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American Automobile Insurance Co. v. Hawaii Nut & Bolt, Inc.

United States District Court, D. Hawaii

December 16, 2016

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.


          Alan C. Kay Sr. United States District Judge

         For the 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.


         At 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.

         I. Underlying Action

         On June 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)).[1] 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, 11.

         As part 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.

         The 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 such contracts.

         According 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.

         On 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.

         Safeway 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.

         Shortly 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. ¶ 63.

         II. Insurance Policies

         FFIC issued three Commercial General Liability (“CGL”) policies and three umbrella and excess policies to HNB during the relevant time period (the “Policies”).

         American 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.

         National 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.

         The CGL 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.[2] “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, at 425.

         The 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.


         FFIC 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.

         On 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.

         On 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.

         Safeway 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.

         On 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 Dismiss.


         I. Motion to Dismiss for Failure to State a Claim

         Rule 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).

         In 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 n.8).

         The 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).

         Under 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).

         II. Diversity Jurisdiction

         The 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 omitted).


         I. Framework for Construing Insurance Contracts

         Under 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 speech.”).

         “In 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 ...

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