C. BREWER AND COMPANY, LTD., Plaintiff-Appellant
INDUSTRIAL INDEMNITY COMPANY; INDUSTRIAL INSURANCE COMPANY OF HAWAII, LTD.; NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH; UNITED STATES FIRE INSURANCE COMPANY; LIBERTY MUTUAL INSURANCE COMPANY; TIG INSURANCE COMPANY; COLUMBIA CASUALTY COMPANY; JAMES RIVER INSURANCE COMPANY; THE HOME INSURANCE COMPANY; MARINE INDEMNITY INSURANCE COMPANY OF AMERICA; RELIANCE INSURANCE COMPANY; LEXINGTON INSURANCE COMPANY; CIGNA PROPERTY AND CASUALTY INSURANCE CO.; PACIFIC EMPLOYERS INSURANCE CO., INC.; SCOTTSDALE INSURANCE COMPANY; FIREMAN'S FUND INSURANCE COMPANY OF HAWAII; FIRST STATE INSURANCE CO.; KILAUEA IRRIGATION CO., INC.; KEHALANI HOLDINGS CO., INC.; STATE OF HAWAII; HAWAII INSURANCE GUARANTY ASSOCIATION; and DOE DEFENDANTS 2-30, Defendants-Appellees STATE OF HAWAI'I, Third-Party Plaintiff-Cross-Appellant,
MARSH USA, INC.; and DOE THIRD-PARTY DEFENDANTS 1-30, Third-Party Defendants-Appellees and KEHAULANI HOLDINGS COMPANY, INC., Third-Party Plaintiff-Cross-Appellant
UNITED NATIONAL INSURANCE COMPANY; COMMONWEALTH INSURANCE COMPANY; ALEXANDER HOWDEN LIMITED; INTEGRITY INSURANCE COMPANY; HAWAIIAN INSURANCE & GUARANTY COMPANY, LIMITED; HOLLAND-AMERICA; INTERNATIONAL INSURANCE COMPANY; TRADEWIND INSURANCE COMPANY, LIMITED; ISLAND INSURANCE COMPANY, LIMITED and DOE THIRD-PARTY DEFENDANTS 1-30, Third-Party Defendants-Appellees
NOT FOR PUBLICATION IN WEST'S HAWAII REPORTS AND PACIFIC REPORTER
APPEAL FROM THE CIRCUIT COURT OF THE FIFTH CIRCUIT (CV. NO. 06-1-0140).
Kenneth R. Kupchak Tred R. Eyerly (Mark M. Murakami with them on the briefs) (Damon Key Leong Kupchak Hastert) for Plaintiff-Appellant C. Brewer and Company
Lissa H. Andrews (Devon I. Peterson with her on the brief) (Rush Moore LLP) Susan J. Field Acting (Erin M. Donovan with her on the brief) (Musick Peeler & Garrett, LLP) for Defendant-Appellee United States Fire Insurance Co.
James Monma (Randall Y.S. Chung and Ward F.N. Fujimoto on the brief) (Matsui Chung, ALC) for Defendant-Appellee Liberty Mutual Insurance Co.
Bradford F.K. Bliss (Jeffrey A. Griswold with him on the brief) (Lyons, Brandt, Cook & Hiramatsu) for Defendant-Appellee Columbia Casualty Insurance Co.
Keith K. Hiraoka (Roeca, Louie & Hiraoka) for Defendant-Appellee Fireman's Fund Insurance Co. of Hawaii, Inc.
Keith K. Hiraoka (Roeca, Louie & Hiraoka) Robert J. Romero (Anne D. O'Niell and Cassidy E. Chivers with him on the brief) (Hinshaw and Culbertson, LLP) for Defendant-Appellee James River Insurance Co.
Paul S. White (admitted pro hac vice) (Tressler, Soderstrom, Maloney & Priess) (Gale L. F. Ching and Mitzi A. Lee with him on the brief) (Ching & Lee) for Defendant-Appellee Marine Indemnity Insurance Co. of America
William A. Bordner (Devin L. Choy with him on the brief) (Burke McPheeters Bordner & Estes) (Kevin G. McCurdy (pro hac vice) and Mary P. McCurdy (pro hac vice) with him on the brief) (McCurdy & Fuller, LLP) for Defenadnt-Appellee Lexington Insurance Co. and National Union Fire Insurance Co. of Pittsburg
Shelton G.W. Jim On (SJO & Associates, LLLLC) (Law Office of Shelton G.W. Jim On) (Henry F. Beerman with him on the brief) (Jim On and Beerman) for Defendant-Appellee Ace Property and Casualty Insurance Company fka CIGNA Property and Casualty Insurance Co. and Pacific Employers Insurance Co.
