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Illinois National Insurance ) Company, An v. Nordic Pcl Construction

April 26, 2012

ILLINOIS NATIONAL INSURANCE ) COMPANY, AN ILLINOIS CORPORATION; AND NATIONAL
UNION FIRE INSURANCE COMPANY
PITTSBURGH, PA., A PENNSYLVANIA CORPORATION,
PLAINTIFFS,
v.
NORDIC PCL CONSTRUCTION, INC., F/K/A NORDIC CONSTRUCTION, LTD., A HAWAII CORPORATION, DEFENDANT.
NORDIC PCL CONSTRUCTION,
INC., F/K/A NORDIC CONSTRUCTION LTD., A HAWAII CORPORATION,
DEFENDANT AND THIRD-PARTY PLAINTIFF,
v.
MARSH USA, INC.,
THIRD-PARTY DEFENDANT.



The opinion of the court was delivered by: Susan Oki Mollway Chief United States District Judge

ORDER (1) GRANTING IN RELEVANT PART COUNTERCLAIM DEFENDANTS' OF REQUEST FOR JUDICIAL NOTICE; (2) GRANTING IN PART AND DENYING IN PART COUNTERCLAIM DEFENDANTS' MOTION TO DISMISS COUNTERCLAIM FILED OCTOBER 24, 2011, AND GIVING NORDIC LEAVE TO AMEND IN CERTAIN RESPECTS; IN FAVOR OF PENDING STATE (3) DENYING COUNTERCLAIM DEFENDANTS' MOTION TO STRIKE PORTIONS OF THE COUNTERCLAIM ) FILED OCTOBER 24, 2011; (4) DENYING THIRD-PARTY DEFENDANT MARSH USA, INC.'S ALTERNATIVE, STAY PROCEEDINGS ACTION; (5) DENYING DEFENDANT AND THIRD-PARTY PLAINTIFF NORDIC CONSTRUCTION, INC., F/K/A NORDIC CONSTRUCTION LTD.'S SUBSTANTIVE JOINDER TO THIRD-PARTY DEFENDANT MARSH USA, INC.'S MOTION TO DISMISS OR, IN THE ALTERNATIVE, STAY PROCEEDINGS IN FAVOR OF PENDING STATE ACTION; AND (6) GRANTING THIRD-PARTY DEFENDANT MARSH USA, INC.'S MOTION FOR JUDGMENT ON THE PLEADINGS ON COUNTS V AND VI OF DEFENDANT/THIRD-PARTY PLAINTIFF NORDIC PLC ) CONSTRUCTION, INC.'S THIRD-) PARTY COMPLAINT FILED OCTOBER 24, 2011

ORDER (1) GRANTING IN RELEVANT PART COUNTERCLAIM DEFENDANTS' REQUEST FOR JUDICIAL NOTICE; (2) GRANTING IN PART AND DENYING IN

PART COUNTERCLAIM DEFENDANTS' MOTION TO DISMISS COUNTERCLAIM FILED OCTOBER 24, 2011, AND GIVING NORDIC LEAVE TO AMEND IN CERTAIN RESPECTS; (3) DENYING COUNTERCLAIM DEFENDANTS' MOTION TO STRIKE PORTIONS OF THE COUNTERCLAIM FILED OCTOBER 24, 2011; (4) DENYING THIRD-PARTY DEFENDANT MARSH USA, INC.'S MOTION TO DISMISS

OR, IN THE ALTERNATIVE, STAY PROCEEDINGS IN FAVOR OF PENDING STATE ACTION; (5) DENYING DEFENDANT AND THIRD-PARTY PLAINTIFF NORDIC CONSTRUCTION, INC., F/K/A NORDIC CONSTRUCTION LTD.'S SUBSTANTIVE JOINDER TO THIRD-PARTY DEFENDANT MARSH USA, INC.'S MOTION TO DISMISS OR, IN THE ALTERNATIVE, STAY PROCEEDINGS IN FAVOR OF PENDING STATE ACTION; AND (6) GRANTING THIRD-PARTY DEFENDANT MARSH USA, INC.'S MOTION FOR JUDGMENT ON THE PLEADINGS ON COUNTS V AND VI OF DEFENDANT/THIRD-PARTY PLAINTIFF NORDIC PLC CONSTRUCTION, INC.'S THIRD-PARTY COMPLAINT FILED OCTOBER 24, 2011

