclusion, the
Gemini Policy does not constitute “other valid and collectible
insurance” available to KDC within the plain meaning of the
Indian Harbor Policy.
B.
[Id. at 24-25.]
KDC Memorandum in Opposition
KDC filed its opposition on November 21, 2011.3
3
[Dkt.
KDC also filed its Evidentiary Objections to Declaration
of J. Robert McMahon, [dkt. no. 141-36,] arguing that Mr. McMahon
lacks personal knowledge necessary to testify regarding any
contacts Indian Harbor has with New York. In response, Indian
(continued...)
17
no. 140.]
It first states that the Indian Harbor Motion does not
dispute its potential to provide coverage under the Indian Harbor
Policy for pollution-related claims in the Underlying Actions.
It maintains that the “other insurance” clause does not apply
because the Indian Harbor and Gemini Policies do not cover the
same risk, and accordingly, Indian Harbor must provide both a
defense and indemnity for each of the Underlying Actions.
[KDC
Mem. in Opp. to Indian Harbor Motion at 1-2.]
First, KDC contends that the Court should apply Hawai`i
law in its analysis of the Indian Harbor Policy.
It states that,
while the Hawai`i Supreme Court has ruled on choice of law
issues, the question whether a choice of law provision included
within an insurance policy, a contract of adhesion, is
enforceable, is one of first impression.
In any event, KDC
argues that New York has no nexus with Indian Harbor, the
3
(...continued)
Harbor claims that Mr. McMahon is the Assistant Vice President &
Line of Business Manager for the company (XL Specialty Insurance
Company) that is solely responsible for the claims handling for
Indian Harbor’s Pollution and Remediation Legal Liability
policies. A person in his position and acting in that capacity
has the personal knowledge to discuss Indian Harbor and Indian
Harbor’s contacts. Further, Mr. McMahon testified that: he
personally knows Indian Harbor’s Chairman/CEO/President is based
in the New York office; he personally knows that Indian Harbor
pollution policies are issued from New York; and he personally
knows that his ultimate boss in the XL Insurance claims
department, the XL Insurance Global Head of Claims, is based in
that New York office. All of this personal knowledge is
sufficient foundation to testify that Indian Harbor conducts
business out of the New York office. [Indian Harbor Response,
filed 11/28/11 (dkt. no. 151-1), at 2-7.]
18
underlying claimants, the Indian Harbor Policy, or the locations
where the policy was to be delivered and performed, whereas
Hawai`i has a strong interest in seeing its laws applied in this
action.
[Id. at 7-12.]
Next, KDC argues that the Indian Harbor Policy does not
insure the same risk as the Gemini Policy, thereby making the
“other insurance” clause inapplicable under either New York or
Hawai`i law.
It argues that the application of such clauses is
predicated on the availability of multiple policies, each
insuring the same loss or risk; it is a condition precedent to
show that the same risk is covered by both policies.
[Id. at 14-
19.]
It argues that the tort of bad faith is covered by
Hawai`i law, because tort claims are not governed by contractual
choice of law provisions.
[Id. at 19 (citing Sutter Home Winery,
Inc. v. Vintange, Ltd., 971 F.2d 401, 407-08 (9th Cir. 1992)).]
KDC argues that a question of fact exists as to whether Indian
Harbor breached the covenant of good faith and fair dealing by
failing to contribute to the defense because Indian Harbor’s
interpretation of its own policy is patently unreasonable under
either Hawai`i or New York law.
It states that there “is no
reported case that applies the ‘other insurance’ claim where the
policies in question cover different risks.”
19
[Id. at 21.]
C.
Lloyds’ Memorandum in Opposition
Lloyds filed its opposition on November 21, 2011.
[Dkt. no. 138.]
It makes similar arguments that the Indian
Harbor Policy is not “excess” because it covers pollutants, which
are excluded under the Gemini Policy.
Lloyds states that its
policy, like Gemini’s, includes a pollution exclusion, which
provides, in pertinent part, as follows:
f. Pollution
(1) “Bodily injury” or “property damage”
arising out of the actual, alleged or
threatened discharge, dispersal, seepage,
migration, release or escape of “pollutants”:
(a) At or from any premises, site or
location which is or was at any time
owned or occupied by, or rented or
loaned to, any insured. However, this
subparagraph does not apply to:
(i) “Bodily injury” if sustained
within a building and caused by
smoke, fumes, vapor or soot from
equipment used to heat that
building;
(ii) “Bodily injury” or “property
damage” for which you may be held
liable, if you are a contractor and
the owner or lessee of such
premises, site or location has been
added to your policy as an
additional insured at that
premises, site or location and such
premises, site or location is not
or never was owned or occupied by,
or rented or loaned to, any
insured, other than that additional
insured;
or
20
(iii) “Bodily injury” or “property
damage” arising out of heat, smoke
or fumes from a “hostile fire”;
. . . .
(2) Any loss, cost or expense arising out of
any:
(a) Request, demand, order or statutory
or regulatory requirement that any
insured or others test for, monitor,
clean up, remove, contain, treat,
detoxify or neutralize, or in any way
respond to, or assess the effects of,
“pollutants”; . . . .
[Lloyds’ Mem. in Opp. to Indian Harbor Motion at 2-3 (quoting
Exh. A to KDC’s Cross-Claim Against Additional Defendant Certain
Underwriters at Lloyds (Lloyds Policy), at 4).]
Lloyds states
that the Indian Harbor Policy is the mirror image of the
pollution exclusion under the Gemini and Lloyds Policies.
Lloyds argues that, under either Hawai`i or New York
insurance law, Indian Harbor owes KDC a defense under the Indian
Harbor Policy.
To the extent that Indian Harbor’s coverage
overlaps with the exclusions in the CGL policies, there is not
other “valid and collectible insurance” and Indian Harbor’s
coverage is primary.
If there is a possibility of coverage
under its policy with respect to any claim asserted in an
Underlying Actions, then Indian Harbor has an obligation to
provide its insureds with a defense as to the entire action.
[Id. at 10-12.]
21
D.
Indian Harbor Replies
1.
