Hawaiian Ins. & Guar. Co., Ltd. v. Blair, Ltd., 11093

• Decision Date: 17 October 1986
• Docket Number: No. 11093,11093
• Citation: 6 Haw.App. 447,726 P.2d 1310
• Court: Hawaii Court of Appeals
• Parties: HAWAIIAN INSURANCE & GUARANTY COMPANY, LIMITED, Plaintiff-Appellee, v. BLAIR, LTD., Defendant-Appellant, and Kukui Nuts of Hawaii, Inc., Defendant-Appellee, and Pomare, Ltd. and John Does 1 through 20, Defendants.

Page 1310

726 P.2d 1310

6 Haw.App. 447

HAWAIIAN INSURANCE & GUARANTY COMPANY, LIMITED, Plaintiff-Appellee, v. BLAIR, LTD., Defendant-Appellant, and Kukui Nuts of Hawaii, Inc., Defendant-Appellee,

and

Pomare, Ltd. and John Does 1 through 20, Defendants.

No. 11093.

Intermediate Court of Appeals of Hawai'i.

Oct. 17, 1986.

Syllabus by the Court

1. The insurer's duty to defend is broader than its duty to pay, and 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.

2. Where the pleadings in the complaint fail to allege any basis for recovery within the coverage clause of the policy, the insurer has no obligation to defend.

3. Where the complaint alleged that the insured imported and sold fake Hawaiian kukui nut leis and jewelry thereby causing damage to the value of plaintiff's "product line" of authentic Hawaiian kukui nut leis and jewelry, the "diminution in value" of plaintiff's "product line" did not constitute "loss of use of tangible property" within the meaning of "property damage" under the insured's comprehensive general liability insurance policy, and the insurer had no duty to defend.

4. Trade libel or disparagement means the publication of matters disparaging the quality of another's land, chattel, or intangible things, that the publisher should recognize as likely to result in pecuniary loss to the other through the conduct of a third person in respect to the other's interest in the property.

5. "Passing off" or "palming off" an inferior product for a better product does not constitute publication in an alleged trade libel or disparagement, but makes a case for unfair competition.

6. Where a comprehensive general liability insurance policy provides personal injury liability coverage for damages arising from the publication of a libel or other defamatory or disparaging material, except publications in the course of or related to advertising, even if plaintiff's allegation that the insured "passed off" or "palmed off" its inferior products as being plaintiff's products may reasonably infer publication because communication to the buyers or prospective buyers of the insured products was involved, the communication constitutes advertising which is excepted from coverage, and the insurer had no duty to defend.

7. Under HRS § 431-455 an insurer's liability for the insured's attorney's fees and costs arises only when it is ordered to pay policy benefits.

Robert J. Smolenski (James W. Kaywell, with him on briefs, Smolenski & Wooddell, of counsel), Honolulu, for defendant-appellant.

Lex R. Smith (Bert T. Kobayashi, Jr. and John T. Komeiji, with him on brief, Kobayashi, Watanabe, Sugita & Kawashima, of counsel), Honolulu, for plaintiff-appellee.

Before BURNS, C.J., and HEEN and TANAKA, JJ.

TANAKA, Judge.

Defendant Blair, Ltd. (Blair), the insured under a comprehensive general liability insurance policy (Policy) issued by plaintiff Hawaiian Insurance & Guaranty Company, Limited (HIG), the insurer, appeals from the declaratory judgment holding that HIG is not obligated to defend and indemnify Blair under the Policy against the claims of defendant Kukui Nuts of Hawaii, Inc. (KNH). We affirm.

I.

On September 13, 1984, KNH filed a 22-count complaint (Complaint) containing 131 paragraphs of allegations against Blair and eleven other named defendants. ¹ The Complaint alleged that KNH was successfully engaged in the business of manufacturing and selling leis and jewelry made from Hawaiian kukui ² nuts, that the defendants imported and sold "fake" Hawaiian kukui nut leis and jewelry "made from tung nuts grown apparently in Taiwan[,]" and that the importation and sale of such fakes "drove" KNH into a reorganization proceeding under chapter 11 ³ of the Bankruptcy Code in May of 1984.

Blair tendered the defense of the KNH lawsuit to HIG. On January 14, 1985, HIG commenced this action against Blair and KNH ⁴ seeking a declaratory judgment that it had no obligation to defend and indemnify Blair under the Policy. Blair counterclaimed alleging that HIG breached the Policy, breached an implied covenant of good faith and fair dealing under the Policy, breached its fiduciary duty as insurer, and engaged in "unfair claim settlement practices."

