Standard Oil Co. of California v. Hawaiian Ins. & Guaranty Co., Ltd.

• Decision Date: 08 December 1982
• Docket Number: No. 7111,7111
• Citation: 65 Haw. 521,654 P.2d 1345
• Court: Hawaii Supreme Court
• Parties: STANDARD OIL COMPANY OF CALIFORNIA, a Delaware Corporation, Plaintiff-Appellee, Cross-Appellant, v. HAWAIIAN INSURANCE & GUARANTY COMPANY, LTD., a Hawaii corporation, Defendant-Appellant, Cross-Appellee. and AIR SERVICE CORPORATION, Universal Enterprises dba Associated Aviation Activities and Southern Marine & Aviation Underwriters, Inc., Plaintiffs-Appellees, v. HAWAIIAN INSURANCE & GUARANTY COMPANY, LTD., a Hawaii corporation, Defendant-Appellant.

Page 1345

654 P.2d 1345

65 Haw. 521

STANDARD OIL COMPANY OF CALIFORNIA, a Delaware Corporation, Plaintiff-Appellee, Cross-Appellant, v. HAWAIIAN INSURANCE & GUARANTY COMPANY, LTD., a Hawaii

corporation, Defendant-Appellant, Cross-Appellee.

and

AIR SERVICE CORPORATION, Universal Enterprises dba

Associated Aviation Activities and Southern Marine

& Aviation Underwriters, Inc., Plaintiffs-Appellees, v. HAWAIIAN INSURANCE & GUARANTY COMPANY, LTD., a Hawaii

corporation, Defendant-Appellant.

No. 7111.

Supreme Court of Hawai'i.

Dec. 8, 1982.

Syllabus by the Court

1. An insurer's duty to defend arises whenever there is a potential for indemnification liability of insurer to insured under the terms of the policy.

2. It is reasonable for the insured to rely on the insurer to make a determined effort to ascertain not only from the pleadings but also from the insurer's own independent investigation whether the insured was entitled to defense representation under the policy.

Berton T. Kato, Honolulu (Kobayashi, Watanabe, Sugita & Kawashima, Honolulu, of counsel), for defendant-appellant, cross-appellee.

Warren J. Senda, Honolulu (Case, Kay & Lynch, Honolulu, of counsel), for plaintiff-appellee, cross-appellant.

James F. Ventura, Honolulu (Libkuman, Ventura, Moon & Ayabe, Honolulu, of counsel), for plaintiffs-appellees.

Before RICHARDSON, C.J., LUM and NAKAMURA, JJ., and OGATA and MENOR Retired Justices, assigned temporarily.

PER CURIAM.

The plaintiffs-appellees, brought suit against defendant-appellant Hawaiian Insurance & Guaranty Company, Ltd. (hereinafter also "HIG"), to recover damages they allegedly sustained when HIG failed and refused to defend actions brought against them by the heirs and executors of the pilot and the passengers of a plane which crashed on May 20, 1973. In the circuit court, HIG raised as one of its principal defenses the failure to give notice as required by the insurance contract. The trial court disposed of this contention by ruling that HIG had waived notice. On appeal, the intermediate court of appeals held that it was unnecessary for it to reach the question of waiver, inasmuch as it was satisfied from the record that HIG had been given notice as required by the insurance agreement. 2 Haw.App. 451, 634 P.2d 123 (1981). We granted certiorari for the purpose of determining whether the appeals court erred in holding as a matter of law that HIG had been properly and seasonably notified.

I

The airplane crash claimed the lives of the pilot, Dr. Robert C.H. Chung, and his passengers, George Chappel, Myrtle Chappel, Duane Archer, Tamarah Sue Archer, and Marcia Lynn Archer. The failure of the left engine to function had caused the aircraft to plummet to the ground. Investigation revealed that contaminants in the fuel strainer of the left engine may have been a cause of the engine failure. The tanks feeding the engine had been fueled from an aviation refueler truck covered by a liability insurance policy issued by HIG for the benefit of plaintiffs-appellees, Standard Oil Company of California (hereinafter "SOCAL"), Air Service Corporation (hereinafter "ASC"), and Universal Enterprises dba Associated Aviation Activities (hereinafter "AAA").