Wesley D. Shimazu (Yamamura & Shimazu, AAL, ALC) (John Price and Amanda J. Weston on the brief) (Alan B. Yuter on the brief) (Selman Breitman, LLP) for Defendant-Appellee Scottsdale Insurance Co.
Peter W. Olson (Cades Schutte, LLP) for Defendant-Appellee First State Insurance Co.
William K. Meheula III (Andrew S. Winer with him on the briefs) (Winer Meheula & Devens LLP) for Defendant-Cross-Appellant Kehalani Holdings Co., Inc.
Reese R. Nakamura (Michael S. Vincent with him on the briefs) Deputies Attorney General for Defendant-Cross-Appellant State of Hawai'i
Michele-Lynn E. Luke (Ressner Umebayashi Bain & Matsunaga) for Defendants-Appellees Tradewind Insurance Co., Ltd. and Island Insurance Co., Ltd.
Patricia Kehau Wall (appearing at oral argument but no brief filed) for Defendant-Appellee TIG Insurance Company
Nakamura, Chief Judge, and Foley, J., and Circuit Court Judge Aim, in place of Fujise and Leonard, JJ., all recused
Plaintiff-Appellant C. Brewer and Company, Ltd. (C. Brewer) filed a second amended complaint for declaratory relief seeking a declaration regarding the insurance coverage obligations, including the duty to defend and indemnify, owed by numerous insurance companies. C. Brewer had been sued for damages in three lawsuits (Underlying Lawsuits) filed in the aftermath of the breach of the Kaloko Dam on Kaua'i on March 14, 2006, which resulted in seven deaths and extensive property damage. The Underlying Lawsuits are: Pflueger v. State, Civil No. 06-1-1391 (Pflueger); Fehring v. Pflueger, Civil No. 06-1-0082 (Fehring); and Midler v. Pflueger, Civil No. 06-1-0110 (Midler). In its declaratory relief action, C. Brewer named as defendants seventeen insurance companies (collectively, "Defendant Insurers") that had issued insurance policies to C. Brewer covering periods from 1987 through the Kaloko Dam breach.
C. Brewer grouped the insurance policies issued into the following categories: (1) commercial general liability policies (CGL policies); (2) multi-peril property policies (property policies); and (3) excess insurance or umbrella policies (excess policies). For purposes of our analysis, we further categorize the insurance policies and Defendant Insurers based on whether the policy issued had a policy period that ended before the March 14, 2006, breach of the Kaloko Dam (pre-breach) or was in effect at the time of the Kaloko Dam breach. For example, James River issued a CGL policy for the period December 15, 2005, to January 1, 2007, that was in effect at the time of the Kaloko Dam breach. Columbia Casualty issued a pre-breach CGL policy for the period December 15, 2004 to December 15, 2005, which was the policy period immediately preceding the Kaloko Dam breach.
In its declaratory relief action, C. Brewer named the State of Hawai'i (State), Kehalani Holdings Company (Kehalani), and Kilauea Irrigation Company (Kilauea Irrigation) as additional "necessary party" defendants. The State, Kehalani, and Kilauea Irrigation had been sued along with C. Brewer in the Underlying Lawsuits, and C. Brewer alleged that the State, Kehalani, and Kilauea Irrigation were named as an insured or additional insured on certain of the insurance policies issued to C. Brewer. The State and Kehalani, in turn, filed claims for declaratory relief concerning the issue of their insurance coverage in cross-claims against Defendant Insurers and in third-party complaints against additional insurance companies.
