St. Paul Fire & Marine Insurance Company v. Liberty Mutual Insurance Company

Filing 44

CERTIFIED QUESTION To The Hawaii Supreme Court From The United States District Court For the District of Hawaii In Civil No. 13-00361 HG-BMK. Signed by JUDGE HELEN GILLMOR on 3/31/2014. (gab, )CERTIFICATE OF SERVICE Participants 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

HAWAII SUPREME COURT

ST. PAUL FIRE AND MARINE
INSURANCE COMPANY, a
Minnesota corporation,
Plaintiff,
vs.
LIBERTY MUTUAL INSURANCE
COMPANY, a Massachusetts
corporation,
Defendant.

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CERTIFIED QUESTION TO THE
HAWAII SUPREME COURT FROM
THE UNITED STATES DISTRICT
COURT FOR THE DISTRICT OF
HAWAII IN CIVIL NO. 13-00361
HG-BMK

CERTIFIED QUESTION TO THE HAWAII SUPREME COURT
FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
HAWAII IN CIVIL NO. 13-00361 HG-BMK

INTRODUCTION
Plaintiff St. Paul Fire and Marine Insurance Company, an
excess insurer, filed suit against Defendant Liberty Mutual
Insurance Company, a primary insurer, for claims arising from
a wrongful death action against the Parties’ mutual insured.
The wrongful death action proceeded to trial, resulting in a
finding of liability against the mutual insured, and a verdict
of $4.1 million. After verdict, the action was settled for an
amount in excess of the $1 million primary insurance policy

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limit issued by Defendant. Plaintiff paid the amount in
excess.
Plaintiff alleges that Defendant acted in bad faith by
rejecting settlement offers within the limits of the its
primary insurance policy. Plaintiff seeks to recover, pursuant
to the doctrine of equitable subrogation, the amount of the
settlement payment made by Plaintiff, and related costs and
fees.
Defendant filed a Motion for Judgment on the Pleadings.
The Motion raises the issue of whether an excess liability
insurer may bring a cause of action, pursuant to the doctrine
of equitable subrogation to the rights of the insured, against
a primary liability insurer for failure to settle a claim
against the mutual insured within the limits of the primary
liability policy, when the primary insurer has paid its policy
limit toward settlement. The Court certifies this question to
the Hawaii Supreme Court for its consideration, as it presents
an unresolved question of Hawaii State law.

PROCEDURAL HISTORY
On June 10, 2013, Plaintiff St. Paul Fire and Marine
Insurance Company filed suit against Defendant Liberty Mutual
Insurance Company in the Circuit Court of the First Circuit

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for the State of Hawaii. (Notice of Removal Ex. A, ECF No.
1.)1
On July 22, 2013, Defendant timely removed the action to
the Federal District Court for the District of Hawaii. (ECF
No. 1.)

On July 29, 2013, Defendant filed an Answer. (ECF

No. 5.)
On November 20, 2013, Defendant filed a Motion for
Judgment on the Pleadings. (ECF No. 23.)
On December 13, 2013, Plaintiff filed an Opposition.
(ECF No. 29.)
On December 27, 2013, Defendant filed a Reply. (ECF No.
33.)
On February 5, 2013, a hearing on the Motion for Judgment
on the Pleadings was held. The Court ordered the Parties to
meet and confer in order to frame a question for submission to
the Hawaii Supreme Court regarding whether an excess liability
insurer may bring a cause of action, under the doctrine of
equitable subrogation to the rights of the insured, against a
primary liability insurer for failure to settle a claim
against the mutual insured within the limits of the primary

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The citations refer to the CM/ECF docket for the
District Court for the District of Hawaii in Civil No. 1300361 HG-BMK.
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liability policy. (ECF No. 38.) The Parties were unable to
agree upon the question for submission.
On March 14, 2014, each Party filed a Proposed Question
to be certified to the Hawaii Supreme Court. (ECF Nos. 42 and
43.)

