Written by Bruce D. Voss

The Hawaii Intermediate Court of Appeals reversed most of a Circuit Court judge’s insurance coverage rulings in the Kaloko Dam litigation, highlighting some key principles of Hawaii insurance law.

C. Brewer & Co., Ltd. was sued for damages in three multi-million-dollar lawsuits filed in the aftermath of the Kaloko Dam breach on March 14, 2006, which resulted in seven deaths and extensive property damage. In a declaratory relief action, C. Brewer named as defendants 17 insurance companies that had issued commercial general liability (“CGL”), multi-peril property, and umbrella insurance policies to C. Brewer between 1987 and the date of the breach.

The insurance company defendants filed motions to dismiss, contending there was no coverage under the policies. The Circuit Court judge essentially accepted the insurance companies’ interpretation of the policies and the law, and dismissed C. Brewer’s claims. The ICA reversed most of the Circuit Court rulings, finding the judge had misinterpreted several basic principles of Hawaii insurance law.

The Circuit Court, applying the so-called “injury-in-fact” trigger for coverage, ruled that the pre-breach CGL insurers had no duty to defend because the underlying lawsuits did not allege damages occurring within the policy periods of the pre-breach CGL insurers. As the underlying lawsuits did not claim damages for bodily injury during any pre-breach CGL policy period, the key question was whether the suits sought recovery for property damage which occurred during pre-breach CGL policy periods.

The insureds argued that the pre-breach CGL insurers had a duty to defend them in the property damage lawsuit because that suit sought damages for continuous, incremental, indivisible property damage to the Kaloko Dam, beginning in at least 1987 and continuing through all the pre-breach CGL policy periods. After reviewing the allegations of the complaint, the Hawaii Intermediate Court of Appeals agreed, finding the lawsuit at least “raised the possibility that the insureds would be subject to liability for actual damage (injury-in-fact) to the Kaloko Dam that occurred during the pre-breach CGL policy periods.”

In so ruling, the ICA repeated the foundation of Hawaii’s duty-to-defend law: “It is the possibility of coverage upon which the duty to defend rests. This possibility may be remote, but if it exists, the insurer owes the insured a defense.”

The ICA ruled the Circuit Court also erred by finding one insurer was not liable for coverage because of the limitations of a “designated premises endorsement”. The “Schedule of Locations” attached to the premises endorsement did not specifically list Kaloko Dam. That schedule, however, did list C. Brewer’s headquarters where it made the company’s strategic business decisions. The threshold coverage question was whether the policy language “arising out of the ownership, maintenance, and use of the designated premises” could be interpreted to encompass the use of C. Brewer’s business headquarters to make negligent business decisions that caused personal injury and property damage outside of the designated premises. Case law in other jurisdictions outside Hawaii has found a designated premises endorsement does not exclude coverage for negligent decisions made at corporate headquarters which resulted in personal injuries at a non-designated premises.

The Hawaii ICA found the designated premises endorsement was ambiguous as it is “reasonably susceptible to more than one meaning”. Because there were issues of fact regarding the parties’ intent, the ICA ruled that the Circuit Court erred in granting summary judgment to the insurer. The ICA remanded the issue back to the Circuit Court so the parties could introduce additional evidence to explain their intent regarding the designated premises endorsement.

In explaining the relevant law, the ICA explained: “If the ambiguity in the policy cannot be resolved through extrinsic evidence of the parties’ intent, then the court should apply principles of construction applicable to insurance policies. . . . Under these principles, insurance policies must be construed liberally in favor of the insured and any ambiguities must be resolved against the insurer.”