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Aquilina v. Certain Underwriters at Lloyd’s Syndicate #2003

United States District Court, D. Hawaii

September 26, 2019

STEPHEN G. AQUILINA and LUCINA, J. AQUILINA, Individually and on Behalf of all Others Similarly Situated; AUDRA M. LANE and SCOTT L. LANE, Individually and as Trustees of the Lane Family Trust, dated March 28, 1998, and on Behalf of All Others Similarly Situated, Plaintiffs,


          Alan C. Kay Sr. United States District Judge

         Plaintiffs are residents of the Puna District of Hawai’i Island who purchased surplus lines homeowner’s insurance policies brokered and underwritten by the various Defendants. In the aftermath of the May 2018 eruption of Kilauea Volcano, Plaintiffs sustained significant damages to their properties and sought coverage for the losses under their surplus lines policies. Such coverage was denied, primarily based on an exclusion precluding coverage for lava-related damage. Plaintiffs now allege that Defendants carried out a deceptive scheme by which they unlawfully “steered” Plaintiffs and other homeowners into purchasing, through the surplus lines market, what Plaintiffs call “essentially worthless” coverage, with the goal of increasing profits and commissions and lowering payouts for covered claims.

         Defendant Ilikea LLC d/b/a Moa Insurance Services Hawaii (“Moa”) has moved to dismiss the Complaint under Federal Rule of Civil Procedure (“Rule”) 12(b)(6). For the reasons explained in this Order, the Court GRANTS Moa’s Motion to Dismiss, ECF No. 63, insofar as it seeks dismissal of all Plaintiffs’ claims against Moa.


         I. The Policies

         Plaintiffs Stephen and Lucina Aquilina, and Audra and Scott Lane, individually and as Trustees of the Lane Family Trust (collectively, “Plaintiffs”), as well as a putative class of similarly-situated consumers (the “Class”), [1] purchased surplus lines homeowners insurance policies (the “Policies”) to insure their residential properties in Hawai’i. Compl. ¶ 1. The Policies were purchased with the assistance of two retail brokers, Defendants Pyramid Insurance Centre, Ltd. (“Pyramid”) and Ilikea LLC d/b/a Moa Insurance Services Hawaii (“Moa”), and one coverholder, Defendant Borisoff Insurance Services, Inc. d/b/a Monarch E&S Insurance Services (“Monarch”), whose assets are owned by Specialty Program Group, LLC d/b/a SPG Insurance Solutions, LLC (“SPG”) (collectively, “Broker Defendants”).[2]The Policies were underwritten by several syndicates of Defendants Certain Underwriters at Lloyd’s London, including Syndicates #2003, #318, #4020, #2121, #2007, #1183, #1729 (collectively, “Underwriters”). Compl. ¶ 1.

         Pyramid and Moa are both retail brokers who placed the Policies and worked on Plaintiffs’ behalf to procure homeowner’s insurance. See Compl. ¶¶ 35-36. Monarch is a licensed surplus lines broker, and coverholder to and authorized agent of Underwriters. See Compl. ¶¶ 29, 32-34. As the coverholder, Monarch is listed on the Policies as the point of contact for handling claim-related communications with Plaintiffs. Compl. ¶¶ 29-34; see also ECF Nos. 30-3 & 30-4.[3] The Complaint also alleges that Monarch acted with the assistance of “its authorized agents, including Moa and Pyramid.” Compl. ¶ 29.

         II. The Surplus Lines Insurance Market

         Surplus lines insurance is available as a last resort when the traditional insurance market is “unable or unwilling to provide coverage due to risky characteristics.” Compl. ¶ 39, 46-47. The surplus lines market exists to provide coverage for high-risk loss exposures when “admitted insurers in the standard market do not have the flexibility” to underwrite such risks. Compl. ¶ 40. Surplus lines insurance is provided by non-admitted insurers who are not licensed to operate in Hawai’i and who are not required to obtain approval for their rates, forms, and underwriting rules. Compl. ¶ 41. “[S]urplus lines insurers often fill the gap to provide insurance coverage for high-risk perils, but are only permitted to do so under specified circumstances.” Compl. ¶ 41.