BACKGROUND

Plaintiff St. Paul Fire and Marine Insurance Company
(“St. Paul”) and Defendant Liberty Mutual Insurance Company
(“Liberty Mutual”) both issued insurance policies to Pleasant
Travel Service, Inc. dba Royal Kona Resort and Hawaiian Hotels
and Resorts (“Pleasant Travel”). The Insurance Policies were
in effect from January 1, 2010 through January 1, 2011.
(Compl. at ¶¶ 4-6, attached as Ex. A to ECF No. 1.)
In July 2010, during the time that both the Liberty
Mutual General Liability Policy and the St. Paul Commercial
Umbrella Policy were in effect, Pleasant Travel was sued in

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Hawaii State Court.2 Liberty Mutual took control of the
defense and appointed counsel to represent Pleasant Travel.
(Compl. at ¶¶ 10, 12.)
Plaintiff St. Paul alleges that Defendant Liberty Mutual
rejected multiple opportunities to settle the action within
the $1 million limit of the Liberty Mutual Policy. (Compl. at
¶¶ 7, 13-14.)
The litigation proceeded to trial, resulting in a
finding of liability against Pleasant Travel and verdict of
$4.1 million. (Compl. at ¶ 15.) Plaintiff St. Paul claims
that, in 2012, after the verdict, the action was settled for a
confidential amount in excess of the Liberty Mutual Policy
limit. Plaintiff St. Paul claims that it paid the amount of
the settlement in excess of the Liberty Mutual Policy Limit.
(Compl. at ¶¶ 16-17.)
Plaintiff St. Paul alleges that Defendant Liberty Mutual
acted unreasonably in rejecting settlement offers within its
policy limit. Plaintiff St. Paul alleges claims, pursuant to
the doctrine of equitable subrogation, for (1) breach of
contract and (2) tortious breach of the implied covenant of

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The action, which sought damages resulting from an
accidental death, was brought in the Circuit Court of the
Third Circuit of the State of Hawaii. Estate of Karen Celaya,
et al v. Pleasant Travel Service dba Royal Kona Resort and
Hawaiian Hotels and Resorts, et al., Case No. 10-01-265K.
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good faith and fair dealing. (Compl. at ¶¶ 18-27.) Plaintiff
St. Paul seeks compensatory damages for the amount of the
settlement payment, interest, fees, and costs incurred to
resolve the action against Pleasant Travel. (Compl. at pg. 6.)
Defendant Liberty Mutual moved for judgment on the
pleadings. (ECF No. 23.)

ANALYSIS
Plaintiff St. Paul Fire and Marine Insurance Company
(“St. Paul”), an excess insurer, brings suit against Defendant
Liberty Mutual Insurance Company (“Liberty Mutual”), a primary
insurer, for claims arising from Defendant’s alleged bad faith
in failing to settle an action against the mutual insured
within the limits of the primary insurance policy.
The Parties dispute whether Hawaii law recognizes such a
claim.
It is Defendant’s position that Hawaii law does not
recognize an excess insurer’s right to equitable subrogation
of an insured’s bad faith claims against its primary insurer.
Defendant also claims that an excess insurer has no right to
equitable subrogation, where a primary insurer has exhausted
its indemnity limit in payment of an underlying claim; or
where the mutual insured was not exposed to liability beyond

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the limits of the excess insurance policy. (Motion for
Judgment on the Pleadings at pgs. 8-10, ECF No. 23.)
The Hawaii Supreme Court first recognized a bad faith
cause of action in the first-party insurance context in Best
Place, Inc. v. Penn America Ins. Co., 920 P.2d 334 (Haw.
1996). The Supreme Court held that “there is a legal duty,
implied in a first- and third-party insurance contract, that
the insurer must act in good faith in dealing with its
insured, and a breach of that duty of good faith gives rise to
an independent tort cause of action.” Best Place, 920 P.2d at
346. An insurer’s duty to act in good faith in dealing with
its insured and handling a claim is independent of the
insurer’s contractual duty to pay claims. Id.; Miller v.
Hartford Life Ins. Co., 266 P.3d 418, 427 (Haw. 2011); Enoka
v. AIG Hawaii Insurance Co., Inc., 128 P.3d 850, 865 (Haw.
2006).
The Hawaii Supreme Court has also recognized an insurer’s
right of equitable subrogation based on the rights of its
insured against a tortfeasor. An insurer may step into the
shoes of its insured, pursuant to the doctrine of equitable
subrogation, when the insurer pays a debt for which another is
primarily answerable. State Farm Fire and Cas. Co. v. Pacific
Rent-All, Inc., 978 P.2d 753, 767-71 (Haw. 1999). In Alamida

