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State Farm Fire and Casualty Co. v. GP West, Inc.

United States District Court, D. Hawaii

June 7, 2016

STATE FARM FIRE AND CASUALTY COMPANY, Plaintiff,
v.
GP WEST, INC. and AIR CONDITIONING OF MAUI, INC., Defendants.

          ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANTS’ CROSS-MOTION FOR PARTIAL SUMMARY JUDGMENT

          Alan C. Kay Sr. United States District Judge.

         For the reasons set forth below, the Court GRANTS Plaintiff State Farm Fire and Casualty Company’s Motion for Summary Judgment, ECF No. 31, and DENIES Defendant GP West, Inc.’s Cross-Motion for Partial Summary Judgment Re Duty to Defend, ECF No. 36, to which Defendant Air Conditioning of Maui, Inc. has filed a Joinder, ECF No. 38.

         PROCEDURAL BACKGROUND

         On September 25, 2015, Plaintiff State Farm Fire and Casualty Company (“State Farm” or “Plaintiff”) filed the operative First Amended Complaint for Declaratory Judgment (“Complaint”) asking this Court to determine, as a matter of law, that State Farm has no duty to defend or indemnify Defendants GP West, Inc. (“GP West”) or Air Conditioning of Maui, Inc. (“AC Maui, ” and collectively with GP West, “Defendants”) for claims asserted against Defendants in an underlying lawsuit. Complaint ¶ 5, ECF No. 16.

         On September 28, 2015, Defendant GP West filed an Answer to the Complaint, as well as a Counterclaim Against Plaintiff (“Counterclaim”). ECF No. 19. In its Counterclaim, GP West seeks declarations that State Farm has a duty to both defend and indemnify GP West for the underlying lawsuit. Counterclaim ¶¶ 42, 47. GP West also seeks a declaration that State Farm breached an implied covenant of good faith and fair dealing by rejecting GP West’s tender to State Farm of the defense of the underlying lawsuit. Id. ¶¶ 54-55.

         On February 17, 2016, State Farm filed a Motion for Summary Judgment (“Pl.’s MSJ”), ECF No. 31, along with a Separate Concise Statement in Support of Motion for Summary Judgment (“Pl.’s CSF”), ECF No. 32. In its Motion, State Farm seeks summary judgment on both its Complaint and GP West’s Counterclaim, alleging that the claims for which Defendants seek defense and indemnity do not arise from an “occurrence, ” as required for coverage under the relevant State Farm policies; that coverage is precluded by one or more of the policies’ exclusions; and that “any coverage afforded GP West as an additional insured under [the relevant policy] is excess over the coverage afforded under GP West’s own policy with Nationwide.” Pl.’s MSJ at 42. Additionally, State Farm seeks summary judgment on GP West’s Counterclaim that State Farm breached the implied covenant of good faith and fair dealing. Id. at 38.

         On April 19, 2016, GP West filed a Cross-Motion for Partial Summary Judgment Re Duty to Defend and Opposition to Plaintiff State Farm’s Motion for Summary Judgment (“GPW’s MSJ”), ECF No. 36, along with a Separate Concise Statement in Support of Its Cross-Motion for Partial Summary Judgment (“GPW’s CSF”), ECF No. 37. GP West argues it is entitled to summary judgment on State Farm’s duty to defend the underlying lawsuit because it is possible that certain allegations in the underlying complaint are covered by State Farm’s policy and that no exclusions preclude coverage for the underlying claims. GPW’s MSJ at 1, 27. It further argues that State Farm’s Motion for Summary Judgment on its duty to indemnify should be denied as premature. Id. at 2. Finally, it argues that the Court should deny State Farm’s Motion with regards to GP West’s Counterclaim, which alleges that State Farm breached the covenant of good faith and fair dealing when it relied on GP West’s Nationwide Mutual Insurance Company (“Nationwide”) insurance policy to deny GP West a defense in the underlying lawsuit. Id. at 33.

