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Gemini Insurance Company v. Kukui`Ula Development Company (Hawaii)

August 31, 2012

GEMINI INSURANCE COMPANY,
PLAINTIFF,
v.
KUKUI`ULA DEVELOPMENT COMPANY (HAWAII), LLC; DMB KUKUI`ULA, LLC; KDC, LLC; DMB ASSOCIATES (HAWAII), INC.; AND A & B PROPERTIES, INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Leslie E. Kobayashi United States District Judge

ORDER DENYING ADDITIONAL DEFENDANTS CERTAIN UNDERWRITERS AT LLOYD'S MOTION FOR RECONSIDERATION

Before the Court is Additional Defendants Certain Underwriters at Lloyd's ("Underwriters") Motion for Reconsideration ("Motion"), filed on July 13, 2012. Defendants Kukui'ula Development Company (Hawaii), LLC, DMB Kukui'ula, LLC, KDC, LLC, DMB Associates (Hawaii), Inc., and A&B Properties, Inc. (collectively, "KDC"), and Plaintiff Gemini Insurance Company ("Gemini") filed their memoranda in opposition on July 27, 2012, and Underwriters filed their reply on August 10, 2012. The Court finds this matter suitable for disposition without a hearing pursuant to Rule LR7.2(d) of the Local Rules of Practice of the United States District Court for the District of Hawai`i ("Local Rules"). After careful consideration of the Motion, supporting and opposing memoranda, and the relevant legal authority,

Underwriters' Motion is HEREBY DENIED for the reasons set forth below.

BACKGROUND

Underwriters seek reconsideration of the Court's Order

(1) Granting in Part and Denying in Part Gemini Insurance Company's Motion for Summary Judgment Against Indian Harbor Insurance Company and Certain Underwriters at Lloyds and (2) Denying Additional Defendants Certain Underwriters at Lloyd's Motion For Summary Judgment ("Order"), filed June 29, 2012 [dkt. no. 274]. The parties and the Court are familiar with the extensive factual and procedural background of this case. The Court therefore will only discuss the background that is relevant to the instant Motion.

In the Order, the Court disposed of several motions for summary judgment regarding the various insurers' duties to defend KDC in several state court lawsuits.*fn1 At issue in the current Motion are the following rulings relating to KDC's claims against the insurers for bad faith and contribution among the insurers:

E. KDC's Bad Faith Claim against Underwriters

Underwriters also seeks summary judgment on KDC's claim for bad faith. As the Hawai'i Supreme Court stated in Miller v. Hartford Life Insurance Co., 126 Hawai'i 165, 178, 268 P.3d 418, 431 (2011):

The burden of proof for bad faith liability is not insubstantial. As we stated in Best Place [v. Penn America Insurance Co., 82 Hawai'i 120, 920 P.2d 334 (1996)], an insurer's conduct that is based on an interpretation of the insurance contract that is reasonable does not constitute bad faith; moreover, an erroneous decision not to pay a claim for benefits due under a policy does not by itself prove liability. Rather, the decision not to pay a claim must be in "bad faith" in order to prove liability.

See also Enoka v. AIG Hawaii Ins. Co., 109 Hawai'i 537, 552, 128 P.3d 850, 865 (2006) ("where an insurer denies the payment of no-fault benefits based on 'an open question of law,' there is 'obviously no bad faith on the part of the insurer in litigating that issue'" (citation omitted)).

This Court cannot say that Underwriters adopted a "reasonable interpretation" of the "continuing or progressive injury" exclusion when it refused to defend KDC, when the complaints alleged both the manifestation of damage as well as the commencement of construction activities that gave rise to new injury or damage during the Underwriters Policy period. As discussed herein, even assuming that the Underwriters Policy precluded coverage for damage or injury that first manifested before the inception of the Underwriters Policy on September 23, 2008, Underwriters should have known that there was a possibility that damages first potentially occurred during its policy period. The Court cannot say that it is an "open question of law" whether Underwriters had a duty to defend; at most, Underwriters presents a question of fact regarding the reasonableness of its actions.

At the hearing on the present motions, Underwriters argued that, even if Underwriters had a duty to defend and failed to honor that obligation, it acted reasonably in refusing to defend KDC. It further argues that KDC cannot show any damage arising out of such refusal, since Gemini fully covered KDC's defense in the Underlying Actions. [6/4/12 Hrg. Trans. at 56-57.] Conversely, KDC argues that it was indeed injured by Underwriters's refusal to defend, since the Gemini Policy is self-eroding and contains a $100,000 self-retention amount [Gemini Policy at 57], while the Underwriters Policy contains a $50,000 self-retention amount [Underwriters Policy at 36-45]. While it is fortunate for both KDC as well as the other insurers that, once tendered, Gemini did provide a defense in the Underlying Actions, KDC astutely draws attention to the fact that Gemini's defense is more costly to KDC than Underwriters's defense would have been due to the $100,000 ...


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