Burlington Ins. Co. v. United Coatings Mfg. Co.

• Decision Date: 15 October 2007
• Docket Number: Civil No. 06-00679 JMS/KSC.
• Parties: The BURLINGTON INSURANCE COMPANY, Plaintiff, v. UNITED COATINGS MANUFACTURING COMPANY, INC., Defendant. United Coatings Manufacturing Company, Inc., Counterclaimant, v. The Burlington Insurance Company, Counterclaim Defendant.
• Court: U.S. District Court — District of Hawaii

518 F.Supp.2d 1241

The BURLINGTON INSURANCE COMPANY, Plaintiff, v. UNITED COATINGS MANUFACTURING COMPANY, INC., Defendant.

United Coatings Manufacturing Company, Inc., Counterclaimant, v. The Burlington Insurance Company, Counterclaim Defendant.

Civil No. 06-00679 JMS/KSC.

United States District Court, D. Hawai`i.

October 15, 2007.

Michael D. Prough, Morison-Knox Holden & Prough, LLP, Walnut Creek, CA, Ralph J. O'Neill, Stephen B. MacDonald, MacDonald Rudy Byrns O'Neill & Yamauchi, Honolulu, HI, for Plaintiff and Counterclaim Defendant.

John R. Myrdal, Mary L. Martin, Robert E. Chapman, Elise Owens Thorn, Clay Chapman Crumpton Iwamura & Pulice, Honolulu, HI, for Defendant and Counterclaimant.

ORDER GRANTING PLAINTIFF AND COUNTERCLAIM DEFENDANT THE BURLINGTON INSURANCE COMPANY'S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANT AND COUNTERCLAIMANT UNITED COATINGS MANUFACTURING COMPANY'S MOTION FOR SUMMARY JUDGMENT

J. MICHAEL SEABRIGHT, District Judge.

I. INTRODUCTION

Defendant and Counterclaimant United Coatings Manufacturing Company, Inc. ("United Coatings") is the named insured of five commercial general liability insurance contracts issued by Plaintiff and Counterclaim Defendant The Burlington Insurance Company ("Burlington"). Burlington and United Coatings both move for summary judgment as to whether Burlington has a duty to defend and/or indemnify United Coatings in an underlying state action brought by four separate Associations of Apartment Owners ("AOAO") in which it is alleged that "Acryclad," a topcoat manufactured and sold by United Coatings, and represented by United Coatings to be 100% acrylic, contained nonacrylic filler and did not meet the AOAO's performance expectations ("AOAO State Action"). As a matter of law, the court finds that Burlington is not obligated to defend or indemnify United Coatings because the claims asserted in the AOAO State Action, including claims for negligent misrepresentation, negligence, and strict products liability, are contract-based. The court therefore GRANTS Burlington's Motion for Summary Judgment and DENIES United Coatings' Countermotion for Summary Judgment.

II. BACKGROUND

A. Factual Background

1. Acryclad

The AOAO contracted with Sealtech, Inc., a subdivision of Seal Masters of Hawaii ("Sealtech"), to undertake the repair and repainting of several residential buildings ("Project"). The AOAO specified that each Project building was to be covered with an elastomeric wall coating system with a topcoat of low-fill, flexible, waterproof, 100% acrylic paint. The AOAO explains that it selected a 100% acrylic topcoat in order to protect the elastomeric coating from degradation (including chalking due to ultraviolet exposure), prolong the useful life of the elastomeric coating, and minimize maintenance and repair expenses.

According to the AOAO State Action Complaint, Sealtech selected "Aquathon," an elastomeric system manufactured by United Coatings for use on the Project buildings. United Coatings then recommended that Sealtech use its "Acryclad" paint as the Project's topcoat. United Coatings represented that Acryclad was "a 100% acrylic emulsion coating incorporating ... extreme ultraviolet resistance for long term weather applications" and that it was a "[r]ich, acrylic formulation designed for maximum ultraviolet and weather resistance." AOAO State Action Compl. ¶ 6. Sealtech allegedly relied on these representations when purchasing Acryclad as the topcoat for the Project.

At some point following the application of Acryclad, residents began to notice chalking and streaking of the exterior walls, streaking and dirtying of the windows, and chips of fallen paint in the parking lots. Id. ¶ 7. An agent of Architectural Diagnostics, Ltd., a firm hired by the AOAO to provide architectural and consulting services for the Project, obtained samples of the Acryclad topcoat. Laboratory tests revealed that Acryclad was not 100% acrylic but instead contained a binder comprised of an acrylic backbone copolymerized with both acrylonitrile and styrene groups which made Acryclad susceptible to degradation from ultraviolet exposure, leading to the release of pigment particles and the appearance of chalking. Id. ¶ 9. By this time, Acryclad had been applied to part or all of each of the Project buildings.

