The Hawaii federal district court confirmed its prior holdings that there is no duty to defend or indemnify for property damage caused by faulty workmanship. State Farm Fire & Cas Co. v. GP West, Inc., 2016 U.S. Dist. LEXIS 74240 (D. Haw. Jun 7, 2016). (Full disclosure - our office represents GP West in this matter).
GP West, the contractor, and Air Conditioning of Maui, Inc. (AC Maui), the subcontractor, were sued by the owner of a veterinary clinic for installation of an alleged defective HVAC system. GP West contracted with the owner to build the clinic. AC Maui was the HVAC subcontractor and designed, sized and priced a HVAC system for the clinic. The underlying complaint alleged that after the building was substantially complete, the HVAC system experienced multiple equipment defects and mechanical breakdowns, and did not properly dehumidify the building.
Paragraph 43 of the underlying complaint alleged that the defective HVAC system caused damage to property not part of the HVAC system itself, including the development of mold in the clinic, the collapse of the clinic's sub-ceiling, rust and corrosion to metal door frames and fixtures, and damage and electrical short-outs to light fixtures.
State Farm issued a CGL policy to AC Maui, which named GP West as an additional insured. GP West was also insured by its own insurer, Nationwide. State Farm agreed to defend AC Maui under a reservation of rights, but denied GP West's tender. Nationwide defended GP West under a reservation of rights. After filing its action for declaratory judgment, State Farm agreed to participate in GP West's defense.
On cross-motions for summary judgment, the court found there was no duty to defend or indemnify. The defendants argued paragraph 43 of the underlying complaint alleged damage to property other than the HVAC system itself, thereby distinguishing this case from the Ninth Circuit decision in Burlington Ins. Co. v. Oceanic Design & Const. Inc.,383 F.3d 940 (9th Cir 2004) and the decision from the Hawaii Intermediate Court of Appeals, Group Builders, Inc. v. Admiral Ins. Co., 123 Haw. 142, 231 P.3d 67 (2010). Both Burlington and Group Builders held that there was no occurrence when property damage arose from a construction defect and the underlying action was contract based.
Defendants also argued that Act 83, enacted after the Group Builders decision, required the court to consider cases in which the Hawaii Supreme Court had indicated damage caused by faulty workmanship were in fact covered under Hawaii law. But the court noted that prior decisions from the federal district court had found that nothing in Act 83 purported to nullify any of the decisions preceding Group Builders that determined that contract and contract-based claims are not covered under CGL policies under Hawaii law. Further, the court was bound to follow the Ninth Circuit's decision in Burlington. Therefore, as a matter of law, the underlying plaintiffs' claims were all contract-based claims and not covered by State Farm's policy.
The defendants argued that the underlying complaint also alleged they were negligent for violation of the Maui county building code. Under Hawaii law, as announced in Association of Apartment Owners of Newtown Meadows v. Venture 15, Inc., 115 Haw. 232, 267 P.3d 225 (2007), such claims were deemed an independent tort and not contract based. The federal district court, however, found that Newtown Meadows was not applicable because the holding allowed a homeowner to pursue a negligence claims against a builder where the builder allegedly violated an applicable building code. Here, a commercial building had been constructed and no Hawaii case had been identified to extend the Newtown Meadows to commercial buildings. Further, Newtown Meadows was concerned with stating an exception to the economic loss rule which was inapplicable here. The economic loss rule held that a cause of action in products liability would not lie where a plaintiff alleged a purely economic loss stemming from injury only to the product itself.
The court also rejected defendants' argument that the products-completed operations coverage was an indication that construction defects were intended by the parties to be covered under the policy. The court found that even if the policies included coverage for products-completed operations, this did not obviate the requirement that coverage for such claims arise from an "occurrence."
Finally, the court ruled that State Farm did not breach the covenant of good faith and fair dealing by comparing its "Other Insurance" provision to that of Nationwide's "Other Insurance" provision in determining that State Farm was excess over Nationwide and had no duty to defend. GP West relied upon Nautilus Ins. Co. v. Lexington Ins. Co., 132 Haw. 283, 321 P.3d 634 (2014) to argue that an insurer could not deny a defense by relying upon its "Other Insurance" provision and determining that another insurer had the primary obligation to defend. The Nautilus decision was distinguishable because State Farm was not GP West's primary insurer. State Farm did provide primary insurance, but not to GP West.
Policyholders in Hawaii have continually failed to secure coverage for construction defect claims in federal district court. The issue has not been presented to the Hawaii Supreme Court since the decisions in Burlington and Group Builders were rendered nor since the enactment of Act 83. Policyholders must await a case to reach the Hawaii Supreme Court to see whether these cases and their progeny were correctly decided under Hawaii law.