Defendant Insurers filed motions to dismiss for failure to state a claim or for summary judgment with respect to C. Brewer's claims for declaratory relief. Through a series of orders, the Circuit Court of the Fifth Circuit (Circuit Court)granted these motions. In dismissing C. Brewer's claims against Defendant Insurers that issued pre-breach CGL policies (pre-breach CGL insurers), the Circuit Court essentially found that the damages alleged in the Underlying Lawsuits had occurred on or after March 14, 2006, the date of Kaloko Dam breach. The Circuit Court therefore ruled that the damages alleged in the Underlying Lawsuits did not occur during the pre-breach CGL policy periods, and that the pre-breach CGL insurers had no duty to defend or indemnify C. Brewer. The Circuit Court granted summary judgment in favor of Columbia Casualty on the additional ground that C. Brewer had failed to show any potential for coverage in light of the "Known or Continuing Injury or Damage" endorsement set forth in Columbia Casualty's policy.
The Circuit Court granted summary judgment in favor of James River, the CGL insurer that issued the policy in effect when the Kaloko Dam breach occurred, based upon the designated premises endorsement in the policy James River issued to C. Brewer. The Circuit Court ruled that this endorsement precluded insurance coverage and the duty to defend because the site of the Kaloko Dam was not included as a designated premises. The Circuit Court dismissed C. Brewer's claims against the Defendant Insurers that issued excess policies (excess insurers) based on the excess insurers' joinder in motions filed by primary coverage insurers or the excess insurers' own motions.
The property policies identified by C. Brewer in its declaratory relief action were all issued for pre-breach policy periods. In dismissing C. Brewer's claims against Defendant Insurers that issued the pre-breach property policies (property insurers), the Circuit Court ruled that a manifestation trigger applied to these policies and that C. Brewer failed to allege that any covered damages had become manifest during the pre-breach property policy periods.
Applying the same reasoning it used in ruling against C. Brewer, the Circuit Court also dismissed the claims for declaratory relief asserted by the State against certain of the Defendant Insurers. Eventually, through various Circuit Court orders and stipulations between the parties, all claims for declaratory relief asserted by C. Brewer, the State, and Kehalani (collectively, the "Insureds") against the Defendant Insurers were dismissed, and this appeal followed.
On appeal, C. Brewer argues:
1. With respect to the pre-breach CGL insurers, the Circuit Court erred in ruling that these insurers had no duty to defend despite the allegations in the Underlying Lawsuits of "continuous, incremental, and indivisible" property damage during the policy period covered by each of the pre-breach CGL policies.
2. With respect to Columbia Casualty, a pre-breach CGL insurer, the Circuit Court erred in ruling that Columbia Casualty's "Known or Continuing Injury or Damage" endorsement provided an additional basis for concluding that it had no duty to defend.
3. With respect to James River, the Defendant Insurer that issued the policy in effect on the date of the Kaloko Dam breach, the Circuit Court erred in ruling that there was no duty to defend based on the policy's designated premises endorsement.
4. With respect to the property insurers, the Circuit Court erred in determining that a manifestation trigger for coverage applied.
5. With respect to the excess insurers, the Circuit Court erred in dismissing the claims against the excess insurers.
Defendant-Cross-Appellant the State and Defendant-Cross-Appellant Kehalani raise similar arguments. The State argues:
1. The Circuit Court erred in ruling that the CGL insurers had no duty to defend, and it failed to properly apply Hawai'i Supreme Court precedents and Hawai'i Rules of Civil Procedure (HRCP) Rule 12(b)(6) (2000) and Rule 56 (2000) in rendering its decisions.
2. The Circuit Court erred in adopting a manifestation trigger for the property policies. 3. The Circuit Court erred in dismissing the claims against the excess insurers.
1. The Circuit Court erred in ruling that the CGL insurers had no duty to defend.
2. The Circuit Court erred in concluding that a manifestation trigger applied to the property policy issued by Marine Indemnity.
As explained in greater detail below, we hold that the Circuit Court: (1) erred in ruling that the pre-breach CGL insurers had no duty to defend in the Pflueger lawsuit on the ground that the Pflueger lawsuit did not allege any injury-in-fact that occurred during their policy periods, but properly ruled that the pre-breach CGL insurers had no duty to defend in the
Fehring and Midler lawsuits; (2) erred in relying on Columbia Casualty's "Known or Continuing Injury or Damage" endorsement as an additional ground for its ruling that Columbia Casualty had no duty to defend in the Pflueger lawsuit; (3) erred in ruling that James River had no duty to defend in the Underlying Lawsuits based on James River's designated premises endorsement; (4) erred in dismissing the claims against the property insurers for failure to state a claim for relief; and (5) erred in dismissing the claims against the excess insurers based on its rulings dismissing the primary insurers.