I. INTRODUCTION.

This case involves a dispute about whether insurance benefits are available to a general contractor who built structures that allegedly have construction defects. Plaintiffs Illinois National Insurance Company ("Illinois National") and National Union Fire Insurance Company of Pittsburgh, PA ("National Union") (collectively, the "Insurers"), commenced this action for declaratory relief against Defendant Nordic PCL Construction, Inc., f/k/a Nordic Construction, Ltd. ("Nordic"), on August 23, 2011. See Compl., ECF No. 1. Nordic filed a Counterclaim against the Insurers, see Countercl., ECF No. 10-1, and a Third-Party Complaint against Marsh USA, Inc. ("Marsh"). See Third-Party Compl., ECF No. 11.

The parties are now before the court on numerous motions: Counterclaim Defendants' Request for Judicial Notice in Support of Their (1) Motion to Dismiss the Counterclaim and (2) Motion to Strike Portions of the Counterclaim, ECF No. 16 ("Request for Judicial Notice"); Counterclaim Defendants' Motion to Dismiss Counterclaim Filed October 24, 2011, ECF No. 14 ("Motion to Dismiss Counterclaim"); Counterclaim Defendants' Motion to Strike Portions of the Counterclaim Filed October 24, 2011, ECF No. 15 ("Motion to Strike"); Third-Party Defendant Marsh USA, Inc.'s Motion to Dismiss or, in the Alternative, Stay Proceedings in Favor of Pending State Action, ECF No. 33 ("Marsh's Motion To Dismiss Or Stay"); Defendant and Third-Party Plaintiff Nordic PCL Construction, Inc., f/k/a Nordic Construction Ltd.'s Substantive Joinder to Third-Party Defendant Marsh USA Inc.'s Motion to Dismiss or, in the Alternative, Stay Proceedings in Favor of Pending State Action, ECF No. 36 ("Nordic's Joinder"); and Third-Party Defendant Marsh USA, Inc.'s Motion for Judgment on the Pleadings on Counts V and VI of Defendant/Third-Party Plaintiff Nordic PCL Construction, Inc.'s Third-Party Complaint, ECF No. 29 ("Marsh's Motion for Judgment on the Pleadings").

The court GRANTS IN RELEVANT PART the Insurers' Request for Judicial Notice to the extent it covers matters relevant to these motions; GRANTS IN PART the Insurers' Motion to Dismiss Counterclaim, but gives Nordic leave to amend the Counterclaim in certain respects; DENIES the Insurers' Motion to Strike; DENIES Marsh's Motion To Dismiss Or Stay and Nordic's Joinder; and GRANTS Marsh's Motion for Judgment on the Pleadings.

II. BACKGROUND.

This action arises out of alleged construction defects

involving two projects on which Nordic acted as the general contractor. Nordic is a defendant in a pending state court action with respect to one of the projects and says it spent more than $400,000 on repairs with respect to the other project. Nordic tendered the defense of the pending state court action to the Insurers and sought reimbursement of the cost of repairs already performed. The Insurers responded by filing this action to determine their rights under the insurance policies issued to Nordic.

A. The Insurance Policies. 1. The CGL Policy.

In or around 2007, Illinois National issued Commercial General Liability Policy No. GL 161-68-33 (the "CGL Policy") to Nordic. See CGL Policy, attached as Exhibit "A" to Compl., ECF No. 1-1. The CGL Policy was effective from May 1, 2007, to May 1, 2008. Id. Section I, Coverage A of the CGL Policy "applies to 'bodily injury' and 'property damage' only if: (1) The 'bodily injury' or 'property damage' is caused by an 'occurrence' that takes place in the 'coverage territory[.]'" Id. at 23 (Policy page numbers referred to are at the top of the page, as in "page 23 of 64," not at the bottom right). "Occurrence" is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Id. at 35. The CGL Policy excludes coverage for "'[b]odily injury' or 'property damage' for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." Id. at 24.

