*** FOR PUBLICATION IN WEST’S HAWAI‘I REPORTS AND PACIFIC REPORTER ***
Electronically Filed
Supreme Court
SCCQ-XX-XXXXXXX
14-NOV-2023
09:16 AM
Dkt. 112 OP
IN THE SUPREME COURT OF THE STATE OF HAWAIʻI
---o0o---
ST. PAUL FIRE AND MARINE INSURANCE COMPANY, THE TRAVELERS
INDEMNITY COMPANY OF AMERICA, THE PHOENIX INSURANCE COMPANY,
TRAVELERS PROPERTY CASUALTY COMPANY OF AMERICA,
Plaintiffs-Appellants,
vs.
BODELL CONSTRUCTION COMPANY, SUNSTONE REALTY PARTNERS X, LLC,
STEADFAST INSURANCE COMPANY,
Defendants-Appellees.
SCCQ-XX-XXXXXXX
CERTIFIED QUESTIONS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAIʻI
(CASE NO. 20-cv-00288-DKW-WRP)
NOVEMBER 14, 2023
RECKTENWALD, C.J., McKENNA, AND EDDINS, JJ.,
CIRCUIT JUDGE TONAKI AND CIRCUIT JUDGE CATALDO,
ASSIGNED BY REASON OF VACANCIES
OPINION OF THE COURT BY EDDINS, J.
*** FOR PUBLICATION IN WEST’S HAWAI‘I REPORTS AND PACIFIC REPORTER ***
I.
The United States District Court for the District of Hawaiʻi
certified two questions to this court. We accepted those
questions per Hawaiʻi Rules of Appellate Procedure Rule 13.
The federal court’s order frames the issue: “[W]hether the
State of Hawaiʻi authorizes the equitable reimbursement of
defense fees and costs incurred by an insurer in litigating on
behalf of its insured.” The court asks:
(1) Under Hawaiʻi law, may an insurer seek equitable
reimbursement from an insured for defense fees and costs
when the applicable insurance policy contains no express
provision for such reimbursement, but the insurer agrees to
defend the insured subject to a reservation of rights,
including reimbursement of defense fees and costs?
(2) If an insurer may seek equitable reimbursement of
defense fees and costs under Hawaiʻi law, (A) for what
specific fees and costs may the insurer obtain
reimbursement, (B) which party carries the burden of proof,
and (C) what is the burden of proof?
We answer question 1 No.
We do not answer question 2.
We hold that an insurer may not recover defense costs for
defended claims unless the insurance policy contains an express
reimbursement provision. A reservation of rights letter will
not do.
II.
If there’s the possibility of coverage, there’s a duty to
defend. See Dairy Rd. Partners v. Island Ins. Co., Ltd., 92
Hawaiʻi 398, 412, 992 P.2d 93, 107 (2000). The “possibility may
2
*** FOR PUBLICATION IN WEST’S HAWAI‘I REPORTS AND PACIFIC REPORTER ***
be remote, but if it exists the [insurer] owes the insured a
defense.” Standard Oil Co. of Cal. v. Hawaiian Ins. & Guaranty
Co., Ltd., 65 Haw. 521, 526, 654 P.2d 1345, 1349 (1982) (cleaned
up).
As long as a complaint alleges one claim that the policy
possibly covers, the duty to defend absorbs all claims. Finley
v. Home Ins. Co., 90 Hawaiʻi 25, 29, 975 P.2d 1145, 1149 (1998).
Some jurisdictions allow insurers to recoup defense costs
for defending uncovered claims. See, e.g., Buss v. Superior
Court, 939 P.2d 766 (Cal. 1997).
Other jurisdictions do not. See, e.g., Am. & Foreign Ins.
Co. v. Jerry’s Sport Ctr., Inc., 2 A.3d 526, 543 (Pa. 2010).
