Coverage for construction defects continues to be hotly contested in Hawaii state and federal courts. In a recent decision, Judge Mollway felt bound to follow the Ninth Circuit's decision in Burlington Ins. Co. v. Oceanic Design & Constr., Inc., 383 F.3d 940, 944 (9th Cir. 2004), where the court found construction defect claims arise from breach of contract, not from an occurrence. Judge Mollway's most recent decision on the issue is Illinois Nat. Ins. Co. v. Nordic PCL Constr., Inc., 2012 U.S. Dist. LEXIS 58464 (D. Haw. April 26, 2012).
Nordic constructed a grocery store for Safeway. In addition to the grocery store, Nordic built a 165-space rooftop parking deck, retail shops and related improvements. After opening for business in 2007, Safeway experienced significant leaks. Safeway demanded that Nordic repair the parking deck. Nordic sent the demand letter to the insurer, who agreed to appoint counsel subject to a reservation of rights.
Safeway filed suit against Nordic in state court alleging, among other things, breach of contract and negligence. The insurer provided Nordic with a defense, but Nordic hired independent counsel.
The insurer filed for declaratory relief in federal district court. Nordic counterclaimed for breach of contract, breach of the covenant of good faith and fair dealing, misrepresentations and omissions of material fact, and bad faith. The insurer moved to dismiss the counterclaim.
Regarding the breach of contract claim, the court was bound by Burlington. Consequently, the court agreed with the insurer that the underlying damage was not caused by an "occurrence" as defined in the policy and was therefore not covered. In response to the argument that Burlington and the Hawaii Intermediate Court of Appeals decision, Group Builders, Inc. v. Admiral Ins. Co., 123 Haw. 142, 231 P.3d 67 (Ct. App. 2010), failed to follow a trilogy of Hawaii Supreme Court cases - Sentinel Ins. Co., Ltd v. First Ins. Co. of Haw., Ltd., 76 Haw. 277, 875 P.2d 894 (1994);Hurtig v. Terminix Wood Treating & Contracting, Co., 67 Haw. 480, 692 P.2d 1153 (1984); and Sturla, Inc v. Fireman's Fund Ins. Co., 67 Haw. 203, 684 P.2d 960 (1984) - the court merely presumed that Burlington and Group Builders took the Supreme Court cases into account.
Nor was the court influenced by H.B. 924, which said "the meaning of the term 'occurrence' shall be construed in accordance with the law as it existed at the time that the insurance policy was issued." The policy here was issued in 2007, after the Burlington decision in 2004. Therefore, the breach of contract claim was dismissed. With respect to the "occurrence" based portion of that claim, the dismissal was with prejudice.
Count II, alleging a breach of the covenant of good faith and fair dealing, was dismissed with leave to amend. Count III, alleging fraud and negligent misrepresentation, was also dismissed with leave to amend. Count IV, the bad faith count, was dismissed only to the extent it was based on fraud.