         The Hawai’i Insurance Code provides that surplus lines insurance may only be placed through a “licensed surplus lines broker.” Compl. ¶ 44 (citing Haw. Rev. Stat. § 431:8-301(a)). The same provision requires that, “[b]efore placing a surplus lines policy, . . . a surplus lines broker must perform a diligent search of the insurance market” to determine whether the insurance can be obtained from authorized insurers; whether the insurance is in addition to or in excess of the amount and coverage that can be procured from authorized insurers; and whether the insurance is procured at a rate “lower than the lowest rate that is generally acceptable to authorized insurers transacting that kind of business and providing insurance affording substantially the same protection.” Compl. ¶ 45 (quoting Haw. Rev. Stat. § 431:8-301(a)(2)-(4)).

         III. The Steering Scheme

         The Complaint alleges a “steering scheme” through which Defendants allegedly sold surplus lines policies to Plaintiffs and the Class without complying with certain obligations under Hawai’i law. Compl. ¶ 47. As a result, in the devastating aftermath of the Kilauea Volcano eruption, Plaintiffs were denied coverage under their Policies for significant losses to their homes and properties. Compl. ¶¶ 7-8, 71-74.

         The Complaint alleges that Defendants unlawfully placed surplus lines insurance instead of more comprehensive coverage, such as that available through the Hawai’i Property Insurance Association (“HPIA”).[4] Compl. ¶¶ 48-52. According to the Complaint, Plaintiffs’ and the Class’s properties qualified for HPIA insurance, but Defendants were incentivized not to place HPIA policies because Underwriters’ policies were “more lucrative.” Compl. ¶¶ 48-56, 62-66.

         Defendants allegedly misrepresented to Plaintiffs that the Policies were the only available insurance without having performed the due diligence required under Hawai’i law to place surplus lines insurance. Compl. ¶ 3. According to Plaintiffs, Defendants “improperly steered” them into purchasing the Policies, which contain several exclusions that render coverage “essentially worthless.” Compl. ¶¶ 1-4. Plaintiffs highlight one exclusion in particular, which precludes coverage for “the peril of lava and/or lava flow causing direct or indirect physical damage or loss of use of the insured property” (the “Lava Exclusion”). Compl. ¶ 1.

         Plaintiffs allege that, since 2012, Broker Defendants and Underwriters “steered” Plaintiffs and the Class to purchase Lloyd’s Policies. Among other things, Defendants artificially inflated the insurance coverage amounts-such as the home value or the personal liability coverage-beyond the HPIA coverage limits so that they could place Plaintiffs and the Class with Lloyd’s surplus lines insurance policies.” Compl. ¶¶ 4. Defendants allegedly “knew that they were not allowed to place Plaintiffs and the Class with surplus lines insurance unless the insurance coverage amounts exceeded the coverage available through traditional insurance carriers. Compl. ¶ 5. According to Plaintiffs, the state’s own HPIA insurance program could have provided them with more comprehensive coverage, yet Broker Defendants placed them with and Underwriters sold them surplus lines policies anyway. Compl. ¶¶ 5, 56-57.

         This scheme is repeated in similar form throughout the Complaint to allege wrongdoing by Defendants in procuring the Policies for Plaintiffs and the Class. Compl. ¶¶ 58, 61, 66-69. The Complaint asserts that Defendants represented to Plaintiffs and the Class that they could only purchase insurance through the surplus lines market, thereby steering them into purchasing the Policies subscribed by Underwriters. Compl. ¶¶ 58, 67-69. The scheme in turn enabled Underwriters to increase their revenues and profits and Broker Defendants to collect “kickbacks” from Underwriters in the form of increased commissions. Compl. ¶¶ 6, 59, 69. Plaintiffs allege that the commissions were “directly tied to the amount of premium steered to [Underwriters]” to incentivize Broker Defendants to “maximize the amount of surplus lines insurance placed with [Underwriters].” Compl. ¶ 59; see also Compl. ¶ 6.

         As a result of the scheme, Plaintiffs were provided less comprehensive coverage because of “numerous exclusions inevitably associated with [Underwriters’] surplus lines homeowner’s insurance”-in particular, the Lava Exclusion. Compl. ¶ 60. The Complaint alleges that, for a home located in a particularly risky Lava Zone, a homeowner’s policy excluding lava coverage “amount[s] to no coverage at all.” Compl. ¶ 1.

         The Complaint frames the scheme this way:

In furtherance of their undisclosed scheme to drive profits and commissions and lower payouts for claims, Defendants improperly steered Plaintiffs and the Class into Lloyd’s surplus lines homeowner’s insurance policies by: (a) failing to perform various duties and due diligence, including the duties and due diligence required under HRS §431:8-301(a); (b) omitting that non-surplus lines insurance was available; and/or (c) artificially inflating the amount of coverage beyond the coverage limits provided under non-surplus lines insurance, specifically through the government-established Hawaii Property Insurance Association (“HPIA”).