Reply to KDC Opposition
Indian Harbor first responds that, under New York law
applicable to the Indian Harbor policy, if two or more liability
insurance policies have an obligation to defend an underlying
lawsuit, the “other insurance” provisions determine the priority
of that defense obligation.
[Indian Harbor Reply to KDC Mem. in
Opp. to Indian Harbor Motion at 1.]
It argues that the Indian
Harbor Policy states that it is excess over “any other valid and
collectible insurance available to the insured,” and the Gemini
policy provides that it is a primary policy; neither policy
limits application of its “other insurance” provision based on
the type of policies or liabilities at issue; and Gemini’s policy
is “valid and collectible insurance” for purposes of KDC’s
defense and, as such, is primary to Indian Harbor’s excess
policy.
[Id. at 1-2.]
2.
Reply to Gemini and Lloyds Oppositions
In its reply to the other insurers’ oppositions, Indian
Harbor repeats its argument that both it and Gemini potentially
have defense and indemnity liability for at least some of the
claims in the Underlying Actions, and, therefore, the “other
insurance” provisions determine the priority of that defense
obligation.
Gemini’s policy provides “valid and collectible
insurance” for purposes of KDC’s defense, and the plain meaning
22
of the Indian Harbor Policy should be enforced.
[Indian Harbor
Reply to Gemini and Lloyds’ Mems. in Opp. to Indian Harbor Motion
at 2-4.]
Next, it argues that Gemini has a duty to defend KDC in
the Underlying Actions and fails to negate the potential for
coverage for each allegation in these suits.
It argues that
there are several allegations that noise and pests caused
“bodily injury” and “property damage,” in addition to allegations
of “bodily injury” and “property damage” caused by blasting.
Further, with respect to the pollution exclusion, Gemini has
failed to demonstrate that the red dust, dirt, and toxic fumes
were “brought on or to the premises, site or location,” as
required for the relevant subsection of the pollution exclusion
to apply.
Having failed to establish that it has no duty to
defend, Indian Harbor argues that summary judgment should be
granted in Indian Harbor’s favor that Gemini has a duty to defend
the underlying lawsuits.
II.
[Id. at 6-10.]
Gemini Motion
Gemini moves for partial summary judgment on the
grounds that it has no duty to defend or indemnify Defendants
with respect to the Underlying Actions and the Erickson claim
because the damages alleged were caused by dust and other
“pollutants” as defined by the Gemini Policy, and therefore
coverage is barred by the policy’s pollution exclusion.
23
The Gemini Policy contains the following insuring
agreement:
1. Insuring Agreement
a. We will pay those sums that the insured
becomes legally obligated to pay as damages
because of “bodily injury” or “property
damage” to which this insurance applies. We
will have the right and duty to defend the
insured against any “suit” seeking those
damages. However, we will have no duty to
defend the insured against any “suit” seeking
damages for “bodily injury” or “property
damage” to which this insurance does not
apply. We may, at our discretion,
investigate any “occurrence” and settle any
claim or “suit” that may result. . .
b. This insurance applies to “bodily injury”
and “property damage” only if:
(1) The “bodily injury” or “property
damage” is caused by an “occurrence”
that takes place in the “coverage
territory”;
. . . .
[Mem. in Supp. of Gemini Motion at 7-8 (quoting Gemini Policy).]
Pursuant to this provision, in order for there to be liability
coverage under the Gemini Policy, there must be an “occurrence”
that causes “bodily injury” or “property damage”.
In SECTION V - DEFINITIONS, the Gemini Policy defines
“bodily injury” and “property damage” as follows:
“Bodily injury” means bodily injury, sickness or
disease sustained by a person, including death
resulting from any of these at any time.
“Property damage” means:
a. Physical injury to tangible property
24
including all resulting loss of use of that
property. All such loss of use shall be
deemed to occur at the time of the physical
injury that caused it; or
b. Loss of use of tangible property that is
not physically injured. All such loss of use
shall be deemed to occur at the time of the
“occurrence” that caused it.
[Id. at 8 (quoting Gemini Policy).]
The Gemini Policy contains an endorsement, AMENDED
DEFINITIONS ENDORSEMENT - “OCCURRENCE” AND DUTY TO DEFEND (Form
CR 0200 08 04) (“Occurrence Endorsement”) which defines the term
“occurrence” as follows:
“Occurrence” means an accident, including
continuous or repeated exposure to substantially
the same general harmful conditions that first
happens during the term of this insurance . . . .
[Id. (quoting Gemini Policy).]
The Occurrence Endorsement
further expressly provides that Gemini shall have no obligation
“to defend any ‘suit’ against the ‘insured’ or any additional
insured if such ‘suit’ does not allege an ‘occurrence’ as defined
in this endorsement.”
[Id. at 9.]
Gemini states that it is currently providing a defense
with respect to the Underlying Actions pursuant to a full
reservation of rights.
[Id. at 9 (citing Gemini’s Concise
Statement of Facts (“CSF”), Exh. 5 (6/17/09 Reservation of Rights
Letter)).]
Gemini first argues that coverage is unambiguously
precluded by the policy’s pollution exclusion, which provides:
25
This insurance does not apply to:
. . . .
f. Pollution
(1) “Bodily injury” or “property damage” arising
out of the actual, alleged or threatened
discharge, dispersal, seepage, migration, release
or escape of “pollutants”:
. . . .
(d) At or from any premises, site or location on
which any insured or any contractors or
subcontractors working directly or indirectly on
any insured’s behalf are performing operations if
the pollutants” are brought on or to the premises,
site or location in connection with such
operations by such insured, contractor or
subcontractor.
[Id. at 12 (quoting Gemini Policy).]
In SECTION V - DEFINITIONS,
the Gemini Policy defines “pollutants” as follows:
“Pollutants” mean any solid, liquid, gaseous or
thermal irritant or contaminant, including smoke,
vapor, soot, fumes, acids, alkalis, chemicals and
waste. Waste includes materials to be recycled,
reconditioned or reclaimed.
[Id. at 12-13 (quoting Gemini Policy).]
