The Hawaii Federal District Court recently remanded a coverage case to allow the Hawaii state court to decide whether an exclusion in a professional liability policy was applicable.  See  Keown v. Tudor Ins. Co., 2008 U.S. Dis;t. LEXIS 42996 (D. Haw. May 30, 2008).

     The insured was a realtor and held a professional liability policy issued by Tudor.  The insured was sued by the Honpa Hongwanji on Kauai for his involvement in arranging a co-tenancy between the Hongwanji and Early School, of which the insured happened to be the principal.  The underlying complaint alleged that the insured, acting as principal of Early School, represented both parties in negotiating a purchase of the property.   The property was purchased without an agreed-upon written co-tenancy agreement being entered.  A mortgage was later filed on the property, identifying the insured as the mortgagee of an undivided 1/2 interest in the property. The Honwanji’s complaint sought: (1) a partition and declaration that its property was not encumbered by the mortgage; and (2) damages from the insured for breaching his duty of care in representing the Hongwanji in the purchase.

     The insured sought a defense from Tudor.  Tudor denied coverage because the insured was not acting as a realtor at the time of purchase.  The insured sued in Hawaii state court, for declaratory relief and attorney fees, but Tudor removed to federal court on diversity grounds.

     Judge Seabright affirmed the magistrate’s Findings and Recommendations that the case should be remanded to state court.  Although Tudor argued the request for attorney fees was a claim for monetary relief, the Court noted the fee request was dependent on the claim for declaratory relief.  Fees were sought under Haw. Rev. Stat. 431:10-242, which did not create a separate cause of action for attorney’s fees, but instead conditioned the payment of fees on the insured’s prevailing on its liability claim.  Further, the case involved a state law issue not yet addressed by the Hawaii courts.  Specifically, the insured challenged the denial of coverage on the basis that the real estate transaction arose from the insured’s services as a school principal.  It was unclear under Hawaii state law whether the claim was excluded by the policy.  By remanding the case, the Hawaii state courts could determine the proper scope of the exclusion.