Weber v. Indemnity Ins. Co. of North America

• Citation: 345 F.Supp.2d 1139
• Decision Date: 17 November 2004
• Docket Number: No. Civ. 04-00377 SPK/LEK.,Civ. 04-00377 SPK/LEK.
• Parties: Janet C. WEBER, Plaintiffs, v. INDEMNITY INSURANCE COMPANY OF NORTH AMERICA, Defendant.
• Court: U.S. District Court — District of Hawaii

345 F.Supp.2d 1139

Janet C. WEBER, Plaintiffs, v. INDEMNITY INSURANCE COMPANY OF NORTH AMERICA, Defendant.

No. Civ. 04-00377 SPK/LEK.

United States District Court, D. Hawai'i.

November 17, 2004.

Howard G. McPherson, Bert S. Sakuda, Cronin Fried Sekiya Kekina & Fairbanks Davies, Honolulu, HI, for Plaintiff.

Thomas E. Cook, Steven Y. Otaguro, Lyons Brandt Cook & Hiramatsu Davies, Honolulu, HI, Robert J. Romero, Anne D. O'Niell, Hinshaw & Culbertson LLP, San Francisco, CA, for Defendant.

ORDER (1) GRANTING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT; (2) GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION FOR SUMMARY JUDGMENT; AND (3) DENYING PLAINTIFF'S COUNTER-MOTION TO CERTIFY STATE LAW QUESTIONS

SAMUEL P. KING, District Judge.

INTRODUCTION

This case presents several interrelated issues of first impression of Hawaii insurance law. Three motions are before the Court. First, Plaintiff Janet Weber ("Weber") moves for partial summary judgment, seeking a declaration regarding the nature of a liability policy of Defendant Indemnity Insurance Company of North America ("Indemnity" or "IICNA") that covered Eco-Adventures, Inc., ("Eco-Adventures") in a related admiralty action. Second, in response, IICNA moves for summary judgment, primarily contending that Weber has no standing to enforce rights (either as a third-party, or as an assignee of Eco-Adventures) relating to the IICNA policy. Third, Weber asks this Court (if not inclined to rule on the merits of the other motions) to certify questions to the Hawaii Supreme Court. See Haw. R.App. P. 13 (Certification of Question of Hawai'i Law by Federal Courts).

The matters were argued on October 6, 2004. After due consideration of the issues, the Court (1) GRANTS Plaintiff's motion for partial summary judgment, (2) GRANTS in part and DENIES in part Defendant's motion for summary judgment, and (3) DENIES Plaintiff's counter-motion to certify questions to the Hawaii Supreme Court.

DISCUSSION

I.

Weber asks this Court to declare that an insurance policy of IICNA is not a "defense within limits" ("DWL") or "cannibalizing" policy. A DWL policy includes the costs of defending an insured against a suit or claim within the limits of the policy, leaving less to pay a judgment or settlement or otherwise indemnify against a suit or claim against the insured.¹ The more conventional liability policy includes only amounts of a judgment or settlement within the policy's limits; the costs to defend a claim or suit are separate and, theoretically, open-ended. See, e.g., Bankers Trust Co. v. Old Republic Ins. Co., 7 F.3d 93, 94 (7th Cir.1993) ("The obligation to defend and to indemnify are separate. It is possible to state a single cap on the costs of both, but few policies do so. Under most policies, the costs of defense are nominally unlimited, although the stakes of the case set an implicit limit[.]").

This question arises from an underlying admiralty Jones Act personal injury action, Weber v. Eco-Adventures, Inc., Civ. No. 02-00596ACK/BMK (D.Haw.), which settled in April of 2004 during trial before U.S. District Judge Alan C. Kay. The IICNA policy at issue insured Eco-Adventures against certain claims or suits, including the underlying action by Weber against Eco-Adventures. IICNA had retained the firm of Frame, Formby & O'Kane to defend Eco-Adventures. After extended mediation efforts, rather than accept IICNA's settlement offers of the (declining) remaining policy limits, Weber negotiated directly with EcoAdventures (not with Frame, Formby) to allow a stipulated judgment of $225,000 to enter against Eco-Adventures in exchange for an assignment by Eco-Adventures to Weber of all Eco-Adventures' bad faith rights as against IICNA. As part of the deal, Weber covenanted not to execute the stipulated $225,000 judgment against Eco-Adventures and to drop attempts to pursue personal claims against Eco-Adventures' shareholders, officers or directors.² The settlement process also included a finding or statement on the record by a U.S. Magistrate Judge and the mediator, based upon their participation in the settlement discussions, that the settlement amount was a "reasonable settlement" and "within an appropriate range" for the facts of the case.³

