American Automobile Insurance Company, et al v. Hawaii Nut & Bolt, Inc.
ORDER GRANTING PLAINTIFFS AMERICAN AUTOMOBILE INSURANCE COMPANY'S AND NATIONAL SURETY CORPORATION'S MOTION TO DISMISS BREACH OF CONTRACT AND REFORMATION COUNTERCLAIMS IN SECOND AMENDED COUNTERCLAIM re 104 Motion to Dismiss for Failu re to State a Claim. Signed by JUDGE ALAN C. KAY on 12/16/2016. --The Court GRANTS FFIC's Motion to Dismiss. The Court GRANTS FFIC's Motion to Dismiss Count I: Breach of Contract of the SACC WITHOUT PREJUDICE and with leave to amend and GRANTS the Motion to Dismiss Count IV: Reformation WITHOUT PREJUDICE and with leave to amend.Safeway and HNB must file any amended complaint within thirty days of the entry of this Order. Any amended complaint must co rrect the deficiencies noted in this Order. (eps, )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).
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
INSURANCE COMPANY, a
NATIONAL SURETY CORPORATION,
an Illinois Corporation,
HAWAII NUT & BOLT, INC. AND
SAFEWAY INC.; HAWAII NUT &
INSURANCE COMPANY, a
NATIONAL SURETY CORPORATION,
an Illinois Corporation,
DOUGLAS MOORE, MONARCH
INSURANCE SERVICES, INC., a
Hawaii Corporation, and
INSURANCE ASSOCIATES, INC.,
a Hawaii Corporation,
) Civ. No. 15-00245 ACK-KSC
ORDER GRANTING PLAINTIFFS
AMERICAN AUTOMOBILE INSURANCE
COMPANY’S AND NATIONAL SURETY
) CORPORATION’S MOTION TO DISMISS
BREACH OF CONTRACT AND
IN SECOND AMENDED COUNTERCLAIM
ORDER GRANTING PLAINTIFFS AMERICAN AUTOMOBILE INSURANCE
COMPANY’S AND NATIONAL SURETY CORPORATION’S MOTION TO DISMISS
BREACH OF CONTRACT AND REFORMATION COUNTERCLAIMS
IN SECOND AMENDED COUNTERCLAIM
For the reasons discussed below, the Court GRANTS
Plaintiffs/Counterclaim Defendants American Automobile Insurance
Company’s and National Surety Corporation’s Motion to Dismiss
Breach of Contract and Reformation Counterclaims in Second
Amended Counterclaim, ECF No. 104, with leave to amend.
At issue is an insurance coverage dispute between
Plaintiffs/Counterclaim Defendants American Automobile Insurance
Company and National Surety Corporation (collectively, Fireman’s
Fund Insurance Corporation, “FFIC” or “the Insurers”) and
Defendants/Counterclaim Plaintiffs Hawaii Nut & Bolt, Inc.
(“HNB”) and Safeway Inc. (“Safeway”) over defects related to the
construction of a Safeway store in Hawaii.
On June 22, 2009, Safeway filed a complaint in the
First Circuit Court of the State of Hawaii (“Underlying
Complaint” or “UC”).
Second Am. Counterclaim (“SACC”), ECF No.
64, ¶ 14; Kasbohm Decl. Ex. A, Compl., Safeway Inc. v. Nordic
PCL Constr., Inc., No. 09-1-1414-06 (Haw. Cir. Ct. June 22,
The Underlying Complaint involved issues pertaining to
the construction of the roof deck at a Safeway store in
See generally UC.
Safeway alleged that in
November 2006 it entered into a construction contract with
Nordic PCL Construction, Inc. (“Nordic”), wherein Nordic became
the general contractor for the Kapahulu Safeway store.
UC ¶¶ 3,
The Court takes judicial notice of the documents attached
to the Motion to Dismiss, i.e. the Underlying Complaint and the
insurance policies, pursuant to Federal Rule of Evidence (“FRE”)
201. FRE 201 “permits a court to take judicial notice of
adjudicative facts ‘not subject to reasonable dispute.’” United
States v. Chapel, 41 F.3d 1338, 1342 (9th Cir. 1994) (quoting
Fed. R. Evid. 201). The rule further provides that a fact “is
not subject to reasonable dispute” where it “can be accurately
and readily determined from sources whose accuracy cannot be
questioned.” Fed. R. Evid. 201(b)(2). These documents fall
under FRE 201 and their authenticity has not been questioned by
Safeway or HNB. Accordingly, taking judicial notice of the
documents is appropriate. See Burbank-Glendale-Pasadena Airport
Auth. v. City of Burbank, 136 F.3d 1360, 1364 (9th Cir. 1998)
(taking judicial notice of pleadings filed in related state
court action); Illinois Nat. Ins. Co. v. Nordic PCL Const.,
Inc., 870 F. Supp. 2d 1015, 1026 (D. Haw. 2012) (taking judicial
notice of relevant portions of insurance policies at issue).
Consideration of these documents is also appropriate
pursuant to the “incorporation by reference” doctrine. See Coto
Settlement v. Eisenberg, 593 F.3d 1031, 1038 (9th Cir. 2010)
(“We have extended the doctrine of incorporation by reference to
consider documents in situations where the complaint necessarily
relies upon a document or the contents of the document are
alleged in a complaint, the document’s authenticity is not in
question and there are no disputed issues as to the document’s
As part of the contract, Nordic agreed to “retain
professional subcontractors and vendors as may be necessary to
fully implement the services it was rendering.”
Id. ¶ 14.
also agreed to “be responsible for the timely and proper
performance of services by its subcontractors, their respective
subcontractors and vendors of any tier to the same extents as if
all such services were performed by Nordic.”
The Underlying Complaint further alleged that Nordic
entered into a contract with HNB in which HNB “agreed to supply
certain products manufactured by VersaFlex and/or others to be
used in the construction of the Roof Deck.”
Id. ¶ 16.
VersaFlex Incorporated (“VersaFlex”) developed products,
collectively referred to as the “VersaFlex Coating System” which
were used to waterproof the roof deck of the Kapahulu Safeway.
Id. ¶¶ 4, 16, 17.
As part of its contract with Nordic, HNB
agreed to “supply . . . the preparation of the Wearing Slab for
the application of the VersaFlex Coating System and for the
VersaFlex Coating System itself.”
Id. ¶ 16.
HNB also allegedly
entered into a contract with Cascade Industries, Inc.
(“Cascade”) to supply the products manufactured by VersaFlex.
Id. ¶¶ 4, 17.
As discussed further below, Safeway and HNB now
claim that there were no such contracts.
According to the Underlying Complaint, HNB along with
VersaFlex represented that the VersaFlex products were
sufficient, adequate, and/or fit for their intended use in
connection with the Safeway project and that the products would
perform as intended notwithstanding Hawaii’s ultraviolet (“UV”)
Id. ¶¶ 20-21; see also SACC ¶ 19.
Relying on these
representations, Safeway chose to use the VersaFlex Coating
UC ¶ 22; SACC ¶ 21.
HNB also proposed to Safeway “the
option of deleting the UV and color resistant aliphatic top
coat” of the VersaFlex Coating System to save costs.
UC ¶ 27;
SACC ¶¶ 22-23.
On January 2008, shortly after the Safeway Kapahulu
store opened to the public, the store “began experiencing
pervasive water leaks that penetrated into the store through the
Roof Deck, disrupting business operations and causing damage to
Safeway’s business and reputation.”