On December 3, 1973, the heirs and executors of the Chappels and the Archers filed suit in circuit court (Civil Nos. 40848 and 40849, respectively) against Dr. Chung's estate and unnamed Doe defendants. The complaints alleged various theories of negligence and products liability. On February 22, 1974, ASC was brought in by the Chung estate as a third-party defendant in said Civil Nos. 40848 and 40849. After being served with process, ASC forwarded the same to HIG. In its letter of transmittal ASC wrote HIG: "We trust that you will take the necessary steps for our legal representation." Because of HIG's lack of action, however, defaults were entered against ASC. These defaults were later set aside as a result of a stipulation between the Chung and HIG attorneys. Thereafter, HIG transmitted the legal documents to Southern Marine and Aviation Underwriters, Inc. (hereinafter "Southern Marine"), whose attorneys subsequently defended against the suits on behalf of ASC and AAA. This was apparently done pursuant to an aviation liability insurance policy which had been issued to ASC and AAA by Southern Marine. On September 13, 1974, ASC was identified as a Doe defendant by the plaintiffs in Civil Nos. 40848 and 40849. AAA and SOCAL were respectively identified as Doe defendants by said plaintiffs on February 20, 1975, and on June 30, 1975.

On February 27, 1975, the Chung Estate filed its own suit (Civil No. 44402). ASC and AAA were made party defendants in this action and were served with process on March 7, 1975. ASC and AAA forwarded the complaints and summonses to HIG which in turn forwarded them to Southern Marine whose attorneys also took over the defense of that action. In her letter of transmittal, ASC's executive secretary wrote to HIG: "We submit these to you for proper action."

Civil Nos. 40848, 40849, and 44402 were later consolidated. On June 27, 1975, pursuant to stipulation, SOCAL was brought in as a third-party defendant in all three cases by ASC and AAA. In their third-party complaint, ASC and AAA alleged:

Furthermore Standard Oil rented to Air Service and/or Associated Aviation Activities an aviation refueler truck in which to store the gasoline or fuel provided and by which to dispense said gasoline or fuel. In connection therewith Standard Oil assumed certain obligations and duties in connection with the maintenance and upkeep of the truck and its components.

4. If plaintiffs in said Civil Numbers have sustained injuries and damages as alleged, said injuries and damages were caused by the negligence, breach of contract, breach of warranty, breach of strict tort liability, or other fault of Standard Oil and Air Service and/or Associated Aviation Activities were in no way at fault.

This was the first time the refueler truck was specifically linked to the cause of the accident. SOCAL was served with the third-party complaint and summons on June 30, 1975, but did not immediately forward them to HIG. Only on January 13, 1976, did SOCAL, through its attorneys, tender the defense of the actions to HIG as SOCAL's insurer. On January 28, 1976, HIG replied in writing, taking the position that the case was strictly a products liability case. In its letter, HIG advised SOCAL's attorneys: "Based on the pleadings, our policy, which covers only Comprehensive Automobile liability, does not apply and therefore, we decline your tender to undertake the defense of Standard Oil under our policy." ¹

With HIG's refusal to defend the actions, Southern Marine undertook the defense. After the trial had commenced, SOCAL, ASC, and AAA settled with the Chungs, Chappels, and Archers. On May 21, 1976, SOCAL filed suit against HIG in circuit court (Civil No. 48381) for damages it sustained as a result of HIG's refusal to defend. A similar suit was filed by ASC, AAA, and Southern Marine on December 2, 1976 (Civil No. 50084). These two cases were later consolidated.

On March 28, 1977, SOCAL moved for partial summary judgment. ASC, AAA and Southern Marine filed their motion for summary judgment on May 31, 1977. Plaintiffs-appellees urged the circuit court to find as a matter of law that HIG had a duty to defend under the insurance policy, leaving open the issue of damages. HIG contended in its memorandum opposing the motions, as it did in its answer to the complaints, that it received late notice of the actions.

The circuit court granted the motions and found: "That having refused to defend ASC and SOCAL on the grounds of noncoverage, HIG has waived and cannot now assert as a defense that SOCAL and/or ASC failed to give HIG timely notice of the wrongful death claims." The circuit court later granted summary judgment to the plaintiffs-appellees on the issue of damages. ²

HIG appealed on the issues of liability and damages. SOCAL cross-appealed on the issue of apportionment of damages. The appeals were consolidated and assigned to the intermediate court of appeals.

II

The policy in question provided, as a condition of coverage, that "[i]f claim is made or suit is brought against the insured, the insured shall immediately forward to the company every demand, notice, summons or other process received by him or his representative."

HIG argued before the appellate court that it had not received, within a reasonable time, notice that it was the conduct of its insureds in the maintenance of the truck that was being claimed as the cause of the accident. In response, the intermediate appellate court said:

We cannot agree. The first of the insureds to be joined was ASC. It promptly forwarded the pleadings served upon it to HIG. Under those pleadings, there was a potential liability for the covered risk (negligence in the maintenance of the truck, including loading and unloading) and HIG was on notice of that fact from that point on. Had it defended that risk and participated in the proceedings, it would have had notice of the fact that the truck was being specifically pointed to just as soon as that fact turned up. The insured is required by the policy to give notice and forward the pleadings to the insurer. ASC and AAA did so. We do...