Burlington Ins. v. Oceanic Design & Const.

• Decision Date: 08 September 2004
• Docket Number: No. 02-17317.,02-17317.
• Court: U.S. Court of Appeals — Ninth Circuit
• Parties: The BURLINGTON INSURANCE COMPANY, Plaintiff-Appellee, v. OCEANIC DESIGN & CONSTRUCTION, INC., Defendant-Appellant.

383 F.3d 940

The BURLINGTON INSURANCE COMPANY, Plaintiff-Appellee, v. OCEANIC DESIGN & CONSTRUCTION, INC., Defendant-Appellant.

No. 02-17317.

United States Court of Appeals, Ninth Circuit.

Submitted February 11, 2004.^*

Filed September 8, 2004.

COPYRIGHT MATERIAL OMITTED

Gerald S. Clay and Scott I. Batterman, Stanton Clay Chapman Crumpton & Iwamura, Honolulu, HI, for the defendant-appellant.

Stephen B. MacDonald and Ralph O'Neill, MacDonald Rudy Byrns O'Neill & Yamauchi, Honolulu, HI, for the plaintiff-appellee.

Appeal from the United States District Court for the District of Hawaii; Barry M. Kurren, Magistrate Judge, Presiding. D.C. No. CV-02-00219-BMK.

Before: TASHIMA and CLIFTON, Circuit Judges, and LEIGHTON, District Judge.^**

CLIFTON, Circuit Judge:

The issue presented by this case is whether, under Hawaii law, a company which contracted to build a house is covered under its commercial general liability policy against claims brought against the company by the dissatisfied homeowners. The district court granted summary judgment to the insurer on the ground that claims for breach of contract and breach of contract-related tort duties did not give rise to coverage within the scope of the policy. We affirm.

I. BACKGROUND

Defendant-Appellant Oceanic Design & Construction, Inc., a Hawaii corporation, contracted to build a single-family residence in Honolulu, Hawaii for homeowners Jeanette C. Chae, Susan K. Woo, and Diana Han (a/k/a Diana Chong) (collectively the "homeowners"). Construction was completed, but not to the satisfaction of the homeowners, and they refused to pay. Oceanic filed suit against the homeowners in Hawaii state court in April 1999, alleging the homeowners had breached the contract by failing to pay the balance due. See Oceanic Design & Constr., Inc. v. Jeanette C. Chae, et al., Civil No. 99-1536-04, Circuit Court of the First Circuit, State of Hawaii (the "underlying lawsuit").

The homeowners asserted a counterclaim against Oceanic in that lawsuit, alleging five causes of action: (1) breach of contract; (2) breach of express and implied warranties; (3) deceptive trade practices;¹ (4) negligent and/or intentional infliction of emotional distress upon homeowner Han; and (5) punitive damages. The gravamen of the homeowners' allegations was that Oceanic improperly designed and/or constructed the foundation of the residence causing earth movement and resulting in physical and structural damage to both the residence and the retaining walls on the property.

At the time the counterclaim was filed, Oceanic was the named insured under a standard-form commercial general liability ("CGL") insurance policy issued by Defendant-Appellee Burlington Insurance Company.² Coverage A of the policy, titled "Bodily Injury and Property Damage Liability," provided that Burlington will "pay those sums that the insured becomes legally obligated to pay because of `bodily injury' or `property damage' to which this insurance applies." The policy further provided that Burlington has the "right and duty to defend the insured against any `suit' seeking those damages," but "no duty to defend the insured against any `suit' seeking damages ... to which this insurance does not apply." Coverage was limited to "`bodily injury' or `property damage' caused by an `occurrence.'" The policy defined "[o]ccurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions," but did not define "accident." Coverage was excluded for "`bodily injury' or `property damage' expected or intended from the standpoint of the insured."

Oceanic timely tendered defense of the counterclaim to Burlington. Burlington agreed to defend under a reservation of rights. Burlington then filed this action in the district court seeking a declaration that the CGL policy did not provide coverage against the homeowners' counterclaim.

Burlington moved for summary judgment, arguing that none of the allegations in the counterclaim were covered under the policy. Oceanic filed a cross-motion for summary judgment, asserting that it was entitled to a defense from Burlington because there was a possibility that one or more of the allegations in the counterclaim were covered under the policy. The district court concluded that the claims alleged in the counterclaim were contract or contract-based tort claims not within the scope of coverage of the CGL policy.³ Accordingly, the district court granted Burlington's motion for summary judgment and denied Oceanic's cross-motion for summary judgment.

Oceanic timely appealed. We have jurisdiction under 28 U.S.C. § 1291.