Gemini asserts that the pollution exclusion precludes
liability coverage for “bodily injury” or “property damage”
arising out of the actual, alleged or threatened discharge,
dispersal, seepage, migration, release or escape of “pollutants”
at or from the Project.
It states that the injuries and damages
alleged in the Underlying Actions arise predominantly from the
excessive amounts of dirt and dust stirred by KDC’s construction
activities which migrated to the property of the Schredders and
26
AOAO-plaintiffs.
The Schredders also complain of “toxic fumes.”
[Id. at 13.]
It also asserts that, even under the narrower
“traditional environmental pollution” legal standard, the
injuries alleged in the Underlying Actions arising from the dirt,
dust, and other irritants attributable to KDC’s construction
activities, were caused by “pollutants” for which coverage is
barred.
[Id. at 15-20 (citing Allen v. Scottsdale Ins. Co., 307
F. Supp.2d 1170 (D. Hawai`i 2004); Apana v. TIG Ins. Co., 504 F.
Supp. 2d 998, 1006 (D. Hawai`i 2007), and on appeal at 574 F.3d
679, 682 (9th Cir. 2009); and Certain Underwriters at Lloyd’s of
London v. NFC Mining, Inc., 2011 U.S. App. LEXIS 11924 (6th Cir.
June 9, 2011)).]
A.
Indian Harbor Memorandum in Opposition
Indian Harbor argues that the Gemini Motion does not
try to disprove coverage for all claims in the Underlying
Actions.
It also argues that the naturally occurring red dirt is
not excluded under the pollution exclusion.
[Indian Harbor Mem.
in Opp. to Gemini Motion at 1-2.]
First, Indian Harbor argues that Gemini asks the Court
to find that it has no duty to defend or indemnify the Underlying
Actions in their entirety, but the Gemini Motion only seeks to
defeat coverage for some of the allegations relating to dust,
dirt, and toxic fumes, and ignores other allegations, including
27
damage from blasting, noise, and rats, rodents, and pests.
[Id.
at 9.]
Second, Indian Harbor argues that Gemini failed to show
that the pollution exclusion applies to allegations of damages
because of dust, dirt, and toxic fumes.
It maintains that the
naturally occurring red dirt (and resulting dust) that is part of
Kauai’s unique environment is not a “pollutant,” and that Gemini
has failed to submit any evidence to demonstrate that the red
dirt here had any polluting qualities (or that all allegations of
dust and dirt involved polluting qualities).
It distinguishes
the cases cited by Gemini as involving toxic or contaminated
dirt, crushed concrete, asphalt, refuse, toxic ingredients, coal
dust, and noxious chemicals – not naturally occurring dirt and
dust.
[Id. at 18-20.]
Indian Harbor urges the Court to adopt the “traditional
environmental pollution” standard discussed in Nautilus Ins. Co.
v. Hawk Transport Services, LLC, Case No. 10-00605, 2011 U.S.
Dist. LEXIS 65663 (D. Hawai`i June 20, 2011), in which “Judge
Ezra cast doubt on the prior decisions of this Court in Allen and
Apana that construed pollution exclusions broadly.”
[Id. at 21.]
Indian Harbor asserts that Nautilus ultimately stated: “a court
divines from the circumstances whether a reasonable policy holder
would consider the substance at issue to be a pollutant in the
specific context of the underlying case.”
28
[Id. (quoting Ins.
Co., 2011 U.S. Dist. LEXIS 65663, at *27).]
Here, Indian Harbor
argues that a reasonable policy holder would not consider
naturally occurring red dirt to be excluded by a pollution
exclusion.
B.
KDC’s Memorandum in Opposition
KDC argues that the Underlying Actions assert claims of
property damage and bodily injury resulting from construction
activities unrelated to conditions barred by the pollution
exclusion.
Further, it relies on the Fed. R. Civ. P. 30(b)(6)
deposition testimony of William Trelease and Robert Weisensee,
who purportedly “confirmed Gemini’s underwriting intent was to
insure dust-related damage to third parties.”
to Gemini Motion at 2.]
[KDC Mem. in Opp.
KDC asserts that the underwriters
testified that dust arising from grading activities was intended
to be covered unless contaminated, and dust liability exposures
were understood to be insurable; moreover, Gemini charged $1.8
million in premium, “in part, because of the known risk of red
dust exposure in Hawai`i.”
[Id.]
Next, KDC argues that the pollution exclusion does not
preclude coverage for dust or dirt.
To understand the true
intent of the parties as to whether coverage is provided, KDC
asks the Court to consider the 30(b)(6) testimony regarding
underwriting intent.
[Id. at 15.]
KDC argues that the
underwriter understood the likelihood of dust-related claims, and
29
did not include a soils exclusion in the policy.
Further, Gemini
has presented no evidence that the dust or dirt was contaminated;
in fact, Gemini’s underwriter testified that if the dirt is not
contaminated, the intent was to cover the loss.
[Id. at 18.]
KDC also argues that the pollution exclusion does not
apply because Gemini has presented no evidence that the dirt and
dust caused by the grading operation were “brought on or to the
premises, site or location,” because the dirt and dust were
already on the premises.
[Id. at 19.]
KDC asks the Court to deny the Gemini Motion and enter
summary judgment on these issues in favor of KDC, pursuant to
Fed. R. Civ. P. 56(f)(1) and Rule LR56.1(i) of the Local Rules of
Practice of the United States District Court for the District of
Hawai`i (“Local Rules”).
C.
Lloyds’ Response
Lloyds concurs with Gemini’s analysis of the pollution
exclusion in the Gemini Policy – and by extension the virtually
identical pollution exclusion in the Lloyds’ Policy – and its
applicability to the claims asserted in the Underlying
Actions at issue herein.
D.
Gemini’s Reply
Gemini argues that it is entitled to summary judgment
because the alleged dirt, dust, and toxic fumes qualify as
“pollutants” as they are solid or gaseous “irritants” or
30
“contaminants.”
[Gemini Reply to all Mems. in Opp. at 8.]
It also argues that the Underlying Actions do not
satisfy the Gemini Policy’s “occurrence” requirement, which
defines “occurrence” as “an accident, including continuous or
repeated exposure to substantially the same general harmful
conditions that first happens during the term of insurance.”