UC ¶ 31; SACC ¶ 26.
Safeway further alleged that at the time the roof deck began
leaking, “it also became apparent that the VersaFlex Coating
System was failing” and that “[s]pecifically, the VersaFlex
Coating System began to manifest cracks and failures in the
waterproof membrane throughout the entire field of the Roof
UC ¶ 33; see also SACC ¶ 27.
According to Safeway, the
deletion of the aliphatic top coat contributed to the damages it
UC ¶ 30; SACC ¶ 24.
Safeway asserted the following claims against HNB
based on alleged misrepresentations, defects, and deficiencies
in connection with the construction of the Kapahulu Safeway
store: 1) breach of contract; 2) breach of the covenant of good
faith and fair dealing; 3) negligence/gross negligence; 4)
breach of express and implied warranties; 5) unjust enrichment;
6) negligent misrepresentation and/or omission; 7) intentional
misrepresentation and/or fraudulent concealment; 8) product
defects; and 9) negligent design and manufacture.
UC ¶¶ 49-96,
Shortly after HNB was served a copy of the Underlying
Complaint, HNB tendered the claims to FFIC.
SACC ¶ 53.
agreed to defend HNB under a reservation of rights and retained
counsel for HNB.
¶¶ 54-57, 62.
underlying lawsuit for six years.
FFIC defended HNB in the
Id. ¶ 63.
FFIC issued three Commercial General Liability (“CGL”)
policies and three umbrella and excess policies to HNB during
the relevant time period (the “Policies”).
American Automobile Insurance Company (“AAIC”) issued
CGL policy number A S1 AZC 8066751 for the policy period of May
1, 2007 to May 1, 2008 and A S1 AZC 80828365 for the policy
period of May 1, 2008 to May 1, 2009.
Decl. Exs. B, C.
SACC ¶¶ 41, 44; Kasbohm
AAIC also issued umbrella and excess insurance
policies to HNB under these policy numbers and for the same
SACC ¶¶ 42, 45; Kasbohm Decl. Exs. B, C.
National Surety Corp. (“NSC”) issued CGL policy No. A
S1 AZC 80828365 to HNB for the policy period of May 1, 2009 to
May 1, 2010.
SACC ¶ 44; Kasbohm Decl. Ex. C.
NSC also issued
an umbrella and excess insurance policy to HNB under the same
policy number for the same time period.
SACC ¶ 44; Kasbohm
Decl. Ex. C.
The CGL policies provide insurance for “bodily injury
and “property damage” “only if: (a) The bodily injury and
property damage is caused by an occurrence that takes place in
the coverage territory[.]”
C, at 411-412. 2
Kasbohm Decl. Ex. B, at 73-74, Ex.
“Occurrence” is defined by the Policies as “[a]n
accident including continuous or repeated exposure to
substantially the same general harmful conditions.
Id. Ex. B,
at 87, Ex. C, at 425.
The umbrella insurance policies provide coverage for
“Bodily Injury or Property Damage that takes place during our
Policy Period and is caused by an Occurrence[.]”
98, Ex. C, at 439.
Id. Ex. B, at
The umbrella policies define an “occurrence”
as “an accident, including continuous or repeated exposure to
substantially the same general harmful conditions.”
at 112, Ex. C, at 453.
Id. Ex. B,
The excess insurance provisions in the
The page numbers cited to are to the Bates Numbers in
Exhibits B and C of the Kasbohm Declaration.
umbrella/excess insurance policies only insure damages that “are
covered by Primary Insurance.”
Id. Ex. B, at 94, Ex. C, at 435.
FFIC filed a Complaint for Declaratory Judgment
against HNB in this Court on June 29, 2015.
Compl., ECF No. 1.
The Complaint sought a binding declaration that under the
Policies, FFIC had no duty to defend and/or indemnify HNB for
the claims asserted in the Underlying Lawsuit.
On September 4, 2015, HNB filed a First Amended Answer
to the Complaint along with a Counterclaim against the Insurers.
ECF No. 14.
The Counterclaim included counts for bad faith and
On February 12, 2016, HNB settled the Underlying
Action with Safeway.
SACC ¶ 2.
As part of the settlement, HNB
entered into a stipulated judgment in which it assigned its
claims against FFIC and its insurance agents and brokers to
Id. ¶¶ 2-3.
join this action.
Accordingly, Safeway was granted leave to
ECF No. 42.
Safeway and HNB then filed a Second Amended
Counterclaim (“SACC”) raising claims against FFIC and its
insurance agents/brokers (Douglas Moore, Monarch Insurance
Services, Inc., and Insurance Associates, Inc.).
HNB filed four counterclaims against FFIC: 1) breach of
contract; 2) bad faith 3) negligent misrepresentation and
omission; and 4) reformation.
SACC ¶¶ 71-142.
On September 7, 2016, FFIC filed the instant Motion to
Dismiss Breach of Contract and Reformation Counterclaims in
Second Amended Counterclaim (“Motion to Dismiss”).
Defendants Douglas Moore and Monarch Insurance Services, Inc.
filed a Statement of No Position on November 21, 2016.
HNB and Safeway filed their Memorandum in Opposition
(“Opposition” or “Opp.”) on November 21, 2016.
FFIC filed its Reply on November 28, 2016.
ECF No. 180.
ECF No. 181.
Court held a hearing on FFIC’s Motion to Dismiss on December 12,
At the hearing, counsel for Counterclaim Defendant
Insurance Associates, Inc. also represented that Insurance
Associates, Inc. was not taking a position on the Motion to
Motion to Dismiss for Failure to State a Claim
Rule 12(b)(6) authorizes the Court to dismiss a
complaint that fails “to state a claim upon which relief can be
Fed. R. Civ. P. 12(b)(6).
Rule 12(b)(6) is read in
conjunction with Rule 8(a), which requires only “a short and
plain statement of the claim showing that the pleader is
entitled to relief.”
Fed. R. Civ. P. 8(a)(2).
The Court may
dismiss a complaint either because it lacks a cognizable legal
theory or because it lacks sufficient factual allegations to
support a cognizable legal theory.
Balistreri v. Pacifica
Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988).
In resolving a Rule 12(b)(6) motion, the Court must
construe the complaint in the light most favorable to the
plaintiff and accept all well-pleaded factual allegations as
Sateriale v. R.J. Reynolds Tobacco Co., 697 F.3d 777, 783
(9th Cir. 2012).
The complaint “must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is
plausible on its face.’”
Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
“The plausibility standard . . . asks for more than a
sheer possibility that a defendant has acted unlawfully.”
“Where a complaint pleads facts that are ‘merely consistent
with’ a defendant’s liability, it ‘stops short of the line
between possibility and plausibility of entitlement to relief.’”
Id. (quoting Twombly, 550 U.S. at 557).
“In considering a
motion to dismiss, the court is not deciding whether a claimant
will ultimately prevail but rather whether the claimant is
entitled to offer evidence to support the claims asserted.”
Tedder v. Deutsche Bank Nat. Trust Co., 863 F. Supp. 2d 1020,
1030 (D. Haw. 2012) (citing Twombly, 550 U.S. at 563 n.8).
The Court should grant leave to amend unless the
pleading cannot be cured by new factual allegations.
Student All. v. Ray, 699 F.3d 1053, 1079 (9th Cir. 2012).
