The federal district court for the District of Hawaii denied the brokers' motion for summary judgment seeking dismissal from claims that they inadequately advised the insured of the law regarding construction defects in Hawaii. Am Auto. Ins. Co. v. Haw. Nut & Bolt, Inc., 2017 U.S. Dist. LEXIS 148571.
Safeway sued Hawaii Nut & Bolt (HNB) and others for construction defects in a newly constructed store. The underlying complaint alleged products liability claims against HNB as the distributor of the "VersaFlex Coating System." HSB had represented that the coating system was adequate for its intended use. The underlying complaint alleged failure of the VersaFlex Coating System in waterproofing the roof deck of the store. After the store opened, water leaks from the roof deck appeared. Safeway alleged they were caused by the cracks and failures in the waterproof membrane in the roof deck.
HNB notified its insurers of the claims. The insurers defended HNB during the litigation subject to reservation of rights letters.
Safeway and HNB settled the underlying complaint and entered a stipulated judgment by which Safeway was assigned all of HNB's claims against its brokers, Monarch Insurance Services, Inc. and Insurance Associates, Inc., for selling to HNB policies with inadequate coverage.
The insurers filed a complaint for declaratory judgment against HNB seeking a declaration that under the policies HNB had purchased, the insurers had no duty to further defend and/or indemnify. The insurers had issued to HNB three CGL policies and three umbrella and excess policies. HNB had purchased the policies through Douglas Moore who was associated with Monarch and later Insurance Associates (brokers).
HNB filed a counterclaim against the insurers and later amended the counterclaim to add the brokers as counterclaim defendants. The insurers settled their declaratory judgment action and the counterclaims against them. The breach of contract and breach of fiduciary duty claims against the brokers remained.
Monarch and Mr. Moore filed a motion for summary judgment, to which Insurance Associates substantively joined.
Under Hawaii law, "an insurance agent owes a duty to the insured to exercise reasonable care, skill, and diligence in carrying out the agent's duties in procuring insurance." Quality Furniture, Inc. v. Hay, 61 Haw. 89, 93, 595 P.2d 1066, 1068 (1979). The brokers contended, however, that these duties did not include anticipating the Intermediate Court of Appeals' decision in Group Builders, Inc. v. Admiral Ins. Co., 123 Haw. 142, 231 P.3d 67 (Haw. Ct. App. 2010), a duty on which HNB and Safeway's claims depended. Group Builders found that "construction defect claims do not constitute an 'occurrence' under a CGL policy," and thus contract and contract-based tort claims arising from shoddy performance were not covered under CGL policies. See 123 Haw. at 148-49, 231 P.3d at 73-74. In 2011, the Hawaii legislature passed Act 83, under which "the meaning of the term 'occurrence' shall be construed in accordance with the law as it existed at the time that the insurance policy was issued."
The district court had previously held that policies issued before Group Builders and after the Ninth Circuit's decision in Burlington Ins. Co. v. United Ins. Co. v. Oceanic Design & Construction, Inc., 383 F.3d 940 (9th Cir. 2004) (holding that under Hawaii law, construction defects did not arise from an occurrence and were not covered) continued to fall within the Ninth Circuit's Burlington analysis. The policies here pre-dated Group Builders, so Act 83 required that the policies be interpreted according to the then-existing law, i.e., based on Burlington.
The brokers argued that Hawaii law regarding construction defect claims was unsettled during the time that the policies were issued. Further, the brokers did not owe duties to HNB to advise it of the risk it was not covered for the types of claims in the underlying action. Monarch, however, held itself out as having a "focus" in construction insurance. Mr. Moore began working with HNB in 2000 and knew of HNB's need for product liability insurance. HNB representatives testified that they relied on Mr. Moore to procure appropriate insurance for the business. The court noted that a reasonable jury could find that Mr. Moore was informed about HNB's business needs and that HNB's continued reliance on Mr. Moore led to a duty to advise HNB regarding its product liability coverage and any risks to coverage.
There was also evidence which would allow a reasonable jury to find Mr. Moore breached his duties to HNB. The policies were renewed each year after Burlington in 2004 and subsequent relevant cases from the district court. Mr. Moore testified that even after Group Builders, he did not understand the definition of an "occurrence" under a CGL policy for a construction-related business because he did not work with the construction industry "very much." A reasonable jury could determine that while Mr. Moore represented to HNB that there was some product liability coverage, he was unaware of and did not advise HNB of any risk that the policies might exclude product liability coverage.
Therefore, the broker's motion on the duties owed to HNB was denied.