[Id. at 14 (quoting Gemini Policy).]
Gemini states that, to the
extent coverage for claims in the Underlying Actions is not
excluded by the pollution exclusion, Gemini expects to seek this
Court’s ruling on any continued duty to defend by means of a
timely motion for summary judgment regarding the “no occurrence”
issue.
[Id. at 15.]
DISCUSSION
The standard for summary judgment is well-known to the
parties and does not bear repeating here.
See, e.g., Rodriguez
v. Gen. Dynamics Armament & Technical Prods., Inc., 696 F. Supp.
2d 1163, 1176 (D. Hawai`i 2010).
I.
Indian Harbor Motion
Indian Harbor seeks summary judgment that it has no
duty to defend KDC because the Indian Harbor Policy is excess for
defense purposes to the Gemini Policy, and that it is not liable
to KDC for bad faith.
It also seeks summary judgment that Gemini
has a duty to defend under the Gemini Policy.
The Court first
addresses the parties’ arguments regarding whether New York or
31
Hawai‘i law governs the interpretation of the Indian Harbor
Policy, and concludes that New York law should be applied.
A.
Choice of Law
The Indian Harbor Policy’s choice of law clause
provides that New York law applies as follows:
L.
CHOICE OF LAW – All matters arising hereunder
including questions related to the
validity[,] interpretation, performance and
enforcement of this Policy shall be
determined in accordance with the law and
practice of the State of New York
(notwithstanding New York’s conflicts of law
rules).
[Stern Decl., Exh. 1 (Indian Harbor Policy).].
The parties agree
that, under Hawai‘i law, a contractual choice of law provision
will be upheld if that law has some nexus with either the parties
or the contract.
The Hawaii choice of law analysis places
primary emphasis on the determination of “which
state would have the strongest interest in seeing
its laws applied to the particular case.” Unified
W. Grocers, Inc. v. Twin City Fire Ins. Co., 457
F.3d 1106, 1111 (9th Cir. 2006) (quoting Lewis v.
Lewis, 69 Haw. 497, 748 P.2d 1362, 1365 (1988));
see also Del Monte Fresh Produce (Hawaii), Inc. v.
Fireman’s Fund Ins. Co., 117 Hawai‘i 357, 364, 183
P.3d 734, 741 (2007). This district court,
however, has recognized that, under Hawaii law,
“‘a choice of law provision provided in a contract
between the parties will generally be upheld.’”
Hawaii Forest & Trail Ltd. v. Davey, CV 07-00538
HG-BMK, 2009 WL 47331, at *3 (D. Haw. Jan. 8,
2009) (quoting Del Monte Fresh Produce, Inc. v.
Fireman’s Fund Ins. Co., 117 Hawai‘i 357, 364, 183
P.3d 734 (2007)).
Del Monte noted that in Airgo, Inc. v.
Horizon Cargo Transport, Inc., 66 Haw. 590, 595,
32
670 P.2d 1277, 1281 (1983), the Hawaii Supreme
Court stated that parties’ choice of law provision
will be upheld if that law has some nexus with
either the parties or the contract. See Del
Monte, 117 Hawai‘i at 364-65, 183 P.3d 741-42.
Hawaiian Telcom Commc’ns, Inc. v. Tata Am. Int’l Corp., Civil No.
10-00112 HG-LEK, 2010 WL 2594482, at *5 & n.7 (D. Hawai‘i May 24,
2010).
The parties hotly dispute whether the parties or the
policy have a sufficient nexus with New York.
With respect to
Indian Harbor’s affirmative showing, the Court finds that
Mr. McMahon has sufficient personal knowledge with respect to the
matters set forth in his declaration.
That is, although it is a
North Dakota corporation, Indian Harbor conducts the business of
insurance out of multiple locations, including an office in New
York; its directors, officers, and employees are located in this
New York office, including the General Counsel for Indian Harbor,
the Global Head of Claims for XL Insurance, the ultimate head of
the claims department responsible for handling the claims at
issue in this action are located in New York office; and
underwriters for XL Environmental, the XL Insurance business unit
that underwrote this policy, has underwriters located in New York
office.
[McMahon Decl. at ¶¶ 3-11.]
The Court therefore finds
that New York has “some nexus” with the parties, although its
relationship to the Indian Harbor Policy is more tenuous, and New
York has no apparent relationship with the insured, the claimants
33
in the Underlying Actions, or the location where the policy is to
be performed.
The Court is also convinced, however, that Hawai‘i has
a strong interest in the application of its laws to the instant
dispute.
KDC argues that applying New York law would undermine
Hawai‘i law with respect to its right to recover attorneys’ fees
should it prevail.
Further, the Gemini and Lloyds Policies
appear to be governed by Hawai‘i law, thus, the Court will be
forced to apply different laws to the different policies.
On
balance, however, these considerations do not overcome the choice
of law analysis.
KDC voluntarily purchased the Indian Harbor
Policy with a New York choice of law clause, and the Court will
uphold the clear expectations of the contracting parties.
To the extent the Court is presented with a matter of
first impression, however, the Court forecasts that Hawai‘i
courts would apply the “some nexus” contractual choice of law
analysis set forth above to insurance contracts, rather than
simply apply the law of the forum with the greatest interest in
the dispute.
That is, the parties’ choice of law provision will
be upheld if that law has some nexus with either the parties or
the policy.
See Del Monte, 117 Hawai‘i at 364-65, 183 P.3d
741-42; Airgo, 66 Haw. at 595, 670 P.2d at 1281.
Here, despite
the somewhat tenuous relationship with all relevant parties and
the policy, all that is required for the choice of law provision
34
to apply is “some nexus,” which the Court finds is satisfied.
Indian Harbor, the insurer, has “some nexus” to New York.
The
Court therefore applies the law of New York to the interpretation
of the Indian Harbor Policy.
B.
Excess Policy
Indian Harbor seeks summary judgment on its claim that
it does not have a duty to defend KDC because the Indian Harbor
Policy is excess to the Gemini Policy.
