HRS § 663-10 Lien Is the Exclusive Post-Settlement Remedy for Property & Casualty Insurers (Extending Yukumoto) and the Made-Whole Doctrine Is Declined in the Maui Fire Global Settlement

I. Introduction

The Hawaiʻi Supreme Court’s reserved-questions opinion in In re: The Petition for the Coordination of Maui Fire Cases arises from the August 2023 Maui fires and a proposed “global settlement” intended to resolve thousands of claims against multiple defendants (including Hawaiian Electric-related entities, the State, the County, and major landowners). Alongside personal and class claims, numerous insurance carriers filed separate subrogation actions seeking to recover amounts paid to insureds for fire-related losses.

The settlement term sheet made effectiveness contingent on resolving insurers’ subrogation demands in one of two ways: either insurers would release their claims, or a final, unappealable ruling would declare insurers’ exclusive remedy to be lien recovery against the settlement under HRS § 663-10. The Circuit Court of the Second Circuit reserved three questions. The Supreme Court’s answers establish a statewide rule governing property and casualty insurer recovery rights when insureds settle with tortfeasors, clarify the continuing relevance of State Farm Fire & Casualty Co. v. Pacific Rent-All, Inc. after 2000 statutory changes, and decline to inject the “made whole” doctrine into the statutory lien framework in this mass tort setting.

II. Summary of the Opinion

The Supreme Court reads HRS § 663-10 (collateral source lien procedure in tort recoveries) together with HRS § 431:13-103(a)(10)(A) (an “unfair insurance practice” provision that expressly channels “reimbursement of past benefits paid” to § 663-10 when damages are recovered by judgment or settlement). Interpreting the statutory text and legislative history (1986 tort/insurance reforms; 2000 Act 29; 2002 Act 228), the court concludes the Legislature intended a “fair, uniform and comprehensive procedure” that (1) protects reimbursement rights but (2) limits them to lien recovery from corresponding special damages, with a fee/cost reduction, and (3) promotes settlement by preventing insurers from disrupting third-party settlements through independent post-settlement subrogation lawsuits.

Crucially, the court draws a boundary: the exclusivity of the lien remedy applies only once the insured has recovered by judgment or settlement. In the absence of any such recovery, a property and casualty insurer’s equitable subrogation remains available because there is no settlement fund against which to assert a lien and no competition with the insured for the same recovery.

The court also announces an important structural safeguard: although the lien remedy is exclusive, settlement parties may not in bad faith allocate recoveries to defeat valid lien interests. The court recognizes an implicit good-faith requirement in settlement structuring under § 663-10 and sketches a presumption framework (inspired by, but not adopting, Troyer v. Adams) to police allocations that disproportionately label recovery as general damages to nullify liens.

III. Analysis

A. Precedents Cited

1. Yukumoto v. Tawarahara

Yukumoto v. Tawarahara, 140 Hawaiʻi 285, 400 P.3d 486 (2017), is the opinion’s primary doctrinal engine. Yukumoto held that in the context of an insured’s tort settlement, a health insurer’s recovery rights are confined to the statutory lien mechanism—no independent subrogation action against the settling tortfeasor and no contractual provisions that conflict with § 663-10. In this Maui Fire opinion, the court extends Yukumoto’s statutory exclusivity logic beyond “personal insurance” (health) to property and casualty insurers in the settlement/judgment context, emphasizing that article 13 of the Insurance Code broadly regulates “trade practice in the business of insurance” and that only workers’ compensation and no-fault/motor vehicle insurers are expressly exempted.

At the same time, the court preserves Yukumoto’s conceptual distinction between “personal insurance” and property/casualty insurance by keeping equitable subrogation alive for property/casualty insurers where there is no settlement/judgment—thus avoiding a reading that would categorically eliminate property/casualty subrogation.

