J. MICHAEL SEABRIGHT, District Judge.
Plaintiff State Farm Fire and Casualty Company ("State Farm") seeks a declaration
Before the court is State Farm's Motion for Summary Judgment, seeking a ruling that it has no duty to defend and/or indemnify the Wimberlys for claims Shimabukuro is asserting against them in the underlying action because (1) the claims do not assert "bodily injury," "property damage," or "personal injury" caused by an "occurrence" as defined in State Farm's insurance policy ("the Policy"), and (2) coverage is otherwise excluded under the Policy. Based on the following, the court finds that the complaint in the underlying action does not raise the possibility of coverage, and therefore GRANTS State Farm's Motion for Summary Judgment.
The court first describes the essential facts alleged against the Wimberlys in the underlying action. The allegations are not disputed by the parties and are assumed to be true for purposes of this declaratory relief action. See, e.g., Burlington Ins. Co. v. Oceanic Design & Constr., Inc., 383 F.3d 940, 944-45 (9th Cir.2004) ("The focus is on the alleged claims and facts."). The court then sets forth the relevant provisions of the Policy.
By contract dated February 28, 2009, the Wimberlys sold real property located at 1583 Ala Lani Street in Honolulu, Hawaii to Shimabukuro, with a June 2009 closing. Doc. No. 18-3, Brown Decl. Ex. A ("Underlying Compl.") ¶¶ 7, 12. The Wimberlys were represented by real estate agent JoAnn Matsuo ("Matsuo") during the transaction. Id. ¶ 4, 7. As part of the transaction, the Wimberlys, assisted by Matsuo, prepared and delivered a "Seller's Real Property Disclosure Statement" to Shimabukuro. Id. ¶ 8. Shimabukuro, after taking possession of the property, allegedly cleared vegetation and discovered "patchwork repair and cracks and damages" to a retaining wall, and "learned that the wall was in imminent danger of collapse." Id. ¶ 14. The condition of the wall was not disclosed in the Seller's Real Property Disclosure Statement. Id. ¶ 10. The cost to repair the retaining wall and stabilize the land "exceeds $100,000." Id. ¶ 15.
On February 28, 2011, based on the sales transaction and the undisclosed condition of the retaining wall, Shimabukuro
Based on those factual allegations, the underlying complaint asserts claims against all the underlying defendants for misrepresentation (Count One), negligence (Count Two), breach of contract (Count Three), rescission (Count Four), unfair and deceptive trade practices (Count Five), and punitive damages (Count Six).
Because it is entitled "negligence," Count Two is particularly important for purposes of assessing whether the Wimberlys are entitled to insurance coverage. In relevant part, Count Two provides:
Id. ¶ 19.
State Farm insured the Wimberlys' premises at 1583 Ala Lani Street under a Rental Dwelling Policy, No. 91-BX-9370-9. Doc. No. 15-3, Miller Decl. Ex. 2 ("the Policy"). As clarified by State Farm's counsel at the oral hearing on the Motion, the Wimberlys — as owners who are alleged to be residents and citizens of California at all relevant times — were renting out the premises and thus were insured by a Rental Dwelling Policy. After the underlying action was filed, the Wimberlys tendered the action to State Farm. State Farm has provided the Wimberlys a defense of the underlying action, subject to a reservation of rights. See Doc. No. 1, Compl. ¶ 15.
Doc. No. 15-3, Miller Decl. Ex. 2.
After notifying the Wimberlys that it was defending the underlying suit subject to a reservation of rights, State Farm filed this declaratory relief action on August 12, 2011. The suit is based upon diversity of citizenship — State Farm is an Illinois Corporation, and the Wimberlys are residents and citizens of California. Doc. No. 1, Compl. ¶¶ 1-2. The suit seeks a declaration that it is not required to defend and/or indemnify the Wimberlys in the underlying action because the Policy is not applicable to the claims in the underlying action. On December 2, 2011, the Wimberlys filed a counterclaim against State Farm, seeking declaratory relief and making claims for breach of contract and specific performance.
