Commerce & Industry Ins. Co. v. Bank of Hawaii

• Decision Date: 13 July 1992
• Docket Number: No. 15715,15715
• Citation: 832 P.2d 733,73 Haw. 322
• Court: Hawaii Supreme Court
• Parties: COMMERCE & INDUSTRY INSURANCE COMPANY, Plaintiff/Counter-Defendant-Appellant, v. BANK of HAWAII, Defendant/Counter-Claimant-Appellee, and John Does 1-10, Jane Does 1-10, Doe Corporations 1-10, and Doe Governmental Entities 1-10, Defendants.

Page 733

832 P.2d 733

73 Haw. 322

COMMERCE & INDUSTRY INSURANCE COMPANY, Plaintiff/Counter-Defendant-Appellant, v. BANK of HAWAII, Defendant/Counter-Claimant-Appellee, and John Does 1-10, Jane Does 1-10, Doe Corporations 1-10, and Doe Governmental Entities 1-10, Defendants.

No. 15715.

Supreme Court of Hawai'i.

July 13, 1992.

Reconsideration Denied July 31, 1992.

Syllabus by the Court

1. The insurer's duty to defend its insured is contractual in nature and courts look to the language of the particular policy involved to determine the scope of that duty.

2. 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 of the policy's coverage.

3. Where the pleadings fail to allege any basis for recovery within the coverage clause the insurer has no obligation to defend.

4. If the plaintiff's complaint against the insured alleges facts which might support a recovery covered by the policy, it is the duty of the defendant to undertake the defense, until it can confine the claim to a recovery that the policy does not cover.

5. An insurer has a duty to proceed in defense of a suit, at least to the point of establishing that liability upon which plaintiff was relying was in fact not covered by the policy, and not merely that it might not be.

6. The duty to defend is not contingent on actual liability as determined by the result of trial.

7. The duty to defend is not outcome-determinative but merely depends on a potential for coverage and is determined at the time suit is brought and not at the termination of the litigation.

8. An insurer's ultimate non-liability should not free it from its concurrent contractual duty to defend.

9. Hawaii Rules of Civil Procedure (HRCP) Rule 54(b) makes absolutely clear the tentative nature of a dismissal of a claim prior to issuance of a judgment on all claims or as to all parties. The duty to defend continues until the potential for liability is finally resolved, which would require the insurer to defend until either HRCP Rule 54(b) certification was granted and the appeal period had expired or a final judgment had disposed of the entire case.

10. When the insurer begins the defense of its insured and then determines that it is not obligated to do so, it cannot withdraw if that action would prejudice the insured unless the insurer has expressly reserved its right to withdraw.

11. Where an insurer contests its continued duty to pay for the defense of claims made against an insured and initiates a declaratory action, and the court concludes the insurer had an obligation to continue to pay the costs of defense, HRS § 431:10-242 clearly provides that the insured is also entitled to reasonable attorneys fees and costs for the declaratory action.

Roy F. Hughes (Stuart N. Fujioka, with him on the opening brief), Honolulu, for plaintiff/counter-defendant-appellant.

Dorothy Sellers of Carlsmith, Ball, Wichman, Murray, Case, Mukai & Ichiki, Honolulu, for defendant/counter-claimant-appellee.

Before LUM, C.J., WAKATSUKI and LEVINSON, JJ., BURNS, Chief Judge in place of MOON, J., recused, and HEEN, Judge, in place of KLEIN, J., recused.

LUM, Chief Justice.

From a declaratory judgment action to determine the scope of plaintiff-appellant Commerce & Industry Insurance Company's (CIIC) duty to defend, CIIC appeals an order granting summary judgment in favor of defendant-appellee Bank of Hawaii (BOH) and holding that CIIC had a duty to defend BOH even after claims covered by CIIC were dismissed in the underlying litigation.

We agree with the lower court that dismissal of the emotional distress claim which gave rise to the initial duty to defend did not finally dispose of the potential for coverage. Because the dismissal of the claim giving rise to coverage was not made final and appealable, CIIC's refusal to pay the continued costs of defending the entire suit was improper.

I.