2. The CGL Policy

United Coatings is the named insured on five commercial general liability policies issued by Burlington effective from April 30, 2002 to April 30, 2007. See Courchaine Decl. Exs. A, B, C, D & E. The provisions of each contract relevant to the present dispute are identical and are collectively referred to in this Order as the "CGL Policy."

The CGL Policy "applies to `property damage' only if ... [the] `property damage' is caused by an `occurrence' that takes place in the `coverage territory.'" CGL Policy § I(1)(b)(1). "Property damage" is defined under the CGL Policy as

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the "occurrence" that caused it.

CGL Policy § V(17). "Occurrence" is defined by the CGL Policy as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." CGL Policy § V(13).

3. The AOAO State Action

On July 11, 2006, the AOAO filed suit against Sealtech and United Coatings in the Circuit Court for the First Circuit of the State of Hawaii, asserting counts of misrepresentation (Count I); strict products liability (Count II); negligence (Count III); breach of contract (Count IV); breach of warranties (Count V); unfair or deceptive acts or practices (Count VI); unfair competition (Count VII); and specific performance (Count VIII). On November 20, 2006, United Coatings tendered defense of the AOAO State Action to Burlington. Burlington agreed to defend subject to a reservation of rights.

B. Procedural Background

On December 28, 2006, Burlington filed its Complaint in this court seeking a declaratory judgment regarding its duties to defend and/or indemnify United Coatings and asserting entitlement to reimbursement for fees incurred or paid in its defense of the AOAO State Action. United Coatings filed its Answer and Counterclaim on January 26, 2006 and Burlington filed its Answer to the Counterclaim on February 23, 2007.

Burlington filed its Motion for Summary Judgment on July 6, 2007. United Coatings filed its Opposition and Countermotion for Summary Judgment on August 23 2007. Burlington filed its Reply and Opposition to the Countermotion on August 30, 2007 and United Coatings filed its Reply on September 5, 2007. The court heard oral arguments on September 10, 2007.

III. STANDARDS OF REVIEW

A. Summary Judgment Standard

A party is entitled to summary judgment where there is no genuine issue of material fact. Fed.R.Civ.P. 56(c). When reviewing a motion for summary judgment, the court construes the evidence — and any dispute regarding the existence of facts — in favor of the party opposing the motion. Snead v. Metro. Prop. & Cas. Ins. Co., 237 F.3d 1080, 1086 (9th Cir. 2001). "One of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses." Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Thus, summary judgment will be mandated if the nonmoving party "`fails to make a showing sufficient to establish the existence of an element essential to that party's case.'" Broussard v. Univ. of Cal. at Berkeley, 192 F.3d 1252, 1258 (9th Cir.1999) (quoting Celotex, 477 U.S. at 322, 106 S.Ct. 2548). In insurance disputes, the insurer is only required "to establish the absence of a genuine issue of material fact regarding the question of coverage pursuant to the plain language of the insurance policies and the consequent entitlement to the entry of judgment as a matter of law." State Farm Fire & Cas. Co. v. Gorospe, 106 F.Supp.2d 1028, 1030 (D.Haw.2000).

B. Diversity Cases Under 28 U.S.C. § 1332

The court has diversity jurisdiction over this case under 28 U.S.C. § 1332. Under Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), federal courts sitting in diversity cases apply federal procedural rules and substantive state law. "In the absence of controlling state law, a `federal court sitting in diversity must use its own best judgment in predicting how the state's highest court would decide the case.'" Tirona v. State Farm Mut. Auto. Ins. Co., 812 F.Supp. 1083, 1085 (D.Haw.1993) (citations omitted). "In so doing, a federal court may be aided by looking to well-reasoned decisions from other jurisdictions." Takahashi v. Loomis Armored Car Sera., 625 F.2d 314, 316 (9th Cir.1980).

IV. ANALYSIS

The claims, in the AOAO State Action, including misrepresentation, strict products liability, negligence, breach of contract, breach of warranties, unfair or deceptive acts or practices, unfair competition, and specific performance are contract claims or contract-based tort claims and thus not covered by the CGL Policy.¹

A. Duties to Defend and Indemnify Under Hawaii Law

1. General Construction of Insurance Contracts

Under Hawaii law, courts must look to the language of the insurance policy to determine the scope of the insurer's duties. See Sentinel Ins. Co. v. First Ins. Co. of Haw., 76 Hawai`i 277, 287, 875 P.2d 894, 904 (1994); see also Hawaiian Ins. & Guar. Co. v. Fin. Sec. Ins. Co., 72 Haw. 80, 87, 807 P.2d 1256, 1260 (1991) ("In the context of insurance coverage disputes, we must look to the language of the insurance policies themselves to ascertain whether coverage exists, consistent with the insurer and insured's intent and expectations."). The Hawaii Supreme Court has offered the following...