Court Opinion

ID: 8942895
Source: CourtListenerOpinion
Date Created: 2022-11-27 08:06:01.899468+00
Date Added: 2024-06-11T17:09:46.605389
License: Public Domain

CYNTHIA HOLCOMB HALL, Circuit Judge,
dissenting in part and concurring in part.
I dissent from the majority’s interpretation of Hawaii law and the MGIC Directors and Officers Errors and Omissions Insurance Policy (the policy). The policy provides MGIC the option to advance litigation expenses as they come due, and the right to associate itself with the defense. The parties knew about these provisions when they signed the policy. Yet the majority takes statements regarding the scope of the insurer’s duty to defend under Hawaii law out of context to conclude that Hawaii implies a duty to defend in all insurance contracts unless expressly negated, and ignores the plain, unambiguous language of the policy.
I
Contrary to the majority’s analysis, Hawaii does not imply a duty to defend in all insurance contracts unless the policy expressly provides otherwise. The question of whether an insurer has a duty to defend in a particular case has two separate components: (1) whether there is a duty to defend imposed by the policy, see, e.g., First Insurance Co. v. Hawaii, 66 Hawaii 413, 665 P.2d 648, 651-52 (1983); Ritter v. United States Fidelity & Guaranty Co., 573 F.2d 539, 542 (8th Cir.1978); and (2) whether any of the accusations against the insured are within the scope of the duty to defend, see, e.g., Standard Oil Co. v. Hawaiian Insurance & Guaranty Co., 65 Hawaii 521, 654 P.2d 1345, 1349 (1982); Gray v. Zurich Insurance Co., 65 Cal.2d 263, 419 P.2d 168, 176, 54 Cal.Rptr. 104 (1966). The Hawaii courts have continuously emphasized that “ ‘the insurer’s duty to defend is purely contractual and depends, in the first instance, on the language of the particular policy involved.’ ” First Insurance v. Hawaii, 665 P.2d at 651 (quoting Ritter, 573 F.2d at 542) (emphasis added). See also Hawaiian Insurance & Guaranty Co. v. Chief Clerk, — Hawaii —, 713 P.2d 427, 430 (1986); Hawaiian Insurance & Guaranty Co. v. Brooks, — Hawaii —, 686 P.2d 23, 26 (1984). The Hawaii courts have not qualified this statement with a rule that a duty to defend is implied unless expressly negated. If the policy does not impose a duty to defend upon the insurer, then there is no duty to defend under Hawaii law.
The majority’s reliance on Standard Oil, 654 P.2d 1345, and First Insurance v. Hawaii, 665 P.2d 648, is wholly misplaced. In Standard Oil Co. v. Hawaiian Insurance & Guaranty Co., 2 Hawaii App. 451, 634 P.2d 123, 128-29 (1981), the Hawaii Intermediate Court of Appeals addressed the question of whether the insurer received adequate notice from the insured that a complaint against the insured presented claims for which the insurer was required to defend and potentially indemnify. 634 P.2d at 128-29. The insurance policy at issue specifically provided that the “[insurer] shall have the right and duty to defend any suit against the insured____” Id. at 125. The court concluded that the complaints filed against the insured which the insured forwarded to the insurer provided the required notice. Id. at 129. In affirming the notification issue the Hawaii Supreme Court relied on the California Supreme Court’s decision in Gray, 419 P.2d 168, for the proposition that “[a]n insurer’s duty to defend arises whenever there is a potential for indemnification liability of insurer to insured under the terms of the policy.” 654 P.2d at 1349. Because the *1458policy imposed a duty to defend on the insurer whenever there was a potential for indemnification, the court concluded that the insurer had a duty to look behind the pleadings to determine if any potential for indemnification existed. Id. The court did not imply a duty to defend as a matter of Hawaii law as the majority suggests; the duty to defend was provided in the insurance policy.
First Insurance v. Hawaii, 665 P.2d 648, fails to support the majority’s analysis for similar reasons. As in Standard Oil, the insurance policy in First Insurance v. Hawaii gave the insurer “the right and duty to defend any suit against the insured____” Id. at 653. The issue in First Insurance v. Hawaii, was whether the insurer’s duty to defend was triggered by pleadings against the insured which stated covered and not covered claims. Id. at 652-54. Relying on Standard Oil and Gray,1 the court held that the duty to defend imposed by the policy applied under such circumstances. Id. at 652. The court did not imply a duty to defend as a matter of Hawaii law.
The majority’s strained construction of Crawford v. Ranger Insurance Co., 653 F.2d 1248, 1250-53 (9th Cir.1981) (applying Hawaii law), is even less persuasive. The insurance policy at issue in Crawford covered death and injuries from plane crashes, but excluded the pilot from its coverage. Id. at 1250-51. We held that the insurer did not waive its right to contest coverage by providing a defense under a reservation of rights. Id. at 1253. In ruling on the waiver issue we noted that the insurer had a duty to defend the entire suit because the allegations included claims that were covered and the claim for the pilot’s death that was not covered. Id. Like First Insurance v. Hawaii and Standard Oil, this was a statement regarding the scope of the insurer’s duty to defend. The majority’s conclusion that we implied a duty to defend as a matter of Hawaii law in Crawford because the duty to defend language was not quoted in the opinion is pure conjecture. The existence of a duty to defend was not at issue, there was no need to quote the duty to defend provision of the policy in the opinion. Crawford contains no statement that a duty to defend is implied as a matter of Hawaii law when not expressly negated by the contract.