Neither this court, nor Hawaiʻi’s federal district court has
decided the repayment issue. Scottsdale Ins. Co. v. Sullivan
Properties, Inc. came close, predicting this court would find a
right to reimbursement. No. 04-00550 HG-BMK, 2007 WL 2247795,
at *3 (D. Haw. Aug. 2, 2007). Other cases from our federal
district court have dampened that forecast. See Exec. Risk
Indem., Inc. v. Pac. Educ. Servs., Inc., 451 F. Supp. 2d 1147,
1163 (D. Haw. 2006); Choy v. Cont’l Cas. Co., No. 15-00281
SOM/KSC, 2015 WL 7588233, at *10 (D. Haw. Nov. 25, 2015); GGA,
Inc. v. Kiewit Infrastructure W. Co., 611 F. Supp. 3d 1000, 1031
(D. Haw. 2020).
3
*** FOR PUBLICATION IN WEST’S HAWAI‘I REPORTS AND PACIFIC REPORTER ***
We reject a putative right to reimbursement for defense
fees and costs. Hawaiʻi’s stout duty to defend clashes with
repayment. So we side with policyholders and hold that insurers
do not have a right to reimbursement of defense costs.
Three main reasons shape our decision. First, the initial
contract governs. See Dairy Rd. Partners, 92 Hawaiʻi at 411–12,
992 P.2d at 106-07. Second, reimbursement erodes the duty to
defend. See First Ins. Co. of Haw., Inc. v. State, by Minami,
66 Haw. 413, 416, 665 P.2d 648, 651 (1983). Third, the insured
is not unjustly enriched. See Small v. Badenhop, 67 Haw. 626,
635-36, 701 P.2d 647, 654 (1985).
A.
The initial contract governs.
Mutual understanding and consent animate a contract’s
terms. See Moss v. Am. Int’l Adjustment Co., Inc., 86 Hawaiʻi
59, 63, 947 P.2d 371, 375 (1997). An insurance policy is a
contract. “[I]nsurance policies are subject to the general
rules of contract construction.” Dairy Rd. Partners, 92 Hawaiʻi
at 411, 992 P.2d at 106 (cleaned up).
When a court interprets an insurance policy it reads the
contract to the policyholder’s advantage. A while ago this
court – talking about insurance policies - said it had “long
subscribed to the principle that they must be construed
liberally in favor of the insured and any ambiguities must be
4
*** FOR PUBLICATION IN WEST’S HAWAI‘I REPORTS AND PACIFIC REPORTER ***
resolved against the insurer.” Tri-S Corp. v. W. World Ins.
Co., 110 Hawaiʻi 473, 489, 135 P.3d 82, 98 (2006).
The possibility of coverage typically depends on the
policy’s language. The contract’s words. Or its missing words.
See Hawaiian Holiday Macadamia Nut Co., Inc. v. Indus. Indem.
Co., 76 Hawaiʻi 166, 169, 872 P.2d 230, 233 (1994) (“Because the
insurer’s duty to defend its insured is contractual in nature,
we must look to the language of the policy involved to determine
the scope of that duty.”).
Here, the federal district court - in a declaratory
judgment action - found a duty to defend. Like most standard
insurance policies, the words called for defense. And no words
called for pay back.
A reservation of rights letter reinforces defenses and
exclusions placed in the contract. “[A]ffording an insured a
defense under a reservation of rights agreement merely retains
any defenses the insurer has under its policy.” First Ins., 66
Haw. at 422, 665 P.2d at 654.
Insurers may reserve contractual rights, not create new
ones. “[P]ermitting reimbursement by reservation of rights,
absent an insurance policy provision authorizing the right in
the first place, is tantamount to allowing the insurer to
extract a unilateral amendment to the insurance contract.”
Jerry’s Sport, 2 A.3d at 544. A reservation of rights letter
5
*** FOR PUBLICATION IN WEST’S HAWAI‘I REPORTS AND PACIFIC REPORTER ***
does not alter policy coverage or remake a contract. It “does
not relieve the insurer of the costs incurred in defending its
insured where the insurer was obligated, in the first instance,
to provide such a defense.” First Ins., 66 Haw. at 422, 665
P.2d at 654.