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v. Wilson, 495 P.2d 585, the Hawaii Supreme Court described
the flexibility of the equitable subrogation doctrine as:
. . . broad enough to include every instance in
which one party pays a debt for which another is
primarily answerable, and which in equity and good
conscience should have been discharged by the
latter; but it is not to be applied in favor of one
who has officiously, and as a mere volunteer, paid
the debt of another, for which neither he nor his
property was under any obligation to pay; and it is
not allowed where it works any injustice to the
rights of others.
Id. at 589.
A number of jurisdictions have recognized that an excess
insurer may sue a primary insurer for bad faith failure to
settle, based on a theory of equitable subrogation. See e.g.,
New Appleman Insurance Law Practice Guide §

29A.18[3];

National Sur. Corp. v. Hartford Cas. Ins. Co., 493 F.3d 752
(6th Cir. 2007)(Kentucky law); Scottsdale Ins. Co. V. Addison
Ins. Co., 2013 WL 5458918 (Mo.Ct.App. 2013)(Missouri law).
A smaller number of jurisdictions, however, have declined
to recognize a cause of action by excess insurers against
primary insurers, based on a theory of equitable subrogation
or any other theory. See e.g. New Appleman on Insurance Law
Practice Guide § 29A18[5]; Federal Ins. Co. v. Travelers Cas.
& Ins. Co., 843 So.2d at 140, 145 (Ala. 2002)(Alabama law).
Hawaii courts have not addressed whether an excess
insurer may be equitably subrogated to an insured’s claim for
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bad faith failure to settle within the primary insurance
policy limits, when the primary insurer has exhausted its
liability limit in settlement of the claims against the
insured.
The Court believes it is prudent for the Hawaii Supreme
Court to address the unresolved issue, as it is one of first
impression. See Lehman Bros. v. Schein, 416 U.S. 386, 391
(1974) (noting that the use of certification rests in the
sound discretion of the federal court); Smith v. Cutter
Biological, Inc., 911 F.2d 374, 375 (9th Cir.1990)(“We do not
think it is appropriate to substitute our judgment on the
interpretation of a Hawaii statute for the judgment of the
Hawaii Supreme Court.”).
Hawaii Rule of Appellate Procedure 13 explicitly
contemplates certification under circumstances such as this
where there is “a question concerning the law of Hawaii that
is determinative of the cause and that there is no clear
controlling precedent in the Hawaii judicial decisions.” Haw.
R. App. P. 13(a). Accordingly, the Court certifies the
following question to the Hawaii Supreme Court, pursuant to
its discretionary authority under Hawaii Rule of Appellate
Procedure 13:
May an excess liability insurer bring a cause of
action, under the doctrine of equitable subrogation
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to the rights of the insured, against a primary
liability insurer for failure to settle a claim
against the mutual insured within the limits of the
primary liability policy, when the primary insurer
has paid its policy limit toward settlement?
The District Court's phrasing of the question is not
intended to restrict the Hawaii Supreme Court's consideration
of the problems and issues involved. The Hawaii Supreme Court
is free to reformulate the relevant state law questions as it
perceives them to be, in light of the contentions of the
parties. Allstate Ins. Co. v. Alamo Rent–A–Car, Inc., 137 F.3d
634, 637 (9th Cir. 1998). If the Hawaii Supreme Court declines
to accept certification, this Court will resolve the issues
according to its understanding of Hawaii law. Id.
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CONCLUSION
The Court certifies the following question to the Hawaii
Supreme Court:
May an excess liability insurer bring a cause of
action, under the doctrine of equitable subrogation
to the rights of the insured, against a primary
liability insurer for failure to settle a claim
against the mutual insured within the limits of the
primary liability policy, when the primary insurer
has paid its policy limit toward settlement?

IT IS SO ORDERED.
Dated:

March 31, 2014, Honolulu, Hawaii.

/s/ Helen Gillmor
Helen Gillmor
United States District Judge

St. Paul Fire and Marine Insurance Company v. Liberty Mutual
Insurance Company; Civil No. 13-00361 HG-BMK; CERTIFIED
QUESTION TO THE HAWAII SUPREME COURT FROM THE UNITED STATES
DISTRICT COURT FOR THE DISTRICT OF HAWAII IN CIVIL NO. 1300361 HG-BMK

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