Under Rule 12(b)(6), review is generally limited to
the contents of the complaint.
Sprewell v. Golden State
Warriors, 266 F.3d 979, 988 (9th Cir. 2001); Campanelli v.
Bockrath, 100 F.3d 1476, 1479 (9th Cir. 1996).
may “consider certain materials—documents attached to the
complaint, documents incorporated by reference in the complaint,
or matters of judicial notice—without converting the motion to
dismiss into a motion for summary judgment.”
United States v.
Ritchie, 342 F.3d 903, 908 (9th Cir. 2003).
The Court has diversity jurisdiction to hear this case
pursuant to 28 U.S.C. § 1332.
Federal courts sitting in
diversity apply state substantive law and federal procedural
Hanna v. Plumer, 380 U.S. 460, 465 (1965); Erie v.
Tompkins, 304 U.S. 64, 78 (1938).
A federal court is bound by
the decisions of a state’s highest court when interpreting state
Ariz. Elec. Power Coop., Inc. v. Berkeley, 59 F.3d 988,
991 (9th Cir. 1995).
However, “[i]n the absence of such a
decision, a federal court must predict how the highest state
court would decide the issue using intermediate appellate court
decisions, decisions from other jurisdictions, statutes,
treatises, and restatements as guidance.”
Framework for Construing Insurance Contracts
Under Hawaii law, courts look to the plain language of
the insurance policy to determine the scope of the insurer’s
Dairy Rd. Partners v. Island Ins. Co., Ltd., 992 P.2d
93, 107 (Haw. 2000); see also Burlington Ins. Co. v. Oceanic
Design & Const. Inc., 383 F.3d 940, 945 (9th Cir. 2004) (“In
Hawaii, the terms of an insurance policy are to be interpreted
according to their plain, ordinary, and accepted sense in common
“In the context of insurance coverage disputes, [the
Court] must look to the language of the insurance policies
themselves to ascertain whether coverage exists, consistent with
the insurer and insured’s intent and expectations.”
Ins. & Guar. Co. v. Fin. Sec. Ins. Co., 807 P.2d 1256, 1260
“[B]ecause insurance policies are contracts of
adhesion, they must  be construed liberally in favor of the
insured, [and] any ambiguities in their terms and conditions
must be resolved against the insurer.”
Estate of Doe v. Paul
Revere Ins. Grp., 948 P.2d 1103, 1114-15 (Haw. 1997).
policies must also be “construed in accordance with the
reasonable expectations of a layperson.”
Adventures, Inc. v. N. Am. Capacity Ins. Co., 623 F. Supp. 2d
1189, 1194 (D. Haw. 2009).
A contract term is considered
ambiguous only if it is “capable of being reasonably understood
in more ways than one.”
Cho Mark Oriental Food, Ltd. v. K & K
Int’l, 836 P.2d 1057, 1064
“The insurer owes a duty to indemnify the insured ‘for
any loss or injury which comes within the coverage provisions of
the policy, provided it is not removed from coverage by a policy
State Farm Fire & Cas. Co. v. Cabalis, 80 F. Supp.
3d 1116, 1122 (D. Haw. 2015) (quoting Dairy Rd. Partners, 992
P.2d at 108).
Consideration of Evidence Beyond the Complaint and Duty to
As an initial matter, the parties dispute whether the
Court should look to evidence beyond the Underlying Complaint to
determine whether FFIC has a duty to indemnify.
Opposition, Safeway and HNB argue that because the underlying
case was settled, the Court must consider “all available
Opp., at 12-13.
In turn, FFIC claims that because
the SACC does not indicate that settlement was based on
allegations other than those in the Underlying Complaint, the
Court need not look beyond the Underlying Complaint to decide
Reply, at 4.
Safeway and HNB cite to only one case applying Hawaii
law to support its argument and as FFIC argues, this case is
In Allstate Insurance Co. v. Davis, this Court
considered an insurer’s duty to defend and indemnify an insured
for claims arising out of an alleged assault.
1112, 1119 (D. Haw. 2006).
430 F. Supp. 2d
With respect to its consideration of
the duty to indemnify, the Court noted that it should consider
“whether actual liability of the insured may be established at
trial considering all available evidence.”
Id. at 1127.
Court proceeded to consider the criminal judgment in the
underlying criminal case pursuant to a Hawaii Supreme Court
decision finding criminal judgments admissible in certain
Here, there was no trial, neither is there
a document comparable to a criminal judgment nor is there any
court finding for the Court to review.
inapplicable to the instant case.
Accordingly, Davis is
The other cases cited by
Safeway and HNB apply law from other jurisdictions outside the
See Opp., at 13.
In contrast, FFIC cites to a federal district court
case from the Central District of California for the proposition
that “where a plaintiff has not alleged that the settlement
involved matters outside those raised by the complaint, the
court looks to the complaint to determine whether the insurer
would have had a duty to indemnify such claims.”
Contractors, LTD v. Liberty Mut. Fire Ins. Co., No. CV14-3041
DMG(MANx), 2015 WL 11004493, at *5 (C.D. Cal. Mar. 31, 2015)
(citing Horace Mann Ins. Co. v. Barbara B., 846 P.2d 792, 795
(Cal. 1993); Enron Oil Trading & Transp. Co. v. Underwriters of
Lloyd’s of London Under Policy No. 552/020129100, 47 F. Supp. 2d
1152, 1161 (D. Mont. 1996), aff’d in part, rev’d in part sub
nom. Enron Oil Trading & Transp. Co. v. Walbrook Ins. Co., 132
F.3d 526 (9th Cir. 1997); Texas Farmers Ins. Co. v. Lexington
Ins. Co., 380 F. App’x 604, 607 (9th Cir. 2010)).
that Safeway and HNB have not alleged in the SACC that the
settlement was based on allegations other than those in the
Reply, at 4.
Ninth Circuit cases holding that the facts underlying
the settlement agreement should be considered in determining the
duty to indemnify have made clear that the underlying complaint
See, e.g., Enron Oil Trading, 132 F.3d at 529
(noting that insured would be entitled to prove that settlement
payment was attributable to certain covered claims present in
the underlying complaint).
Indeed, these cases seem to be
primarily concerned with whether claims raised in the underlying
complaint—which would provide insurance coverage—were
considered in settlement.
See id.; see also Texas Farmers, 380
F. App’x at 607 (noting that settlement documents demonstrated
that a covered claim pled in the underlying complaint was
included in the settlement).
Contrary to most of the above-cited cases, which
involved motions for summary judgment, this case is currently
before the Court on a Motion to Dismiss.
Because the Court is
ruling on a Motion to Dismiss, it would be inappropriate at this
point to consider most of the evidence submitted by Safeway and
HNB along with their Opposition to the Motion to Dismiss.
Accordingly, the Court has not considered most of these exhibits
in its Order.
III. Breach of Contract Claim
FFIC argues that Safeway and HNB fail to state a claim
for breach of contract in Count I of the SACC, because the
claims in the Underlying Complaint are not for “occurrences” as
defined in the insurance policies and Hawaii and Ninth Circuit
Mem. in Support of Motion to Dismiss (“Mem.”), at 9-
On this basis, FFIC claims that it owes no duty to
indemnify HNB for the stipulated judgment.
The Court agrees
insofar as the case is before the Court on a Motion to Dismiss.
