Why it matters: The Hawaii Supreme Court handed a policyholder victory when it ruled that the locations delineated in a commercial general liability (CGL) policy did not preclude coverage for the insured at other locations. The dispute involved coverage for property damage and personal injury caused by the collapse of a dam on the island of Kauai. Facing litigation, the insured filed suit against its insurers seeking judgment on the scope of coverage. The only insurer with a policy in effect at the time of the collapse denied coverage, pointing to a Designated Premises Endorsement (DPE) that it argued limited coverage to the specific premises listed. But the state’s highest court ruled that the list was “not sufficiently ‘clear and unequivocal’ to limit coverage to injuries occurring on the designated premises,” and to hold otherwise would unlawfully convert the CGL policy into a premises liability policy. Instead, the court relied upon a Fifth Circuit Court of Appeals decision to find that the policy covered injury or damage “arising out of” the ownership, maintenance, or use of a designated premises. Because decisions about the dam were made at a location listed on the DPE, coverage was appropriate, the court concluded.

Detailed discussion: On March 16, 2006, a large portion of the Kaloko Dam on the island of Kauai collapsed, releasing more than 3 million gallons of water, causing significant property damage, and killing seven people. James Pflueger owned the dam at the time and filed a state court lawsuit against C. Brewer and Company, the company he purchased the property from.

Pflueger contended that C. Brewer sold the dam aware that it had questionable structural integrity, requesting damages and indemnification for the company’s negligent acts or omissions and failure to warn about the dam’s unsafe conditions.

C. Brewer (a subsidiary of the company that constructed the dam in the late 1800s) in turn filed suit against 17 different insurers, requesting rulings regarding their obligations pursuant to various policies.

James River Insurance Company issued the only policy—a commercial general liability (CGL) policy—in effect at the time the dam breached. The insurer moved for summary judgment, relying upon a Designated Premises Endorsement (DPE) that stated: “This insurance applies only to ‘bodily injury,’ ‘property damage,’ or ‘personal and advertising injury’ arising out of the ownership, maintenance or use of the premises shown” in a schedule of locations.

The list of locations included C. Brewer’s corporate headquarters but not the dam site. James River asserted that the DPE unambiguously precluded coverage for the dam.

A trial court granted the motion and an appellate court reversed. The Hawaii Supreme Court upheld the reversal.

“We hold that the James River DPE provides coverage for injury and damage that occur on premises not listed in the schedule if the injury or damage arises out of the ownership, maintenance or use of a designated premises,” the court concluded.

The court adopted the reasoning from a Fifth Circuit Court of Appeals decision, American Guarantee and Liability Insurance Co. v. 1906 Co., 129 F.3d 802 (5th Cir. 1997), where the panel explained that the phrase “arising out of” is “ordinarily understood to mean ‘originating from,’ ‘having its origin in,’ ‘growing out of,’ or ‘flowing from.’ In the insurance context, this phrase is often interpreted to require a causal connection between the injuries alleged and the objects made subject to the phrase.”

“[I]n this case, the [dam] was owned and operated by KIC, a C. Brewer subsidiary, KIC’s employees were considered employees of C. Brewer, and all major business decisions concerning the [dam], including the alleged failure to capitalize KIC, the entrance into various agreements to maintain the [dam], and the eventual sale of the land underlying the Reservoir, were apparently made at C. Brewer’s corporate headquarters,” the court wrote. “Therefore, a causal connection could possibly be found between C. Brewer and its entrustment of the [dam] to KIC, the operation of the designated premises, and the injuries that resulted from C. Brewer’s allegedly negligent corporate decisions.”

Adopting the insurer’s position that “arising out of” should be limited to liability for injury and damage occurring on designated premises would effectively convert the CGL policy to a premises liability policy, the Hawaii Supreme Court added.

Relying on a federal court decision from Florida, American Empire Surplus Lines Insurance Co. v. Chabad House of North Dade, Inc., 771 F. Supp. 2d 1336 (S.D. Fla. 2011), the court held that “a DPE ‘must be clear and unequivocal[]’ to convert a CGL policy to a premises liability policy in order to effectively limit coverage to injury or damage that occurs on undesignated premises.”

“In this case, the James River DPE does not clearly convert the policy into a premises liability policy,” the Hawaii Supreme Court explained.

Additional considerations supported this conclusion, such as the inclusion of “personal and advertising injury” in the DPE, which suggested that the parties intended to include coverage for negligent decisions made at a designated premises that resulted in injury and damages elsewhere. And the policy featured broad coverage territory encompassing the United States, Canada, Puerto Rico, and other parts of the world.

Finding that the policy provided coverage for negligence claims arising out of the use of C. Brewer’s corporate headquarters, the court remanded the case for consideration of other exclusions or endorsements asserted by James River.

To read the opinion in C. Brewer and Company v. Marine Indemnity Insurance Company of America, click here.