United States District Court, D. Hawaii
AMERICAN AUTOMOBILE INSURANCE COMPANY, a Missouri Corporation; NATIONAL SURETY CORPORATION, an Illinois Corporation, Plaintiffs,
HAWAII NUT & BOLT, INC. AND SAFEWAY INC., Defendants. SAFEWAY INC.; HAWAII NUT & BOLT, INC., Counterclaim Plaintiffs
AMERICAN AUTOMOBILE INSURANCE COMPANY, a Missouri Corporation; NATIONAL SURETY CORPORATION, an Illinois Corporation, Counterclaim Defendants. and DOUGLAS MOORE, MONARCH INSURANCE SERVICES, INC., a Hawaii Corporation, and INSURANCE ASSOCIATES, INC., a Hawaii Corporation, Additional Counterclaim Defendants.
ORDER GRANTING PLAINTIFFS AMERICAN AUTOMOBILE
INSURANCE COMPANY'S AND NATIONAL SURETY CORPORATION'S
MOTION TO DISMISS BREACH OF CONTRACT AND REFORMATION
COUNTERCLAIMS IN SECOND AMENDED COUNTERCLAIM
C. Kay Sr. United States District Judge
reasons discussed below, the Court GRANTS
Plaintiffs/Counterclaim Defendants American Automobile
Insurance Company's and National Surety Corporation's
Motion to Dismiss Breach of Contract and Reformation
Counterclaims in Second Amended Counterclaim, ECF No. 104,
with leave to amend.
issue is an insurance coverage dispute between
Plaintiffs/Counterclaim Defendants American Automobile
Insurance Company and National Surety Corporation
(collectively, Fireman's Fund Insurance Corporation,
“FFIC” or “the Insurers”) and
Defendants/Counterclaim Plaintiffs Hawaii Nut & Bolt,
Inc. (“HNB”) and Safeway Inc.
(“Safeway”) over defects related to the
construction of a Safeway store in Hawaii.
22, 2009, Safeway filed a complaint in the First Circuit
Court of the State of Hawaii (“Underlying
Complaint” or “UC”). Second Am.
Counterclaim (“SACC”), ECF No. 64, ¶ 14;
Kasbohm Decl. Ex. A, Compl., Safeway Inc. v. Nordic PCL
Constr., Inc., No. 09-1-1414-06 (Haw. Cir. Ct. June 22,
2009)). The Underlying Complaint involved issues
pertaining to the construction of the roof deck at a Safeway
store in Kapahulu, Hawaii. See generally UC. Safeway
alleged that in November 2006 it entered into a construction
contract with Nordic PCL Construction, Inc.
(“Nordic”), wherein Nordic became the general
contractor for the Kapahulu Safeway store. UC ¶¶ 3,
of the contract, Nordic agreed to “retain professional
subcontractors and vendors as may be necessary to fully
implement the services it was rendering.” Id.
¶ 14. It also agreed to “be responsible for the
timely and proper performance of services by its
subcontractors, their respective subcontractors and vendors
of any tier to the same extents as if all such services were
performed by Nordic.” Id.
Underlying Complaint further alleged that Nordic entered into
a contract with HNB in which HNB “agreed to supply
certain products manufactured by VersaFlex and/or others to
be used in the construction of the Roof Deck.”
Id. ¶ 16. VersaFlex Incorporated
(“VersaFlex”) developed products, collectively
referred to as the “VersaFlex Coating System”
which were used to waterproof the roof deck of the Kapahulu
Safeway. Id. ¶¶ 4, 16, 17. As part of its
contract with Nordic, HNB agreed to “supply . . . the
preparation of the Wearing Slab for the application of the
VersaFlex Coating System and for the VersaFlex Coating System
itself.” Id. ¶ 16. HNB also allegedly
entered into a contract with Cascade Industries, Inc.
(“Cascade”) to supply the products manufactured
by VersaFlex. Id. ¶¶ 4, 17. As discussed
further below, Safeway and HNB now claim that there were no
to the Underlying Complaint, HNB along with VersaFlex
represented that the VersaFlex products were sufficient,
adequate, and/or fit for their intended use in connection
with the Safeway project and that the products would perform
as intended notwithstanding Hawaii's ultraviolet
(“UV”) exposure. Id. ¶¶ 20-21;
see also SACC ¶ 19. Relying on these
representations, Safeway chose to use the VersaFlex Coating
System. UC ¶ 22; SACC ¶ 21. HNB also proposed to
Safeway “the option of deleting the UV and color
resistant aliphatic top coat” of the VersaFlex Coating
System to save costs. UC ¶ 27; SACC ¶¶ 22-23.