2. The Umbrella Policy.

In or around 2007, National Union issued Commercial Umbrella Liability Policy No. BE 5685754 (the "Umbrella Policy") to Nordic. See Umbrella Policy, attached as Exhibit "B" to Compl., ECF No. 1-2. The Umbrella Policy was effective from May 1, 2007, to May 1, 2008. Id. Section I of the Umbrella Policy provides coverage if "the Bodily Injury or Property Damage is caused by an Occurrence that takes place anywhere, and the Bodily Injury or Property Damage occurs during the Policy Period." Id. at 6. "Occurrence" is defined in the Umbrella Policy as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions. All such exposure to substantially the same general harmful conditions will be deemed to arise out of one Occurrence." Id. at 25. The Umbrella Policy excludes "liability for which the Insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." Id. at 10.

B. The Alleged Construction Defects.

1. Kapahulu Safeway.

Nordic constructed a grocery store for Safeway, Inc. ("Safeway"), at 900 Kapahulu Avenue in Honolulu, Hawaii. Compl. ¶ 8, ECF No. 1. Nordic's contract, signed in September 2006, required Nordic to build not only the store, but also a 165-space, rooftop parking deck, retail shops, and related improvements. Id. ¶ 10; Countercl. ¶ 5, ECF No. 10-1. The parking deck was to consist of a floating concrete "wearing slab" topped with sealant. Compl. ¶ 10, ECF No. 1.

Shortly after opening for business in 2007, Safeway allegedly had significant leaks. Id. ¶ 11. In January 2008, Safeway allegedly notified Nordic that the leaks had damaged interior fixtures and equipment, that Safeway lost profits during remedial work, and that the "wearing slab" was uneven and cracking. Id.; Countercl. ¶ 14, ECF No. 10-1. In October 2008, Safeway sent Nordic a letter demanding that Nordic repair the parking deck. Id. ¶ 15. Nordic allegedly forwarded the demand letter to AIG Domestic Claims, Inc. ("AIG"), the Insurers' representative. Id. AIG agreed to appoint counsel for Nordic, subject to a reservation of rights. Id. ¶ 16. AIG allegedly followed up with a second letter to Nordic, pointing out that "[t]here are several provisions of the policies that may preclude or limit coverage for this matter," but not explicitly asserting that the claim did not involve an "occurrence" under the Policies. Id. ¶ 18.

On or around June 22, 2009, Safeway commenced suit, Safeway, Inc. v. Nordic PLC Construction, Inc., Case No. 09-1-1414-06 (the "Safeway Action"), against Nordic for alleged construction defects in the Circuit Court of the First Circuit, State of Hawaii. Compl. ¶ 12, ECF No. 1. Safeway's complaint alleged breach of contract, breach of the covenant of good faith and fair dealing, negligence, gross negligence, breach of express and implied warranties, unjust enrichment, negligent misrepresentation, intentional misrepresentation, and declaratory relief. Id. Nordic tendered the Safeway Action to the Insurers under the CGL Policy and Umbrella Policy (collectively, "the Policies"). Id. ¶ 13. Illinois National is providing Nordic with a defense in the Safeway Action, and both Illinois National and National Union have reserved their rights under their respective policies. Id. Notwithstanding the provision of a defense, Nordic claims that it is incurring costs and attorney's fees for independent counsel to protect its interests, because "the appointed insurance defense counsel lacks the staff and resources" to manage discovery. Countercl. ¶ 21, ECF No. 10-1.