The Indian Harbor Policy
contains the following “other insurance” language:
I. OTHER INSURANCE – Subject to Section VI.,
Limits of Liability and Retention, this insurance
shall be in excess of the Retention Amount stated
in the Declarations and any other valid and
collectible insurance available to the INSURED,
whether such other insurance is stated to be
primary, pro rata, contributory, excess,
contingent or otherwise, unless such other
insurance is written only as specific excess
insurance over the limits of liability provided in
this Policy.
[Stern Decl., Exh. 1 (Indian Harbor Policy), at 11.]
The other parties argue that this “other insurance”
clause does not apply because the Indian Harbor and Gemini
Policies do not cover the same risk, and accordingly, Indian
Harbor must provide both a defense and indemnity for each of the
Underlying Actions.
The Indian Harbor Policy expressly affords
coverage for “pollution conditions,” while the Gemini and Lloyds
Policies expressly exclude coverage for the discharge, dispersal
or release of pollutants.
The Indian Harbor Policy states:
35
I. INSURING AGREEMENT
A. Coverage A – POLLUTION LEGAL LIABILITY
The Company will pay on behalf of the INSURED
for LOSS from POLLUTION CONDITIONS on, at, under
or emanating from the location(s) stated in the
Pollution Legal Liability Schedule, which the
INSURED has or will become legally obligated to
pay as a result of a CLAIM first made against the
INSURED during the POLICY PERIOD, provided that
the INSURED reports the CLAIM to the Company, in
writing, during the POLICY PERIOD or, if
applicable, the Automatic or Optional Extended
Reporting Period.
[Id. at 1-2.]
The Indian Harbor Policy covers “pollution conditions,”
which are defined as the “discharge, dispersal, release, seepage,
migration, or escape of any solid, liquid, gaseous or thermal
pollutant, irritant or contaminant, including but not limited
to smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals,
hazardous materials, waste materials. . . ,” [id. at 3,] and
likely includes the alleged toxic fumes, toxic dust, diesel
fumes, pesticides and other poisons generated by or involved in
KDC’s construction activities.
The Gemini Policy, on the other
hand, includes a pollution exclusion, precluding coverage of “any
solid, liquid, gaseous or thermal irritant or contaminant,
including smoke, vapor, soot, fumes, acids, alkalis, chemicals
and waste.
Waste includes materials to be recycled,
reconditioned or reclaimed.”
13-15.]
[Id., Exh. 2 (Gemini Policy), at
Thus, Indian Harbor’s grant of coverage appears to be
36
roughly the mirror image of the pollution exclusion under the CGL
policies issued by Gemini and Lloyds.
That is, the Indian Harbor
Policy expressly covers what the Gemini Policy excludes.
Applying the law of New York, the Court concludes that
Indian Harbor is not entitled to summary judgment that it has no
duty to defend based on its policy’s “other insurance” clause.
Indian Harbor argues that its policy is “excess” based on the
recent decision in Fieldston Property Owners Ass’n, Inc. v.
Hermitage Insurance Co., Inc., 16 N.Y.3d 257 (2011).
In that
case, the court explained the general standard as follows:
In resolving insurance disputes, we first
look to the language of the applicable policies
(see Raymond Corp. v National Union Fire Ins. Co.
of Pittsburgh, Pa., 5 NY3d 157, 162 [2005]). If
the plain language of the policy is determinative,
we cannot rewrite the agreement by disregarding
that language (see id.).
Id. at 264.
In Fieldston, unlike in the instant matter, both of
the policies at issue covered claims of injurious falsehood
alleged in the underlying actions, i.e., the same loss.
As a
result, the Fieldston court held that, one policy’s “primacy on
the injurious falsehood claim triggers a primary duty to defend
against the remaining causes of action in the two complaints,
thus preempting any obligation,” by the other insurer.
Id.
With
respect to primary and excess insurance, Fieldston explains as
follows:
[A] “primary insurer has the primary duty to
defend on behalf of its insureds”, and it
37
generally has no “entitlement to contribution from
an excess insurer[.]” Although an excess
insurance carrier may elect to participate in an
insured’s defense to protect its interest, it has
“no obligation to do so”.
As relevant here, Federal’s D&O policy
provides that its coverage is excess where “any
Loss arising from any claim made against the
Insured(s) is insured under any other valid
policy(ies).” “Loss” as defined in the D&O policy
includes “Defense Costs.” Based on the broad duty
to defend, and upon the conceded possibility that
Hermitage’s CGL policy covers at least one cause
of action in each of the two underlying
complaints, Hermitage has a duty to provide a
defense to the entirety of both complaints. Thus,
under the terms of Federal’s D&O policy, there
does exist “other insurance” which would cover the
“loss” arising from the defense of the two
underlying actions. Accordingly, Hermitage had an
obligation to defend both of the underlying
actions without contribution from Federal,
notwithstanding the fact that Federal would appear
to have an obligation to indemnify Fieldston for a
greater proportion of the causes of action, if
successfully prosecuted.
Id. at 264-65 (citations and some quotation marks omitted).
“An ‘other insurance’ clause “limit[s] an insurer’s
liability where other insurance may cover the same loss[.]”
Sport Rock Int’l, Inc. v. Am. Cas. Co. of Reading, PA, 878
N.Y.S.2d 339, 344 (2009) (citing 15 Couch on Insurance 3d §
219:1) (emphasis added).
Here, the parties dispute whether the
policies cover the same claims.
On the current record, it
appears the policies do not cover the same risks and do not
provide the same level or type of coverage.
The allegations in
the Underlying Actions may create the potential for coverage
38
under the Indian Harbor Policy, while the Gemini policy does not
insure pollution claims, but covers the property damage and
bodily injury claims alleged in the Underlying Actions not caused
by pollution.
The Gemini Policy is primary in most respects, but
not with respect to pollution conditions.
The Indian Harbor
Policy is, therefore, not excess with respect to pollution.