In 1986, BOH filed an action against Business Phones Hawaii, Inc. (Business Phones), Anthony Geary (Geary) and Christy Kawabata (Kawabata) to collect on a debt. Business Phones, Geary, and Kawabata filed counterclaims based on alleged misrepresentations made by BOH during the course of negotiations for the loan, and Geary and Kawabata also alleged emotional distress. CIIC, BOH's general liability insurance carrier, acknowledged a potential for coverage as to the emotional distress claims and a concomitant duty to defend. Rather than hiring separate counsel to defend the suit, CIIC agreed to pay a portion of the hourly rate of the law firm hired by BOH to collect the loan. Notably, CIIC denied coverage for any counterclaim except emotional distress but did not expressly reserve its right to discontinue payment for the defense of the suit where those claims became inactive or resolved.

On September 22, 1988, the trial court issued an order granting BOH's Motion for Judgment on the Pleadings or Alternatively for Summary Judgment on the asserted emotional distress claims brought by Kawabata and Geary. On October 24, 1988, Kawabata filed a motion pursuant to Rule 54(b), Hawaii Rules of Civil Procedure (HRCP), to certify the order as a final order for the purposes of appeal which the lower court finally granted on May 23, 1989. Neither Geary nor BOH filed a motion for HRCP Rule 54(b) certification as to the dismissal of Geary's claim for emotional distress.

CIIC agreed to bear the attorneys' fees and costs associated with the Kawabata appeal of the emotional distress claim. Eventually, the Kawabata appeal was dismissed without briefing or argument. Bank of Hawaii v. Business Phones, Inc., No. 13927, appeal dismissed per stipulation, (May 11, 1990).

On October 12, 1988, CIIC informed BOH that with the dismissal of claims for emotional distress, the obligation to afford a defense no longer existed and that CIIC would no longer be responsible for any portion of the litigation costs. When it became clear that BOH disagreed with the position taken by CIIC with regard to CIIC's continued obligation to pay for defense, CIIC filed the instant declaratory judgment action.

In this declaratory action, the court below held that the duty to defend extends to the entire suit and did not cease where the dismissal of the Geary emotional distress claim lacked finality. At issue in this appeal is whether CIIC had a duty to continue to pay for the defense during the period of litigation following the dismissal of Kawabata's emotional distress claim until HRCP Rule 54(b) certification and dismissal of Geary's emotional distress claim without certification.

II.

The insurer's duty to defend its insured is contractual in nature and this court must look to the language of the particular policy involved to determine the scope of that duty. Hawaiian Ins. & Guar. Co. v. Blair, Ltd., 6 Haw.App. 447, 449, 726 P.2d 1310, 1312 (1986). The policy here in question states,

the company shall have the right and duty to defend any suit against the insured seeking damages on account of [covered claims] ..., even if any of the allegations of the suit are groundless, false or fraudulent....

Thus, the obligation to defend under this policy, as with most liability insurance policies, is broader than the duty to pay claims and arises wherever there is the mere potential for coverage. See, e.g., First Ins Co. of Hawaii v. State of Hawaii, 66 Haw. 413, 420, 665 P.2d 648, 653 (1983); Standard Oil Co. of California v. Hawaiian Ins. & Guar. Co., 65 Haw. 521, 654 P.2d 1345 (1982). 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." 66 Haw. at 417, 665 P.2d at 652.

The converse of the rule that the duty arises wherever there is a potential for coverage and extends to a defense of the entire suit is also true. " 'Where pleadings fail to allege any basis for recovery within the coverage clause the insurer has no obligation to defend.' " Hawaiian Ins. & Guar. Co. v. Blair, Ltd., 6 Haw.App. 447, 449, 726 P.2d 1310, 1312 (1986) (quoting 7C J. Appleman, Insurance Law and Practice, § 4684.01 at 91 (Berdal ed. 1979)); see also Sturla, Inc. v. Fireman's Fund Ins. Co., 67 Haw. 203, 211, 684 P.2d 960, 965 (1984) (where there is no potential for indemnification, there is no duty to defend).

Between the maxim that the duty to defend arises where there is a potential for covered liability and the maxim that there is no duty to defend where there is no potential for coverage, courts have oft quoted the following rule enunciated by Judge Learned Hand:

It follows that, if the plaintiff's complaint against the insured alleged facts which would have supported a recovery covered by the policy, it was the duty of the defendant to undertake the defence [sic], until it could...