Hawaii Intermediate Court of Appeals Reverses Lower Court’s Dismissal of Insureds’ Claims Arising from Work-Related Death

    The court reversed dismissal of all claims against the insurers for a work-related death after determining that policy exclusions conflicted with statutory mandates on coverage. Waiau, et al. v. Hawaii Employers' Mut. Ins. Co,  Inc., et al., 2024 Haw. App, LEXIS 583 (Haw. Ct. App., Dec. 31, 2014).

    Amos K. Agliam, an employee of C&F Trucking, was killed when the brakes in the truck he was driving careened off the road. C&F Trucking was not an entity but a "dba" and a trade name registered by Frank M. Lawrence (Frank). A claim was made for workers' compensation benefits and Angliam's estate received such benefits. 

    In a separate suit, the Waiau heirs sued Frank, fellow employees, and C&F Trucking (together, Assignors) alleging that each Assignor was managing and/or supervisory employees and/or officers and/or directors of C&F Trucking, and that Agliam's death was caused by the wilful and wanton misconduct of each of the Assignors.

    The Assignors notified C&F's workers compensation carrier, Hawaii Employers' Mutual Insurance Company (HEMIC), its primary carrier, First Insurance and one of its excess carriers, North American Capacity Insurance Company (NACIC), but perhaps failed to notify another excess carriers, General Star Indemnity Company, of the underlying lawsuit. Each insurer declined to defend or indemnify for any of the Assignors' claims. The Assignors hired defense counsel and eventually entered into an agreement with the Waiau heirs to stipulate to a single count for negligence, wilful and/or wanton misconduct, and to go to binding arbitration to determine damages to the Waiau heirs. The parties further agreed that the Assignors would assign their rights and claims against the Assignors' insurers to the Waiau heirs and that the Waiau heirs would give the insurers notice of the binding arbitration and an opportunity to appear and dispute the damages. None of the insurers participated in the arbitration. Special and general damages amounting to $2,607,528.60 were awarded the the Waiau heirs and a final judgment reflecting this amount was entered.

    First Insurance issued a Business Auto Policy to C&F Trucking Frank Lawrence DBA with limits of $300,000 per person and $600,000 per accident. First Insurance denied coverage under an exclusion for damages resulting from bodily injury to the insured's employee. The policy had a severability-of-interest provision stating that the insurance applied "separately to each insured who is seeking coverage or against whom a claim is made or suit is brought."

    Frank dba C&F Trhucking also had an excess automobile policy with General Star. The policy stated that except for its own express provisions, "the policy will follow the terms, conditions, agreements, definitions, exclusions and limitations of the [First Insurance Policy]."  The policy further stated that General Star had no obligation to defend.

    NACIC issued a Commercial Following Form Excess Liability Policy to Frank dba C&F Trucking. The policy also stated there was no duty to defend. 

    The Waiau heirs filed suit against HEMIC, First Insurance, General Star, and NACIC, seeking (among other things) declaratory relief, and special, general and punitive damages. The complaint included counts for: Declaratory Relief (Count I); Breach of Contract and/or Contractual Warranties (Count II); Bad Faith (Count III); and Punitive Damages (Count IV).

    NACIC and General Star filed motions for summary judgment arguing they had no duty to defend or indemnify because the underlying policy issued by First Insurance had not exhausted. First Insurance filed a substantive joinder, arguing that its policy excluded coverage to an employee or fellow employee of the insured. The trial court granted summary judgment to General Star and NACIC. 

    On appeal, the insurers argued that the First Insurance policy excluded coverage for bodily injury to Agliam as either an employee of Frank DBA C&F Trucking or fellow employees of Frank, or assuming they were insured under the policy, the other Assignors. Under the Hawaii workers' compensation statute, an injured employee gave up the right to recover damages from an employer "in exchange for the certainty of a statutory award for all work-connected injuries."  Under Haw. Rev. Stat. 386-8, a fellow employee of the injured party was immune from suit for simple negligence, but not for wilful and wanton misconduct of the co-employee. Thus, while Frank's liability as Agliam's employer was prohibited by the workers' compensation statute, the Waiau heirs' fellow employee claims against the Assignors were not otherwise barred by the statute. Accordingly, the First Insurance policy exclusions, if enforced, denied coverage for bodily injury claims that were not subject to liability protections under the workers' compensation statute. 