On March 14, 2006, a large portion of the Kaloko Dam collapsed, releasing over three hundred million gallons of water and claiming seven lives and causing extensive property damage. The Underlying Lawsuits were subsequently filed seeking damages against C. Brewer, the State, Kehalani, and others. C. Brewer was insured under various CGL policies, excess policies, and property policies issued by Defendant Insurers from 1987 through the Kaloko Dam breach in 2006,  and the State and Kehalani were named as an insured or additional insured under a number of these policies. C. Brewer filed the instant declaratory relief action to determine the duties owed by Defendant Insurers.
According to the allegations in the Pflueger complaint, which were later incorporated into the Fehring and Midler complaints, the background regarding the history of the Kaloko Irrigation System and the Kaloko Dam is as follows:
The Kaloko Irrigation System (System) was constructed by a subsidiary of C. Brewer, the Kilauea Sugar Company, in the late 1800s. The System carried water flowing from the government-owned mauka watersheds into the Kaloko Ditch (Ditch), which then transported the water into the Kaloko Reservoir (Reservoir), where it was stored and then distributed for the irrigation of sugar cane fields on makai lands. The water was held within the Reservoir by the Kaloko Dam, an earthen dam constructed in the streambed by Kilauea Sugar Company in or around 1890. With the decline of the sugar industry, the Kilauea Sugar Company allegedly stopped maintaining the System in about 1970, which caused the System to fall into disrepair.
As part of an agreement with the State, C. Brewer in 1981 created Kilauea Irrigation to revitalize the System and to sell System water to local farmers for irrigation. The State issued permits (Water Permits) to Kilauea Irrigation granting it the right and authority to use government waters from government land, "together with the right to construct, operate, repair and maintain a water transportation system within the [Kaloko] Ditch Right of Way and the Pu[']u Ka Ele Stream."
Kehalani, a subsidiary of C. Brewer, owned title to a portion of the land underneath the Kaloko Reservoir. Title to the rest of the land underneath the Reservoir was owned by an adjoining land owner, the Lucas Trust. In February 1987, Kilauea Irrigation entered into a Water Rights Agreement with the Lucas Trust. As part of this agreement, Kilauea Irrigation assumed sole responsibility for the operation, inspection, maintenance, and repair of the System, including the Kaloko Dam. Despite this duty, C. Brewer, through Kilauea Irrigation, allegedly did little maintenance on the Kaloko Dam, or the System as a whole, for decades.
In 1987, Kehalani sold its property, including the Kaloko Dam, to James H. Pflueger (Pflueger). The deed conveying the property was subject to the 1987 Water Rights Agreement. As such, the responsibility for the operation, inspection, maintenance, and repair of the System and Dam remained with Kilauea Irrigation. In November 2005, the Hawai'i Public Utilities Commission approved the sale of C. Brewer's stock in Kilauea Irrigation to Hitch Co., and the sale was completed in December 2005. Hitch Co. was a company created by Thomas Hitch (Hitch), who had operated the System as an independent contractor for Kilauea Irrigation for many years. Hitch Co. and its owner Hitch assumed Kilauea Irrigation's rights and responsibilities under the Water Rights Agreement and the Water Permits to operate, inspect, maintain and repair the System.
In the aftermath of the Kaloko Dam breach on March 14, 2006, the Underlying Lawsuits were filed.
Pflueger, Pflueger Properties, and Pflueger Management, LLC (collectively, "Pflueger Plaintiffs") filed a complaint seeking recovery of damages, including indemnification against claims brought against them arising out of the Kaloko Dam breach. The Pflueger Plaintiffs asserted twenty-three claims against the Insureds, including claims for negligence, gross negligence, negligent entrustment, fraud, breach of contract, trespass, nuisance, and contribution and indemnification, and broadly seek a judgment for "general, special and punitive damages in an amount to be proven at trial."
