In Hart v TICOR Title Insurance Company, ___ P. 2d ___ (Haw. No. SCWC-29467 3/27/2012), the Hawai’i Supreme Court held that a title insurer must defend its insureds in a potential escheat claim despite the “inartful” and defective pleading of the State’s underlying complaint.  The court followed long-respected precedent putting the burden on the insurer to prove that there was no genuine issue of material fact with respect to whether a possibility existed that the insureds would suffer a covered loss if their land were encumbranced by the State.

The initiating step occurred when the Harts, the TICOR insureds, filed a petition to consolidate two owned lots into one parcel.  The State filed an answer, objecting to the consolidation and asserted it had present interests in the property and specifically reserved any interests in the property that may have escheated to the State.  These same interests were asserted in an answer to the Harts’ amended petition for consolidation and in the State’s prayer for affirmative relief.

The Harts tendered their defense of the State’s escheat claims to TICOR, which denied on the basis that it claimed, “while escheat to the state is not a matter which is excluded from coverage, it does not appear that the State is currently making any claim of escheat.”  The Harts disagreed, contending that a defense against the claim of escheat was inseparably part of the defense of all claims.

Although the Harts prevailed on their petition for consolidation over the State’s objection, they filed a complaint for declaratory judgment against TICOR alleging breach of contract and bad faith.  The amount of reimbursement claimed for defense costs was less than $30,000.

On motions for summary judgment, the court entered summary judgment against the Harts and in favor of TICOR on the Harts’ claim for breach of contract for failing to defend them.  The district court found “that the [S]tate’s escheat defense was a routine reservation of a possible defense and did not trigger coverage” and that “the language raising the escheat defense did not create a realistic or reasonable potential for coverage” under the Policy.  The district court also awarded TICOR attorneys’ fees and costs in the amount of $5,281.49.  The Intermediate Court of Appeals (ICA) affirmed, noting “[t]he State’s reservation of possible rights did not amount to a claim of an escheated interest[]” in part because the State did not follow the statutory requirements for making an escheat claim.  Hart v. TICOR Title Ins. Co., No. 29467, 2011 WL 2938210, at *1 (Haw. App. July 21, 2011).

In a very thorough and well-analyzed opinion, the Supreme Court of Hawai’i reversed the ICA and held that TICOR had a duty to defend and to reimburse the Harts for their attorney’s fees.  The first issue the Court addressed was whether the State’s escheat reservation qualified as a “claim” triggering the duty to defend.  The policy provided that TICOR “shall provide for the defense of an insured in litigation in which any third party asserts a claim adverse to the title or interest as insured…”  The Harts maintained that the State’s answer “asserted interest in and claims against” the Harts’ property.  On the other hand, TICOR argued, and the ICA agreed, that the State was not making an escheat “claim” in its Answer, but was “merely” indicating “that it was not waiving, by its response, any claims based on escheat.”  Hart, 2011 WL 2938210, at *1.

The Supreme Court concluded that the word, “claim” should be interpreted according to its plain, ordinary, and accepted sense in common speech consistent with the reasonable expectations of a layperson.  Citing Black’s Law Dictionary, 282 (9th ed. 2009), “claim” includes any “interest or remedy recognized at law; the means by which a person can obtain a privilege, possession, or enjoyment or a right or thing[.]”  Therefore, the Court concluded that because “claim” is not defined in the Policy, and because the State’s allegations twice sought to establish the State’s present escheat interest in the Harts’ insured property and twice-requested affirmative relief regarding its present escheat interest, the State’s reservation fell within the broad, common definition of “claim” as covered under the Policy.

The next issue the Court addressed was at what point the “possibility” or potentiality of coverage should be measured.  It reasoned that to have any effect at all, the duty to defend must be determined when the claim is initially asserted  (“an insurer’s ultimate non-liability should not free it from its concurrent [and distinct] contractual duty to defend.”).  The fact that the State ultimately clarified that it was “not pursuing any claim of escheat to the State” did not excuse TICOR from its initial duty to defend.

Finally, the Court rejected TICOR’s argument that it was not required to defend because the State failed to follow the proper procedure for bringing an escheat claim under HRS § 665-1 (1993.  By so concluding, the ICA improperly tied TICOR’s duty to defend to the sufficiency or merits of the State’s pleading.  “Put differently, the ICA erroneously made TICOR’s duty to defend contingent upon the outcome or ultimate sufficiency of the State’s escheat claim.”

Thanks to my friend, Alan Van Etten, Deeley King Pang & Van Etten, Honolulu, who authored the amicus curiae brief on behalf of United Policyholders.