See
Sport Rock Int’l, Inc., 878 N.Y.S.2d at 344 (citing 15 Couch on
Insurance 3d § 219:1) (“Where the same risk is covered by two or
more policies, each of which was sold to provide the same level
of coverage (as is the case here), priority of coverage (or,
alternatively, allocation of coverage) among the policies is
determined by comparison of their respective ‘other insurance’
clauses[.]”)); Great N. Ins. Co. v. Mount Vernon Fire Ins. Co.,
92 N.Y.2d 682, 686-87 (1999) (“In insurance contracts the term
‘other insurance’ describes a situation where two or more
insurance policies cover the same risk in the name of, or for the
benefit of, the same person[.]”) (citation omitted); accord
Rhone-Poulenc, Inc. v. Int’l Ins. Co., No. 94 C 3303, 1996 WL
328011, at *13 (N.D. Ill. June 11, 1996) (“The [Environmental
Impairment Liability (“EIL”)] coverage clearly was intended to
provide primary coverage for residual pollution to fill gaps that
developed in CGL coverage.”).
Under the circumstances and based on the current
record, the Court concludes that Indian Harbor has not
39
established as a matter of law that it has no duty to defend
based on the “other insurance” clause in the Indian Harbor
Policy.
The Indian Harbor Motion is DENIED with respect to this
issue.
C.
Bad Faith
Next, Indian Harbor seeks summary judgment on KDC’s bad
faith claim.
KDC argues that the tort of bad faith issue is
covered by Hawai`i law, because tort claims are not governed by
contractual choice of law provisions.
As the Ninth Circuit
stated in Sutter Home Winery, Inc. v. Vintange, Ltd., 971 F.2d
401, 407 (9th Cir. 1992), “[c]laims arising in tort are not
ordinarily controlled by a contractual choice of law provision.
Rather, they are decided according to the law of the forum
state.” (Citing Consolidated Data Terminals v. Applied Digital
Data Sys., 708 F.2d 385, 390 n.3 (9th Cir. 1983)).
In
Allis-Chalmers Corp. v. Lueck, 471 U.S. 202, 218 (1985), however,
the Supreme Court held that a tort claim under Wisconsin law for
the bad faith handling of an insurance claim was “inextricably
intertwined” with matters of contract interpretation, and was
pre-empted by § 301 of the Labor Management Relations Act, as
follows: “Because the right asserted not only derives from the
contract, but is defined by the contractual obligation of good
faith, any attempt to assess liability here inevitably will
involve contract interpretation.”
40
In any event, the Court need
not decide which state’s law applies to the bad faith claim at
this time, because, for purposes of the instant motion, the
result is the same.
The Court acknowledges that “there remains a strong
presumption in New York against a finding of bad faith liability
by an insurer.”
Hugo Boss Fashions, Inc. v. Federal Ins. Co.,
252 F.3d 608, 624 (2d Cir. 2001).
The Court finds, nonetheless,
that under either New York or Hawai‘i insurance law regarding bad
faith, Indian Harbor’s denial of KDC’s claim is to be assessed
based upon either its reasonableness, an arguable difference of
opinion, or gross disregard for its policy obligations.
Compare
Pavia v. State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445, 453
(1993) (“in order to establish a prima facie case of bad faith,
the plaintiff must establish that the insurer’s conduct
constituted a ‘gross disregard’ of the insured’s interests”); and
Greenidge v. Allstate Ins. Co., 312 F. Supp. 2d 430, 440
(S.D.N.Y. 2004), aff’d by 446 F.3d 356 (2d Cir. 2006) (holding
that the insureds “could still have a viable claim here if
Allstate declined the settlement proposal based on unreasonable
construction of the policy.
But that is not the case.
First,
even if Allstate’s interpretation were mistaken, it is far from
unreasonable, as demonstrated by the fact that Allstate obtained
opinion letters from two separate sets of outside counsel that
confirmed its reading of the policies.”); with Miller v. Hartford
41
Life Ins. Co., No. SCCQ–11–0000329, --- P.3d ----, 2011 WL
6811570, at *15 (Haw. Dec. 28, 2011) (“The burden of proof for
bad faith liability is not insubstantial.
As we stated in Best
Place [v. Penn America Insurance Co., 82 Hawai‘i 120, 920 P.2d
334 (1996)], an insurer’s conduct that is based on an
interpretation of the insurance contract that is reasonable does
not constitute bad faith; moreover, an erroneous decision not to
pay a claim for benefits due under a policy does not by itself
prove liability.
Rather, the decision not to pay a claim must be
in ‘bad faith’ in order to prove liability.”); and Enoka v. AIG
Hawaii Ins. Co., Inc., 109 Hawai‘i 537, 552, 128 P.3d 850, 865
(2006) (“where an insurer denies the payment of no-fault benefits
based on ‘an open question of law,’ there is ‘obviously no bad
faith on the part of the insurer in litigating that issue’”)
(citation omitted).
KDC argues that a question of fact exists as to whether
Indian Harbor breached the covenant of good faith and fair
dealing by failing to contribute to the defense because Indian
Harbor’s interpretation of its own policy is patently
unreasonable under either Hawai`i or New York law.
Indian
Harbor, on the other hand, argues that whether its policy is
excess is at least an “open question” of law and qualifies as a
“reasonable question” and an “arguable basis” for declining to
defend KDC at this time; it argues that it “reasonably relied on
42
clear New York authority that dictates that its policy is excess
and the majority of jurisdictions that have so held.”
[Mem. in
Supp. of Indian Harbor Motion at 28.]
Under either New York or Hawai‘i law, Indian Harbor has
not met its burden on summary judgment of establishing that it is
not liable for bad faith.
That is, there is a genuine issue of
material fact as to whether Indian Harbor’s denial of KDC’s claim
was reasonable Hawai‘i law, or, whether it had presented a
“reasonable question” or an “arguable basis” for declining to
defend KDC, or, exhibited a gross disregard for its policy
obligations under New York law.
Under the circumstances and
based on the current record, the Court concludes that Indian
Harbor has not established as a matter of law that it is not
liable for bad faith.
The Indian Harbor Motion is DENIED with
respect to this issue.4
D.
Unnamed Insureds
Alternatively, Indian Harbor states that it has no duty
to defend two KDC entities and is entitled to summary judgment
because they are not insureds under the Indian Harbor Policy.
