On May 19, 2010, the Hawaii Intermediate Court of Appeals determined construction defect claims did not constitute an occurrence under a CGL policy. Group Builders, Inc. v. Admiral Ins. Co., 123 Haw. 142, 231 P.3d 67 (Haw. Ct. App. 2010) ("Group Builders I") [post here]. The appeal in Group Builders I, however, only addressed the duty to indemnify. The ICA has now issued a second decision (unpublished), holding that there is was duty to defend Group Builders on the construction defect claims under Hawaii law, based upon the policy language and the allegations in the underlying complaint. Group Builders, Inc. v. Admiral Ins. Co., 2013 Haw.App. LEXIS 207 (Haw. Ct. App. April 15, 2013) [decision here].
The underlying suit involved allegations by Hilton Hotels Corp. that Group Builders, a subcontractor working on an addition to the hotel, was responsible for mold found after completion of the project. Hilton alleged that the "design, construction, installation, and/or selection of the . . . building exterior wall finish . . . did not provide an adequate air and/or moisture barriers." The counts alleged against Group Builders included breach of contract and negligence.
Admiral refused to defend because the construction was completed after its policy period. Admiral also contended that the business risk exclusions, j (5) and j (6), excluded coverage for "your operations" and "your work."
In the coverage suit, the trial court found no duty to indemnify, but determined Admiral had a duty to defend. A partial final judgment was issued on the duty to defend. A separate partial final judgment was issued rejecting plaintiffs' claims that Admiral acted in bad faith. Meanwhile, the indemnity issue was decided by the ICA in Group Builders I on May 19, 2010, wherein the court ruled that construction defects claims did not constitute an "occurrence." Consequently, there was no duty to indemnify breach of contract claims based on allegations of shoddy performance.
One point not mentioned in the ICA's history of the case is that the Hawaii Legislature's effectively negated Group Builders I in June 2011, by enacting Act 83. The Act, now codified at Haw. Rev. Stat. 431:1-217, said that "the term 'occurrence' shall be construed in accordance with the law as it existed at the time that the insurance policy was issued."
Notwithstanding its prior determination that there was no duty to indemnify Group Builders, the ICA found Admiral had a duty to defend. The ICA noted that under Hawaii law, before Admiral could deny a defense, it had to prove it would be "impossible" for Hilton to prevail against Group Builders in the underlying suit on a claim covered by the policy. It was of no consequence if the court later determined that there was no duty to indemnify.
Admiral contended its expert testified at a deposition that the mold growth could not have occurred during its policy period. The ICA determined reliance on a deposition taken five years after the insured tendered the underlying complaint was not controlling for determining the duty to defend. Hilton's complaint did not specify when the mold growth began, when any property damage occurred, or what caused the mold to grow. Therefore, the ICA assumed that property damage occurred during the policy period.
But two questions remained when the defense was tendered to Admiral. First, were damages caused by defective workmanship an '"occurrence" under a standard-form CGL? Second, if so, could the damage be excluded under the exclusions j (5) or j(6)?
Actually, the Hawaii Supreme Court answered the first question in Sentinel Ins. Co. v. First Ins. Co. of Hawaii, Ltd., 76 Haw. 277, 875 P.2d 894 (1994), where the court found coverage existed under the insuring agreement for damages sustained from alleged construction defects. Sentinel also held where there was a legal ambiguity caused by differing interpretations in various jurisdictions of policy language, the language had to be construed in the insured's favor. Here, the ICA reasoned that Admiral owed a duty to defend because courts across the country were split as to whether construction defect claims constituted an "occurrence" at the time Admiral refused to defend.
Turning to the business risk exclusions, the ICA again determined that there was a disparity regarding the scope of these exclusions across the country. The exclusions only applied if the "property damage" arose out of "that particular part" of the property where the operations were being performed by the insured. Admiral cited cases from other jurisdictions which read the phrase "that particular part" broadly. Other cases, however, limited the exclusion to damages necessitating repair or replacement of the defective workmanship only.
Hilton's complaint did not specify which installation was defective, nor it specify which parts of the construction project were damaged. Therefore, there was a possibility that the exclusions would not exclude coverage for all of Hilton's claims against Group Builders. Consequently, Admiral had a duty to defend.
Finally, the bad faith claims were properly dismissed by the trial court. Under the reasonableness standard adopted by the Hawaii Supreme Court, the duty to indemnify construction defect claims in Hawaii was an open question of law. Admiral's decision rejecting coverage was therefore not unreasonable for purposes of determining bad faith.