Hawaiʻi statutory law favors the policyholder and supports
the primacy of the contract. Hawaiʻi Revised Statutes (HRS)
§ 431:10-220(a) reads: “No agreement in conflict with,
modifying, or extending any contract of insurance shall be valid
unless in writing and made a part of the policy.” And HRS
§ 431:10-220(b) instructs: “No insurer or its representatives
shall make any insurance contract or agreement relative thereto
that is not plainly expressed in the policy.”
Most policies call for a duty to defend. If an insurance
contract has no express right to reimbursement, there’s no
reimbursement.
B.
Reimbursement erodes the duty to defend.
The duty to defend and the duty to indemnify differ.
“[T]he obligation of an insurer to defend its insured is
separate and distinct from an insurer’s obligation to pay a
judgment entered against its insured.” First Ins., 66 Haw. at
416, 665 P.2d at 651.
6
*** FOR PUBLICATION IN WEST’S HAWAI‘I REPORTS AND PACIFIC REPORTER ***
The duty to defend is broader than the duty to indemnify.
Hawaiian Holiday, 76 Hawaiʻi at 169, 872 P.2d at 233. An insurer
only indemnifies covered claims. Tri-S Corp., 110 Hawaiʻi at
488, 135 P.3d at 97. But an insurer must defend when there is
possible coverage, even “groundless, false, or fraudulent”
claims. First Ins., 66 Haw. at 417, 665 P.2d at 652. And the
insurer has to defend mixed actions: some claims covered, others
not. Finley, 90 Hawaiʻi at 29, 975 P.2d at 1149. “[T]he insurer
is obligated to provide a defense against the allegations of
covered as well as the noncovered claims.” First Ins., 66 Haw.
at 418, 665 P.2d at 652.
Hawaiʻi’s duty to defend is determined up front, at the
start. Not the end. See Nautilus Ins. Co. v. Lexington Ins.
Co., 132 Hawaiʻi 283, 303, 321 P.3d 634, 654 (2014). “Although
an insurer’s duty to indemnify arises only after damages are
fixed, the duty to defend arises as soon as damages are sought.”
Gen. Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods Co.,
828 N.E.2d 1092, 1103 (Ill. 2005). When a claim may fit a
contract’s confines, “the insurance company’s refusal to defend
at the outset of the controversy is a decision it makes at its
own peril.” Jerry’s Sport, 2 A.3d at 542.
If insurers recover for defending uncovered claims, our law
flips: the duty to defend may be determined after the insurer
tenders a defense. Not only does this sequence narrow the broad
7
*** FOR PUBLICATION IN WEST’S HAWAI‘I REPORTS AND PACIFIC REPORTER ***
duty to defend, it dilutes an insurer’s good faith duty to take
on a defense; worse it may bring on bad faith. “[A]llowing an
insurer to exercise an independent right to reimbursement . . .
before it obtains a declaratory judgment would be wholly
inconsistent with and likely constitute a breach of, its duty
under established law to undertake the defense in good faith.”
Burlington Ins. Co. v. Panacorp. Inc., 758 F. Supp. 2d 1121,
1141 (D. Haw. 2010).
Reimbursement for defense costs undercuts the duty to
defend. “It would amount to a retroactive erosion of the broad
duty to defend . . . by making the right and duty to defend
contingent upon a court’s determination that a complaint alleged
covered claims.” Jerry’s Sport, 2 A.3d at 544. Letting the
insurer recoup costs “would effectively require that insurers
only defend to the same extent that they must ultimately
indemnify.” Gen. Star Indem. Co. v. Driven Sports, Inc., 80 F.
Supp. 3d 442, 463 (E.D.N.Y. 2015). As far as an insured, rather
than protection for all possible claims, they are only protected
from repaying costs for claims eventually deemed covered.