         That same day, AC Maui filed a Joinder to GP West’s Cross-Motion for Partial Summary Judgment Re Duty to Defend and Opposition to Plaintiff State Farm’s Motion for Summary Judgment and Additional Memorandum in Opposition. ECF No. 38.

         On April 26, 2016, State Farm filed a Combined Reply Memorandum in Support of Its Motion for Summary Judgment and Memorandum in Opposition to Defendant GP West’s Cross-Motion for Summary Judgment and Defendant AC Maui’s Joinder Therein (“Pl.’s Reply”). ECF No. 42. On May 3, 2016, GP West filed a Reply Memorandum in Support of Its Cross-Motion for Partial Summary Judgment Re Duty to Defend (“GPW’s Reply”). ECF No. 43.

         The Court held a hearing on June 6, 2016 regarding the instant Motions.

         FACTUAL BACKGROUND

         This case arises out of a lawsuit pending in the Circuit Court of the Second Circuit, State of Hawaii alleging, inter alia, breach of contract by Defendants for installation of a defective HVAC system in the underlying plaintiffs’ building. See Kot LLC v. GP West, Inc., Civ. No. 14-1-0352(2), Circuit Court of the Second Circuit, State of Hawaii. Defendants having tendered defense of the claims alleged in that lawsuit to State Farm, State Farm now seeks a binding declaration that it has no duty to defend or indemnify Defendants for those claims or any other claims that may arise out of the subject matter of the underlying lawsuit.

         I. The Underlying Lawsuit

         On January 30, 2015, Kot LLC, Hawaii Research and Development Group, Ltd. dba Maui Veterinary Clinic (“MVC”), and Dr. Wayne S. Kot, DVM filed a first amended complaint in the Circuit Court of the Second Circuit, State of Hawaii against GP West, AC Maui, and Nordyne, LLC (“Nordyne”). Harada-Stone Decl. Ex. 1, ECF No. 32-3. Kot LLC is the owner of a building referred to as the “MVC Building, ” which MVC leases from Kot LLC for use as a veterinary clinic. Id. ¶¶ 1-2, 9. Dr. Kot is a licensed veterinarian doing business in the MVC Building. Id. ¶ 3.

         The underlying complaint alleges that on or about October 15, 2008, Kot LLC, as owner, and GP West, as general contractor, entered into a contract for the construction of the MVC Building. Id. ¶ 9. AC Maui was the HVAC subcontractor for the construction project, and in that capacity “designed, sized, and priced an HVAC system for the MVC Building consisting of the installation of seven . . . central air conditioning units.” Id. ¶¶ 10-11. The air conditioning units and air handlers were manufactured by Nordyne. Id. ¶ 15. According to the complaint, defendants were aware that the HVAC system was intended for use in a veterinary clinic used for the hospitalization and housing of animals, as well as for surgeries performed by Dr. Kot. Id. ¶ 16.

         The complaint further alleges that after the MVC Building was substantially complete, the HVAC system experienced multiple equipment defects and mechanical breakdowns and did not properly dehumidify the building. Id. ¶¶ 18-19. The underlying plaintiffs contend that “[t]he HVAC system has experienced and continues to experience an excessive number of mechanical failures.” Id. ¶ 20.

         The underlying plaintiffs also allege that they properly filed claims under the one-year warranty provided by GP West, which in turn alerted AC Maui to the mechanical issues. Id. ¶¶ 21-22. However, plaintiffs assert that defendants failed to disclose that the HVAC equipment installed in the MVC Building had not been purchased through the manufacturer’s authorized distributor in Hawaii, and that GP West and AC Maui were therefore unable to timely obtain replacement parts to repair the system. Id. ¶¶ 24-25.

         Relatedly, plaintiffs allege that defendants “affirmatively misrepresented Defendant Nordyne’s warranty process, ” and that plaintiffs “were repeatedly billed for parts and labor that should have been covered under Defendant Nordyne’s warranty.” Id. ¶¶ 26-27.