II. DISCUSSION

We review de novo a district court's decision to grant summary judgment and apply the same summary judgment standard employed by the district court. United States v. City of Tacoma, 332 F.3d 574, 578 (9th Cir.2003). Therefore, we must determine, viewing the evidence in the light most favorable to Oceanic, whether there are any genuine issues of material fact and whether the district court correctly applied the substantive law. Id. The district court's interpretation of state law is reviewed under the same de novo standard that is used to review questions of federal law. Conestoga Servs. Corp. v. Executive Risk Indem., Inc., 312 F.3d 976, 981 (9th Cir.2002).

To the extent this case raises issues of first impression, our court, sitting in diversity, "must use [its] best judgment to predict how the Hawaii Supreme Court would decide[the] issue." Helfand v. Gerson, 105 F.3d 530, 537 (9th Cir.1997). "In so doing, a federal court may be aided by looking to well-reasoned decisions from other jurisdictions." Takahashi v. Loomis Armored Car Serv., 625 F.2d 314, 316 (9th Cir.1980).

Hawaii insurance law provides for a broad duty to defend arising whenever the pleadings raise a potential for indemnification liability of the insurer to the insured. Hawaiian Holiday Macadamia Nut Co. v. Indus. Indem. Co., 76 Hawai'i 166, 872 P.2d 230, 233 (Haw.1994). The duty to defend exists irrespective of whether the insurer is ultimately found not liable to the insured and is based on the possibility for coverage, even if remote, determined at the time suit is filed. See Commerce & Indus. Ins. Co. v. Bank of Hawaii, 73 Haw. 322, 832 P.2d 733, 736 (1992). "Furthermore, where a suit raises a potential for indemnification liability of the insurer to the insured, the insurer has a duty to accept the defense of the entire suit even though other claims of the complaint fall outside the policy's coverage." Hawaiian Holiday, 872 P.2d at 233 (citation and quotation marks omitted).

Hawaii adheres to the "complaint allegation rule." Pancakes of Hawaii, Inc. v. Pomare Props. Corp., 85 Hawai'i 286, 944 P.2d 83, 88 (App.1997). The focus is on the alleged claims and facts. The duty to defend "is limited to situations where the pleadings have alleged claims for relief which fall within the terms for coverage of the insurance contract. `Where pleadings fail to allege any basis for recovery within the coverage clause, the insurer has no obligation to defend.'" Hawaiian Holiday, 872 P.2d at 233 (citation omitted). In Hawaii, the terms of an insurance policy are to be interpreted according to their plain, ordinary, and accepted sense in common speech. Dairy Road Partners v. Island Ins. Co., 92 Hawai'i 398, 992 P.2d 93, 106 (2000). Each policy is to be interpreted according to the entirety of its terms and conditions. See AIG Hawaii Ins. Co. v. Estate of Caraang, 74 Haw. 620, 851 P.2d 321, 326 (1993). "All doubts as to whether a duty to defend exists are resolved against the insurer and in favor of the insured." Dairy Road Partners, 992 P.2d at 107 (citation and quotation marks omitted).

Both parties have acknowledged that there are no genuine issues of material fact. We are therefore asked to decide whether any of the claims asserted against Oceanic by the homeowners in the underlying lawsuit are covered under the policy to trigger Burlington's duty to defend.

The policy covers claims for liability for "bodily injury" or "property damage" if "caused by an occurrence." Because Burlington has conceded for purposes of appeal that the counterclaim has alleged both "bodily injury" and "property damage," we must decide whether, under Hawaii law, any of the homeowners' allegations present the possibility that their damages were caused by an "occurrence," for which there is coverage under the policy.

A. Homeowners' Negligent Breach of Contract Allegation

Oceanic argues that the policy potentially covers the "other acts" claim asserted in paragraph 10(l) of the homeowners' counterclaim. That claim reads in context:

FIRST CAUSE OF ACTION

BREACH OF CONTRACT

8. [Homeowners] contracted with [Oceanic] on or about December 1, 1998 for the construction and supervision of the Poola Street residence.

9. In consideration of the services described above, [Oceanic] was paid certain sums of money.

10. [Oceanic] breached its contractual obligations in at least the following respects:

a. Failure to properly plan, supervise, inspect, and construct the Poola Street residence, including but not limited to the retaining walls and the preparation of the soils and/or foundation of the residence;

b. Failure to ensure that said Poola Street residence was free from faults and defects;

c. Planned, designed, engineered, and constructed a structure which was unable to support foreseeable loads;

d. Planned, designed, engineered, and constructed a structure which was susceptible to water and earth movement damage;

e. Violated applicable State of Hawaii, County of Honolulu and/or Uniform building codes, ordinances, laws and regulations;

f. Planned, designed, engineered, and constructed a residence and [sic] substantially inferior to the standard of care and quality which had been agreed;

g. Identified for use or allowed to be used, improper construction materials, techniques and methods;

h....