Finding Insurer’s Declaratory Relief Action Raises Unsettled Questions of State Law, Case is Dismissed

    The federal district court for the District of Hawaii dismissed the insurer's action for declaratory relief because it raised issues that were unsettled by Hawaii courts. Association of Apartment Owners of Lahaina Residential Condominium, et al., No. 1-24-cv-00075-JAO-BMK, Order Granting AOAO's Motion to Dismiss (D. Haw. Aug. 29, 2024). 

    The case addressed whether a property damage exclusion barred coverage over an owner's claim that a condominium association and its property manager failed to obtain adequate insurance before the condominium's property was damaged by the Maui wildfire in August 2023. Great American filed suit seeking a declaration that it had no duty to defend or indemnify the Association and the property manage, Quam Properties Hawaiiana, Inc., in connection with a demand for mediation submitted to the Association and Quam on behalf of one of the owners. 

    The policy provided errors and omissions coverage to the Association and Quam. The policy excluded "any Claim made against any Insured . . . based upon, arising out of, relating to directly or indirectly resulting from or in consequence of, or in any way involving . . . damage to to destruction of any tangible property or the loss of use of any tangible property."

    On October 6, 2023, counsel for some of the owners submitted a demand for mediation to counsel for the Association. The demand claimed that the coverage for the Association was woefully inadequate. Mediation was demanded pursuant to Hawaii's condominium statute. 

    The Association tendered the demand to Great American. Coverage was denied because the demand was not a "Claim" under the policy and the property damage exclusion barred coverage.  Great American later agreed to reimburse the costs of defense incurred in connection with the mediation under a reservation of rights, which preserved the right to file this action. A mediation occurred, but no resolution was reached, no further mediation was scheduled, and no owner filed suit against the Association and Quam.

    Great American filed a Motion for Judgment on the Pleadings. The Association responded by filing a motion asking the court to decline to exercise jurisdiction and to dismiss the case because it raised unsettled question of state law.

    The court analyzed its right to exercise discretion to retain jurisdiction under the factors enumerated in Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491 (1942). The court first considered whether there was a parallel state proceeding. The Association contended the mediation qualified as a parallel proceeding, particularly because it was expected to ripen into a state court lawsuit if the dispute could not be resolved. Great American objected that the Association had not cited any authority to support its contention that a non-binding mediation qualified as a parallel proceeding under Brillhart – and further that it was pure conjecture whether the owners would ever file a state court lawsuit. While the Association did not show that a presumption in favor of hearing this matter in state court existed, this did not prevent the court from ultimately concluding that state court still provided the better forum based on consideration of other factors. 

    First, insurance law was an area left to the states. Great American may be correct that because the exclusions "arising out of" and "in any way involving" language is interpreted broadly, the property damage exclusion applies. On the other hand, the Association may be correct that potential liability existed based on violations of the Hawaii condominium statutes and breach of the governing documents from the moment the property was underinsured. Because the potential liability (and harm to owners) existed separate and independent from the additional harm from the physical property damage caused by the fire, the property damage exclusion would not bar all coverage here.

    The court also found the parties' briefing on the question of concurrent or independent causation undeveloped, further risking federal court entanglement with this issue that could impact wildfire litigation in Hawaii more broadly. Because these coverage issues were not settled under Hawaii law and could have immediate reification on numerous other insurance coverage disputes related to the fire, it was one better resolved by Hawaii courts, without federal entanglement.

    There was also no compelling federal interest. Balancing these considerations (the existence of parallel proceedings, unsettled questions of state law, and federal interests), the court found that the first Brillhart factor weighed in favor of dismissal. 

    The second Brillhart factor, forum shopping, was neutral. Because diversity jurisdiction provided a basis to bring suit in federal court, Great American did not engage in forum shopping by filing suit here.

    Regarding the next Brillhart factor, duplicative litigation, the court found this factor tipped slightly in favor of dismissal. On the one hand, this finite dispute concerning Great American's obligations under the policy with regard to the demand would be entirely disposed of in either federal or state court. There was some risk, however of duplicative litigation and inconsistent results should the court opt to maintain jurisdiction over the case and the mediation ripened into a state court lawsuit. 

    Therefore, the court concluded that the Brillhart factors weighted in favor of remand because, even assuming no parallel state action or accepting that the risk of duplicative proceedings remained speculative at this point, the needless determination of state law factor weighed strongly in favor of dismissal. The Associatih's motion to dismiss was granted.