ISLAND INSURANCE COMPANY, LTD. v. Arakaki

LAW L!BF¥AF§Y

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NO. 29ll6
IN THE INTERMEDIATE COURT OF APPEALS §§ §§
‘ §§
oF THE sTATE OF HAWAI‘I '§
3 ss
51
ISLAND INSURANCE CQMPANY, LTD., a Hawai‘i m
corporation, Plaintiff-Appellee, 4 §§ §§
WALTER Y. ARAKAKI, Defendant-Appellant §§ 55

APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT
(CIVIL NO. O7~l-O780)

MEMORANDUM OPINION
(By: Nakamura, C.J., Foley and Leonard, JJ.)

Defendant-Appellant walter Y. Arakaki (Arakaki) appeals
from the Final Judgment filed on March 24, 2008 in the Circuit

(circuit court). The circuit court

Court of the First Circuitl
entered judgment in favor of Plaintiff-Appellee Island Insurance

Ltd. (Island) and against Arakaki.

On appeal, Arakaki contends the circuit court erred in
2007 Motion for Summary Judgment

Company,

granting Island's December l1,
(SJ Motion). Arakaki raises four points of error regarding the
circuit court's grant of summary judgment:

l. The circuit court erroneously ruled that the
allegations in the Complaint filed in Swift v. Arakaki, Civil No.
O5~l-15l6, (Swift's Complaint) were not directed against Arakaki
in his official capacity within the meaning of Arakaki's

Commercial General Liability (CGL) Policy with Island (the

Policy).
2. The allegations in Swift's Complaint did not

denote an "occurrence" within the meaning of the Policy.

1 The Honorable victoria S. Marks presided.

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3. The allegations in Swift's Complaint did not
denote "bodily injury" or "property damage" within the meaning of
the Policy.

4.i The circuit court erroneously relied on Swift's
unverified and inadmissible Complaint as evidence negating
Island's duty of coverage (indemnity).

I . BACKGROUND

On August 23, 2005, Stephen H. Swift filed Swift's
Complaint in circuit court against Arakaki and SSWYA. SSWYA was
a general partnership formed by Arakaki and Swift for the purpose
of acquiring various assets of the Oahu Sugar Company, Ltd.
Swift's Complaint stated that a dispute had arisen over the
purchase of the assets, leading to litigation that resulted in a
settlement in favor of SSWYA from third parties. Swift's
Complaint alleged that Arakaki and SSWYA transferred SSWYA
property and assets (presumably including proceeds of the
settlement) for Arakaki's individual benefit. Swift's Complaint
further alleged that Arakaki's attorney denied Swift access to
the partnership books.

Shortly after the filing of Swift's Complaint, Arakaki
tendered defense of the lawsuit to Island. Arakaki maintained
CGL insurance with Island for his contracting company: Walter Y.
Arakaki, General Contractor, Inc. On May l, 2007, Island filed a
Complaint for Declaratory Judgment (Island's Complaint), seeking
a determination that "Island has no duty under [the Policy] to
defend or indemnify [Arakaki] for claims asserted against him in
[Swift's Complaint] (the 'Underlying Lawsuit")." lsland
thereafter filed its SJ Motion on the duty of defense and
coverage. Island attached a copy of Swift's Complaint and a
declaration by Island's attorney that Swift's Complaint was “a
true and accurate copy of the complaint in the [U]nderlying

[L]awsuit." Arakaki opposed the motion.

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The first circuit court granted Island's SJ Motion and
filed the Final Judgment on March 24, 2008. Arakaki timely

appealed.
II. STANDARDS OF REVIEW

we review the circuit court's grant or denial of
summary judgment de novo. Hawaii [sic] Community
Federal Credit Union v. Keka, 94 HawaFi 2l3, 22l, ll
P.3d l, 9 (2000). The standard for granting a motion
for summary judgment is settled:

[S]ummary judgment is appropriate if the
pleadings, depositions, answers to
interrogatories, and admissions on file,
together with the affidavits, if any, show that
there is no genuine issue as to any material
fact and that the moving party is entitled to
judgment as a matter of law. A fact is material
if proof of that fact would have the effect of
establishing or refuting one of the essential
elements of a cause of action or defense
asserted by the parties. The evidence must be
viewed in the light most favorable to the non~
moving party. In other words, we must view all
of the evidence and the inferences drawn
therefrom in the light most favorable to the
party opposing the motion.

Id. (citations and internal quotation marks
omitted).

Coon v. City and County of Honolulu, 98 HawaFi 233,
244-45, 47 P.3d 348, 359-60 (2002) (second alteration

in original).

Kau v. City and County of Honolulu, l04 HawaFi 468, 473~74,
92 P.3d 477, 482-83 (2004).

