Hawaii Federal District Court Compels Appraisal
The Hawaii federal district court denied the insurers' motion to dismiss on forum non convenient grounds and granted the insured's motion to compel arbitration. BRE Hotels and Resorts LCC, et al. v. Ace Am Ins. Co., et al., 2024 U,.S. Dist. LEXIS 163852 (D. Haw. Sept. 11, 2024).
BRE Hotels & Resorts LLC (BRE) owned the Grand Wailea Resort on Maui and the Turtle Bay Resort on Oahu. Both hotels were damaged by a rainstorm on March 9, 2021. Estimated losses exceeded $55 million. BRE filed a claim with its sixteen insurers. BRE sought $46 million in four categories: business interruption losses at the Grand Wailea ($29.6 million); damaged tiles at the Grand Wailea ($8.3 million); furniture, fixtures, and equipment at Turtel Bay ($6.2 million); and an assortment of ancillary issues at both properties ($1.9 million).
The insurers investigated and took issued with BRE's estimates. The insurers contended that most of the tiles suffered from an independent defect and were not damaged by the storm, that the insurance policies did not cover the replacement of undamaged furniture, and that the claimed business interruption losses were too high. The insurers paid $4 million.
BRE was not satisfied, as it believed its claim entitled it to over $40 million more. BRE demanded appraisal under the policies. The insurers rejected the demand and BRE filed a petition to compel arbitration. The insurers moved to dismiss, arguing that the policies contained forum selection clauses that committed the parties to the jurisdiction of New York's state courts.
The court first determined that it had subject matter jurisdiction under Chapter 2 of the Federal Arbitration Act, covering international arbitration agreements. The court could also exercise supplemental jurisdiction over the Chapter 1 agreements with domestic insurers.
The insurers next argued that the policies contained a forum selection clause that committed all actions stemming from the policies to the exclusive jurisdiction of New York state courts. The policies also included a section stating that "[t]he parties hereto do irrevocably submit to the exclusive jurisdiction of the Courts of the state or country in which the First Named Insured has its principal place of business." BRE's principal place of business was Illinois. The insurers failed to show that the court should overlook the clear contradiction that existed in most of the policies. Therefore, the motion to dismiss was denied.
Turning to the motion to compel appraisal, BRE contended that the four disputed categories of losses – the business interruption, the ancillary issues, the furniture, and the tiles – all fell within the bounds of the appraisal clause because they amounted to disagreements about the amount of a claim. The insurers argued that the disagreements were about whether the policies could be interpreted to cover BRE's claim; in other words, they argued that the disputes were legal questions of contract interpretation, unfit for appraisal.
The insurers argued that BRE had not fully cooperated in that it failed to produce requested documents and to sit for an Examination Under Oath. The court agreed that parties must comply with their contractual obligations, but a minor technical infection did not preclude a party from enforcing their own rights under a policy. Here, the insurers failed to show that BRE had not fully complied with the policies, and they failed to establish prejudice from any alleged failure to comply. BRE was therefore not barred from bringing this action.
Next, the court turned to the insurers' disputes over BRE's four categories of claims – business interruption, ancillary expenses, furniture, and tiles – and whether they were best classified as legal or factual questions.
The insurers insisted that there were separate coverage issues concerning the business interruption claim. Yet neither in their brief nor in their cited exhibits did the insurers specifically identify what the purported coverage issues were. Appraisal was therefore appropriate as to the business interruption claim.
The ancillary costs also did not present a legal question. The insurers conceded that certain property damage and ancillary costs at Turtle Bay Resort – which BRE claimed was worth nearly $2 million – "involved exclusively scope and/or measurement issues." Such issues were prime for appraisal.
BRE also asserted a claim for $4 million in furniture at the Turtle Bay Resort. While the insurers alluded to a coverage issue concerning the matching of guest room furniture, they did not identify a specific question about the policies' interpretation or application. To the contrary, the parties appeared to agree to the circumstances under which the policies covered matching furniture sets; the only outstanding questions were whether the furniture was in fact damaged and whether those specific damaged items could be individually replaced. There were also questions about the fact of the loss which could be resolved by appraisal.
The final category, the tiles, was the most contentious. BRE claimed that it was entitled to $7.1 million more to replace the tiles at the Grand Wailea Resort, because large portions of the tile system were damaged by the storm. The insurers believed that BRE was only entitled to replace fifty-seven specific tiles. The rest of the tiles were not covered because the tiles' underlying mortar bed and waterproofing membrane suffered from preexisting defects and deterioration and were therefore not damaged by the storm. The insurers also argued that the policies did not cover the replacement of non-matching, undamaged tiles to maintain aesthetic uniformity.
The court reasoned that the question of whether the tile underlayment was damaged by the storm or had preexisting defects might prove to be a complicated one. But it was fundamentally a factual question about the rainstorm's damage and the associated amount of loss, not a legal questions about the scope of the policies' coverage. An appraisal panel could undertake that factual inquiry, informed by the arguments and evidence presented by the parties.
The issue on whether the policies covered replacing tiles for aesthetic purposes was a question of coverage reserved for the court. It was conceivable that appraisal would not resolve all of the issues with BRE's claim. After considering the parties' evidence, the appraisers might conclude, for example, that the tiles' waterproofing membrane was not damaged by the storm. BRE could then argue that replacing all of the tiles nonetheless fell within the scope of the policy's coverage, perhaps by contending that the policy permits BRE to have matching aesthetic tiles. Such an argument would present interpretive issues to be resolved by the court. But for now, BRE's claim raised factual questions that could be resolved by the appraisal process. The court therefore granted the petition to compel appraisal.
