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State Farm Fire and Casualty Co. v. Saarman Construction, Ltd.

United States District Court, D. Hawaii

March 5, 2018




         This insurance coverage dispute arises out of a fatal workplace injury to an employee of Ocean Tile, the named insured under a commercial policy placed with State Farm. Before the Court is State Farm's Motion for Summary Judgment (“MSJ”) on both its Complaint for Declaratory Judgment, and on the Counterclaim for Declaratory Judgment and for Breach of the Covenant of Good Faith and Fair Dealing filed by Saarman, Ocean Tile's general contractor. MSJ, Dkt. No. 30. For the reasons set forth below, State Farm's MSJ is DENIED.


         I. Underlying Facts

         In 2015, Saarman served as the general contractor for a renovation project located at the Golf Villas at Maunalani Resort (the “Golf Villas”) in Waimea, Hawaii (the “Project”). First Am. Compl. ¶ 9, Dkt. No. 17 [hereinafter FAC]. Saarman was hired to plan, conduct, oversee and inspect the renovations associated with the Project (FAC ¶ 9), and towards this end, subcontracted with Ocean Tile to install tiles outside of Building 1, Unit 1 of the Golf Villas (FAC ¶¶ 10, 19, Dkt. No. 17).

         On September 16, 2015, Lawrence S. Deponte, an Ocean Tile employee, fell while working on scaffolding Saarman allegedly provided. Deponte died of his injuries several hours later. FAC ¶ 12(A), Dkt. No. 17.

         On April 8, 2016, Ashley I. Narciso, individually and as the personal representative of Deponte's Estate, commenced an action against Saarman in the Circuit Court of the Third Circuit, State of Hawaii, Civil No. 16-1-126K (“Underlying Lawsuit”). The Underlying Lawsuit alleges that on the date of the workplace accident, Saarman controlled the Project, including the tile work performed by Ocean Tile, and Saarman was therefore liable for the acts and omissions of Ocean Tile under the doctrine of respondeat superior. FAC ¶¶ 12(B)- (C), Dkt. No. 17.[1] The Underlying Lawsuit seeks general and special damages, including pain and suffering, emotional distress, loss of future earnings, medical expenses, funeral and burial expenses, and all other damages provided in Hawai‘i Revised Statutes (“HRS”) § 663-3. FAC ¶ 13, Dkt. No. 17. There is also a “survivors' claim” asserted by Deponte's two children that seeks general and special damages, including emotional distress, loss of consortium, society, companionship, comfort, support, economic support, care and attention, under HRS § 663-3.[2]

         On June 12, 2016, Saarman filed a Third-Party Complaint against Ocean Tile in the Underlying Lawsuit (“Underlying Third-Party Complaint”). FAC ¶ 15, Dkt. No. 17; see Harada-Stone Decl., Ex. 1 [Underlying Third-Party Compl.] at 8- 28, Dkt. No. 31-2. In it, Saarman denies having caused or contributed to the injuries and damages alleged by the plaintiffs in the Underlying Lawsuit (“Underlying Plaintiffs”) (Underlying Third-Party Compl. ¶¶ 5-6, Dkt. No. 31-2 at 10); Saarman argues that if Underlying Plaintiffs suffered the injuries and damages asserted therein, then “such injuries or damages were caused by the negligence, strict liability, breach of warranty, breach of contract, improper acts or omissions, wrongdoing or breach of duty on the part of Ocean Tile and other Third-Party Defendants (Underlying Third-Party Compl. ¶ 7, Dkt. No. 31-2 at 3); and Saarman contends that

if any judgment is entered against Defendant and Third Party Plaintiff Saarman, such damages, costs, expenses and attorneys' fees will have been caused by Ocean Tile and other Third-Party Defendants for whom Saarman is entitled to written indemnification, indemnification, contribution, subrogation and/or reimbursement from Ocean Tile and other Third-Party Defendants for the entire amount of such judgment, if any, rendered against Saarman, together with its expenses, costs and reasonable attorneys' fees.

(Underlying Third-Party Compl. ¶ 8, Dkt. No. 31-2 at 3). See FAC ¶¶ 16-18.

         In Count II of the Underlying Third-Party Complaint, Saarman also alleges that the Subcontract Agreement between Saarman and Ocean Tile signed on or about April 2, 2015 (“Subcontract”), obligated Ocean Tile to “indemnify, defend and hold harmless Saarman from and against claims, demands, causes of action, damages, costs, expenses, actual attorney's fees, losses or liability arising out of or in connection with Ocean Tile's operation and/or performance under the Subcontract Agreement.” Ching Decl., Ex. A [Subcontract] § 11, Dkt. No. 34-3 at 11; see also FAC ¶ 20, Dkt. No. 17. As such, the Subcontract allegedly entitles Saarman to a “full and complete defense and indemnification from Ocean Tile for the claims asserted against Saarman” in the Underlying Lawsuit. Subcontract § 12, Dkt. No. 34-3 at 12; FAC ¶ 20.