In the introduction to their complaint, the
Pflueger Plaintiffs stated that:
This Complaint arises out of the March 14, 2006 breach of the Ka Loko Dam in Kilauea, Kaua'i, which resulted in the tragic loss of human life as well as property damage. This Complaint seeks to hold accountable the only parties that had the practical ability and the legal obligation to prevent the tragedy.
The Pflueger complaint alleged that the Insureds had various responsibilities and duties concerning the Kaloko Dam and that the Insureds negligently failed to meet these responsibilities and duties, including that:
(1) "[C. Brewer's subsidiary] announced its exit from the [sugar] business in about 1970, and ceased its maintenance of the System. The System then fell into a state of disrepair."
(2) "[C. Brewer], thorough its wholly-owned subsidiary [Kilauea Irrigation], did little maintenance on the [Kaloko] Dam, or the System as a whole, for decades. Trees were allowed to grow at the foot of the [Kaloko] Dam. Ditches were obstructed. Gates rusted and became inoperable. Seepage that affected the structural stability of the [Kaloko] Dam went unaddressed. The System was largely in disrepair."
(3) C. Brewer never adequately capitalized Kilauea Irrigation and Kilauea Irrigation "put very little money into the care and maintenance of the System."
(4) "[C. Brewer] and its subsidiaries, [Kehalani] and [Kilauea Irrigation], all failed to take any action to make the recommended repairs to the [Kaloko] Dam or to otherwise address the concerns regarding its structural stability."
(5) "[C. Brewer], independently and through its wholly-owned subsidiary, [Kilauea Irrigation], breached its duty to properly operate, inspect, repair and/or maintain the System, including the [Kaloko] Dam, its appurtenant structures and/or the Reservoir."
(6) C. Brewer and Kehalani failed to disclose to Pflueger and purchasers of property makai of the Kaloko Dam the content of reports questioning the structural stability of the Kaloko Dam or the significant estimated cost of repairing the Kaloko Dam and Reservoir.
(7) "[The State] ... (1) knew since 1982 that the structural stability of the [Kaloko] Dam was questionable but never required [Kehalani] or its affiliates to make repairs; (2) never told [Pflueger] that the structural stability of the [Kaloko] Dam was questionable; . . . and (4) authorized an inexperienced and undercapitalized public utility company, [Kilauea Irrigation], to operate, inspect, maintain and repair the irrigation system, including the [Kaloko] Dam, and then failed to properly monitor and oversee [Kilauea Irrigation] and failed to intervene when it became clear that [Kilauea Irrigation] was not meeting its obligations."
(8) "The State, independently and through the [Public Utilities Commission] and [Department of Land and Natural Resources], breached its duty of care to [the Pflueger] Plaintiffs by" its actions and inactions, including failing to supervise the System and its water; failing to monitor or require Kilauea Irrigation to monitor the volume of water flowing into the Reservoir; failing to use or require Kilauea Irrigation to use the existing water control systems to stop the flow of water into the Reservoir during the heavy rains in February and March of 2006; improperly classifying the Kaloko Dam as a "low hazard"; "failing to warn [the Pflueger] Plaintiffs of reports that the structural stability of the [Kaloko] Dam was questionable"; failing to ensure that Kilauea Irrigation and/or Hitch Co. had the expertise, knowledge, and resources to operate and maintain the System, including the Kaloko Dam, before granting various certificates, permits, and approvals.
In an interrogatory answer submitted in the Pflueger lawsuit, the Pflueger Plaintiffs asserted that they are in part alleging in their complaint that the failure of the Insureds to mafintain the Kaloko Dam from 1982 to March 14, 2006, resulted in a "continuous, incremental and indivisible process of damage to the dam . . . that culminated in the breach of the dam on 3/14/06."
The Fehring and Midler complaints sought to recover damages resulting from the March 14, 2006, breach of the Kaloko Dam. The Fehring complaint sought recovery for the deaths of seven people who were downstream of the Kaloko Dam when the breach occurred. The Midler complaint sought recovery for property damage. The Fehring and Midler complaints alleged negligence by the Pflueger Plaintiffs,  the Insureds, and others, and both complaints incorporated by reference the allegations made in the Pflueger complaint.
The Pflueger Plaintiffs filed cross-claims against the Insureds in Fehring seeking indemnification for any damages the Pflueger Plaintiffs were required to pay. The Pflueger Plaintiffs also filed ...