The majority’s conclusion that Hawaii implies a duty to defend in all insurance policies unless expressly negated is the worst form of judicial activism by a federal court. If the Hawaii legislature2 or the Hawaii courts wish to adopt the rule of construction which the majority has fashioned, then I will gladly apply it. However, I will not participate in the majority’s decision to substitute its judgment for that of Hawaiian lawmakers.
II
I also disagree with the majority’s interpretation of the MGIC policy at issue in this case. The majority discerns an ambiguity in the standard insurance practice of stating a general definition in the policy and then limiting that definition through subsequent exclusions, when no other court or scholar reviewing the same or similar language has found an ambiguity.
The policy definition of loss in section 1(d) includes ' “judgments, settlements, costs ... and defense of legal actions, *1459claims, or proceedings and appeals there-from____” By defining litigation expenses as a loss they are subject to the exclusions set forth elsewhere in the policy the same as any other loss. The policy does not contemplate “unconditional payment of defense costs for potentially covered claims” as the majority suggests, it contemplates payment of defense costs as a loss if indemnification is required. See Continental Casualty Co. v. Board of Education, 302 Md. 516, 489 A.2d 536, 538-43 (1985).3 Conspicuously absent from the MGIC policy is any clause providing that the insurer has the right and the duty to defend.4
Interpreted properly there is no conflict between section 1(d) of the policy and section 5(c), which gives MGIC the option to advance expenses upon request, and makes expenses advanced subject to repayment if MGIC is ultimately determined to have no liability. In Continental Casualty the Maryland Supreme Court interpreted loss and expense provisions substantively identical to those in the MGIC policy. See 489 A.2d at 538-39. The insured was held liable for certain claims within the policy’s coverage and certain claims outside of the policy’s coverage. Id. at 543. The insured sought recovery for those litigation expenses which it was entitled to recover under the insurance policy and for failure to defend the entire suit. Id. at 542-43. The court responded:
Provisions of the subject CNA policy relating to defense are substantially different from the duty to defend clause of a conventional liability policy. Assureds and/or the Board, not CNA, select and retain defense counsel. “Loss,” whether incurred by way of judgment, settlement, or defense costs, is charged against the policy limit without distinguishing between damages and legal fees. CNA has the option, but not the obligation, to advance expenses. CNA’s consent, which is not unreasonably to be withheld, is to be obtained before expenses are incurred or settlements made. If CNA advances expenses under the subject policy and “it is finally established the Insurer has no liability” under the policy, then each recipient of advances agrees to repay CNA all monies advanced on his or her behalf.
Id. at 543. See also Comment, supra note 4 at 711 (noting that director has no recourse under MGIC policy if insurer refuses to advance expenses as they come due, and relying on unpublished district court decision in Clandening v. MGIC Indemnity Corp., No. CV 83-2432 (C.D.Cal. May 24, 1983), reaching the same conclusion). Contrary to the majority’s interpretation, this approach gives effect to all sections of the MGIC policy. Section 1(d) creates a right to payment for judgments and defense costs within the policy’s coverage. Section 5(c) compliments section 1(d) by giving MGIC the option to advance litigation costs subject to repayment if liability is not established.
The majority’s interpretation of section 1(d) also gives no meaning to section 6(d), which gives MGIC “the right to associate itself in the defense,” and section 5(a), which gives MGIC the right to review costs, charges, expenses or settlements before they are incurred by the insured. The right to associate itself with the defense is a provision for the benefit of MGIC which *1460negates any implication that the policy imposes a duty to defend. See Kienle v. Flack, 416 F.2d 693, 695-96 (9th Cir.1969); Healy Tibbitts Construction Co. v. Foremost Insurance Co., 482 F.Supp. 830, 837 (N.D.Cal.1979). The majority’s implication of a duty to defend in the policy renders section 5(a) nonsensical by requiring MGIC to consult with itself before reaching settlements or incurring costs.
Rather than take a view of section 1(d) which renders three other sections of the policy meaningless, I find that MGIC has no duty to defend under the policy. I would reverse the district court’s grant of summary judgment for plaintiffs on the duty to defend issue and grant summary judgment in favor of MGIC.
HI
Because of my resolution of the duty to defend issue I do not address plaintiffs’ allegation that MGIC acted in bad faith in advancing defense costs under a reservation of rights, or plaintiffs’ claim that multiple losses are involved. I concur in the majority’s conclusion that there remain material issues of fact regarding MGIC’s alleged bad faith in responding to plaintiffs settlement inquiries.