On February 23, 2012, State Farm filed its Motion for Summary Judgment, with a hearing set for April 23, 2012. The Wimberlys filed their Opposition on April 2, 2012. The Motion was then withdrawn, but was re-instated, and State Farm filed its Reply on June 4, 2012. A hearing was held on June 18, 2012. The Wimberlys filed a Supplemental Memorandum in Opposition on June 25, 2012, and State Farm filed a corresponding Supplemental Reply on July 2, 2012.
Summary judgment is proper where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). Rule 56(a) mandates summary judgment "against a party who fails to make a showing sufficient to establish the existence of an element essential to the party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); see also Broussard v. Univ. of Cal. at Berkeley, 192 F.3d 1252, 1258 (9th Cir.1999).
"A party seeking summary judgment bears the initial burden of informing the court of the basis for its motion and of identifying those portions of the pleadings and discovery responses that demonstrate the absence of a genuine issue of material fact." Soremekun v. Thrifty Payless, Inc., 509 F.3d 978, 984 (9th Cir.2007) (citing Celotex, 477 U.S. at 323, 106 S.Ct. 2548); see also Jespersen v. Harrah's Operating Co., 392 F.3d 1076, 1079 (9th Cir.2004). "When the moving party has carried its burden under Rule 56[ (a) ] its opponent must do more than simply show that there is some metaphysical doubt as to the material facts [and] come forward with specific facts showing that there is a genuine issue for trial." Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (citation and internal quotation signals omitted); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (stating that a party cannot "rest upon the mere allegations or denials of his pleading" in opposing summary judgment).
"An issue is `genuine' only if there is a sufficient evidentiary basis on which a reasonable fact finder could find for the nonmoving party, and a dispute is `material' only if it could affect the outcome of the suit under the governing law." In re Barboza, 545 F.3d 702, 707 (9th Cir.2008) (citing Anderson, 477 U.S. at 248, 106 S.Ct. 2505). When considering the evidence on a motion for summary judgment, the court must draw all reasonable inferences on behalf of the nonmoving party. Matsushita
The court outlines the legal framework for interpreting the Policy and determining the scope of an insurer's coverage duties, and then addresses the parties' arguments.
"Every insurance contract shall be construed according to the entirety of its terms and conditions as set forth in the policy, and as amplified, extended, restricted, or modified by any rider, endorsement or application attached to and made a part of the policy." Hawaii Revised Statutes ("HRS") § 431:10-237. Thus, under Hawaii law, courts must look to the language of the insurance policy to determine the scope of an insurer's duties. See Sentinel Ins. Co. v. First Ins. Co. of Haw., 76 Haw. 277, 287, 875 P.2d 894, 904 (1994); see also Hawaiian Ins. & Guar. Co. v. Fin. Sec. Ins. Co., 72 Haw. 80, 87, 807 P.2d 1256, 1260 (1991) ("In the context of insurance coverage disputes, we 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."); Burlington Ins. Co., 383 F.3d at 945 ("In Hawaii, the terms of an insurance policy are to be interpreted according to their plain, ordinary, and accepted sense in common speech.").
Insurance policies must nevertheless be construed "in accordance with the reasonable expectations of a layperson." Hawaiian Isle Adventures, Inc. v. N. Am. Capacity Ins. Co., 623 F.Supp.2d 1189, 1194 (D.Haw.2009) (citing Dawes v. First Ins. Co. of Haw., 77 Haw. 117, 121, 883 P.2d 38, 42 (1994)). The Hawaii Supreme Court classifies insurance contracts as "contracts of adhesion" and "ha[s] long subscribed to the principle that [insurance contracts] must be construed liberally in favor of the insured and any ambiguities must be resolved against the insurer." Guajardo v. AIG Hawai'i Ins. Co., 118 Haw. 196, 202, 187 P.3d 580, 586 (2008) (citing Dairy Rd. Partners v. Island Ins. Co., 92 Haw. 398, 411-12, 992 P.2d 93, 106-07 (2000) (internal citations, quotation marks, brackets, and ellipses omitted)).
