(Article from Insurance Law Alert, September 2024)
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Holding
A Hawaii district court dismissed an insurer’s declaratory judgment action seeking a ruling as to its duty to defend a suit arising from wildfire-related property damage, reasoning that a state court is best situated to decide the coverage issues. Great American Ins. Co. v. Assoc. of Apt. Owners of Lahaina Residential Condominium, No. 24-00075 (D. Haw. Aug. 29, 2024).
Background
The dispute arose after Maui wildfires destroyed a condominium development in Lahaina. Several homeowners submitted a demand for mediation to the Association of Apartment Owners of Lahaina Residential Condominium (“AOAO”), which alleged that AOAO breached its statutory duty to obtain replacement property coverage for the building. AOAO, in turn, tendered the demand to Great American under an errors and omissions policy. Great American denied coverage, arguing that the demand was not a “Claim” under the policy and that a property damage exclusion barred coverage. Great American ultimately agreed to reimburse AOAO for its defense costs under a reservation of rights and subsequently filed this action seeking a declaration of no coverage. AOAO moved to dismiss the suit, arguing that the court should decline to exercise jurisdiction because the case raises unsettled questions of state law. The court granted the motion.
Decision
The district court noted that although it had diversity jurisdiction, it retained discretion to dismiss the suit pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201(a). Discretion in this context is governed by several factors, including whether the federal suit would require “needless determination of state law issues.” Needless determination of state law may occur when (1) there are parallel state proceedings involving state law issues, (2) Congress expressly reserved the area of law for state resolution, and (3) there is no compelling federal interest.
In dismissing the suit, the court focused on the second factor, emphasizing that insurance law is expressly left to the states by virtue of the McCarran-Ferguson Act. Additionally, the court noted that the case presented unsettled questions under Hawaii law. In particular, the court explained that while Hawaii state courts have interpreted standard policy phrases such as “arising out of” or “destruction of tangible property,” state courts have not addressed the more complicated question of whether allegations that an insured entity, such as the AOAO, breached a statutory duty to secure adequate insurance coverage, are subject to a property damage exclusion. As the court observed, AOAO’s liability for underinsuring the building could potentially exist independent of the physical property damage caused by the wildfire, in which case the exclusion would not apply.
Additionally, the court held that a question relating to concurrent causation “further risk[ed] federal court entanglement . . . that may impact wildfire litigation in Hawai’i more broadly.” More specifically, the court explained that resolution of the coverage issue would entail a proximate causation analysis to determine whether the damages sought by the property owners stemmed independently (or concurrently) from the fire damage and/or the preceding “botched insurance coverage.”
Without addressing the merits of the causation issue, the court observed that this case “involves thorny coverage questions related to a fire that caused unprecedented death and destruction on Maui, where the majority of resulting lawsuits remain pending in state court on Maui.” As such, and because “the answer to the coverage question is not settled under Hawai’i law and could have immediate ramifications on numerous other insurance coverage disputes related to the fire,” the court declined to exercise its discretionary jurisdiction.
Comments
While the court based its ruling primarily on the relegation of insurance law to state courts, the decision provides guidance on the “parallel state proceedings” analysis in evaluating whether a declaratory judgment action should be heard in state court. Here, the parties disputed whether the underlying mediation, as well as a pending state court suit arising out of the fire-related property damage, constituted parallel proceedings. While the court did not expressly rule on this issue, it emphasized that under Ninth Circuit precedent, the phrase “parallel actions” is construed liberally and does not require the two actions to involve the same parties or same issues; rather, “it is enough that the state proceedings arise from the same factual circumstances.” The decision also leaves unanswered the question of whether a non-binding mediation could constitute a “parallel proceeding.”