Based on the limitations the Court is faced with reviewing the
case on a Motion to Dismiss, the Court finds that dismissal of
Count I of the SACC is appropriate.
The Policies provide coverage only for property damage
caused by an “occurrence,” which is defined in relevant part, as
“an accident, including continuous or repeated exposure to
substantially the same general harmful conditions.”
Decl. Ex. B, at 87, 112, Ex. C, at 425, 453.
Hawaii law have consistently determined that claims arising out
of alleged breaches of contract and warranties do not involve
accidents or “occurrences” as defined in the Policies.
The Ninth Circuit, in addressing the coverage
available under CGL policies in Hawaii, indicated its agreement
with several cases from this district that found that “contract
and contract-based tort claims are not within the scope of CGL
Burlington Ins. Co. v. Oceanic Design & Const.,
Inc., 383 F.3d 940, 949 (9th Cir. 2004).
In Burlington, the
insured construction company was sued, inter alia, for breach of
contract, breach of express and implied warranties, and
negligent and/or intentional infliction of emotional distress.
Id. at 943.
The court affirmed the lower court’s granting of
summary judgment for the insurer on the basis that the claims at
issue were not for “occurrences” as defined under the insurance
policy at issue.
Id. at 948.
The court cited to a Hawaii Supreme Court decision
which determined that “[i]n Hawaii, an occurrence ‘cannot be the
expected or reasonably foreseeable result of the insured’s own
intentional acts or omissions.’”
Id. (quoting Hawaiian Holiday
Macadamia Nut Co. v. Indus. Indem. Co., 872 P.2d 230, 234 (Haw.
The court stated that if the construction company
“breached its contractual duty by constructing a substandard
home, then facing a lawsuit for that breach is a reasonably
In this respect, the court cited with
agreement to a Ninth Circuit case outlining the rationale of a
CGL policy as follows:
General liability policies . . . are not designed
to provide contractors and developers with
coverage against claims their work is inferior or
defective. The risk of replacing and repairing
defective materials or poor workmanship has
generally been considered a commercial risk which
is not passed on to the liability insurer.
Rather liability coverage comes into play when
the insured’s defective materials or work cause
injury to property other than the insured’s own
work or products.
Id. (alteration in original) (quoting Anthem Elec., Inc. v. Pac.
Employers Ins. Co., 302 F.3d 1049, 1057 (9th Cir. 2002)).
court also noted that, “[a]llowing recovery for disputes between
parties in a contractual relationship over the quality of work
performed would convert [the] CGL policy into a professional
liability policy or a performance bond.”
As the Policies at issue here, the insurance policy in
Burlington defined an “occurrence” as “an accident, including
continuous or repeated exposure to substantially the same
general harmful conditions.”
Id. at 943.
The court concluded
that based on the contractual relationship between the
homeowners and the construction company at issue, the “claims
for breach of contract and breach of contract-related tort
duties did not give rise to coverage within the scope of the
In Group Builders, Inc. v. Admiral Insurance Co.,
Hawaii’s Intermediate Court of Appeals (“ICA”), relying on
Burlington held that “under Hawaii law, construction defect
claims do not constitute an ‘occurrence’ under a CGL policy.”
231 P.3d 67, 73 (Haw. Ct. App. 2010).
In Group Builders, a
subcontractor was hired to install insulation, sealant,
fireproofing, and metal wall framing for part of hotel that was
Id. at 68.
Approximately a year after the
hotel was open to the public, mold growth was found in the
hotel’s guest rooms.
Id. at 69.
It was discovered that there
were defects in the design and construction of the hotel which
contributed to or caused the mold growth.
The ICA affirmed
the trial court’s ruling that the insurance company did not
breach its duty to indemnify the construction company, holding
that “breach of contract claims based on allegations of shoddy
performance” and “tort-based claims, derivative of these breach
of contract claims, are also not covered under CGL policies.”
Id. at 73-74.
This district court has continued to apply the
reasoning set forth in Burlington and Group Builders to
determine the scope of coverage under CGL policies under Hawaii
Of particular relevance here, in a case between Nordic and
its insurer for coverage related to the same underlying action,
this district court found that Nordic’s breach of contract
counterclaim against its insurer could not stand based on
Burlington, and accordingly granted the insurers’ motion to
dismiss the breach of contract claim.
Illinois Nat. Ins. Co. v.
Nordic PCL Const., Inc., 870 F. Supp. 2d 1015, 1027, 1049 (D.
The court held that the “claims asserted against
Nordic in the” underlying action “arise from Nordic’s alleged
breach of construction contracts” and accordingly, “they are not
covered” under the relevant insurance policies.
Id. at 1028-29.
As here, the policies at issue defined an “occurrence”
as “an accident, including continuous or repeated exposure to
substantially the same general harmful conditions.”
The court determined that the underlying claims for
breach of contract, breach of the covenant of good faith and
fair dealing, negligence, gross negligence, breach of express
and implied warranties, unjust enrichment, and negligent and
intentional misrepresentation were not for “occurrences” as
defined under the policies because the claims arose out of
Nordic’s contractual relationships.
Id. at 1024, 1028-29; see
also Burlington Ins. Co. v. United Coatings Mfg. Co., 518 F.
Supp. 2d 1241, 1251-52 (D. Haw. 2007) (determining there was no
coverage under a CGL policy for damage to exterior walls,
windows, and parking lots caused by a paint product manufactured
and sold by the insured as all underlying claims arose from the
parties’ contractual relationships); State Farm Fire & Cas. Co.
v. GP West Inc., Civ. No. 15-00101 ACK-KSC, 2016 WL 3189187, at
*11 (D. Haw. June 7, 2016) (denying coverage under a CGL policy
for underlying breach of contract, breach of warranties,
negligence, and intentional/negligent misrepresentation claims
where claims stemmed from the contractual relationships and
obligations of the insured subcontractor).
Safeway and HNB raise several arguments to attempt to
distinguish the instant case from the rulings discussed above.
First, Safeway and HNB claim that the instant case is
distinguishable because there was no contract between “HNB and
any other party.”
Opp., at 2.
The Court is not persuaded by
In the first instance, the Underlying Complaint, which
was the operative complaint at the time of the settlement,
contradicts Safeway and HNB’s argument.
Complaint alleges that HNB entered into contracts with Nordic
and Cascade (a subcontractor on the project).
UC ¶ 7.
Underlying Complaint more specifically provides that Nordic
entered into a contract with HNB wherein HNB agreed to supply
VersaFlex manufactured products and that HNB entered into a
contract with Cascade also to aid in supplying VersaFlex
UC ¶¶ 16, 17.
According to the Underlying Complaint,
the contracts between Nordic and HNB and Cascade and HNB
“incorporated by reference the terms and obligations of the
Construction Contract, and were entered into for the intended
benefit of Plaintiff [Safeway] and manifested an intent to
benefit Plaintiff [Safeway].”
Id. ¶ 18.
On this basis, the
Underlying Complaint alleged that Safeway was the “intended
third-party beneficiary of each of these agreements.”
Moreover, Safeway and HNB acknowledge that the
“business transaction with HNB was reflected” in purchase orders
and invoices from HNB.
Opp., at 4.
Such purchase orders and
invoices may provide evidence of a contract under Hawaii law.