The “FIRST NAMED INSURED” on the policy is Kukui’ula South Shore
Community Services, LLC (who is not a party to this lawsuit or
4
To the extent KDC asks the Court to deny the Indian Harbor
Motion and enter summary judgment on these issues in favor of
KDC, pursuant to Fed. R. Civ. P. 56(f)(1) and Local Rule 56.1(i),
the request is DENIED for the reasons set forth above.
43
any Underlying Actions).
Of the relevant entities, only
Kukui’ula Development Company (Hawaii), LLC; KDC, LLC; and DMB
Kukui’ula LLC are added as additional named insureds under the
policy by virtue of Endorsements Nos. 3 and 10.
Neither DMB
Associates (Hawaii), Inc. nor A&B Properties, Inc. are “FIRST
NAMED INSUREDS” or “Additional INSUREDS” or “Additional Named
INSUREDS” endorsed onto the Policy.
Harbor Motion at 28-29.]
Motion on this point.
[Mem. in Supp. of Indian
KDC did not oppose the Indian Harbor
The Court therefore GRANTS the Indian
Harbor Motion with respect to this issue.
E.
Gemini’s Duty to Defend
Last, Indian Harbor argues that Gemini has a duty to
defend KDC in the Underlying Actions because of allegations that
noise and pests caused “bodily injury” and “property damage,” in
addition to allegations of “bodily injury” and “property damage”
caused by blasting.
Further, it argues with respect to the
pollution exclusion, that Gemini has failed to demonstrate that
the red dust, dirt, and toxic fumes were “brought on or to the
premises, site or location,” as required for the relevant
subsection of the pollution exclusion to apply.
For these
reasons, as well as the discussion set forth below with respect
to the Gemini Motion, the Indian Harbor Motion is GRANTED IN PART
with respect to Gemini’s duty to defend based on the pollution
exclusion, but is DENIED IN PART with respect to other exclusions
44
for the present time.
II.
Gemini Motion
Gemini moves for summary judgment that it has no duty
to defend or indemnify KDC.
At the hearing on the motions, the
Court informed the parties that it would not reach the issue of
their respective duties to indemnify because the Underlying
Actions have not concluded.
The following discussion is
therefore limited to Gemini’s argument that it has no duty to
defend based upon the policy’s pollution exclusion.
A.
Interpretation of Insurance Contracts
1.
General Principles
The Hawai`i Supreme Court has set forth the following
principles applicable in the interpretation of insurance
contracts:
[I]nsurers have the same rights as
individuals to limit their liability and to impose
whatever conditions they please on their
obligation, provided they are not in contravention
of statutory inhibitions or public policy. As
such, insurance policies are subject to the
general rules of contract construction; the terms
of the policy should be interpreted according to
their plain, ordinary, and accepted sense in
common speech unless it appears from the policy
that a different meaning is intended. Moreover,
every insurance contract shall be construed
according to the entirety of its terms and
conditions as set forth in the policy.
Nevertheless, adherence to the plain language
and literal meaning of insurance contract
provisions is not without limitation. We have
acknowledged that because insurance policies are
contracts of adhesion and are premised on standard
45
forms prepared by the insurer’s attorneys, we have
long subscribed to the principle that they must be
construed liberally in favor of the insured and
any ambiguities must be resolved against the
insurer. Put another way, the rule is that
policies are to be construed in accord with the
reasonable expectations of a layperson.
Guajardo v. AIG Hawai`i Ins. Co., Inc., 118 Hawai`i 196, 201-02,
187 P.3d 580, 585-86 (2008) (alteration in Guajardo) (quoting
Dairy Rd. Partners v. Island Ins. Co., 92 Hawai`i 398, 411–12,
992 P.2d 93, 106–07 (2000)).
The Hawai`i Supreme Court has also
stated: “[t]he objectively reasonable expectations of
[policyholders] and intended beneficiaries regarding the terms of
insurance contracts will be honored even though painstaking study
of the policy provisions would have negated those expectations.
These ‘reasonable expectations’ are derived from the insurance
policy itself . . . .”
Del Monte Fresh Produce (Hawaii), Inc. v.
Fireman’s Fund Ins. Co., 117 Hawai`i 357, 368, 183 P.3d 734, 745
(2007) (citations and some quotation marks omitted) (some
alterations in original).
Under the principles of general contract
interpretation, “[a] contract is ambiguous when the terms of the
contract are reasonably susceptible to more than one meaning.”
Airgo, Inc. v. Horizon Cargo Transport Inc., 66 Haw. 590, 594,
670 P.2d 1277, 1280 (1983).
It is well settled that courts should not draw
inferences from a contract regarding the parties’
intent when the contract is definite and
unambiguous. In fact, contractual terms should be
46
interpreted according to their plain, ordinary
meaning and accepted use in common speech. The
court should look no further than the four corners
of the document to determine whether an ambiguity
exists. Consequently, the parties’ disagreement
as to the meaning of a contract or its terms does
not render clear language ambiguous.
State Farm Fire & Cas. Co. v. Pac. Rent–All, Inc., 90 Hawai`i
315, 324, 978 P.2d 753, 762 (1999) (citations omitted).
2.
Duty to Defend & Duty to Indemnify
In addition, this district court has summarized the
following relevant aspects of Hawai`i law regarding the duty to
defend and the duty to indemnify.
The burden is on the insured to establish
coverage under an insurance policy. See Sentinel
Ins. Co. v. First Ins. Co. of Haw., 76 Haw. 277,
291 n.13, 875 P.2d 894, 909 n.13 (1994) (as
amended on grant of reconsideration); Crawley v.
State Farm Mut. Auto. Ins. Co., 90 Haw. 478, 483,
979 P.2d 74, 79 (App. 1999). The insurer has the
burden of establishing the applicability of an
exclusion. See Sentinel, 76 Haw. at 297, 875 P.2d
at 914.
The duty to indemnify is owed “for any loss
or injury which comes within the coverage
provisions of the policy, provided it is not
removed from coverage by a policy exclusion.”
Dairy Road Partners v. Island Ins., 92 Haw. 398,
413, 922 P.2d 93, 108 (2000). The obligation to
defend an insured is broader than the duty to
indemnify. The duty to defend arises when there
is any potential or possibility for coverage.