         The complaint states that “[i]n May of 2013, Defendants finally conceded that the HVAC system was defective for all purposes and needed to be completely redesigned and replaced.” Id. ¶ 36. According to an engineering report plaintiffs obtained, “[t]he original design and installation of the system and execution of some or all of the ‘warranty repair work’ on the system was deficient and/or defective”; “[t]he HVAC system as designed and installed was not appropriate or adequate for the purposes of the MVC Building”; and “[c]ertain components of the specified HVAC system[] were never installed or were improperly installed.” Id. ¶ 41.

         The complaint further alleges that the defective HVAC system caused a substantial amount of damage to property not part of the HVAC system itself, including the development of mold in the clinic, the collapse of the clinic’s sub-ceiling, rust and corrosion to metal door frames and fixtures, and damage and electrical short-outs to light fixtures. Id. ¶ 43.

         Plaintiffs in the underlying lawsuit assert claims for breach of contract, breach of express warranty, breach of implied warranties, negligence, and intentional or negligent misrepresentation. Id. ¶¶ 45-70. They seek consequential, special, and general damages, as well as treble and/or punitive damages. Id. at 12.

         II. State Farm’s Insurance Policies

         State Farm issued to AC Maui six insurance policies for successive one-year periods from April 1, 2009 to April 1, 2015. Pl.’s CSF ¶ 11. The first four policies utilized State Farm’s Contractors Policy Special Form 3 - FP-6100 (“Contractors Policies”), while the last two were written using State Farm’s Businessowners Coverage Form CMP-4100 (“Businessowners Policies”). Id. ¶ 17; Harada-Stone Decl. Exs. 2-7.

         a. Contractors Policy Special Form 3 - FP-6100

         The Contractors Policies State Farm issued to AC Maui state that State Farm “will pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury, property damage, personal injury or advertising injury to which this insurance applies.” Pl.’s CSF ¶ 12. Further, the insurance applies only to property damage “caused by an occurrence which takes place in the coverage territory during the policy period.” Id.

         The policies also contain a “Right and Duty to Defend” provision, which states:

We will have the right and duty to defend any claim or suit seeking damages payable under this policy even though the allegations of the suit may be groundless, false or fraudulent. The amount we will pay for damages is limited as described in the Limits of Insurance . . . . We may investigate and settle any claim or suit at our discretion. Our right and duty to defend end when we have used up the applicable limit of insurance in the payment of judgments or settlements or medical expenses.

Id.

         The “Definitions” section of the policies defines “you” and “your” as referring to the named insured, AC Maui. Harada-Stone Decl. Ex. 8 at 1. Other relevant definitions state:

12. occurrence means:
a. an accident, including continuous or repeated exposure to substantially the same general harmful conditions which result in bodily injury or property damage; or
b. the commission of an offense, or a series of similar or related offenses, which results in personal injury or advertising injury.
For purposes of this definition, bodily injury or property damage resulting from the use of reasonable force to protect persons or property will be considered an accident;
. . .
15. products-completed operations hazard:
a. includes all bodily injury and property damage arising out of your product or your work except products that are still in your physical possession or work that has not yet been completed or abandoned. The bodily injury or property damage must occur away from premises you own or rent unless your business includes the selling, handling or distribution of your product for consumption on premises you own or rent.
Your work will be deemed completed at the earliest of the following times:
(1) when all of the work called for in your contract has been completed;
(2) when all of the work to be done at the site has been completed if your contract calls for work at more than one site; or
(3) when that part of the work done at a job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project.
Work that may need service, maintenance, correction, repair or replacement, but which is otherwise compete, will be treated as completed;
. . .
16. property damage means:
a. physical injury to or destruction of tangible property, including all resulting loss of use of that property; or b. loss of use of tangible property that is not physically injured or destroyed, provided such loss of use is caused by physical injury to or destruction of other tangible property;
. . .
21. your ...

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