Insurers Duty to Defend

Generally

Hawaii follows the “Four Corners Rule”, meaning that in determining whether they have a duty to defend, an insurer may look to the facts of the complaint and their own policies. Nautilus Ins. Co., 321 P.3d at 645 (Haw. 2014). An insurer has no duty to defend when the pleadings fail to allege any basis for recovery within a coverage clause. Hawaiian Holiday Macadamia Nut Co., Inc. v. Industrial Indem. Co., 872 P.2d 230, 234 (Haw. 1994). Where the insured tenders their defense in a suit where the complaint does not clearly assert a covered claim, the insurer, as a precondition to refusing the tender on the ground that there is no possibility of coverage, must nevertheless conduct a reasonable investigation to ensure that the facts of the case do not obligate it to defend the insured. Dairy Road Partners v. Island Ins. Co., Ltd., 992 P.2d 93, 109-110 (Haw. 2000); See also Sentinel Ins. Co., Ltd. V. First Ins. Co. of Hawai’i, Ltd., 875 P.2d 894, 905 (Haw. 1994). This does not mean that insurers are permitted to rely upon extrinsic facts that may be subject to dispute in the underlying lawsuit as a basis for disclaiming its duty to defend when the complaint in the underlying suit alleges facts within coverage. Dairy Road Partners, 002 P.2d at 117.

The duty to defend is broader than the duty to indemnify. Hart v. Ticor Title Ins. Co., 272 P.3d 1215, 1225 (Haw. 2012). The duty to defend rests primarily on the possibility that coverage exists. Tri-S. Corp v. W. World Ins. Co., 135 P.3d. 82, 97 (Haw. 2006); see also Nautilus Ins. Co. v. Lexington Ins. Co., 321 P. 3d 634, 645 (“[O]ur case law holds that the duty to defense arises where there is a mere possibility of coverage.”). An insurer will be subject to the duty to indemnify only if, pursuant to the plain language of the insurance policy, the insured could become legally obligated to pay damages under a claim falling within the policy’s coverage. Sentinel Ins. Co., Ltd., 875 P.2d 894 at 904.

Ambiguities in an insurance contract regarding coverage are resolved in favor of the insured as against the insurer, and policies are to be construed in accord with the reasonable expectation of a layperson. Tri-S Corp., 135 P.3d at 98.

Consideration of Extrinsic Evidence

See above.

Occurrence Requirement

General rule

An occurrence is an event that cannot be expected or reasonably foreseeable as a result of the insured’s own intentional acts or omissions; therefore, if conduct alleged is not accidental, it is not an occurrence. Hawaiian Holiday Macadamia Nut Co., 872 P.2d at 234-236. Contract and contract-based tort claims arising due to poor workmanship are not “occurrences” under a CGL policy. Group Builders, Inc. v. Admiral Ins. Co., 123 Hawai’i 142,148 (Haw. Ct. App. 2010).

Faulty workmanship and construction defect claims

Under Hawaii law, claims of poor workmanship or faulty construction, standing alone, are not enough to constitute an “occurrence” under CGL policies. Group Builders, Inc.v. Admiral Ins. Co., 123 Hawai’i at 148-149. Hawai’i views the risks insured by the standard form policy are “injury to people and damage to property caused by [a] faulty [product] or workmanship.” Sturla,Inc. v. Fireman’s Fund Ins. Co., 684 P.2d 960, 964 (Haw. 1984) (Court held that claims asserted against carpet manufacturer/installer seeking replacement cost of carpeting which prematurely faded fell within the “business risk” exclusions of comprehensive general liability policy and was not tangible property that had been physically injured or destroyed).

Bodily injury requirement

Emotional distress

Negligently-inflicted mental distress may be characterized as a reaction to a traumatic stimulus, which may be physical or purely psychic. Leong. V. Takasaki, 520 P.2d 758,66-67 (Haw. 1974). Under Hawai’i law, the statutory term “accidental harm” encompasses emotional injuries and therefore a claim for emotional distress is included within the statutory insurance requirement and will be covered. First Ins. Co. of Hawai’i, Ltd v. Lawrence, 881 P.2d 489 (Haw. 1994).