Both HIG and Blair moved for summary judgment. On November 27, 1985, the lower court granted HIG's motion and denied Blair's motion. After the entry of a declaratory judgment, Blair appealed.

II.

Since the insurer's duty to defend its insured is contractual in nature, to determine the scope of such duty, we must first look at the language of the particular policy involved. First Insurance Co. of Hawaii, Inc. v. State, 66 Haw. 413, 665 P.2d 648 (1983). Here, the pertinent language in the Policy reads:

[T]he company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent[.]

Thus, "the duty to defend is broader than the duty to pay[,]" Id. 66 Haw. at 417, 665 P.2d at 652, and "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." Id. Thus, " 'the insurer is obligated to provide a defense against the allegations of covered as well as the non-covered claims.' " Id. 66 Haw. at 418, 665 P.2d at 652 (quoting 7C J. Appleman, Insurance Law and Practice § 4684.01 at 106 (Berdal ed. 1979)).

Conversely, "where pleadings fail to allege any basis for recovery within the coverage clause the insurer has no obligation to defend." 7C J. Appleman, Insurance Law and Practice, § 4684.01 at 91 (Berdal ed. 1979). See Sturla, Inc. v. Fireman's Fund Insurance Co., 67 Haw. 203, 684 P.2d 960 (1984).

Like the circuit court, we believe that KNH's allegations in the Complaint fail to show any liability or loss covered by the Policy. In other words, the bases of Blair's liability and KNH's damages averred in the Complaint are not risks HIG undertook to protect under the Policy. Consequently, we hold that the circuit court properly declared that HIG had no duty to defend or to indemnify Blair.

A.

Blair contends paragraph 128 of the Complaint raised a potential claim of "property damage" as defined in the Policy and, therefore, HIG had a duty to defend.

Paragraph 128 alleges:

Defendants and each of them have further damaged the value of Plaintiff's product line, trademark(s), tradename(s) and the reputation and good will of Plaintiff in the community and in the public mind.

The Policy provides coverage for "property damage" caused by an "occurrence" and contains the following definitions:

"Occurrence" means an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured;

* * *

* * *

"property damage" means (1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period[.]

Blair starts with the premise that KNH's "product line" is "tangible property" consisting of "the stock of things produced by KNH, or KNH's 'products.' " Although the Complaint does not allege any "physical injury" to KNH's product line, Blair claims there was "loss of use" of the product line, contending that "diminution in value" constitutes "loss of use." Blair concludes its thesis by asserting that since it "did not intend to cause the damages alleged by KNH," there was an "occurrence."

For the purpose of this opinion, we assume, but do not decide, that the "product line" is "tangible property" and that there was an "occurrence." We do not agree with Blair, however, that there was a "loss of use" of KNH's product line. There is no allegation in the Complaint that KNH was deprived of the actual use of its products at any time. And we do not agree that damage to the "value of KNH's product line" constitutes "loss of use" under the facts of this case.

In support of its contention that "diminution in value" constitutes "loss of use," Blair relies on four cases. Based on our analysis, however, we believe that Blair's reliance on those cases was misplaced.

Contrary to Blair's representation, Missouri Terrazzo Co. v. Iowa National Mutual Insurance Co., 566 F.Supp. 546 (E.D. Mo. 1983), aff'd, 740 F.2d 647 (8th Cir.1984), involved physical injury to tangible property, not intangible losses to tangible property. ⁵ In Missouri Terrazzo, the underlying claim was based on the alleged improper construction of a terrazzo floor by the insured resulting in the diminution of value to the building. The court of appeals stated:

Here, the physical damage to tangible property, i.e., the physical deterioration of the floor, is manifest. We agree with Missouri Terrazzo that the diminution in value in this case is "merely a means of measuring the damage sustained as a result of the property damage."

740 F.2d at 650. ⁶

Blair also relies on a California case, Economy Lumber Co. of Oakland, Inc. v. Insurance Company of North America, 157 Cal.App.3d 641, 204 Cal.Rptr. 135 (1984), and two Illinois cases, Pittway Corp. v. American Motorist Insurance Co., 56 Ill.App.3d 338, 13 Ill.Dec. 244, 370 N.E.2d 1271 (1977), and CMO Graphics, Inc. v. CNA Insurance, 115 Ill.App.3d [6 Haw.App. 452] 491, 71 Ill.Dec. 172, 450 N.E.2d 860 (1983). Economy Lumber dealt with issues on the meaning of "occurrence" as applied to the facts of the case and...