See Haw. Rev. Stat. § 490:2-204 (“A contract for sale of goods
may be made in any manner sufficient to show agreement,
including conduct by both parties which recognizes the existence
of such a contract.”); Haw. Rev. Stat. § 490:2-207 (“Conduct by
both parties which recognizes the existence of a contract is
sufficient to establish a contract for sale although the
writings of the parties do not otherwise establish a
Here, there is no dispute that HNB, serving as the
distributor of the VersaFlex products, actually did distribute
the products at issue, which were used for the construction of
the roof deck at the Safeway Kapahulu store.
Thus, the parties
conduct, including the use of invoices and purchase orders,
recognized the existence of a contract.
See Earl M. Jorgensen
Co. v. Mark Const., Inc., 540 P.2d 978, 983 (Haw. Ct. App. 1975)
(noting that use of a purchase order indicated acceptance on the
part of the buyer “to bind the seller”).
Even if there was no direct contract between Safeway
and HNB, Safeway and HNB’s argument fails.
In United Coatings,
this district court rejected United Coatings’ claim that the
underlying state court action was not contract-based because
there was no contract between United Coatings and the underlying
518 F. Supp. 2d at 1249 n.3.
For the construction
project at issue, four Association of Apartment Owners (the
“AOAO”) contracted with Seal Tech, Inc. to repair and repaint
several residential buildings.
Id. at 1244.
The project used
Acrylad, a topcoat product manufactured by United Coatings that
was represented by United Coatings to be 100% acrylic paint.
Following the application of the Acrylad product, residents
noticed “chalking and streaking of the exterior walls, streaking
and dirtying of the windows, and chips of fallen paint in the
Id. at 1245.
The AOAO filed suit against Seal Tech and United
Coatings in state court asserting several counts including
strict products liability, negligence, and breach of contract.
United Coatings’ insurance company filed a declaratory
action in this district court regarding its duty to defend or
indemnify its insured in the underlying state court action.
United Coatings argued that the claims in the
underlying complaint were not contract-based because there was
no contract between United Coatings and the AOAO.
Id. 1249 n.3.
The court found United Coatings’ argument unavailing given that
“[t]he AOAO was the intended and known third-party beneficiary
to the contract and warranties between United Coatings and
The court explained:
As such, the AOAO has standing to sue for breach
of those contracts and warranties. See, e.g.,
Ass’n of Apartment Owners of Newton Meadows, 167
P.3d [225,] 262–65 [Haw. 2007] (discussing third
party beneficiary status and right to sue); Ontai
v. Straub Clinic & Hospital, Inc., 66 Haw. 237,
249–52, 659 P.2d 734, 743 (1983) (finding that
patient could bring action as a third party
beneficiary of an implied warranty between the
manufacturer of an X-ray table and the Straub
hospital). HRS § 490:2–318 states:
Third party beneficiaries of warranties
express or implied. A seller’s
warranty whether express or implied
extends to any person who may
reasonably be expected to use, consume
or be affected by the goods and who is
injured by breach of the warranty. A
seller may not exclude or limit the
operation of this section with respect
to injury to the person of an
individual to whom the warranty
HRS § 490:2–318 is based on the Uniform
Commercial Code (“UCC”) § 2–318. The 1962
official comments to UCC § 2–318 explain that
“[t]he purpose of this section is to give the
buyer’s family, household and guests the benefit
of the same warranty which the buyer received in
the contract of sale, thereby freeing any such
beneficiaries from any technical rules as to
As in United Coatings, here, Safeway was the “intended
third-party beneficiary” of the contracts between the
subcontractors and vendors at issue, including HNB.
And, at the least, the contracts between the
subcontractors involved in the project and HNB contained implied
See, e.g., Ontai, 659 P.2d at 744 (“The implied
warranty of merchantability is perhaps the broadest warranty in
the Uniform Commercial Code.
This warranty is implied by
operation of law into every sale of goods by a merchant seller.
Merchantability, as provided in Hawaii’s statute, means, inter
alia, that the goods ‘are fit for the ordinary purpose for which
such goods are used.’” (footnote omitted) (citations omitted)).
Accordingly, as in United Coatings, that there was no contract
between HNB and Safeway is of no moment.
Safeway and HNB’s allegation that HNB had no contract
with anyone is also unpersuasive, as discussed above.
additionally notes its previous holding that “regardless of the
existence of an actual contract, allegations that stem directly
from contract-based or intentional acts are still not covered as
‘occurrences’ under insurance policies.”
Allstate Ins. Co. v.
Riihimaki, Civ. No. 11-00529 ACK-BMK, 2012 WL 1983321, at *7 (D.
Haw. May 30, 2012); see also State Farm Fire & Cas. Co. v. Lau,
Civ. No. 06-00524 DAE-BMK, 2007 WL 1288153, at *5 (D. Haw. Apr.
30, 2007) (holding that regardless of the existence of a
contract in the underlying suit, the allegations at issue were
Here, as discussed more fully below, all of
the claims against HNB are contract-based.
The Court also rejects Safeway and HNB’s attempt to
distinguish the instant case based on its claim that HNB
“performed no work on the Safeway project.”
Opp., at 15
This claim is belied by the allegations
raised in both the Underlying Complaint and the SACC, which
demonstrate that HNB directly influenced the design of the
The SACC, for instance, alleges that Timothy Lyons, an
HNB employee “interfaced directly with Safeway”; that HNB
“represented to Safeway” that the VersaFlex products were
suitable “for this intended use” and also “preferable to the
waterproofing system Safeway was planning to use”; and that Mr.
Lyons along with VersaFlex had an integral role in causing
Safeway to delete the aliphatic top coat, which Safeway claimed
contributed to its damages.
SACC ¶¶ 18-25.
Complaint contains similar allegations regarding the
representations made by HNB, which influenced the project.
¶¶ 20-26, 28-30.
Given the Court’s rejection of the aforementioned
arguments raised by Safeway and HNB and following the law of
Burlington and the other cases from this district, the Court
finds that the underlying claims for breach of contract, breach
of the covenant of good faith and fair dealing, and breach of
implied warranties are all contract-based claims and as such,
are not covered by the Policies. 3
See United Coatings, 518 F.
Supp. 2d at 1251 (noting that breach of contract and breach of
warranties claims “clearly stem from United Coatings’ contracts
and warranties”); Nordic, 870 F. Supp. 2d at 1024, 1031 (finding
that underlying claims for, inter alia, breach of contract,
breach of the covenant of good faith and fair dealing, and
breach of express and implied warranties, arose from contractual
relationships and were not “occurrences”).
The Court considers
Safeway and HNB do not argue that Act 83, passed by the
Hawaii legislature in 2011 changes the result here. The Court
notes that House Bill 924, which eventually was passed by the
legislature as Act 83, criticized Group Builders. See H.B. 924
§ 1. Act 83, in turn, provided that for liability insurance
policies, “the meaning of the term ‘occurrence’ shall be
construed in accordance with the law as it existed at the time
the insurance policy was issued.” Haw. Rev. Stat. § 431:1217(a).
Here, the relevant policies were issued after the
Ninth Circuit’s decision in Burlington. “Thus, an ‘occurrence’
under the  policies is properly interpreted to exclude
coverage for contract and contract-based tort claims.” GP West,
2016 WL 3189187, at *10. Moreover, as this district court has
previously recognized, “no court has criticized Group Builders—
or Burlington, the case upon which Group Builders so heavily
relied—in the six years since the decision was rendered and the
five years since the enactment of Act 83.” Id.
the additional claims raised in the underlying complaint below
as well as Safeway and HNB’s argument regarding the product
A. Negligence Claims and Intentional
Misrepresentation/Fraudulent Concealment Claim
The Underlying Complaint includes claims for
negligence and gross negligence, negligent misrepresentation
and/or omission, intentional misrepresentation and/or fraudulent
concealment, and negligent design and manufacture.
relevant inquiry is whether these claims are ‘premised on a
contractual relationship or are based on an independent tort
claim under state law.’”