Property Damage Requirement

Purely economic loss

The economic loss rule bars recovery in tort for purely economic losses. City Exp., Inc. v. Express Partners, 959 P.2d 836, 839 (Haw. 1998). See also State ex rel. Bronster v. United States Steel, 929 P.2d 294 (“[e]conomic loss rule applied to claims for relief based on a product liability or negligent design and/or manufacture theory”). Economic losses resulting from claims such as breach of contract, fraud, racketeering, and misappropriation do not constitute “property damage” under a CGL policy. Hawaiian Holiday, 872 P.2d at 234-235 (explaining that the alleged property damage claims did not sound in negligence which would require coverage under the policy, and that the property damage alleged was the result of acts which were the basis for breach of contract and fraud claims).

Loss of use

Diminution in value does not constitute “loss of use”. Hawaiian Ins. & Guar. Co. Ltd. V. Blair, Ltd., 6 Haw.App.447 (Haw. Ct. App. 1986) (Court held that under the insured’s policy provisions, diminution in value of their product line did not cause physical injury to tangible property or loss of use of tangible property and was therefore not covered).

Trigger of Coverage for Latent Injury i.e. exposure to asbestos, silica, and lead paint

Injury in fact theory

Hawaii has adopted the injury in fact trigger for all standard CGL policies. Sentinel Ins. Co., Ltd. V. First Ins. Co. of Hawai’i, Ltd., 76 Hawai’i 277, 298 (Haw. 1994). This is consistent with the intention of drafters of standard form CGL policies who specifically rejected language that would incorporate manifestation of exposure triggers and who intended coverage to be afforded only for injuries shown in fact to have occurred during the policy period. Id. at 300.

Where injury in fact occurs continuously over a period covered by different insurers or policies, and apportionment of the injury is difficult or impossible to determine, the continuous injury trigger may be employed to equitably apportion liability among insurers. Id.

Trigger of Coverage for Non-Latent Injury

Injury in fact

See 1.6.1, above. Under the injury in fact trigger, where coverage is triggered by an occurrence during the policy period by an injury in fact, the injury occurs whether detectable or not – as long as its existence during the policy period can be proven. Sentinel Ins. Co., supra ¶1.6.1.

Construction defect claims

See above.

Duty to Defend Covered and Uncovered Claims

An insurer may not disclaim their duty to defend based on extrinsic facts that may be disputed in the underlying suit where the complaint in the underlying suit alleges facts within coverage. Dairy Road Partners, supra ¶1.1. When an action raises claims which may fall outside of coverage provided by the policy along with covered claims acknowledged by insurer, the insurer will have a duty to defend.

Duty to Defend Contractual Indemnity and Common Law Indemnity Claims

Is there an anti-indemnification statute?

Yes, Haw. Rev. Stat. § 431:10-222. See also Arthur v. State, Dept. of Hawaiian Home Lands, 377 P.3d 26, 36 (Haw. 2016) (Explaining that § 431:10-222 voids as against public policy indemnification clauses in construction contracts between owners and contractors as to “liability for bodily injury to persons or damage to property caused by or resulting from the sole negligence or willful misconduct of the promisee, the promisee’s agents or employees, or indemnitee[s]”).

Insurer’s Wrongful Refusal to Defend

Reliance on coverage defenses to deny indemnity

The Hawai’i Supreme Court has held that whether an insurer’s refusal to defend was justified must be answered in light of the information available to the insurer at the time it made the refusal. Tri-S Corp., 135 P.3d at 106.

Insureds have a right to expect that their insurer will make an effort to ascertain not only from the pleadings but from the insurer’s own independent investigation whether the insured is entitled to a defense under a policy. Standard Oil Co. of California v. Hawaiian Ins. & Guaranty Co., Ltd., 654 P.2d 1345, 1349 (Haw. Ct. App. 1998). Once the insurer receives information concerning the possible absence of coverage, the insurer must promptly serve upon the insured a reservation of rights. AIG Hawaii Ins. Co., Inc. v. Smith, 891 P.2d 261, 264-265 (Haw. 1995). If the insurer discovers that a basis for noncoverage exists, the insurer must give prompt notice to the insured of its intention to withdraw in order for the insured to undertake their own defense. Id.

Where an 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 relief on any of the insurer’s representations to their detriment. Enoka v. AIG Hawaii Ins. Co., Inc., 128 P.2d 850, 870 (Haw. 1006) (quoting State Farm Mut. Auto Ins. Co. v. GTE Hawaiian Telephone Co., 915 P.2d 1336, 1344 (Haw. 1996)).