2. State Farm Fire & Cas. Co. v. Pac. Rent-All, Inc. / State Farm Fire & Casualty Co. v. Pacific Rent-All, Inc.

The insurers leaned heavily on State Farm Fire & Cas. Co. v. Pac. Rent-All, Inc., 90 Hawaiʻi 315, 978 P.2d 753 (1999), which held that in “fire and casualty insurance” the insurer may maintain a subrogation action despite an insured’s release if (1) the tortfeasor had knowledge or colluded and (2) the insurer was “actually prejudiced.” The Maui Fire opinion does not overrule State Farm outright; instead it clarifies its post-2000 reach: because Act 29 (2000) added HRS § 431:13-103(a)(10)(A), the statutory lien process became the exclusive post-settlement remedy, leaving no post-settlement subrogation right to be “prejudiced” by a release. In other words, State Farm’s equitable reinstatement of subrogation after a release cannot operate where the Legislature has made lien recovery exclusive.

The opinion nonetheless borrows State Farm’s sensitivity to inequitable settlement behavior when it recognizes that settlement allocations designed to nullify lien rights may be bad faith and therefore impermissible under the statutory scheme.

3. Rudel v. Haw. Mgmt. All. Ass'n

The court cites Rudel v. Haw. Mgmt. All. Ass'n, 937 F.3d 1262 (9th Cir. 2019), for the interpretive point that HRS § 431:13-103 explicitly incorporates HRS § 663-10 and therefore the statutes “must be read together.” This supports the court’s central move: treating § 431:13-103(a)(10)(A) as the operative statutory directive that channels insurer reimbursement to § 663-10 whenever damages are recovered by settlement/judgment.

4. “Context” subrogation cases and conceptual framing

• State Farm Fire & Cas. Co. v. Pac. Rent-All, Inc. and older equity cases: Peters v. Weatherwax; Grain Dealers Mutual Insurance Co. v. Pacific Insurance Co., Ltd; Pacific Insurance Company, Ltd. v. Esperanza; Shimabuku v. Montgomery Elevator Co.—used mainly to show Hawaiʻi’s historical breadth in equitable subrogation and diligence requirements, while acknowledging statutory displacement where the Legislature speaks clearly.
• St. Paul Fire & Marine Ins. Co. v. Liberty Mut. Ins. Co. and State Farm Fire & Cas. Co. v. Pac. Rent-All, Inc. for definitions and purposes of subrogation.
• AIG Haw. Ins. Co. v. Rutledge and Sol v. AIG Hawaiʻi Insurance Co. to illustrate that some insurance contexts are governed by distinct statutory reimbursement regimes and to reinforce the principle that conflicting contract terms yield to statute.
• Park v. City & Cnty. of Honolulu is distinguished as a workers’ compensation case governed by HRS § 386-8 and exempt from § 431:13-103(a)(10); its “no harm to insured” rationale is not transferable to a setting where insureds are actively recovering via settlement and insurers’ parallel actions could disrupt settlement finality.

5. Settlement policy and good faith analogies

The court’s settlement-protection emphasis draws on Hawaiʻi’s strong pro-settlement jurisprudence, including Gossinger v. Ass'n of Apt. Owners of Regency of Ala Wai and Exotics Hawaii-Kona, Inc. v. E.I. Du Pont De Nemours & Co.. For the lien-defeating allocation concern, the court analogizes (without adopting) to the totality-of-circumstances approach in Troyer v. Adams (good faith settlements under HRS § 663-15.5), proposing a presumption framework to deter collusive allocation of special vs. general damages.

B. Legal Reasoning

1. Statutory architecture: exclusivity triggered by settlement/judgment

The opinion’s reasoning is fundamentally statutory. The court treats HRS § 663-10(a) as establishing a comprehensive lien procedure in “any civil action in tort,” requiring judicial determination of lien validity before approval of a judgment or settlement (and permitting petitions even when no suit is pending). The lien is limited to “corresponding special damages” and is reduced by a “reasonable sum” for the plaintiff’s costs and fees—an explicit legislative balancing of reimbursement and victim compensation.