January 2008, shortly after the Safeway Kapahulu store opened
to the public, the store “began experiencing pervasive
water leaks that penetrated into the store through the Roof
Deck, disrupting business operations and causing damage to
Safeway's business and reputation.” UC ¶ 31;
SACC ¶ 26. Safeway further alleged that at the time the
roof deck began leaking, “it also became apparent that
the VersaFlex Coating System was failing” and that
“[s]pecifically, the VersaFlex Coating System began to
manifest cracks and failures in the waterproof membrane
throughout the entire field of the Roof Deck.” UC
¶ 33; see also SACC ¶ 27. According to
Safeway, the deletion of the aliphatic top coat contributed
to the damages it suffered. UC ¶ 30; SACC ¶ 24.
asserted the following claims against HNB based on alleged
misrepresentations, defects, and deficiencies in connection
with the construction of the Kapahulu Safeway store: 1)
breach of contract; 2) breach of the covenant of good faith
and fair dealing; 3) negligence/gross negligence; 4) breach
of express and implied warranties; 5) unjust enrichment; 6)
negligent misrepresentation and/or omission; 7) intentional
misrepresentation and/or fraudulent concealment; 8) product
defects; and 9) negligent design and manufacture. UC
¶¶ 49-96, 107-25.
after HNB was served a copy of the Underlying Complaint, HNB
tendered the claims to FFIC. SACC ¶ 53. FFIC agreed to
defend HNB under a reservation of rights and retained counsel
for HNB. Id. ¶¶ 54-57, 62. FFIC defended
HNB in the underlying lawsuit for six years. Id.
issued three Commercial General Liability (“CGL”)
policies and three umbrella and excess policies to HNB during
the relevant time period (the “Policies”).
Automobile Insurance Company (“AAIC”) issued CGL
policy number A S1 AZC 8066751 for the policy period of May
1, 2007 to May 1, 2008 and A S1 AZC 80828365 for the policy
period of May 1, 2008 to May 1, 2009. SACC ¶¶ 41,
44; Kasbohm Decl. Exs. B, C. AAIC also issued umbrella and
excess insurance policies to HNB under these policy numbers
and for the same policy periods. SACC ¶¶ 42, 45;
Kasbohm Decl. Exs. B, C.
Surety Corp. (“NSC”) issued CGL policy No. A S1
AZC 80828365 to HNB for the policy period of May 1, 2009 to
May 1, 2010. SACC ¶ 44; Kasbohm Decl. Ex. C. NSC also
issued an umbrella and excess insurance policy to HNB under
the same policy number for the same time period. SACC ¶
44; Kasbohm Decl. Ex. C.
policies provide insurance for “bodily injury and
“property damage” “only if: (a) The bodily
injury and property damage is caused by an occurrence that
takes place in the coverage territory[.]” Kasbohm Decl.
Ex. B, at 73-74, Ex. C, at 411-412. “Occurrence” is
defined by the Policies as “[a]n accident including
continuous or repeated exposure to substantially the same
general harmful conditions. Id. Ex. B, at 87, Ex. C,
umbrella insurance policies provide coverage for
“Bodily Injury or Property Damage that takes place
during our Policy Period and is caused by an
Occurrence[.]” Id. Ex. B, at 98, Ex. C, at
439. The umbrella policies define an “occurrence”
as “an accident, including continuous or repeated
exposure to substantially the same general harmful
conditions.” Id. Ex. B, at 112, Ex. C, at 453.
The excess insurance provisions in the umbrella/excess
insurance policies only insure damages that “are
covered by Primary Insurance.” Id. Ex. B, at
94, Ex. C, at 435.
filed a Complaint for Declaratory Judgment against HNB in
this Court on June 29, 2015. Compl., ECF No. 1. The Complaint
sought a binding declaration that under the Policies, FFIC
had no duty to defend and/or indemnify HNB for the claims
asserted in the Underlying Lawsuit. Id.
September 4, 2015, HNB filed a First Amended Answer to the
Complaint along with a Counterclaim against the Insurers. ECF
No. 14. The Counterclaim included counts for bad faith and
declaratory relief. Id.
February 12, 2016, HNB settled the Underlying Action with
Safeway. SACC ¶ 2. As part of the settlement, HNB
entered into a stipulated judgment in which it assigned its
claims against FFIC and its insurance agents and brokers to
Safeway. Id. ¶¶ 2-3. Accordingly, Safeway
was granted leave to join this action. ECF No. 42.
and HNB then filed a Second Amended Counterclaim
(“SACC”) raising claims against FFIC and its
insurance agents/brokers (Douglas Moore, Monarch Insurance
Services, Inc., and Insurance Associates, Inc.). Safeway and
HNB filed four counterclaims against FFIC: 1) breach of
contract; 2) bad faith 3) negligent misrepresentation and
omission; and 4) reformation. SACC ¶¶ 71-142.