Conditions of Coverage

Late notice

Prejudice requirement

The Hawai’i Supreme Court has recognized a “notice-prejudice” rule, whereby an insurer will not be relieved of liability based on an insured’s untimely notice of a claim unless the insurer can demonstrate that it has been prejudiced as a result of the late notice. Hawaii Management Alliance Ass’n v. Insurance Com’r, 100 P.3d 952, 960 (Haw. 2004). See also Great American Ins. Co. v. Aetna Cas. And Sur. Co., 876 P.2d 1314, 1319 (Haw. 1994) (“Late notice to an insurer is not a defense to coverage unless the insurer can demonstrate that it has been prejudiced by the delay.”); Standard Oil, 654 P.2d at 1348 n. 4 (“The function of the notice requirements is simply to prevent the insurer from being prejudiced, not to provide a technical escape-hatch by which to deny coverage in the absence of prejudice nor to evade the fundamental protective purpose of the insurance contract…”); Tri-S Corp., 135 P.2d at 110 (holding that insurer was not prejudiced due to insufficient notice when insurer had “ample” notice of both instant and underlying actions and at least a year in which to conduct discovery).

Meaning of “arising out of”

Coverage grants/agreements

While the applicability of the phrase “arising out of” the ownership, maintenance, or use is not clear in every case, the phrase itself is unambiguous. Oahu Transit Services, Inc. v. Northfield Ins. Co., 112 P.3d 717, 721 (Haw. 2005) (citing Fortune v. Wong, 702 P.2d 299, 306 (Haw. 1985)). The court in Oahu Transit Services, Inc. stated that, because the phrase is unambiguous, there is no need to interpret the phrase differently whether it appears in a coverage clause or an exclusionary clause. Id. at 722.

Exclusions

In the context of a CGL automobile exclusion, the Hawai’i Supreme Court uses a three-factor test to determine whether injuries arose from the use or operation of a motor vehicle: (1) whether the motor vehicle was an active accessory in causing the plaintiff’s injuries, (2) whether there was an independent act breaking the causal link between “use” of the vehicle and the injuries inflicted, and (3) whether the injuries resulted from use of the vehicle for transportation purposes. Id.

Coverage for punitive damages

Insurable?

No. Haw. Rev. Stat. Ann. § 431:10-240 provides that coverage under any insurance policy issued in Hawaii shall not be construed to provide coverage for punitive or exemplary damages unless specifically included. See also State Farm Fire and Casualty Company v. GP West, Inc., 190 F.Supp.3d 1003 (D. Haw. 2016) (Insurer under CGL policy had no duty to cover punitive damage award against insureds in underlying litigation under Hawai’i law where none of the contractor’s policies or businessowner policies provided for punitive or exemplary damages).

Additional Insured Endorsement

Analysis and factors considered for liability arising out of/caused by the named insured’s work

In Standard Oil, supra, the insured hired an independent contractor. An employee of the independent contractor was injured negligently by an employee of the insured while the employees were not doing related business. The Court rejected the insurer’s argument that if the work done by the independent contractor was the proximate cause its employees injury then the injury was caused by and “arose out of” the work. Instead, the court held that “…[n]o more is necessary than that the [business] subject the employee of the independent contractor to a peril in which comes from the fact that he is required to be in the place where it strikes when it does so.” This reflects Hawai’i’s broad construction of the phrase “arise out of” in the context of additional insured coverage. See also Retherford v. Kama, 470 P.2d 517, 519 (Haw. 1970) (rejecting the Plaintiff’s contention that the phrase “with respect to” must be construed narrowly, only meaning in essence “with respect to accidents and injuries caused by independent contractors in the operations performed by independent contractors” and adopting a liberal interpretation of this policy language).

Coverage B- Personal and Advertising Injury

Communication to buyers or prospective buyers of the insured’s products constitutes advertising which is excepted from coverage under a comprehensive general liability policy which covers damages arising from the publication of a libel or other defamatory material. Hawaiian Ins. & Guar. Co., Ltd. v. Blair, Ltd., 726 P.2d 1310 (Haw. Ct. App. 1986). A claim for trade libel or disparagement requires a publication which induces others not to deal with plaintiff as well as special damages resulting from said publication. Id. at 1315.