2. Moanalua Shopping Center.

The other project that is the subject of the present lawsuit is Moanalua Shopping Center, a strip mall and two-story office building at 930 Valkenburg Street in Honolulu, Hawaii. Compl. ¶ 8, ECF No. 1. Pursuant to a contract dated July 18, 2005, MSC, LLC ("MSC"), hired Nordic to construct the Moanalua Shopping Center. Id. ¶ 15. Nordic finished construction in or around September 2006, but in or around September 2009, the United States Department of the Navy, one of the tenants at the shopping center, complained about a number of construction defects. Id. ¶ 16.

MSC informed Nordic of the Navy's complaints and asked Nordic to remedy the alleged defects (the "Moanalua Claims").

Id. ¶ 17; Countercl. ¶¶ 24-25, ECF No. 10-1. Nordic allegedly tendered the Navy's complaints to the Insurers' agents and repaired the Moanalua Shopping Center. Id. ¶ 27. In or around September 2010, the Insurers, through their agents, promised to investigate the claims and any potential coverage, while reserving their rights. Id. ¶¶ 28-29. Nordic alleges that the Navy and MSC are satisfied with Nordic's repairs, but that Nordic has not been reimbursed by the Insurers for repair costs totaling over $460,000. Id. ¶ 31. There is no pending construction defect lawsuit regarding the Moanalua Claims. Id. ¶ 30.

C. Procedural History.

The Insurers commenced this declaratory action in this court on August 23, 2011. See Compl., ECF No. 1. The Complaint asserts two claims, one seeking a declaration that the Insurers have no duty to provide a defense or indemnification regarding the Safeway Action, the other seeking such a declaration regarding the Moanalua Claims. Id.

Along with its Answer, Nordic filed a Counterclaim against the Insurers. See Countercl., ECF No. 10-1. The Counterclaim asserts breach of contract, breach of the covenant of good faith and fair dealing, misrepresentations and omissions of material fact, and bad faith, and seeks declaratory relief against the Insurers. Id.

Nordic also filed a Third-Party Complaint against Marsh, the broker that had procured the Policies from the Insurers for Nordic. See Third-Party Compl., ECF No. 11. Nordic alleges that it reasonably believed that the Policies would provide completed operations insurance coverage for the types of construction defects alleged in the Safeway Action and Moanalua Claims. Id. ¶ 8. The Third-Party Complaint asserts breach of contract, negligence, promissory estoppel, breach of fiduciary duties, implied indemnity, and contribution and equitable subrogation.

III. THE INSURERS' REQUEST FOR JUDICIAL NOTICE.

The court begins by addressing the Insurers' request that the court take judicial notice of the Policies at issue in support of their Motion to Dismiss Counterclaim and Motion to Strike.

Rule 201 of the Federal Rules of Evidence "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). "Adjudicative facts are simply the facts of the particular case." Advisory Committee Notes to Fed. R. Evid. 201. However, "Judicial notice of adjudicative facts must be approached cautiously because it dispenses 'with traditional methods of proof' and removes the fact noticed from the province of the jury." United States v. Jaimes, 297 F. Supp. 2d 1254, 1256 (D. Haw. 2003) (citing Fed. R. Evid. 201, advisory committee notes to subdivision (b)). Accordingly, judicial notice is appropriate only when the matter is established "beyond reasonable controversy," Lee v. City of L.A., 250 F.3d 668, 690 (9th Cir. 2001), or is a fact "beyond reasonable dispute," Jaimes, 297 F. Supp. 2d at 1256.

The Insurers ask the court to take judicial notice of the two insurance policies at issue in this case. The Policies were attached to the request for judicial notice, as well as to the Complaint, but were not accompanied by a declaration attesting to their authenticity.

Nordic points out that it denied the authenticity of the Policies in its Answer, which stated that the documents "speak for themselves." Nordic also argues that the Policies it received from Marsh differ from those presented by the Insurers.