September 7, 2016, FFIC filed the instant Motion to Dismiss
Breach of Contract and Reformation Counterclaims in Second
Amended Counterclaim (“Motion to Dismiss”).
Counterclaim Defendants Douglas Moore and Monarch Insurance
Services, Inc. filed a Statement of No Position on November
21, 2016. ECF No. 179. HNB and Safeway filed their Memorandum
in Opposition (“Opposition” or
“Opp.”) on November 21, 2016. ECF No. 180. FFIC
filed its Reply on November 28, 2016. ECF No. 181. The Court
held a hearing on FFIC's Motion to Dismiss on December
12, 2016. At the hearing, counsel for Counterclaim Defendant
Insurance Associates, Inc. also represented that Insurance
Associates, Inc. was not taking a position on the Motion to
Motion to Dismiss for Failure to State a Claim
12(b)(6) authorizes the Court to dismiss a complaint that
fails “to state a claim upon which relief can be
granted.” Fed.R.Civ.P. 12(b)(6). Rule 12(b)(6) is read
in conjunction with Rule 8(a), which requires only “a
short and plain statement of the claim showing that the
pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2).
The Court may dismiss a complaint either because it lacks a
cognizable legal theory or because it lacks sufficient
factual allegations to support a cognizable legal theory.
Balistreri v. Pacifica Police Dep't, 901 F.2d
696, 699 (9th Cir. 1988).
resolving a Rule 12(b)(6) motion, the Court must construe the
complaint in the light most favorable to the plaintiff and
accept all well-pleaded factual allegations as true.
Sateriale v. R.J. Reynolds Tobacco Co., 697 F.3d
777, 783 (9th Cir. 2012). The complaint “must contain
sufficient factual matter, accepted as true, to ‘state
a claim to relief that is plausible on its face.'”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2007)). “The plausibility standard . . . asks for more
than a sheer possibility that a defendant has acted
unlawfully.” Id. “Where a complaint
pleads facts that are ‘merely consistent with' a
defendant's liability, it ‘stops short of the line
between possibility and plausibility of entitlement to
relief.'” Id. (quoting Twombly,
550 U.S. at 557). “In considering a motion to dismiss,
the court is not deciding whether a claimant will ultimately
prevail but rather whether the claimant is entitled to offer
evidence to support the claims asserted.” Tedder v.
Deutsche Bank Nat. Trust Co., 863 F.Supp.2d 1020, 1030
(D. Haw. 2012) (citing Twombly, 550 U.S. at 563
Court should grant leave to amend unless the pleading cannot
be cured by new factual allegations. OSU Student All. v.
Ray, 699 F.3d 1053, 1079 (9th Cir. 2012).
Rule 12(b)(6), review is generally limited to 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). 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).
Court has diversity jurisdiction to hear this case pursuant
to 28 U.S.C. § 1332. Federal courts sitting in diversity
apply state substantive law and federal procedural law.
Hanna v. Plumer, 380 U.S. 460, 465 (1965); Erie
v. Tompkins, 304 U.S. 64, 78 (1938). A federal court is
bound by the decisions of a state's highest court when
interpreting state law. Ariz. Elec. Power Coop., Inc. v.
Berkeley, 59 F.3d 988, 991 (9th Cir. 1995). However,
“[i]n the absence of such a decision, a federal court
must 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. (citation
Framework for Construing Insurance Contracts
Hawaii law, courts look to the plain language of the
insurance policy to determine the scope of the insurer's
duties. Dairy Rd. Partners v. Island Ins. Co., Ltd.,
992 P.2d 93, 107 (Haw. 2000); see also Burlington Ins.
Co. v. Oceanic Design & Const. Inc., 383 F.3d 940,
945 (9th Cir. 2004) (“In Hawaii, the terms of an
insurance policy are to be interpreted according to their
plain, ordinary, and accepted sense in common
the context of insurance coverage disputes, [the Court] 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.”
Hawaiian Ins. & Guar. Co. v. Fin. Sec. Ins. Co.,
807 P.2d 1256, 1260 (1991). “[B]ecause insurance
policies are contracts of adhesion, they must  be construed
liberally in favor of the insured, [and] any ambiguities in
their terms and conditions must be resolved against the
insurer.” Estate of Doe v. Paul Revere Ins.
Grp., 948 P.2d 1103, 1114-15 (Haw. 1997). Insurance
policies must also be “construed in accordance with the
reasonable expectations of a layperson.” Hawaiian
IsleAdventures, Inc. v. N. Am. Capacity Ins.
Co., 623 F.Supp.2d 1189, 1194 (D. Haw. 2009). A ...