Sentinel, 76 Haw. at 287, 875 P.2d at 904; accord
Haole v. State, 111 Haw. 144, 151, 140 P.3d 377,
384 (2006) (“if there is no potential for
indemnification, then no duty to defend will
arise”). However, when the pleadings fail to
allege any basis for recovery under an insurance
policy, the insurer has no duty to defend.
Pancakes of Hawaii, Inc. v. Pomare Props. Corp.,
85 Haw. 286, 291, 994 P.2d 83, 88 (Haw. Ct. App.
47
1997)). In other words, for [the insurer] to have
no duty to defend, it must prove that it would be
impossible for a claim in the underlying lawsuit
to be covered by the policy. See Tri–S Corp. v.
W. World Ins. Co., 110 Haw. 473, 488, 135 P.3d 82,
97 (2006).
Estate of Rogers v. Am. Reliable Ins. Co., Civil No. 10–00482
SOM/RLP, 2011 WL 2693355, at *4 (D. Hawai‘i July 8, 2011).
The
Hawai`i Supreme Court has emphasized that the duty to defend
applies even if the possibility of coverage is “remote”.
Tri-S
Corp. v. Western World Ins. Co., 110 Hawai`i 473, 488, 135 P.3d
82, 97 (2006).
Further, “[a]ll doubts as to whether a duty to
defend exists are resolved against the insurer and in favor of
the insured.”
Id.
“[T]he duties to defend and indemnify arise under the
terms of the insurance policy, and it is through an
interpretation of the terms of the policy that such duties are
deemed to be owed.”
Del Monte Fresh Produce, 117 Hawai`i at
369-70, 183 P.3d at 746-47 (citation omitted).
B.
Gemini’s Motion Is Denied As to the Pollution Exclusion
The Gemini Policy excludes coverage for “pollutants”,”
which “means any solid, liquid, gaseous or thermal irritant or
contaminant, including smoke, vapor, soot, fumes, acids, alkalis,
chemicals and waste.
Waste includes materials to be recycled,
reconditioned or reclaimed.”
Policy), at 3, 15.]
[Stern Decl., Exh. 2 (Gemini
The Gemini Motion only seeks summary
judgment for allegations relating to dust, dirt, and toxic fumes,
48
and appears to acknowledge that other allegations, including
damage from blasting, noise, and rats, rodents, and pests, are
covered by the Gemini Policy.
First, to the extent there are covered claims that are
not excluded by the pollution exclusion, Gemini has a duty to
defend in the Underlying Actions and the Erickson claim.
Gemini
“is obligated to provide a defense against the allegations of
covered as well as the noncovered claims.”
First Ins. Co., 66
Haw. 413, 418 665 P.2d 648, 652 (1983); see also id. at 417
(citing Crawford v. Ranger Ins. Co., 653 F.2d 1248, 1253 (9th
Cir. 1981) (“[T]he insurer has a duty to accept the defense of
the entire suit even though other claims of the complaint fall
outside the policy’s coverage.”)).
In other words, for Gemini to
have no duty to defend, “it must prove that it would be
impossible for a claim in the underlying lawsuit to be covered by
the policy.”
Estate of Rogers, 2011 WL 2693355, at *4.
Gemini
has not met this burden.
Second, Indian Harbor and KDC maintain that the
naturally occurring red dirt and dust are not “pollutants,” and
Gemini has presented no evidence that the dust or dirt was
contaminated for purposes of summary judgment.
They further note
that Gemini has presented no evidence that the dirt and dust
caused by the grading operation were brought on or to the
premises, site or location, or whether the dirt and dust were
49
already on the premises.
Because there is are genuine issues of
material fact regarding these issues, and because Gemini has not
established that the pollution exclusion bars all claims as a
matter of law, it has not met its burden on summary judgment.
Under the circumstances and based on the current
record, the Court concludes that Gemini has not established as a
matter of law that it has no duty to defend under the Gemini
Policy’s pollution exclusion.
respect to this issue.
The Gemini Motion is DENIED with
The Court’s ruling is limited to the
issue of Gemini’s duty to defend based on the pollution
exclusion.5
CONCLUSION
On the basis of the foregoing, Indian Harbor Insurance
Company’s Motion for Summary Judgment or, in the Alternative,
Partial Summary Judgment Against KDC and Gemini Insurance
Company, filed on July 1, 2011 [dkt. no. 54], is HEREBY GRANTED
IN PART AND DENIED IN PART.
The Indian Harbor Motion is GRANTED
IN PART as to (1) its duty to defend two KDC entities that are
not named insureds under the Indian Harbor Policy, and (2) as to
Gemini’s duty to defend based on the pollution exclusion.
5
The
Gemini indicates that, to the extent coverage for claims
in the Underlying Actions is not excluded by the pollution
exclusion, it will separately seek this Court’s ruling on any
continued duty to defend by means of a timely motion for summary
judgment regarding the “no occurrence” issue. The Court does not
reach that issue at this time.
50
Indian Harbor Motion is DENIED in all other respects.
Plaintiff Gemini Insurance Company’s Motion for Partial
Summary Judgment, filed on July 5, 2011 [dkt. no. 59], is HEREBY
DENIED.
IT IS SO ORDERED.
DATED AT HONOLULU, HAWAII, February 29, 2012.
/S/ Leslie E. Kobayashi
Leslie E. Kobayashi
United States District Judge
GEMINI INSURANCE COMPANY V. KUKUI`LA DEVELOPMENT COMPANY
(HAWAII), LLC, ET AL; CIVIL NO. 10-00637 LEK-BMK; ORDER GRANTING
IN PART AND DENYING IN PART INDIAN HARBOR INSURANCE COMPANY’S
MOTION FOR SUMMARY JUDGMENT OR, IN THE ALTERNATIVE, PARTIAL
SUMMARY JUDGMENT AGAINST KDC AND GEMINI INSURANCE COMPANY; AND
DENYING PLAINTIFF GEMINI INSURANCE COMPANY’S MOTION FOR PARTIAL
SUMMARY JUDGMENT
51
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