. In the insurance context, with specific regard
to the insurer's duties to defend and indemnify under the
policy, [the Hawafi Supreme Court] has distilled the
summary judgment standard still further:

It is well settled that the duty to provide coverage
[i.e., the duty to indemnify,] and the duty to defend
on the part of an insurer are separate and distinct.
Moreover, the parties' respective burdens of proof
with respect to the duties to indemnify and to defend
are also distinct.

With respect to [an insurer's] prayer for a
declaration that it has no duty to defend . . .
pursuant to the polic[y, its] already heavy burden of
proof as a movant for summary judgment [i]s
significantly augmented. The obligation to defend is

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broader than the duty to pay claims and arises
wherever there is the mere potential for coverage. In
other words, the duty to defend rests primarily on the
possibility that coverage exists. This possibility
may be remote but if it exists, the insurer owes the
insured a defense. All doubts as to whether a duty to
defend exists are resolved against the insurer and in
favor of the insured.

Accordingly, in connection with the issue of its
duty to defend, [the insurer bears] the burden of
proving that there [i]s no genuine issue of material
fact with respect to whether a possibility exist[s]
that [the insured] would incur liability for a claim
covered by the polic[y]. In other words, [the insurer
is] required to prove that it would be impossible for
the [claimant] to prevail against [the insured] in the
underlying lawsuit[] on a claim covered by the
policies. Conversely, [the insured's] burden with
respect to its motion for summary judgment [i]s
comparatively light, because it ha[s] merely to prove
that a possibility of coverage exist[s].

with respect to [an insurer's] prayer for a
declaration that it ha[s] no duty to indemnify [the
insured] pursuant to the polic[y, it is] not required
to disprove any possibility that its insured might be
liable for a claim asserted in the underlying
lawsuits. Rather, without reference to what the
eventual outcome of the underlying lawsuits might
actually be, [the insurer is] required only to
establish the absence of a genuine issue of material
fact regarding the question of coverage pursuant to
the plain language of the insurance polic[y] and the
consequent entitlement to the entry of judgment as a
matter of law.

Dairy Rd. Partners v. Island Ins. Co., Ltd., 92 HawaFi 398,
412-l3, 992 P.2d 93, 107-08 (2000) (internal citations,
quotation signals, and footnote omitted; some brackets and
ellipses deleted and some brackets and ellipses added;
emphases in original).

TRI-S Corp. v. western world Ins. Co., 110 Hawafi 473, 487-88,
135 P.3d 82, 96-97 (2006).
III. DISCUSSION
A.
Arakaki contends that Island did not meet the high

burden of proof to warrant summary judgment on the duty of
defense. Under the burden of proof standard for the moving party

as set forth in Tri-S Corp., Island would have to demonstrate

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that it is impossible for Island to incur liability under the
Policy for claims that Arakaki tendered for defense. Arakaki, by
contrast, has to merely show that the Policy could possibly cover
the tendered claim.

Given this standard, we look to Arakaki's Policy with
Island to determine the Policy's coverage. The Policy provided
CGL coverage with liability limits of $l million per occurrence
and $2 million in the aggregate. The Policy was in effect from
July l, 2004 to July l, 2005. The first section of the Policy
provided coverage for "bodily injury" and/or "property damage,"
which resulted from an Woccurrence" taking place in the "coverage
territory" and during the policy period. The second section of
the Policy provided coverage for "personal and advertising
injury," triggered by a business offense committed in the
"coverage territory" during the policy period. The Policy

further defined these terms:

3. "Bodily injury" means bodily injury, sickness or
disease sustained by a person, including death
resulting from any of these at any time.

13. "Occurrence" means an accident, including continuous
or repeated exposure to substantially the same general
harmful conditions.

14. "Personal and advertising injury" means injury,
including consequential "bodily injury," arising out
of one or more of the following offenses:

a. False arrest, detention or imprisonment;
b. Malicious prosecution;
c. The wrongful eviction from, wrongful entry into,

or invasion of the right of private occupancy of
a room, dwelling or premises that a person
occupies, committed by or on behalf of its
owner, landlord or lessor;

d. Oral or written publication of material that
slanders or libels a person or organization or
disparages a person's or organization's goods,
products or services;

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e. Oral or written publication of material that
violates a person's right of privacy;

f. The use of another's advertising idea in your
"advertisement;" or

g. Infringing upon another's copyright, trade dress
or slogan in your "advertisement."

17. "Property damage" means:

a. Physical injury to tangible property, including
all resulting loss of use of that property. All
such loss of use shall be deemed to occur at the
time of the physical injury that caused it; or

b. Loss of use of tangible property that is not
physically injured. All such loss of use shall
be deemed to occur at the time of the
"occurrence" that caused it.

