Hawaiian Isle Adventures, Inc. v. North American Capacity Insurance
623 F. Supp. 2d 1189, 2009 U.S. Dist. LEXIS 33795, 2009 WL 1046219 (2009)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Under Hawaii law, ambiguous exclusions in insurance contracts are construed liberally in favor of the insured and against the insurer, meaning the insurer bears the burden of proving an exclusion clearly and unambiguously applies to avoid the duty to defend.
Facts:
- Hawaiian Isle Adventures, Inc. (HIA) operates an outdoor recreation business that takes small groups of paying customers on ecological tours, including hiking, snorkeling, and boogie boarding.
- In 1999, an HIA customer on a hiking tour wandered off a trail, fell 25 feet, and broke his pelvis, leading to an out-of-court settlement by HIA's then-current insurance carrier.
- Following the 1999 incident, HIA expressed to its insurance broker an interest in securing full liability coverage for its operations.
- HIA submitted an insurance application to North American Capacity Insurance Company (NAC) on May 25, 2004.
- On July 15, 2004, Lee Townes drowned while participating in a snorkeling activity during one of HIA’s guided outings.
- In May 2006, Carolyn Townes filed a wrongful death lawsuit against HIA in state court, alleging that HIA’s negligence caused her husband’s death while snorkeling.
Procedural Posture:
- Carolyn Townes filed a wrongful death lawsuit against Hawaiian Isle Adventures, Inc. (HIA) in state court in May 2006.
- HIA tendered the defense of the state-court suit to its commercial general liability insurer, North American Capacity Insurance Company (NAC).
- NAC declined to provide a defense or coverage, claiming the insurance policy excluded claims arising from Lee Townes’s death while snorkeling.
- HIA retained counsel to defend itself in the state-court action.
- HIA sued NAC in federal district court as a diversity action, alleging various claims, including breach of contract and seeking declaratory judgment.
- The federal district court previously dismissed Counts II (tortious breach of contract) and V (negligence) of HIA's suit against NAC.
- NAC moved for partial summary judgment on Counts I (breach of contract) and IV (declaratory judgment), arguing it had no duty to defend or indemnify HIA.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does an insurer have a duty to defend and indemnify an insured outdoor recreation company in a wrongful death suit when the insurer claims coverage is precluded by ambiguous exclusions for "your work" (designated activities) and "athletic or sports participants" in the commercial general liability policy?
Opinions:
Majority - Susan Oki Mollway
No, an insurer does not relieve itself of the duty to defend or indemnify its insured when the policy's exclusionary language is ambiguous and fails to clearly preclude coverage. The court denied NAC's motion for summary judgment, finding that NAC failed to meet its burden of proving the applicability of the exclusions it cited. Under Hawaii law, insurance contracts are construed as a whole and given their plain meaning, but as contracts of adhesion, they must be interpreted liberally in favor of the insured, and any ambiguity must be resolved against the insurer, in accordance with the reasonable expectations of a layperson. The court found the "Designated Work Exclusion" ambiguous. While it excluded "bodily injury...arising out of 'your work' shown in the schedule" (listing snorkeling, hiking, etc.), the policy's definition of "your work" referred to "work or operations performed by you or on your behalf," focusing on the insurer's actions, not necessarily the customer's. The court questioned whether "negligent operation, management, or supervision" of a snorkeling tour, or faulty equipment, constituted "snorkeling" itself. NAC's interpretation, which would exclude injuries from nearly all of HIA's core business activities, would render the policy virtually illusory, conflicting with HIA's expressed need for full liability coverage and the substantial premium paid. The "Athletic or Sports Participants" exclusion was also found ambiguous. The language "any sports or athletic contest or exhibition that you sponsor" could reasonably be read as "contests or exhibitions of an athletic or sports nature," where "sports" functions as an adjective, not a standalone noun excluding all sports. Even if "sports" were a noun, snorkeling does not clearly fit dictionary definitions requiring competition or rules. Since snorkeling is not a contest or exhibition, and "sports" is ambiguous, this exclusion does not clearly apply. Finally, the "Designated Operations Limitation exclusion" present in earlier quotation and binder documents was not included in the final policy, which superseded those preliminary documents, and therefore could not be relied upon by NAC.
Analysis:
This case reinforces the pro-insured stance of Hawaii law regarding insurance contract interpretation, particularly concerning ambiguous exclusionary clauses. It highlights that insurers bear a significant burden to prove that an exclusion clearly and unambiguously applies to avoid their duty to defend. The court's focus on a "reasonable layperson's expectation" and the potential for an interpretation to render a policy "illusory" provides a strong framework for future challenges to overly broad or poorly drafted exclusions, especially in commercial general liability policies. The ruling underscores the importance of clear, precise language in policy drafting to ensure exclusions are enforceable, impacting how insurers must articulate limitations on coverage.