The decisive statutory hook is HRS § 431:13-103(a)(10)(A), which makes it an unfair insurance practice to refuse/limit coverage because an insured may have a third-party claim, but provides that “Where damages are recovered by judgment or settlement of a third-party claim, reimbursement of past benefits paid shall be allowed pursuant to section 663-10.” The court reads this as a channeling and limiting directive: post-settlement, “reimbursement … shall be allowed” only via the § 663-10 lien process—hence “exclusive remedy.”

2. Express exemptions imply inclusion

The court invokes the interpretive principle reflected in Rosehill v. Land Use Comm'n: when the Legislature expressly exempts some categories (here, entities licensed under chapters 386 and 431:10C in § 431:13-103(a)(10)(B)), courts presume the Legislature intentionally left other categories (property and casualty insurers) within the statute’s scope. This is central to the extension of Yukumoto beyond health insurers.

3. Legislative history: a “uniform and comprehensive procedure” to avoid duplicate recovery and promote settlement

The court’s historical narrative is unusually detailed and does most of the work in converting “lien protection” into “exclusive remedy”:

• 1986 Special Session Act 2: enacted § 663-10 to prevent “double payments” from collateral sources while limiting lien recovery to special damages so plaintiffs are not deprived of noneconomic damages—expressly balancing insurer reimbursement and plaintiff compensation.
• 2000 Act 29: added § 431:13-103(a)(10) and amended § 663-10 to include “health insurance or benefits,” with committee reports describing “reimbursement rights pursuant to Section 663-10 to avoid a duplicate windfall recovery.” The court reads Act 29 as limiting “reimbursement and subrogation for all insurance companies” to the comprehensive lien process, subject to exemptions.
• 2002 Act 228: brought health insurers back under article 13’s unfair practices provisions to “eliminate any doubt that health insurers have always been subject to these limitations under section 663-10,” responding to testimony that insurers were interfering with settlements. The court treats this as confirming a single framework for insurers generally, not creating separate tracks for different insurer types.

4. The “two worlds” of property/casualty recovery: post-settlement exclusivity vs. no-settlement subrogation

The opinion carefully avoids a result that would (practically) immunize tortfeasors when insureds do not sue. It therefore holds:

• If there is a settlement/judgment: insurers are confined to § 663-10 lien recovery (no independent subrogation actions against settling tortfeasors).
• If there is no settlement/judgment: property and casualty insurers retain equitable subrogation against tortfeasors, because § 663-10 cannot operate without a recovery fund and there is no competition between insured and insurer for the same proceeds.

This bifurcation is the opinion’s principal attempt to harmonize Hawaiʻi’s broad equitable subrogation tradition with the Legislature’s post-2000 settlement-protective statutory scheme.

5. “Actual prejudice” and the collapse of the State Farm release problem post-Act 29

On Question 2, the court’s logic is formal but potent: if post-settlement subrogation rights do not exist (because the statute makes the lien the exclusive remedy), then the insured’s release does not “prejudice” a right the insurer never had in that procedural posture. This reframes State Farm as a pre-Act 29 equitable doctrine that cannot override later, clear statutory limits.

6. Policing settlement allocations: an implied good-faith requirement under § 663-10

The court’s most practically consequential “gap-filler” is its recognition that parties cannot structure settlements in bad faith to defeat liens—e.g., labeling all recovery as general damages “when the circumstances do not warrant such a settlement.” It announces:

• a trial court may presume bad faith where allocation “disproportionately favors general damages at the expense of special damages” to prejudice an insurer far below a valid lien amount;
• the presumption may be overcome by showing allocation reasonableness under the totality of circumstances known at settlement time;
• review on appeal is for abuse of discretion.

Although the court explicitly declines to adopt the Troyer v. Adams test for § 663-10, it signals that trial courts should use similarly practical, fact-sensitive considerations to detect collusion or wrongful purpose.

7. Made whole doctrine: declined (and still not adopted generally)

On Question 3, the court emphasizes institutional restraint: Hawaiʻi has never adopted the made whole doctrine “in any context,” and a reserved-question posture with an undeveloped record is not the vehicle to do so. It rejects the plaintiffs’ reading of State Farm footnote 8 as an adoption. It also notes that made-whole analysis is fact intensive and individualized, and it declines to apply it to the statutory lien-claim process under the circumstances of this mass tort settlement.