GP West, 2016 WL 3189187, at *11
(quoting United Coatings, 518 F. Supp. 2d at 1251).
The negligence and gross negligence claims allege that
the defendants, including HNB, “owed to Plaintiff in connection
with their work on the Project a duty to perform work and
provide products free from defects, in accordance with the
Construction Contract, the Subcontractor/Vendor Agreements . . .
and/or accepted practices and applicable industry standards
. . . and in accordance with all laws, codes, and regulations
applicable to such work and services.”
UC ¶ 64.
claims clearly arose from HNB’s alleged contracts and
See GP West, 2016 WL 3189187, at *12 (“Here, any
duty that Defendants had to ‘perform all work and provide all
services in accordance with the state and local statutes,
ordinances, and regulations,’ arose out of the parties’ contract
and subcontract to construct the MVC Building and install the
HVAC system.”); Nordic, 870 F. Supp. 2d at 1024, 1027-32
(finding the same underlying claims for negligence and gross
negligence were contract-based).
The negligent misrepresentation claim and the
negligent design and manufacture claims rely on allegations that
the VersaFlex product did not perform as promised by the
representations and warranties made by HNB and the other
defendants and on HNB and VersaFlex’s related “actions and/or
See UC ¶ 78-82; 120-23, 125.
Complaint also alleges that in the relevant subcontractor and
vendor agreements between HNB and the other parties, HNB “agreed
to provide quality products . . . free from defects and as
represented or advertised, and in strict conformance with the
Construction Contract . . . in accordance with accepted
practices . . . including adherence to all laws, codes, and
regulations applicable to such work.”
Id. ¶ 19.
As such, the
claims rely on the underlying contract or warranties and are
therefore not covered under the Policies.
See GP West, 2016 WL
at *11 (holding negligent misrepresentation claim not covered
under the CGL policy because it was contractually-based);
Nordic, 870 F. Supp. 2d at 1024, 1027-32 (finding the same
underlying claim for negligent misrepresentation was contractbased); United Coatings, 518 F. Supp. 2d at 1251 (“Because the
AOAO’s claim for negligent misrepresentation depends upon the
existence of United Coatings’ underlying contract, contract of
sale, or warranties, the claim for negligent misrepresentation
Finally, the intentional misrepresentation/fraudulent
concealment claim relies on intentional conduct, and therefore,
“any resulting injury was not caused by an ‘accident’ and is
therefore outside the coverage of the” Policies.
Coatings, 518 F. Supp. 2d at 1251 n.6 (citing Hawaiian Holiday
Macadamia Nut Co., 872 P.3d at 234); see also Nordic, 870 F.
Supp. 2d at 1024, 1027-32 (finding the same underlying claim for
intentional misrepresentation/fraudulent concealment was not
covered under the relevant insurance policies).
B. Unjust Enrichment Claim
The Court similarly finds that the Policies do not
cover Safeway’s underlying claim for unjust enrichment because
the claim relies on HNB’s contractual relationships.
respect to the claim for unjust enrichment, the Underlying
Complaint provides that “[t]he money paid by Plaintiff under the
Construction Contract to Nordic inured to the benefit of all
Defendants” and that “[t]he money was paid with the reasonable
expectation that Nordic and its subcontractors and vendors would
perform their work and supply their products free of material
defects” but the defendants failed to do so.
UC ¶¶ 74-75.
claim explicitly relies on the existence of the alleged
contracts and subcontracts at issue.
See Nautilus Ins. Co. v. 3
Builders, Inc., 955 F. Supp. 2d 1121, 1124, 1134-37 (D. Haw.
2013) (finding underlying claim for unjust enrichment against
contractor arose from the contract or from the contractual
relationships between the relevant parties); Nordic, 870 F.
Supp. 2d at 1024, 1027-32 (finding that the same underlying
claim for unjust enrichment was contract-based).
C. Product Defects Claim
Safeway and HNB additionally attempt to distinguish
the instant case based on the Underlying Complaint’s product
In this respect, Safeway and HNB claim that
Hawaii law recognizes coverage under CGL policies for defective
product tort claims.
Opp., at 14.
In United Coatings, this district court considered
whether a strict product liability claim in the underlying
complaint arose from the product manufacturer’s contracts and
As discussed above, United Coatings concerned
underlying claims regarding Acrylad, a topcoat paint product
manufactured by United Coatings.
518 F. Supp. 2d at 1244-45.
The underlying complaint alleged that United Coatings was
strictly liable “because it manufactured and sold a defective
product which resulted in harm to the exterior walls, windows,
and parking lots” of the residential buildings at issue.
The court recognized that strict product liability
claims are typically tort-based.
Id. at 1252.
court found that rather than asserting a claim that Acrylad was
inherently defective or defective per se, the underlying
plaintiff alleged that “Acrylad was unsuited for the purpose for
which it was purchased and that the composition of the paint was
not as represented or warranted.”
The court noted that the
underlying action was “clearly premised on the representations
made that this specific paint was a 100% acrylic emulsion when
in fact it was not.”
The court further stated: “In
other words, the paint was purchased because it was supposedly
And because it was not 100% acrylic (according to
the AOAO State Action), damage resulted.”
claim was premised on the representations made by the insured
regarding the paint product, the court determined that the
strict product liability claim was “a contract or warranty-based
Id. at 1252.
The Court finds the reasoning in United Coatings
applicable in the instant case. 4
Here, rather than alleging an
inherent defect in the product, the product defects claim is
premised on misrepresentations made by HNB regarding the
Indeed, the product defects claim in the
Underlying Complaint references the express and implied
warranties made by VersaFlex and HNB regarding the products as
well as the misrepresentations and/or omissions made by
VersaFlex and HNB “regarding the quality, performing
capabilities, and useful life of their products.”
UC ¶¶ 110-12,
Moreover, the factual allegations in the Underlying
Complaint focus on representations made by HNB that the
VersaFlex products were appropriate “for their intended use or
purpose in connection” with the Safeway Project and that the
products would “perform as intended” notwithstanding Hawaii’s UV
UC ¶¶ 20-21.
The Underlying Complaint further
provides that Safeway chose to use the VersaFlex products based
on VersaFlex and HNB’s representations.
UC ¶ 22.
similarly alleges that Safeway elected to use the VersaFlex
As FFIC points out, Safeway and HNB are incorrect in
arguing that United Coatings did not involve damage to property
“other than to the paint itself.” Opp., at 21. As noted above,
in United Coatings, the underlying complaint alleged that the
Acrylad damaged the exterior walls, windows, and parking lots of
the residential buildings at issue. 518 F. Supp. 2d at 1251-52.
products based on representations by VersaFlex and HNB that the
products were suitable for the project.
SACC ¶¶ 19, 21.
The Underlying Complaint additionally alleges that
representations by HNB regarding the deletion of the aliphatic
top coat contributed to Safeway’s damages.