Compl. ¶ 4; see also Compl. ¶¶ 93, 104, 119, 127, 138, 143.

         Plaintiffs assert that, in the absence of the scheme, they would have insured their homes with more comprehensive insurance and would have had such coverage in the aftermath of the Kilauea eruption. Compl. ¶¶ 70-74. Now, because of the Lava and other exclusions associated with the Policies, Plaintiffs and the Class have received essentially worthless insurance coverage, enabling Underwriters to deny coverage under the Policies for resulting damages. Compl. ¶¶ 75-76.


         The named Plaintiffs, proceeding individually and on behalf of the Putative Class, filed their Complaint on December 21, 2018. See Compl. ECF No. 1. Therein, Plaintiffs assert seven causes of action:

1. Count I. Violation of the Unfair and Deceptive Acts or Trade Practices Act (“UDAP”), Hawai’i Revised Statutes (“HRS”) §§ 480-1 et seq., against all Defendants. Compl. ¶¶ 88-101.
2. Count II. Violation of the Uniform Deceptive Trade Practices Act (“UDTPA”) (together with Count I, the “UDAP Claims”), HRS §§ 481A-1 et seq., against all Defendants. Compl. ¶¶ 102-06.
3. Count III. Breach of the implied covenant of good faith and fair dealing (“bad faith”) against Defendants Underwriters, Monarch, and SPG. Compl. ¶¶ 107-20.
4. Count IV. Unjust enrichment against all Defendants. Compl. ¶¶ 121-28.
5. Count V. Breach of fiduciary duties against Broker Defendants. Compl. ¶¶ 129-139.
6. Count VI. Negligence against Broker Defendants. Compl. ¶¶ 140-49.
7. Count VII. Declaratory judgment against all Defendants. Compl. ¶¶ 150-54.

         On April 22, 2019, Moa filed a Motion to Dismiss. ECF No. 63. The Parties completed briefing on the Motion on August 27. ECF Nos. 87 (Opposition Brief) & 96 (Reply Brief). The Court heard oral arguments on the Motion on September 10, 2019.


         I. Rule 12(b)

         Rule 12(b)(6) authorizes the Court to dismiss a complaint that fails “to state a claim upon which relief can be granted.” Rule 12(b)(6) is read in conjunction with Rule 8(a), which requires “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 accept all well-pleaded factual allegations as true and construe them in the light most favorable to the plaintiff. 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)). Mere conclusory statements in a complaint or “formulaic recitation[s] of the elements of a cause of action” are not sufficient. Twombly, 550 U.S. at 555. Thus, the Court discounts conclusory statements, which are not entitled to a presumption of truth, before determining whether a claim is plausible. Iqbal, 556 U.S. at 678. However, “[d]ismissal with prejudice and without leave to amend is not appropriate unless it is clear . . . that the complaint could not be saved by amendment.” Harris v. Cty. of Orange, 682 F.3d 1126, 1131 (9th Cir. 2012) (citation omitted).

         II. Rule 9(b)

         Where a party alleges fraud or mistake, the Rules require a heightened pleading standard. In particular, Rule 9(b) requires that, “In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). The Ninth Circuit has held that “[t]o satisfy Rule 9(b), a pleading must identify ‘the who, what, when, where, and how of the misconduct charged, ’ as well as ‘what is false or misleading about [the purportedly fraudulent] statement, and why it is false.’” Cafasso, U.S. ex rel. v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1055 (9th Cir. 2011) (alteration in original) (quoting Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993, 998 (9th Cir. 2010)); see also Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007) (“To comply with Rule 9(b), allegations of fraud must be specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge and not just deny that they have done anything wrong.” (quoting Bly–Magee v. California, 236 F.3d 1014, 1019 (9th Cir. 2001))).

         A motion to dismiss a claim grounded in fraud for failure to plead with particularly under Rule 9(b) is the functional equivalent of a motion to dismiss under Rule 12(b)(6). See Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1107 (9th Cir. 2003). “As with Rule 12(b)(6) dismissals, dismissals for failure to comply with Rule 9(b) should ordinarily be without prejudice. Leave to amend should be granted if it appears at all possible that the plaintiff can correct the defect.” Id.


         Moa argues for dismissal on several grounds. The Court will address each of these arguments in turn. First, however, the Court holds that the Complaint as a whole is subject to Rule 9(b). Because the allegations in the Complaint fall short of meeting the heightened “particularity” standard, and because several causes of action are independently deficient, the Complaint is dismissed against Moa, with leave to amend.