IICNA's policy limit was $300,000 per occurrence, and if the policy was indeed "cannibalizing" then much less than $300,000 — and certainly less than the $225,000 stipulated judgment — was left to be paid to Weber after defense expenses (which were continuing to mount). However, if — as Weber contends — the policy was not "cannibalizing," then the entire $300,000 would have been available to settle the underlying suit. Weber's theory in the present suit is that IICNA breached a duty to Eco-Adventures (and perhaps to herself as the underlying plaintiff) to settle the underlying suit in good faith. See, e.g., Best Place, Inc. v. Penn America Ins. Co., 82 Hawai'i 120, 920 P.2d 334, 346 (1996); Tran v. State Farm Mut. Auto. Ins. Co., 999 F.Supp. 1369, 1372 (D.Haw.1998) ("an insurer who does not accept a reasonable settlement offer within policy limits is also liable for violation of its duty to act in good faith regarding the interests of the insured") (citing Gruenberg v. Aetna Insurance Company, 9 Cal.3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032, 1036-37 (1973)).

Weber brings first-party (as Eco-Adventures' assignee) and third-party (as a third-party beneficiary) bad faith claims against IICNA, and seeks declaratory relief and $225,000 on the consent judgment as well as general, punitive and emotional distress damages. The nature of the policy, i.e., whether or not it is a DWL policy, might be relevant in determining whether IICNA breached good faith duties. Weber filed the suit in state court. IICNA removed it to federal court based upon diversity jurisdiction. The parties agree that substantive Hawaii law controls in interpreting the marine insurance policy. See, e.g., Yu v. Albany Ins. Co., 281 F.3d 803, 806 (9th Cir.2002).

II.

Initially, as the Court indicated at oral argument, the Court exercises its discretion and declines to certify to the Hawaii Supreme Court any of the questions of law raised and discussed later in this order. See Pai `Ohana v. United States, 875 F.Supp. 680, 700 (D.Haw.1995) ("The decision to certify a state law question is within the sound discretion of the federal district court"). Although there is no binding Hawaii law precedent directly on point on many of the state-law questions raised, the Court finds sufficient case law from Hawaii and other jurisdictions to be able to predict Hawaii law with confidence. See, e.g., CIM Ins. Corp. v. Masamitsu, 74 F.Supp.2d 975, 986 (D.Haw.1999) (stating that a district court, sitting in diversity uses its "best judgment to predict how the Hawaii Supreme Court would decide [the] issue") (quoting 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.'" Id. (quoting Takahashi v. Loomis Armored Car Serv., 625 F.2d 314, 316 (9th Cir.1980)). The Court thus DENIES Plaintiff's Counter Motion to Certify State Law Questions, filed on September 17, 2004.

III.

IICNA, contends that the circumstances of the settlement of the underlying suit (e.g., the timing and procuring of the stipulated judgment) bar an independent bad faith action against IICNA, or at least render the judgment unenforceable. IICNA point out that it did not consent to the settlement. It contends that EcoAdventures violated the policy's standard provisions allowing an insurer to control the defense of its insured.⁴ It raises the policy's cooperation clauses.⁵ The implication is that the underlying case — especially after a portion of Weber's case against Eco-Adventures was presented at trial before Judge Kay — was weak. IICNA was defending Eco-Adventures; if IICNA's defense of Eco-Adventures was successful, then Eco-Adventures would have been exonerated.⁶ Because the policy gives IICNA the right to control the defense, IICNA argues that it had a right to have the underlying trial proceed to judgment, rather than have Weber and IICNA's insured — from IICNA's point of view — collude to "set-up" the insurance company. It claims that it was at all times complying with the policy's duties, at least insofar as it was providing a defense to Eco-Adventures.

The legal question may be stated as follows: Where a judgment has resulted from a settlement between the insured and the underlying claimant (rather than from a trial), and as part of the settlement the claimant covenants not to execute the judgment against the insured, may the claimant, as the insured's assignee, pursue a bad faith claim against the insurer. It is a threshold issue. The Court should resolve it before reaching the merits of whether or not IICNA's policy was cannibalizing. A finding that Weber cannot enforce the stipulated judgment, and is otherwise unable to pursue bad faith claims against IICNA, renders the nature of the policy moot.

IICNA relies on a California Supreme Court case that finds such stipulated judgments not binding on the insurer unless the insurer has refused to defend its insured (which did not occur here). See Hamilton v. Maryland Cas. Co., 27 Cal.4th 718, 117 Cal.Rptr.2d 318, 41 P.3d 128 (2002). In similar circumstances, Hamilton held that, because it was at all times defending the insured, the insured's liability could not be fixed by agreement of the parties in the underlying case, but had to be determined by trial (presumably the underlying trial). Id. at 136-37. Hamilton went on to hold that a bad faith action for breach of a duty of reasonable settlement was barred. Id. at 137-38; see also Mercado v. Allstate Ins. Co., 340 F.3d 824, 827 (9th Cir.2003) (stating, under California law after Hamilton, that "plaintiff/assignee could not sue the insurer in tort for its alleged bad faith refusal to settle the case until an...