    The Waiau heirs argued Frank was a co-employee of Agliam and pursuant to the severability-of-interests clause contained in the First Insurance policy, the exclusions were unenforceable. They contended that Frank wore many hats and was sued wearing his co-employee hat, not his employer hat, and therefore the First Insurance Business Auto Policy exclusions did not apply to Frank. The allegations in Count I of the underlying complaint stated that Frank's wilful and wanton conduct as a supervisory employee of C&F Trucking caused Agliam's death. However, it was possible that Frank's adjudicated breach of his duties to Agliam could be found to have occurred in a capacity as a fellow employee and possibly that the claim would be found to be covered under the policies. On the other hand, the First Insurance policy did not insure "officers and directors'"of C&F Trucking. Frank did business as C&F Trucking, which was not a separate legal entity. Frank was the employer and only insured person. There was no separate, severable coverage for Frank, who was Agliam's employer. In other words, the Severability-of-interests clause worked only when there was a separate, non-employer insured. Here, there was no such separate coverage at issue because there was only a single insured, Frank dba C&F Trucking. Therefore, the Waiau heirs' arguments that the exclusions in the First Insurance policy were unenforceable based on the severability-of-interests clause was without merit. 

    The Waiau heirs further argued that the fellow employee exclusion contravened Hawaii public policy because it would allow First Insurance to provide a policy not in compliance with Hawaii statutes requiring that all policies covering motor vehicles must provide insurance, to pay on behalf of the owner, sums which the owner may be obligated to pay for injury or death arising out of the ownership, operation, maintenance or use of the motor vehicle, including liability coverage of not less than the statutory minimums. 

    The conflict of interest provision in the First Insurance policy read,

In the event that there is a conflict between the provisions of this policy or endorsements attached and the Hawaii Motor Vehicle Insurance law, such law shall take precedence over the provisions of the policy or endorsements.

If the employee and fellow employee exclusions in the First Insurance policy were enforced, the policy would not provide the coverage mandated by statute. This constituted a conflict between the policy exclusions and the statute. Therefore, under the terms of the policy, the statute took precedence over the employee and fellow employee exclusions. It was unclear, however, what it meant for the statute to "take precedence" over the conflicting exclusions, i.e., what the remedy was if there was a conflict. The court found that the conflict of interest provisions term was ambiguous with respect as to how it would be applied when a conflict arose because it was reasonably susceptible to more than none interpretation. It was reasonable for the layperson insured to expect that if the policy exclusions were unenforceable with respect to the statutorily-mandated coverage, the liability coverage would be in the amount stated in the policy. This was the amount of liability coverage that was offered by the insurer, not the statutory minimum, which was referenced nowhere in the First Insurance policy. 

    Therefore, First Insurance had a duty to defend Frank, as well as provide liability coverage, absent the exclusions, which were unenforceable due to the conflict with the statute. Accordingly, the lower court erred in granting summary judgment in favor of First Insurance.

    Because the First Insurance policy had not exhausted, the lower court did not err in granting summary judgment to General Star for th duty to defend on Count I (Declaratory Relief) and Count II (Breach of Contract. However, a declaratory ruling that General Star has no duty arising out of Agliam's death to pay on behalf of Frank was premature. Thus, the entry of summary judgment in favor of General Star on Count I and Count II was vacated to the extent that it barred any duties that might arise under the General Star excess policy. Further, General Star presented no evidence concerning the reasonableness of its conduct. Therefore, it was unclear whether the Waiau heirs would be unable to carry their burden on Count III (Bad Faith) or Count IV (Punitive Damages), so it was also err to dismiss these counts. The court also found that the Waiau heirs should have been granted a continuance under Haw. R. Civ. P. 56 (f) to complete discovery related to its bad faith claims.

    Similarly, the lower court did not err in granting summary judgment to NACIC. Its policy also required exhaustion of the First Insurance policy, so granting summary judgment to NACIC on Counts I and II with respect to any obligation to defend the Assignors was proper. The employee and fellow employee exclusions in the First Insurance policy, however, did not operate to bar excess liability coverage under the NACIC policy. Further, the court could not conclude that NACIC demonstrated that the Waiau heirs would be unable to carry their burden at trial with respect to the bad faith claims. Finally, the Waiau heirs should have been granted a continuance under Rule 56 (f) to complete discovery related to the bad faith claims, including whether NACIC unreasonably interpreted its policy or otherwise acted in bad faith. 

    The case was remanded to the lower court for further proceedings.

    Thanks to my colleague, Mark Murakami, for the heads up on this case.