Insurers though are not out of luck. As part of doing
business, insurers assess claims for potential coverage. If
insurers are unsure, they can go to court. Jerry’s Sport, 2
A.3d at 542.
8
*** FOR PUBLICATION IN WEST’S HAWAI‘I REPORTS AND PACIFIC REPORTER ***
C.
Last, the insurers say that when they defend uncovered
claims, policyholders are unjustly enriched. We disagree.
Defense is part of the deal.
By nature, contracts benefit both sides. Though it owes a
duty to defend, the insurer benefits. It retains the premiums.
It directs litigation. It runs the case, decision-making-wise.
Why? Money. Since the insurer faces indemnity exposure,
it deserves what it bargained for – near total control over a
case. “Normally, an insurer’s duty to defend is coupled with
the right to control the defense of the litigation. . . .
Giving the insurer exclusive control over litigation against the
insured safeguards the orderly and proper disbursement of the
large sums of money involved in the insurance business.”
Finley, 90 Hawaiʻi at 34 n.11, 975 P.2d at 1154 n.11.
An insurance company that tenders a defense protects
itself, at least as much as it protects its insured. See
General Agents, 828 N.E.2d at 1103. No scrubs, say the
insurers. An insurer has the right to defend its own way to
avoid the risks of “an inept or lackadaisical defense of the
underlying action.” Terra Nova Ins. Co., Ltd. v. 900 Bar, Inc.,
887 F.2d 1213, 1219 (3d Cir. 1989).
If we allowed reimbursement, the unjustly enriched party
may very well be the insurer. When the insured pays back
9
*** FOR PUBLICATION IN WEST’S HAWAI‘I REPORTS AND PACIFIC REPORTER ***
defense costs to the insurer, it pays for the insurer to protect
itself. Id. If a court later determines that there is no duty
to defend, then reimbursement protects the insurer from bad
faith or breach of contract actions - without any responsibility
for defense costs. See Nat’l Sur. Corp. v. Immunex Corp., 297
P.3d 688, 694 (Wash. 2013). An “all reward, no risk”
proposition creates a win-win situation for the insurer:
buffered from bad faith, it defends all claims, yet has no
obligation to pay for the whole defense. Meanwhile, the insured
“receives no greater benefit than if its insurer had refused to
defend outright.” Id.
What does the policyholder get for ceding control?
Defense. The insured receives a benefit. But it’s not unjust.
Both sides benefit.
The insurance companies argue that the sky will fall and a
world without a right to reimbursement is “rife with temptation
to deny . . . costly and questionable claims.” But insurers are
seasoned, skilled, and well positioned to evaluate whether they
need to defend. And bad faith or breach actions motivate them
to honor contractual obligations. See Best Place, Inc. v. Penn
Am. Ins. Co., 82 Hawaiʻi 120, 131-32, 920 P.2d 334, 345-46
(1996).
10
*** FOR PUBLICATION IN WEST’S HAWAI‘I REPORTS AND PACIFIC REPORTER ***
III.
An insurer may not seek reimbursement from an insured for
defending claims when an insurance policy contains no express
provision for reimbursement.
We answer No to question 1. We do not answer question 2.
Raymond E. Brown /s/ Mark E. Recktenwald
(Matt A. Tsukazaki, Tyler A.
/s/ Sabrina S. McKenna
Tsukazaki, Lindsee B. Falcone on
the briefs) /s/ Todd W. Eddins
for appellants
/s/ John M. Tonaki
Tred R. Eyerly /s/ Lisa W. Cataldo
(Casey T. Miyashiro, Jonathan N.
Marchuk on the briefs)
for appellee Bodell Construction
Company
Cid H. Inouye
(Kelvin H. Kaneshiro, Katherine
B. Hughes on the briefs)
for appellee Sunstone Realty
Partners X, LLC
Alan Van Etten and Tristan S.D.
Andres
for Amicus Curiae
United Policyholders
11