An insurance company's duty to defend is broader than its duty to indemnify and "arises whenever there is the mere potential for coverage." Commerce & Indus. Ins. Co. v. Bank of Haw., 73 Haw. 322, 326, 832 P.2d 733, 735 (1992) (citations omitted). "In other words, the duty to defend `rests primarily on the possibility that coverage exists. This possibility may be remote but if it exists[,] the [insurer] owes the insured a defense.'" Dairy Road Partners, 92 Hawai'i at 412, 992 P.2d at 107 (quoting Standard Oil Co. of Cal. v. Hawaiian Ins. & Guar. Co., 65 Haw. 521, 527, 654 P.2d 1345, 1349 (1982)).
In determining whether an insurer has a duty to defend, Hawaii courts apply the "complaint allegation rule," where
Burlington Ins. Co., 383 F.3d at 944-45 (quoting Hawaiian Holiday Macadamia
To obtain summary judgment that it has no duty to defend, an insurer has the burden of proving that there is "no genuine issue of material fact with respect to whether a possibility exist[s]" that the insured will incur liability for a claim covered by the policy. Dairy Road Partners, 92 Hawai'i at 412, 992 P.2d at 107. In other words, Plaintiff must prove that it would be impossible for the underlying party in the underlying lawsuit to prevail against Defendants on a claim covered by the Policy. See id. at 412-13, 992 P.2d at 107-08. "All doubts as to whether a duty to defend exists are resolved against the insurer and in favor of the insured." Id. at 412, 992 P.2d at 107.
State Farm first argues that the underlying action alleges claims for, or arising out of, a breach of contract, which do not constitute an "occurrence" within the meaning of the Policy. See Burlington Ins. Co., 383 F.3d at 949 ("[C]ontract and contract-based tort claims are not within the scope of [liability] policies under Hawaii law."). Burlington also indicates similar claims for unfair and deceptive trade practice violations are not covered. Id. at 943. And indeed the Wimberlys do not oppose State Farm's arguments as to coverage over these claims arising out of breach of contract. Thus, State Farm owes no coverage duties as to the claims arising from the Wimberly's alleged failure to disclose the condition of the retaining wall in the sales transaction. See also State Farm Fire & Cas. Co. v. Thompson, 2010 WL 2017101, at *9 (D.Haw. May 20, 2010) (Mollway, J.) (reiterating that a claim for "negligent" failure to disclose defects in the sale of real estate arose out of an alleged breach of a contractual duty and thus did not arise from an occurrence or accident under the terms of liability policy).
Likewise, State Farm argues — without opposition from the Wimberlys — that it owes no coverage for allegations of intentional and "negligent misrepresentation." See, e.g., Hawaiian Holiday Macadamia Nut Co., 76 Hawai'i at 170, 872 P.2d at 234 (holding that claims for breach of contract and fraud are not negligence claims resulting from accidental conduct, and where an insurance policy provides coverage for accidental conduct only, an insurer has no duty to defend); Thompson, 2010 WL 2017101, at *8-9 (citing numerous cases for proposition that claims for negligence and negligent misrepresentation in connection with sale of home did not constitute an "occurrence"); see also Safeco Ins. Co. of Am. v. Andrews, 915 F.2d 500, 502 (9th Cir.1990) (holding that a failure to disclose an alleged misrepresentations regarding defective condition of property does not constitute an "occurrence").
The only coverage question remaining is whether the underlying complaint alleges facts that could lead to a negligence claim against the Wimberlys that is independent of claims arising out of the sales contract. In this regard, two decisions from this district — Thompson, 2010 WL 2017101, and an earlier decision arising out of the same facts, RLI Ins. Co. v. Thompson, 2010 WL 1438925 (D.Haw. Apr. 12, 2010) (Kay, J.) — are the key cases. These cases arose from a similar (but ultimately distinguishable) factual background as the instant case. They addressed whether insurers owed coverage duties against an underlying action arising out of a failure to disclose wood rot/termite damage in the sale of real property, where the underlying action alleged claims against the seller sounding in breach of contract and fraud.