In a declaration, Kenneth Spence, a Nordic official who attests to the differences in the Policies, states that the CGL Policy in his possession differs from the Policies offered by the Insurers:

6. . . . . Among other things, the amount of the policy premium is struck through on the first page of the copy of the purported CGL Policy attached to the Request for Judicial Notice, but not in the copy of the purported CGL Policy provided by Marsh.

7. In addition, both copies of the purported CGL Policy contain a Notice stating that it "does not form a part of your insurance contract" but nevertheless purporting to provide information about the policy.

Decl. of Kenneth Spence ¶¶ 6-7, attached to Request for Judicial Notice, ECF No. 42-1. Spence also states that versions of the Umbrella Policy differ in two ways:

9. . . . The second page of the copy of the purported Umbrella Policy attached to the Request for Judicial Notice does not appear in the copy of the purported Umbrella Policy provided by Marsh.

10. Further, the final page of the copy of the purported Umbrella Policy attached to the Request for Judicial Notice, titled "Violation of Communications or Information Law Exclusion Endorsement," differs from its apparent counterpart at the end of the copy of the purported Umbrella Policy provided by Marsh.

Id. ¶¶ 9-10.

The court grants the Insurers' request for judicial notice of the Policies, but the judicial notice is limited to the portions of the Policies quoted or relied on in the present order. Nordic challenges the authenticity of the Policies, but the specific differences it identifies are unrelated to the salient issues now before this court. The discrepancies alleged by Nordic fail to create a reasonable dispute regarding the relevant contractual provisions. At most, Spence "question[s] which copy (if either) is a complete, accurate and authentic copy of the [Policies]." Decl. of Kenneth Spence ¶¶ 8, 11, ECF No. 42-1. At the hearing on the present motions, Nordic conceded that none of the identified differences was relevant to any issue before this court. Therefore, with respect to passages construed or relied on by the court, this court takes judicial notice of the Policies, finding those passages not in dispute.

IV. THE INSURERS' MOTION TO DISMISS COUNTERCLAIM.

The court now turns to the Insurers' Motion to Dismiss

Counterclaim. The parties focus the bulk of their arguments on whether the claims in the Safeway Action or the Moanalua Claims involve an "occurrence" as defined in the Policies. For the reasons discussed below, the court grants in part and denies in part the Motion to Dismiss Counterclaim.

A. Standard.

Under Rule 12(b)(6), a court is generally limited to reviewing 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). If matters outside the pleadings are considered, the Rule 12(b)(6) motion is treated as one for summary judgment. See Keams v. Tempe Tech. Inst., Inc., 110 F.3d 44, 46 (9th Cir. 1997); Anderson v. Angelone, 86 F.3d 932, 934 (9th Cir. 1996). However, courts 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).

On a Rule 12(b)(6) motion to dismiss, all allegations

of material fact are taken as true and construed in the light most favorable to the nonmoving party. Fed'n of African Am. Contractors v. City of Oakland, 96 F.3d 1204, 1207 (9th Cir. 1996). However, conclusory allegations of law, unwarranted deductions of fact, and unreasonable inferences are insufficient to defeat a motion to dismiss. Sprewell, 266 F.3d at 988. Additionally, the court need not accept as true allegations that contradict matters properly subject to judicial notice or allegations contradicting the exhibits attached to the complaint. Id. Dismissal under Rule 12(b)(6) may be based on either:

(1) lack of a cognizable legal theory, or (2) insufficient facts under a cognizable legal theory. Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988) (citing Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 533-34 (9th Cir. 1984)).

To survive a Rule 12(b)(6) motion to dismiss, a claimant must make factual allegations sufficient to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true even if doubtful in fact. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). Accord Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (Rule 8 "does not require 'detailed factual allegations,' but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation."). "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555 (internal citations omitted). The complaint must "state a claim to relief that is plausible on its face." Id. at 570. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 129 S. Ct. at 1949.

As the Ninth Circuit has recently stated: First, to be entitled to the presumption of truth, allegations in a complaint or counterclaim may not simply recite the elements of a cause of action, but must contain sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively. Second, the factual allegations that are taken as true must plausibly suggest an entitlement to relief, such that it is not unfair to require the opposing party to be subjected to the expense of discovery and continued litigation.

Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011).

B. Breach Of Contract.

The Insurers first argue that Nordic fails to state a claim for breach of contract in Count I and a claim for declaratory relief in Count V,*fn1 because the alleged construction defects are not "occurrences" as defined by the Intermediate Court of Appeals ("ICA") in Group Builders, Inc. v. Admiral Insurance Co., 123 Haw. 142, 231 P.3d 67 (Ct. App. 2010) ("Group Builders"), and by the Ninth Circuit in Burlington Insurance Co.

v. Oceanic Design & Construction, Inc., 383 F.3d 940, 944 (9th Cir. 2004) ("Burlington"). Bound by the Ninth Circuit's decision in Burlington, this court agrees with the Insurers that the underlying damage was not caused by any "occurrence" as defined in the main coverage provisions of the Policies and therefore is not covered.

1. The Alleged Damage Was Not Caused By An "Occurrence" Under The Policies.

The crux of the parties' dispute concerns whether the alleged construction defects were caused by an "occurrence." The language of the CGL Policy and the Umbrella Policy defines an "occurrence" as an "accident." The Insurers' position is that the alleged construction defects are deficiencies in Nordic's satisfaction of its contractual duties, and that a breach of contract is not an accident. Nordic says that the defects arise out of alleged negligence, which is in the nature of an accident.

To resolve this dispute, which is before this court based on diversity jurisdiction, the court looks to state law. See Snead v. Metro. Prop. & Cas. Ins. Co., 237 F.3d 1080, 1090 (9th Cir. 2001) (stating that federal courts sitting in diversity apply state substantive law and federal procedural law). When interpreting state law, a federal court is bound by the decisions of a state's highest court. Ariz. Elec. Power Coop. v. Berkeley,

59 F.3d 988, 991 (9th Cir. 1995). In the absence of such a decision, a federal court attempts to 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. Id. See Burlington, 383 F.3d at 944 ("To the extent this case raises issues of first impression, our court, sitting in diversity, must use its best judgment to predict how the Hawaii Supreme Court would decide the issue." (quotation and brackets omitted)).

Under Hawaii law, general rules of contract construction apply to the interpretation of insurance contracts. Dawes v. First Ins. Co. of Haw., Ltd., 77 Haw. 117, 121, 883 P.2d 38, 42 (1994). Insurance policies must be read as a whole and construed in accordance with the plain meaning of their terms, unless it appears that a different meaning is intended. See id. at 131, 883 P.2d at 42; Haw. Rev. Stat. § 431:10-237 ("[e]very insurance contract shall be construed according to the entirety of its terms and conditions as set forth in the policy").

Because insurance contracts are contracts of adhesion, they must be construed liberally in favor of the insured, and any ambiguities must be resolved against the insurer. Put another way, the rule is that policies are to be construed in accordance with the reasonable expectations of a layperson. Dawes, 77 Haw. at 131, 883 P.2d at 42.

The burden is on the insured to establish coverage under an insurance policy. See Sentinel Ins. Co., Ltd. v. First Ins. Co. of Haw., Ltd., 76 Haw. 277, 291 n.13, 875 P.2d 894, 909

n.13 (1994) (as amended on grant of reconsideration). The insurer has the burden of establishing the applicability of an exclusion. See id. at 297, 875 P.2d at 914.

The insurer owes the insured a duty to indemnify "for any loss or injury which comes within the coverage provisions of the policy, provided it is not removed from coverage by a policy exclusion." Dairy Road Partners v. Island Ins. Co., Ltd., 92 Haw. 398, 413, 992 P.2d 93, 108 (2000). The obligation to defend an insured is broader than the duty to indemnify. The duty to defend arises when there is any potential or possibility for coverage. Sentinel, 76 Haw. at 287, 875 P.2d at 904.