Swift's Complaint alleged the following facts:

5. On or about March 24, l995, Plaintiff [Stephen
H. Swift] and Defendant Arakaki formed the general
partnership, SSwYA.

6. Plaintiff and Defendant Arakaki entered into a
certain Asset Purchase and Sale Agreement, dated March 24,
l995, and amended on April 3, l995, with Oahu Sugar Company,
Limited, for the purchase of equipment, tools, machinery,
trade fixtures, parts, and other personal property
("Purchase").

7. SSwYA was formed to buy, sell, own, rent, lease
and otherwise deal with said Purchase.

8. A dispute arose concerning the Purchase,
resulting in litigation, from which, SSwYA received a
settlement from third parties.

9. Upon information and belief, Defendants
transferred SSwYA property, proceeds, benefits, and/or
assets, for Defendant Arakaki's individual benefit, and
Plaintiff is entitled to said proceeds, benefits, and/or
assets as a general partner.

l0. On January 3, 2005, Plaintiff, as a general
partner of SSwYA, made a demand for access to SSwYA's books
and records to Eric. S. Yamagata, counsel for Defendants.

ll. On January 5, 2005, Defendant Arakaki through
Mr. Yamagata refused to provide access to information
concerning SSwYA to Plaintiff.

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Swift's Complaint alleged six causes of action against
Arakaki:

(1) refusal to permit Swift's inspection of
partnership books and records, in violation of HRS § 425-122
(2004 Repl.);

(2) breach of the fiduciary duty of loyalty to Swift,
in violation of HRS § 425-123 (2004 Repl.);

(3) breach of the fiduciary duty of care, in violation
of HRS § 425-l23;

(4) breach of the partnership contract;

(5) wrongful transfer of partnership assets, in
violation of HRS § 425~l20 (2004 Repl.); and

(6) punitive damages for Arakaki's wilful misconduct.

B.

Arakaki argues that Swift's Complaint alleged facts
involving Arakaki in his official capacity as an "executive
officer“2 and director of Arakaki, Inc. Swift's Complaint,
however, does not name Arakaki in his official capacity.
Arakaki's Policy applies only to Arakaki in his official capacity
as an "executive officer" and director of Arakaki, Inc.:

SECTION II~~WHO IS AN INSURED

l. If you are designated in the Declarations as:

d. An organization other than a partnership, joint
venture or limited liability company, you are an
insured. Your "executive officers" and
directors are insureds, but only with respect to
their duties as your officers and directors.

In Arakaki's opposition memorandum to the SJ Motion,
Arakaki appended the Declaration of Rodney Uchida (Uchida), one

of his attorneys. Uchida explained that Arakaki's conduct as

2 The Policy defines "executive officer" as "a person holding any of
the officer positions created by your charter, constitution, by~laws or any
other similar governing document."

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alleged in the Swift Complaint implicated Arakaki in his official
capacity as Arakaki, Inc.'s "executive officer" and director. In
particular, Uchida noted that the SSwAY property Swift claimed
was improperly transferred by Arakaki was transferred to Arakaki,
Inc. This evidence raises a material issue of fact as to whether
the conduct alleged in Swift's Complaint implicates Arakaki in
his official capacity under the Policy.
d c .

Island argues that Swift's Complaint alleged no
occurrence because the misappropriation of partnership assets
(the crux of Swift's Complaint) was intentional or willful
conduct by Arakaki. Island explains that Hawafi courts

determine if a claim arises from an accident (and thus an

.occurrence) within the coverage of a liability insurance policy

by viewing the facts underlying the claim objectively from the
perspective of the insured. Hawaiian Holidav Macadamia Nut Co.
v. Indus. Indem. Co., 76 HawaFi l66, l70, 872 P.2d 230, 234
(l994). Thus, "if the insured did something or failed to do
something, and the insured's expected result of the act of
omission was the injury, then the injury was not caused by an
accident and therefore not within the coverage of the policy."
;Q4 (brackets and ellipses omitted) (quoting AIG Hawaii Ins. Co.
V. Caraang, 74 HaW. 620, 635-36, 851 P.2d 32l, 329 (l993)).
Arakaki argues that Island's own proof raises a

material issue regarding whether Swift's claims against Arakaki
arose from an accident, Arakaki indicates that Swift's Complaint
alleged a breach of the duty of care and grossly negligent or
reckless conduct and according to Tri-S Corp., such allegations
give rise to an occurrence. Arakaki's breach of the duty of

loyalty and care to Swift sounds in negligence.