The Thompson cases ruled consistently with each other, first finding that most of the underlying claims did not constitute "occurrences" for purposes of insurance coverage because the underlying action alleged uncovered breach of contract claims, or allegations of intentional conduct:
Thompson, 2010 WL 1438925, at *9 (emphasis added); see also Thompson, 2010 WL 2017101, at *6-7 (ruling similarly). But the decisions found a potential for coverage in allegations that the seller could have "negligently repaired" wood rot and "exacerbated" existing damage that continued after the sale:
Thus, under the Thompson cases, the possibility of coverage was limited to a potential claim for negligence in repairing or overseeing dry rot repair that caused further property damage (i.e., an "exacerbation of damages").
As to the potential for a claim based on "exacerbation of damages," the Thompson cases are readily distinguishable. The underlying complaint in Thompson alleged that the seller, prior to closing, hired a contractor to perform construction work on the property and "instructed the contractor to `cover over' the termite damage." 2010 WL 2017101, at *1. The seller did this rather than having the contractor repair the termite damage or remove the damaged parts of the structure. Id. That is, there were factual allegations that could have constituted, or led to, a claim for a "negligent fix" that made existing damage worse or "exacerbated" the damage.
Here, on the other hand, although the underlying complaint alleges the existence of a wall with an undisclosed improper "patchwork repair," it does not allege that the Wimberlys actually did that repair (or instructed others in how to patch the wall), much less that they did so negligently or attempted to cover up any condition of the wall. Nor are there allegations that such repair caused further additional ("exacerbated") damages to the condition of the wall. Indeed, the underlying complaint does not allege any facts regarding the "patch" (other than its existence) — e.g., who did the patch, what role the Wimberlys had in such repair (overseeing or directing), or whether the repair exacerbated the condition of the wall.
Rather, the underlying complaint is limited to allegations that the Wimberlys and/or agents misrepresented the condition of the wall, or improperly filled out the disclosure statement. It alleges that the Wimberlys or their agent completed the disclosure statement negligently. It alleges the Wimberlys should have known that the wall was in danger of collapse and thus negligently failed to disclose its condition. But nowhere does it allege that the wall itself was repaired negligently and that such a repair caused further damage — the underlying complaint only alleges improprieties in the sales transaction. The "patchwork repair" simply describes the condition that was not disclosed (intentionally or negligently) on the disclosure form.
Thus, under the complaint allegation rule, no facts are pled that would indicate the potential for coverage under such a "negligent exacerbation of condition" claim. See Dairy Road Partners, 92 Hawai'i at 417, 992 P.2d at 112 ("[W]hen the facts alleged in the underlying complaint unambiguously exclude the possibility of coverage, conclusory assertions contained in the complaint regarding the legal significance of those facts (such as that the facts as alleged demonstrate `negligent' rather than `intentional' conduct) are insufficient to trigger the insurer's duty to defend."); Bayudan, 87 Hawai'i at 387, 957 P.2d at 1069 (agreeing with courts holding "that the mere relabeling of a claim for which coverage is excluded to a claim which could raise the potential for coverage is not a permissible manner in which to trigger an insurer's duty to defend").
In short, the Thompson cases are distinguishable, and the underlying action fails to allege a covered negligence claim against the Wimberlys.
What's more, even if there were some question of fact as to whether the underlying action alleged an "occurrence," coverage is also barred by an exclusion from coverage for property damage sold to others. The exclusion is an additional and independent ground for a finding of no coverage. Specifically, the Rental Dwelling Policy unambiguously excludes liability coverage for:
The exclusion — otherwise known as an "alienated premises" exclusion — is clear and unambiguous. The underlying action alleges property damage
In sum, the court finds that there is no genuine issue of material fact that the underlying action does not raise the possibility of coverage under the Policy. State Farm does not have a duty to defend Defendants in the underlying action, and thus has no duty to indemnify the Wimberlys.
For the foregoing reasons, the court GRANTS State Farm's Motion for Summary Judgment. State Farm is entitled to a declaration that it owes no coverage duties as to the underlying complaint. It follows that State Farm is entitled to summary judgment on the Wimberlys' counterclaim. Judgment shall issue in favor of State Farm and against the Wimberlys. The Clerk of Court is directed to close the case file.
IT IS SO ORDERED.