         I. Rule 9(b) Heightened Pleading Standard

         Although Moa does not initially argue for dismissal under Rule 9(b), [5] the Court concludes that the heightened standard applies because the same fraudulent conduct underlies all the claims. And because the pleading does not satisfy Rule 9(b)’s particularity requirement, the Complaint must be dismissed.

         a. Rule 9(b) Applies to the Complaint as a Whole Because the Allegations are Grounded in a Unified Course of Fraudulent Conduct

         Rule 9(b) requires that, “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). When an “entire claim within a complaint[] is grounded in fraud and its allegations fail to satisfy the heightened pleading requirements of Rule 9(b), a district court may dismiss the complaint or claim.” Vess, 317 F.3d at 1107. Under established Ninth Circuit law, fraud need not be an essential element of a claim to subject it to the heightened pleading standard of Rule 9(b):

In cases where fraud is not a necessary element of a claim, a plaintiff may choose nonetheless to allege in the complaint that the defendant has engaged in fraudulent conduct. In some cases, the plaintiff may allege a unified course of fraudulent conduct and rely entirely on that course of conduct as the basis of a claim. In that event, the claim is said to be “grounded in fraud” or to “sound in fraud, ” and the pleading of that claim as a whole must satisfy the particularity requirement of Rule 9(b).

Id. at 1103-04 (emphasis added).

         Here, Plaintiffs’ claims are based on a single deceptive and fraudulent “scheme” to “steer” Plaintiffs into purchasing illusory surplus lines insurance that they otherwise would not have purchased. The primary allegations are as follows:

• Underwriters had a relationship with Broker Defendants;
• Broker Defendants engaged in a kickback scheme whereby they “wrongly steered” Plaintiffs into purchasing the Policies subscribed to by Underwriters;
• Broker Defendants received “unwarranted commissions” from Underwriters;
• Broker Defendants failed to perform duties and due diligence required under Section 301 of the Surplus Lines Act, HRS § 431:8-301 (“Section 301”), including by omitting that non-surplus lines insurance was available;
• Broker Defendants artificially inflated the amount of coverage beyond the limits provided under non-surplus lines insurance;
• Broker Defendants and Underwriters engaged in conduct of “misrepresenting, concealing, steering, or otherwise omitting” information to mislead Plaintiffs and the Class.

         Compl. ¶¶ 82, 93, 104. Plaintiffs describe Defendants’ conduct as an “integrated, misleading practice to homeowners in Hawaii that includes uniform misrepresentations that misled Plaintiffs and the other members of the Class.” Compl. ¶ 82.

         These allegations, which underly all seven claims against Moa, are based on “a unified course of fraudulent conduct.” See Vess, 317 F.3d at 1103-04. Plaintiffs repeat the same allegations of the “scheme” throughout the Complaint and emphasize that they were “steered” into purchasing illusory Policies. The allegations are grounded in the same fraudulent conduct, and the Court must then review all the allegations under Rule 9(b)’s more stringent standard.

         That each individual cause of action against Moa does not require fraud as an element cannot save those claims from the strict pleading requirements of Rule 9(b). See Vess, 317 F.3d at 1103-04. First, for example, bad faith and unjust enrichment do not typically require a showing of fraud.[6] Yet the Complaint frames the allegations as asserting one underlying, fraudulent and “deceptive scheme.” See Compl. ¶ 119 (bad faith claim alleging “deceptive” scheme where Defendants “artificially inflated coverage amounts” and “manipulate[ed] the surplus lines market” to increase profits and commissions); ¶ 124 (unjust enrichment claim alleging that “Defendants deceptively marketed and sold surplus lines insurance to Plaintiffs and the Class”). Doing so triggers Rule 9(b) with respect to both these claims. See Puri v. Khalsa, 674 F. App’x 679, 690 (9th Cir. 2017) (holding that where an “unjust enrichment claim is based on fraud, it too is subject to Rule 9(b)” (citing Vess, 317 F.3d at 1103-04)); In re Arris Cable Modem Consumer Litig., No. 17-CV-01834-LHK, 2018 WL 288085, at *10 (N.D. Cal. Jan. 4, 2018) (applying Rule 9(b) to unjust enrichment claim); Mostowfi v. I2 Telecom International, Inc., No. 03-5784 VRW, 2005 WL 8162717, at *11 (N.D. Cal. May 23, 2005) (same for breach of good faith and fair dealing claim).