. Gray, like Standard Oil and First Insurance v. Hawaii which have relied on it, is a decision regarding the scope of the insurer’s duty to defend. The insurance contract at issue imposed a duty to defend on the insurer, but the insurer argued that the complaint for intentional injuries was outside the scope of the policy. Id. 419 P.2d at 176. The California Supreme Court rejected the insurer’s argument, holding that the insurer’s duty was governed by the facts underlying the complaint, which stated a claim for intentional injury which was not covered and negligence which was covered, and con-eluding that the duty to defend arose with the potential for indemnification. Id. at 176-77.

. The California legislature has adopted a provision imposing a duty to defend on insurer’s under certain types of insurance contracts unless the duty to defend is negated by the insurance contract. Cal.Civ.Code § 2778; Gribaldo, Jacobs, Jones, & Associates v. Versicherunges, 3 Cal.3d 434, 476 P.2d 406, 414-15, 91 Cal.Rptr. 6 (1970).

. See also Johnston, Corporate Indemnification and Liability Insurance for Directors and Officers, 33 Bus.Law. 1993, 2023 (1978) (interpreting loss provision of Lloyd's directors and officers liability policy on which the MGIC loss provision is patterned, and concluding that "[t]here is nothing in the policy which requires the insurer to pay [defense costs] until the insureds’ liability has been determined’’); Hinsey, The New Lloyd's Policy Form for Directors and Officers Liability Insurance-An Analysis, 33 Bus. Law. 1961, 1966 (1978) (concluding that defense costs are not reimbursed under loss provisions of Lloyd’s policy if one of the policy exclusions applies).

. See Knepper, Liability of Corporate Officers and Directors, § 20.16 at 642 & Supp. (3d ed. 1978) ("The [directors and officers] policy forms do not require payment of legal expenses by the insurer until the legal liability of the insured has been established.”); Comment, Practical Aspects of Directors' and Officers’ Liability Insurance-Allocating and Advancing Legal Fees and the Duty to Defend, 32 UCLA L. Rev. 690, 691-92 (1985) (noting absence of duty to defend in directors and officers liability policies).