The ICA, the Ninth Circuit, and this court have all previously held that claims that arise from alleged breaches of contract do not involve accidents or "occurrences." Because the claims asserted against Nordic in the Safeway Action, as well as the Moanalua Claims, arise from Nordic's alleged breach of construction contracts, they are not covered by the Policies.

In Group Builders, the ICA considered the definition of "accident" set forth in Hawaiian Holiday Macadamia Nut Co., Inc. v. Indus. Indem. Co., 76 Haw. 166, 872 P.2d 230 (1994) ("Hawaiian Holiday"), and Burlington. Group Builders, a named insured under a commercial general liability insurance policy issued by Admiral, had subcontracted to build a portion of a hotel. Group Builders, 123 Haw. at 143, 231 P.3d at 68. The insurance policy covered claims alleging "bodily injury" or "property damage" if "caused by an 'occurrence.'" Id. at 145, 231 P.3d at 70. "The policy define[d] 'occurrence' as 'an accident, including continuous or repeated exposure to substantially the same general harmful conditions.'" Id.

After Group Builders completed the job, the hotel discovered significant mold growth within the new construction and sued various contractors, including Group Builders, for breach of contract, negligence, and negligent misrepresentation, among other claims. Id. at 144, 231 P.3d at 69. Admiral refused to defend or indemnify Group Builders, and the state circuit court granted summary judgment to Admiral on the issue. Id.

The ICA affirmed. Applying the Hawaii Supreme Court's definition of "accident," as addressed by the Ninth Circuit in Burlington, the ICA concluded that the hotel's claims were not covered. "In Hawaii," the ICA explained, "an occurrence 'cannot be the expected or reasonably foreseeable result of the insured's own intentional acts or omissions.'" Id. at 147, 231 P.3d at 72 (quoting Burlington, 383 F.3d at 948). If Group Builders "breached its contractual duty by constructing a substandard home, then facing a lawsuit for that breach is a reasonably foreseeable result." Id. at 147, 231 P.3d at 72 (quoting Burlington, 383 F.3d at 948). The ICA said that the cases cited by the plaintiffs as allowing coverage in other jurisdictions constituted the minority position on this issue. Id. at 148, 231 P.3d at 73. The ICA held not only that "breach of contract claims based on allegations of shoddy performance are not covered under CGL policies," but also that "tort-based claims, derivative of these breach of contract claims, are also not covered under CGL policies." Id. at 148-49, 231 P.3d at 73-74. Accord WDC Venture v. Hartford Accident & Indem. Co., 938 F. Supp. 671, 679 (D. Haw. 1996) (explaining that "[t]here is simply no reason to expect . . . a comprehensive liability policy which has, as its genesis, the purpose of protecting an individual or entity from liability for essentially accidental injury . . . or property damage" to cover "contractual-based allegations").

The ICA's reliance in Group Builders on the Ninth Circuit's decision in Burlington was express and heavy. Burlington involved a contractor that brought suit against homeowners for whom it had constructed a single-family residence. 383 F.3d at 943. The homeowners filed a counterclaim for, among other things, breach of contract, alleging that the contractor had improperly designed or constructed the foundation of the residence, resulting in damage to the property. Id. The insurer, Burlington, agreed to defend the contractor under a reservation of rights, then filed an action seeking a ruling that the insurance policy did not cover the homeowners' counterclaim. Id. Like the Policies before this court, the insurance policy in Burlington defined "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Id.

The Ninth Circuit, applying Hawaii law, stated: The counterclaim then alleges that Oceanic breached its contractual duty by constructing a residence "substantially inferior to the standard of care and quality which had been agreed." Other than a breach of that contractual duty, the facts in this case do not reflect a breach of an independent duty that would otherwise support a negligence claim. In Hawaii, an occurrence "cannot be the expected or reasonably foreseeable result of the insured's own intentional acts or omissions." Hawaiian Holiday Macadamia Nut, 872 P.2d at 234 (citing AIG Hawaii Ins. Co., 851 P.2d at ...


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