         As for the UDAP Claims, allegations made under the “unfair” prong do not ordinarily require compliance with the heightened pleading standard.[7] See Bald v. Wells Fargo Bank, N.A., 688 F. App’x 472, 476 (9th Cir. 2017); Soule v. Hilton Worldwide, Inc., 1 F.Supp. 3d 1084');">1 F.Supp. 3d 1084, 1090 (D. Haw. 2014). But that is only true when the claims are not grounded in fraudulent conduct. See Ryan v. Salisbury, 380 F.Supp. 3d 1031, 1049 (D. Haw. 2019); Soule, 1 F.Supp. 3d at 1090. Both the Ninth Circuit and this Court have held that state-law UDAP claims must be pleaded with particularity when the claims are based on fraudulent conduct. See Kearns v. Ford Motor Co., 567 F.3d 1120, 1122 (9th Cir. 2009) (holding that claims under California’s UDAP laws had to be pleaded with particularity); Smallwood v. NCsoft Corp., 730 F.Supp.2d 1213, 1232-33 (D. Haw. 2010) (holding that claims under Hawai’i’s UDAP laws were based on “fraudulent concealment” and thus required pleading with particularity); see also Long v. Deutsche Bank Nat’l Tr. Co., No. 10-cv-00359 JMS/KSC, 2011 WL 2650219, at *7 (D. Haw. July 5, 2011) (“[W]here a chapter 480 claim is based on fraudulent acts, a plaintiff must plead with particularity.”).

         Here, the only possible basis for liability under UDAP that Plaintiffs have alleged sounds in fraud. Plaintiffs have pointed to no factual allegations in the Complaint-and none are evident to the Court-showing that they are alleging anything other than an overarching deceptive scheme. Nor have Plaintiffs shown that the allegations of deceit can be separated from allegations of resulting unfairness. Thus, the allegations in Counts I and II that Plaintiffs were “steered” or “deceived” are the only possible basis for liability under the Hawai’i UDAP Claims, as the Complaint is currently framed. Cf. Long, 2011 WL 2650219 at *7 (“[A]t least part of Plaintiff’s [UDAP] claim must sound in fraud, but the actual allegations as to Defendants’ conduct are so vague that the court cannot determine what acts Plaintiff alleges are fraudulent.” (footnote omitted)).

         As to Count V, breach of fiduciary duties, the underlying allegations also sound in fraud. See, e.g., Compl. ¶¶ 133-35 (describing the “deceptive” and “fraudulent scheme” carried out by Defendants “to collect secret commissions, steer lucrative business to Lloyd’s, charge Plaintiffs and the Class improper and inflated premiums, and misrepresent Plaintiffs’ and the Class’s insurance coverage”). Thus, to the extent that they “sound in fraud, ” the allegations of Count V are also subject to the heightened Rule 9(b) standard. See Gibson v. Credit Suisse AG, No. 1:10 CV 001-EJL-REB, 2012 WL 1253007, at *6 (D. Idaho Mar. 30, 2012) (holding that plaintiff’s breach of fiduciary duty claim “sounds in fraud thereby necessitating that it satisfy Rule 9(b)’s heightened pleading standard” (citing Kearns, 567 F.3d at 1124)).

         Finally, Count VI asserts a claim for negligence, alleging that Broker Defendants owed a duty to Plaintiffs and the Class stemming from Section 301 to perform “due diligence” to determine whether comparable non-surplus lines insurance was available. Compl. ¶ 142. Count VI asserts that Broker Defendants “failed to use ordinary care to understand the terms, conditions, and costs of the Lloyd’s policy and were grossly negligent.” Compl. ¶ 147. Plaintiffs again allege the same conduct and the same “deceptive scheme.” Compl. ¶¶ 142-43.

         Fraud is obviously not an essential element of a negligence claim. But the allegations in Count VI sound in fraud, bringing them within the scope of Rule 9(b). See Vess, 317 F.3d at 1103-04; see also Waikiki Trader Corp. v. Rip Squeak Inc., No. 09-00344 ACK-BMK, 2010 WL 11530615, at *14 (D. Haw. Apr. 15, 2010) (striking “negligence allegations” because the negligence claim “does not allege any separate facts but rather is based on the same alleged misrepresentations by Plaintiff” and thus is “grounded in fraud and subject to Rule 9(b)”). While it might seem counterintuitive to apply Rule 9(b) to a claim for negligence, Ninth Circuit case law is clear that allegations of a ...

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