UC ¶¶ 27-30.
further states that HNB and VersaFlex represented that the
deletion of the aliphatic top coat would not “impair or
reduc[e] the integrity of the VersaFlex Coating System” and that
HNB and VersaFlex failed to inform Safeway that the deletion of
the aliphatic top coat would increase exposure to UV rays.
¶¶ 27, 29.
The SACC contains similar allegations.
SACC ¶¶ 22-
Accordingly, as in United Coatings, because the
product defect claim is premised on the representations and
warranties made regarding the VersaFlex products, the Court
finds that the claim is contract or warranty-based.
United Coatings, the VersaFlex products were chosen by Safeway
specifically because of the representations made by HNB and
Here, as in United Coatings, the focus of the
Underlying Complaint is on claims that the product would perform
as represented and was appropriate for its intended use, i.e.,
the Safeway project.
Accordingly, the claim depends on HNB’s
“contracts, contracts of sale, warranties or representations.”
United Coatings, 518 F. Supp. 2d at 1252.
The Court reiterates that given that it is considering
a Motion to Dismiss, and for the foregoing reasons, the Court
finds that none of the claims in the Underlying Complaint arise
from a covered “occurrence” as defined under the Policies.
Accordingly, the Court concludes that none of the claims are
covered by the Policies and FFIC did not breach its contract by
not providing coverage for these claims. 5
On this basis, the
Court DISMISSES WITHOUT PREJUDICE and with leave to amend Count
I: Breach of Contract in the SACC to the extent the claim relies
on such a breach. 6
Safeway and HNB do not argue that the underlying claims
are covered by the products-completed operations hazard (“PCOH”)
provisions in the underlying policies. In any event, this
district court has found that the existence of PCOH coverage
“does not obviate the requirement that coverage for such claims
arise from an ‘occurrence.’” GP West, 2016 WL 3189187, at *14;
see also Illinois Nat’l Ins. Co. v. Nordic PCL Const., Inc.,
Civ. No. 11-00515 SOM-KSC, 2012 WL 5386609, at *12-13 (D. Haw.
Oct. 31, 2012).
The Court notes that Count I of the SACC also appears to
raise a claim for breach of the implied covenant of good faith
and fair dealing. See SACC ¶ 76. To the extent Safeway and HNB
wish to maintain such a claim, it should be repled as a separate
claim in an amended complaint.
Equitable Estoppel 7
HNB and Safeway argue in their Opposition that FFIC
should be estopped from claiming that there is no insurance
coverage under its policies “when, for six years, FFIC
internally concluded and also represented to HNB that there was
coverage under the policies at issue.”
Opp., at 28.
Reply, FFIC argues that the facts in the SACC do not provide a
basis for HNB and Safeway’s estoppel claim.
Reply, at 12-14.
It appears that estoppel has not been sufficiently
alleged in the SACC.
The Court notes that given that this case
is before the Court on a Motion to Dismiss, the Court’s
consideration of most of the exhibits submitted by Safeway and
HNB—some of which may be relevant to the issue of estoppel—is
The Hawaii Supreme Court has recognized that in the
insurance context, a party “invoking equitable estoppel must
show that ‘he or she has detrimentally relied on the
representation or conduct of the person sought to be estopped,
and that such reliance was reasonable.’”
AIG Hawaii Ins. Co. v.
The Court notes that the Motion to Dismiss did not request
that any claim for estoppel be dismissed, nor was a claim for
estoppel specifically pled as a numbered counterclaim in the
SACC. Nonetheless, as the parties have addressed the issue in
their briefings, the Court finds it appropriate to consider the
claim in its Order, although the Court will not issue a ruling
Smith, 891 P.2d 261, 266 (Haw. 1995) (quoting Doherty v.
Hartford Ins. Group, 574 P.2d 132, 134–35 (Haw. 1978)).
court also recognized, however, that the requirement of
detrimental reliance “may be dispensed with in order to prevent
Id.; see also Delmonte v. State Farm Fire
& Cas. Co., 975 P.2d 1159, 1170 (Haw. 1999), as amended (Mar.
The Hawaii Supreme Court has also stated the following
with respect to an insurer’s change of position regarding
[E]stoppel is particularly appropriate where the
insurer, either directly or through an agent,
. . . admits coverage under a policy of insurance,
yet later denies coverage. However, where the
insurer maintains the position that it will not
defend an insured because there is no coverage
under a policy, estoppel should not apply because
the insurer has not changed its position
regarding whether it would cover its insured,
and, therefore, the insured has not relied on any
of the insurer’s representations to his or her
Enoka v. AIG Hawaii Ins. Co., 128 P.3d 850, 870 (Haw. 2006)
(second alteration in original) (emphasis omitted) (quoting
State Farm Mut. Auto. Ins. Co. v. GTE Hawaiian Telephone Co.,
915 P.2d 1336, 1344 (1996)), as corrected (Feb. 28, 2006).
Here, in order to maintain a claim for estoppel,
Safeway and HNB must demonstrate that HNB either detrimentally
relied on a representation from FFIC regarding coverage or that
manifest injustice would result if FFIC were allowed to deny
As FFIC points out, Safeway and HNB’s arguments
regarding estoppel in their Opposition do not make reference to
facts or claims alleged in the SACC.
The SACC, under its claims for relief request that the
Court grant “equitable estoppel to enforce the promises made by
SACC, at 31.
The SACC’s bad faith claim (Count
II) also states that “[t]he Insurers should be estopped from
disclaiming coverage for the claims against HNB arising from the
sale, services, promotion and distribution of the constructionrelated products at issue in the Lawsuit.”
Id. ¶ 85.
the SACC does not refer to the requirements of detrimental
reliance or manifest injustice, nor does it sufficiently allege
facts supporting these factors. 8
Again, it appears that the SACC lacks clarity with
respect to its claim for estoppel and fails to sufficiently
allege facts supporting its claim.
See Illinois Nat. Ins. Co.
v. Nordic PCL Const., Inc., Civ. No. 11-00515 SOM-KSC, 2013 WL
3975668, at *9 (D. Haw. July 31, 2013) (dismissing insured’s
claim for estoppel related to the insurers “promise that ‘the
The Court notes that Count III of the SACC (Negligent
Misrepresentation and Omission) alleges that “HNB reasonably
relied on the false information supplied by and omissions of
material information made by the Insurers.” SACC ¶ 104. This
claim does not mention estoppel, however, nor does it allege
Policies would provide coverage for property damage claims
arising out of construction defects’” “given its lack of
clarity”); California Dairies Inc. v. RSUI Indem. Co., 617 F.
Supp. 2d 1023, 1047-48 (E.D. Cal. 2009) (allowing insured to
amend estoppel claim based on assertion of exclusion to
insurance coverage “not mentioned in the insurer’s final denial
of coverage letter” where complaint did not contain allegations
relevant to detrimental reliance).
FFIC argues that Safeway and HNB’s reformation claim
should be dismissed for failure to plead with sufficient
Mem., at 20.
The Court agrees.
In their reformation claim, Safeway and HNB state
that, “Under Hawaii law, relief through reformation may be had
when a written instrument does not, through mutual mistake,
conform to the intention of the parties’ instrument.”
¶ 110; see also State v. Kahua Ranch, Ltd., 384 P.2d 581, 585
(Haw. 1963) (“[R]eformation may be had when the written
instrument does not, through a mutual mistake of fact, conform
to the intention of the parties to the instrument.”).
further alleges that at the time the insurance policies were
procured by HNB, HNB and FFIC “mutually intended” that the
policies “would provide coverage for property damage claims
arising out of construction-related product defects and related
claims” and that “to the extent” that they “believed that the
language” in the policies reflected this intention, they were
Id. ¶¶ 111, 113.