[I]n this jurisdiction, we have never restricted claims
sounding in negligence to unintentional or "careless"
conduct. . . . [A] cause of action sounding in negligence

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will lie if the defendant breaches a duty owed to the
plaintiff, thereby legally causing the plaintiff injury, So
long as "such a relation exists between the parties that the
community will impose a legal obligation upon one for the
benefit of the other," Tabieros v. Clark Equipment Company,
85 HawaFi 336, 353, 944 P.2d l279, 1296 (l997) (citations
and internal quotation signals omitted), i.e., so long as
the defendant owes the plaintiff a duty, the thoughts
passing through the defendant's mind as he or she breaches
that duty are immaterial.

Dairy Rd. Partners v. Island Ins. Co., 92 Hawafi 398, 419-20,
992 P.2d 93, 114-15 (2000). Because Arakaki's conduct was
alleged to be negligent, it gives rise to an occurrence or
accident within the meaning of Arakaki's Policy. Qf; Hawaiian
Holiday, 76 Hawafi at l7l, 872 P.2d at 235 (concluding that
killing of seedlings did not sound in negligence and therefore
was not accidental and could not give rise to an occurrence
within CGL insurance policy). we conclude that Swift's Complaint
raised a material issue of fact regarding an occurrence under
Arakaki‘s Policy.
D.

There is a material issue of fact as to whether Island
had to defend based on the Policy's definition of property
damage. Under the policy, property damage specifically includes
the "loss of use" of tangible property, and the underlying
complaint alleged, inter alia, that Arakaki converted property,
proceeds, benefits, and/or assets for Arakaki's individual
benefit.

E.

Island argues that even if Swift's Complaint alleged an
occurrence of bodily injury or property damage, the policy
exclusion for intended or expected bodily injury or property
damage bars the claim. The relevant policy exclusion provides:

2. Exclusions

This insurance does not apply to:

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a. Expected Or Intended Injury

"Bodily injury" or "property damage" expected or
intended from the standpoint of the insured.

Island argues that Arakaki intended to misappropriate
partnership assets and to the extent that this misconduct raises
an occurrence of bodily injury or property damage, it is barred
by the policy exc1usion. Swift's Complaint states that
"Defendants had a fiduciary duty of care to refrain from engaging
in grossly negligent or reckless conduct, intentional misconduct
or a knowing violation of the law." The complaint further states
that "Defendants' conduct breached their duty of care to [Swift]
by engaging in grossly negligent or reckless conduct, intentional
misconduct, or a knowing violation of the law." Swift's

Complaint is not limited to solely alleging intentional

misconduct. Hawafi courts construe the exclusions in policies
narrowly. See Tri~S Corp., 110 Hawafi at 494 n.8, 135 P.3d at

103 n.8 (quoting Cov v. Nat'l Ins. Ass'n, 713 N.E.2d 353, 360
(Ind. Ct. App. 1999)) ("Our court has also concluded that
negligent and reckless conduct 'is not enough to meet the
"practically certain" standard required for an insurance policy
to exclude expected injuries.'") Given Arakaki's light burden
(to merely show that the policy could possibly cover the tendered
claim) under Tri-S Corp., we conclude that Arakaki has met that
burden here in regards to the policy exclusions.

we conclude that the circuit court erred in granting
summary judgment on the duty of defense in Island's favor. As
noted, under Tri-S Corp., Island (the moving party) has to
demonstrate that it would be impossible for it to incur liability
under the Policy for claims Arakaki tendered for defense. we
conclude that Island has not met this heavy burden. we
accordingly vacate the circuit court's grant of summary judgment

on the duty of defense.

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F .
we also vacate the circuit court's grant of summary
judgment on the duty to indemnify. The only evidence submitted
by Island in support of its SJ Motion was an unverified copy of
Swift's Complaint, Arakaki Inc.'s CGL insurance policy, and a
State of HawaFi Department of Commerce and Consumer Affairs
website printout regarding Arakaki, Inc. Based on our review of
the existing record and our foregoing analysis, we conclude that
Island failed to meet its burden of showing the absence of any
genuine issue of material fact and its entitlement to judgment as
a matter of law on the issue of its duty to indemnify.
IV . CONCLUSION
The Final Judgment filed on March 24, 2008 in the

Circuit Court of the First Circuit is vacated, and this case is
remanded for further proceedings consistent with this opinion.

DATED: Honolulu, HawaFi, June 16, 2010.

On the briefs:

(Law Offices of Melvin Y. Agena) ,

Brian K. Yomono Chief Judge

for Defendant-Appellant.
ssociate Judge
f

Richard B. Miller

Patricia Kehau wall

David R. Harada-Stone

(Tom Petrus & Miller, LLLC)
for Plaintiff-Appellee.

>

A

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