C. Impact

1. Settlement finality and “global peace” in mass torts

The opinion substantially strengthens defendants’ ability to obtain final, global settlements in Hawaiʻi mass torts by limiting insurers (including property and casualty carriers) to lien recovery against settlement proceeds rather than independent post-settlement subrogation suits. This reduces the risk that defendants who pay to settle with victims face a second wave of litigation from insurers for the same loss.

2. Practical shift for insurers: from defendant-focused recovery to lien administration

Property and casualty insurers must now treat § 663-10 lien practice—timely notice, lien validity litigation, special-damages correspondence, and fee/cost reductions—as the central recovery mechanism once insureds settle or obtain judgments. The opinion also signals that attempts to “opt out” of lien practice by insisting on subrogation actions (when settlement/judgment exists) may be characterized as contrary to the statutory scheme.

3. Increased importance of allocation and judicial supervision

Because lien recovery is limited to “corresponding special damages,” how parties allocate settlement amounts between special and general damages becomes high-stakes. The court’s implied good-faith requirement invites more robust judicial scrutiny at settlement approval and lien adjudication stages, particularly where allocations would effectively zero out lien recoveries.

4. Preservation of insurer subrogation where insureds do not sue

The court’s explicit clarification that § 663-10 “does not apply in the absence of a settlement or judgment” preserves insurers’ ability to sue tortfeasors directly when insureds do not pursue tort recovery. This avoids a potential enforcement gap that could otherwise reduce deterrence and permit tortfeasors to escape liability simply because victims do not litigate.

5. Made whole doctrine remains unresolved in Hawaiʻi

The opinion leaves Hawaiʻi without a generally adopted made whole doctrine. Litigants should expect continued arguments, but the court signals that any adoption would likely require a concrete factual record and an appropriate procedural vehicle, not an abstract reserved question tied to a specific mass settlement.

IV. Complex Concepts Simplified

• Subrogation: the insurer “steps into the shoes” of the insured to sue the tortfeasor for amounts the insurer paid.
• Reimbursement via lien (HRS § 663-10): instead of suing the tortfeasor, the insurer claims a portion of the insured’s settlement/judgment—limited to corresponding special damages (economic losses like repair costs, medical bills, lost wages), and reduced by a reasonable share of the plaintiff’s fees/costs.
• Equitable vs. contractual (“conventional”) subrogation: equitable arises from fairness principles; contractual arises from policy language. This opinion emphasizes that even contractual rights yield to statutes that limit recovery mechanisms.
• Collateral source rule vs. lien recovery: the collateral source rule generally prevents tortfeasors from reducing liability due to insurance payments to plaintiffs; § 663-10 addresses a different issue—preventing plaintiffs from double-collecting special damages while safeguarding noneconomic damages and settlement incentives.
• Made whole doctrine: an equitable rule (in some jurisdictions) that bars insurer recovery until the insured is fully compensated for all losses. Hawaiʻi still has not adopted it, and the court declined to apply it here.
• Reserved questions: a procedure where a trial court asks the Supreme Court to decide specific legal questions; the Supreme Court answers based on the reported facts and avoids broader rulings not necessary to those questions.

V. Conclusion

This opinion establishes a major post-disaster settlement rule in Hawaiʻi: once an insured recovers tort damages by judgment or settlement, a property and casualty insurer’s exclusive recovery mechanism is the statutory lien process under HRS § 663-10 as incorporated by HRS § 431:13-103(a)(10)(A), and an insured’s release that preserves lien rights does not “prejudice” the insurer. The court simultaneously preserves equitable subrogation where there is no settlement/judgment, preventing tortfeasors from escaping liability in cases where victims do not sue.

The decision’s broader significance lies in its explicit harmonization of settlement policy, statutory design, and insurance recovery practices: it facilitates “global peace” settlements, channels insurer recovery into court-supervised lien proceedings, and adds an implied good-faith constraint on settlement allocations to prevent gamesmanship—while leaving the made whole doctrine for another day and another record.