On this basis, HNB and
Safeway argue that “[t]he Court should reform the language
contained in the Policies conform to the mutual intention of the
Id. ¶ 115.
Where a party alleges fraud or mistake, the Federal
Rules of Civil Procedure require a heightened pleading standard.
In particular, Rule(b) requires that, “In alleging fraud or
mistake, a party must state with particularity the circumstances
constituting fraud or mistake.”
Fed. R. Civ. P. 9(b).
Ninth Circuit has held that “[t]o satisfy Rule 9(b), a pleading
must identify ‘the who, what, when, where, and how of the
misconduct charged,’ as well as ‘what is false or misleading
about [the purportedly fraudulent] statement, and why it is
false.’” Cafasso, U.S. ex rel. v. Gen. Dynamics C4 Sys., Inc.,
637 F.3d 1047, 1055 (9th Cir. 2011) (alteration in original)
(quoting Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993,
998 (9th Cir. 2010)); see also Swartz v. KPMG LLP, 476 F.3d 756,
764 (9th Cir. 2007) (“To comply with Rule 9(b), allegations of
fraud must be specific enough to give defendants notice of the
particular misconduct which is alleged to constitute the fraud
charged so that they can defend against the charge and not just
deny that they have done anything wrong.” (quoting Bly–Magee v.
California, 236 F.3d 1014, 1019 (9th Cir. 2001))).
Here, the SACC fails to meet this heightened pleading
For example, the SACC fails to plead facts regarding
who at FFIC was mistaken about the scope of the policies’
coverage and when and how such facts regarding the mutual
The SACC also fails to include details of any
statements or representations made by FFIC regarding its alleged
Again, Safeway and HNB attach several exhibits to
their Opposition some of which appear to be relevant to their
claim of mutual mistake.
However, the Court reiterates that in
the context of a Motion to Dismiss, the Court is precluded from
considering most of the exhibits provided by Safeway and HNB. 9
In their Opposition, HNB and Safeway point to
allegations in the SACC that Douglas Moore, HNB’s insurance
agent, met with HNB’s President and CEO, William Hayes, III on
several occasions to discuss HNB’s insurance needs and that Mr.
Hayes during these meetings discussed his insurance needs and
Opp., at 30 (citing SACC ¶¶ 37-52).
Safeway and HNB do not point to any allegations in the SACC
The Court acknowledges that it could potentially consider
the reservation of rights letters, as they were referenced in
the SACC. One of the reservation of right letters references
the possibility of partial coverage under the Policies. Pavey
Decl. Ex. Q. However, consideration of this letter does not
cure the pleading deficiencies related to the reformation claim.
regarding Moore’s communications with FFIC (nor are there any
specific allegations as to such communications in the SACC).
Because mutual mistake requires both sides to be mistaken
regarding a fact, the allegations regarding Moore are
Notably, Safeway and HNB cite to a case from the
Eastern District of Philadelphia which included a reformation
claim alleging mutual mistake regarding coverage available under
an insurance policy.
See Asbury Auto. Grp. LLC v. Chrysler Ins.
Co., No. 01-3319, 2002 WL 15925, at *2 (E.D. Pa. Jan. 7, 2002).
In that case, the court determined that mutual mistake had been
pled with sufficient particularity where the complaint alleged
that at a meeting that took place “from February 10 to February
11, 1999, in Jacksonville, Florida, Bill Koehane, a
representative of defendant [insurance company], informed
plaintiff that the excess umbrella policy would cover all of the
areas of liability that were covered by the primary policy,
which included [employment practices liability] EPL.”
complaint further alleged that plaintiff insured later found out
“that the excess umbrella policy did not cover EPL as it had
been led to believe.”
In Asbury, in contrast to the SACC in the instant
case, the complaint stated specific facts regarding a meeting
with a representative of the insurance company in which a
statement made by said representative evinced the mutual mistake
of the parties regarding coverage.
such specific allegations. 10
Here, the SACC is devoid of
Accordingly, and for the reasons
discussed above, the Court DISMISSES the reformation claim
WITHOUT PREJUDICE and with leave to amend.
See Rymal v. Bank of
Am., Civ. No. 10-00280 DAE-BMK, 2011 WL 6100979, at *7 (D. Haw.
Dec. 6, 2011) (dismissing claim for mutual mistake where claims
were insufficiently pled pursuant to Fed. R. Civ. P. 9(b)).
The Court notes that FFIC additionally argues that the
reformation claim should be dismissed based on the SACC’s
failure to plead in the alternative.
Mem., at 20-21.
Specifically, the negligent misrepresentation claim in the SACC
alleges that FFIC at the time it issued the Policies “intended
to later rely on Burlington’s ‘occurrence’ analysis to deny
coverage for the sorts of property damage claims that it knew or
should have known that HNB expected and understood were covered
under the Policies.”
SACC ¶ 100.
However, in the reformation
claim, the SACC alleges that “HNB and the Insurers mutually
intended at the time the Policies were procured that the
Safeway and HNB state that in Nordic, the court found a
reformation claim adequately pled based on similar allegations
to those made in the SACC at issue here. Opp., at 30 (citing
Nordic PCL Const., Inc., 2013 WL 3975668, at *9). The Court
notes that in Nordic, the court did not elaborate on its ruling
other than stating that it “consider[ed] the alleged mistake to
have been sufficiently pled.” Id. The Court is not bound to
follow this ruling in the instant case.
Policies would provide coverage for property damage claims
arising out of construction-related product defects and related
SACC ¶ 111.
The reformation claim also incorporated
all “allegations contained in the foregoing paragraphs as if
fully stated or set forth herein.”
SACC ¶ 109.
The allegations cited above from the negligent
misrepresentation claim and the reformation claim are
The Federal Rules of Civil Procedure allow
parties to plead inconsistent claims in the alternative.
Fed. R. Civ. P. 8(d).
However, rather than incorporate
inconsistent allegations into the same cause of action as was
done here, the complaint should make clear that the inconsistent
allegations are being pled in the alternative.
See Maloney v.
Scottsdale Ins. Co., 256 F. App’x 29, 31-32 (9th Cir. 2007).
Safeway and HNB should so clarify in any amended claim for
For the foregoing reasons, the Court GRANTS FFIC’s
Motion to Dismiss.
The Court GRANTS FFIC’s Motion to Dismiss
Count I: Breach of Contract of the SACC WITHOUT PREJUDICE and
with leave to amend and GRANTS the Motion to Dismiss Count IV:
Reformation WITHOUT PREJUDICE and with leave to amend.
Safeway and HNB must file any amended complaint within
thirty days of the entry of this Order.
Any amended complaint
must correct the deficiencies noted in this Order.
IT IS SO ORDERED.
Honolulu, Hawaii, December 16, 2016.
Alan C. Kay
Sr. United States District Judge
American Automobile Insurance Company, et al. v. Hawaii Nut & Bolt, Inc., et
al., Civ. No. 15-00245 ACK-KSC Order Granting Plaintiffs American Automobile
Insurance Company’s and National Surety Corporation’s Motion to Dismiss
Breach of Contract and Reformation Counterclaims in Second Amended
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