         Ocean Tile has tendered the Underlying Third-Party Complaint to State Farm pursuant to Ocean Tile's policy, and State Farm is defending Ocean Tile against the Underlying Third-Party Complaint pursuant to a reservation of rights. FAC ¶ 25, Dkt. No. 17; see also Ocean Tile Counterclaim ¶¶ 8-10, Dkt. No. 24-1.

         II. Contracts and Insurance Documents

         State Farm's MSJ implicates the parties' various insurance and other agreements, the relevant provisions of which are described below.

         State Farm-Ocean Tile Policy

         State Farm issued a Business Owners Coverage insurance policy to Ocean Tile, Policy No. 91-BF-C578-3 (the “Policy”), that spans the policy period from January 1, 2015 to January 1, 2016. FAC ¶ 23. See Corder Decl., Exs. 3 [Policy Declarations], Dkt. No. 31-5; 4 [Businessowners Coverage Form CMP-4100], Dkt. No. 31-6; 5 [Sched. Endorsement CMP-4786], Dkt. No. 31-7; 6 [Blanket Endorsement CMP-4785], Dkt. No. 31-8.

         The Policy generally obligates State Farm to provide coverage for “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury'” and preserves “the right and duty to defend the insured against any ‘suit' seeking those damages” provided, however, that there will be “no duty to defend the insured against any ‘suit' seeking damages for ‘bodily injury[]' . . . to which this insurance does not apply.” Coverage Form, Section II-Business Liability ¶ 1, Dkt. No. 31-6 at 24. The Policy further states:

         2. If we defend an insured against a “suit” and an indemnitee of the insured is also named as a party to the “suit, ” we will defend that indemnitee if all of the following conditions are met:

a. The “suit” against the indemnitee seeks damages for which the insured has assumed the liability of the indemnitee in a contract or agreement that is an “insured contract”;
b. This insurance applies to such liability assumed by the insured; [and]
c. The obligation to defend, or the cost of the defense of, that indemnitee, has also been assumed by the insured in the same “insured contract”; . . . .

         Coverage Form, Section II-Suppl. Payments ¶ 2, Dkt. No. 31-6 at 25.

         Under exclusions, the Policy specifies that coverage does not include “any obligation of the insured under a workers' compensation, disability benefits or unemployment compensation law” (Coverage Form, Section II-Exclusions ¶ 4, Dkt. No. 31-6 at 26) or “employer's liability” for “bodily injury” to “[a]n ‘employee' or a former ‘employee' of the insured arising out of and in the course of . . . (a) Employment by the insured; or (b) Performing duties related to the conduct of the insured's business” (Coverage Form, Section II-Exclusions ¶ 5a, Dkt. No. 31-6 at 26)). See also Coverage Form, Section II-Exclusions ¶ 5b, Dkt. No. 31-6 at 26 (explaining that the employer's liability exclusion applies “[w]hether the insured may be liable as an employer or in any other capacity, ” and “[t]o any obligation to share damages with or repay someone else who must pay damages because of the injury, ” but it “does not apply to liability assumed by the insured under an ‘insured contract'”).

         Under the Policy's Endorsement CMP-4786, Saarman is listed as an additional insured for both ongoing and completed operations. Policy Decl. at 6, Dkt. No. 31-5; see also Counterclaim for Declaratory & Related Relief ¶¶ 12, 13, Dkt. No. 22-1 [hereinafter Saarman Counterclaim]. As an “additional insured, ” Saarman is covered under the Policy “with respect to liability for ‘bodily injury' caused, in whole or in part, ” by the insured's “acts or omissions” or “[t]he acts or omissions of those acting on [the insured's] behalf . . . in the performance of . . . ongoing operations for that additional insured.” Sched. Endorsement CMP-4786, Section II-Who Is An Insured ¶ 1a, Dkt. No. 31-7. Additionally, “[a]ny insurance provided to the additional insured shall only apply with respect to a claim made or a ‘suit' brought for damages for which [the insured is] provided coverage, ” and “[t]he insurance afforded the additional insured shall be primary insurance.” Sched. Endorsement CMP-4786, Section II-Who Is An Insured ¶¶ 2, 3, Dkt. No. 31-7. And with regard to “Separation of Insureds, ” the Policy sets forth the following:

         Except with respect to the SECTION II-LIMITS OF INSURANCE, and any rights or duties specifically assigned in this policy to the first Named Insured, this insurance applies:

a. As if each Named Insured were the only Named Insured; and
b. Separately to each insured against whom claim is made or “suit” ...

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