Insurance Law Hawaii

Tenth Circuit Finds Insurer Must Defend Unintentional Faulty Workmanship

   Applying Colorado law, the Tenth Circuit found a duty to defend construction defect claims where the faulty workmanship was unintentional. Greystone Const. Inc. v. National Fire & Marine Ins. Co., 2011 U.S. App. LEXIS 22053 (10th Cir. Nov. 1, 2011). A prior post [here] discussed the Tenth Circuit's certified question to the Colorado Supreme Court in this matter, a request that was rejected by the Colorado court.

   In two underlying cases, Greystone was sued by the homeowner for damage caused to the foundation by soil expansion. In both cases, the actual construction was performed by subcontractors. Further, in neither case was the damage intended or anticipated. Nevertheless, National Union refused to defend, contending property damage resulting from faulty construction was not an occurrence.

   Relying on a Colorado Court of Appeals case, General Security Indemn. Co. of Arizona v. Mountain States Mut. Cas. Co., 205 P.3d 529 (Colo. App. 2009), the district court granted summary judgment to National Union.

   On appeal, the Tenth Circuit first considered whether Colorado legislation enacted to overturn General Security could be applied retroactively. The statute, section 13-20-808, provided courts "shall presume that the work of a construction professional that results in property damage, including damage to the work itself or other work, is an accident unless the property damage is intended and expected by the insured." The court concluded the statute had no retroactive effect and did not apply to this appeal. Incidentally, section 13-20-808 was the model for the initial drafts of the Hawaii 2011 legislature's HB 924, which was eventually enacted in a different version as Act 83.

   The Tenth Circuit then looked to General Security, which held that because the term "accident" implied fortuity, "a claim for damages arising from poor workmanship, standing alone, does not allege an accident that constitutes a covered occurrence . . . ." General Security, 205 P.3d at 534. Despite the decision by the Colorado Court of Appeal, the Tenth Circuit believed the Colorado Supreme Court would construe the terms "occurrence" to encompass unforeseeable damage to nondefective property arising from faulty workmanship.

   The Hawaii Intermediate Court of Appeals (ICA) was heavily influenced by General Security in Group Builders, 123 Haw. 142, 231 P.3d 67 (Haw. Ct. App. 2010), wherein the ICA determined construction defects do not arise from an occurrence and are not covered. The ICA was influenced by General Security's breakdown of cases across the country addressing whether construction defects are covered under a CGL policy, and ultimately agreed with what it termed the "majority" position that there was no coverage.

   The Tenth Circuit, however, disagreed with General Security's breakdown. Most federal circuit and state supreme court cases lined up in favor of finding an occurrence where damage arises from faulty workmanship. The court noted the recent trend interpreted the term "occurrence" to encompass unanticipated damage to non-defective property resulting from poor workmanship. These cases generally held that damage caused by faulty workmanship was neither expected nor intended from the standpoint of the policy holders, and was therefore covered as long as it did not fall under a policy exclusion.

   Therefore, injury flowing from improper or faulty workmanship was an occurrence so long as the resulting damage was to non-defective property, and was caused without expectation or foresight. CGL policies were intended to cover unforeseeable damages, a category that encompassed faulty workmanship leading to physical damage of non-defective property. The damage suffered by the homeowners here may have resulted from an unforeseen occurrence: the damage caused by the faulty workmanship that failed to account for exposure to expansive soils.

   Finally, the court considered the meaning of the "your work" exclusion and the subcontractor exception. It was the initial broad grant of coverage, not the exception to the exclusion, that ultimately created (or did not create) coverage. Exclusions were then considered to determine whether coverage was negated. Given this structure of CGL policies, the "your work" exclusion and the subcontractor exception were illusory if damages to the contractor's non-defective work product was not covered in the first place.

   Consequently, damage arising from poor workmanship could fall under a CGL policy's initial grant of coverage, even though recovery may still be precluded by a business-risk exclusion or other provision.

   Thanks to my Damon Key colleague, Anna Oshiro, for flagging this case.

Faulty Wormanship Exclusion Does Not Bar Coverage

   The court determined that the Faulty Workmanship Exclusion only barred coverage for damages arising from problems with the property under construction itself and not to losses incurred to correct damage from accidents during construction. See 1756 First Associates, LLC v. Continental Casualty Co., 2011 U.S. Dist. LEXIS 117100 (S.D.N.Y. Oct. 3, 2011).

   A tower crane collapsed at the construction site, causing damage. First Associates tendered the claim to its insurer, Continental. Continental reimbursed First Associates for certain costs arising from damage to and cleanup of the construction site and building stemming from the crane collapse. Continental refused, however, to reimburse First Associates for costs associated with construction delays resulting from the collapse.

   Continental relied upon the Faulty Workmanship Exclusion, which read, in part,

[T]his Policy does not insured against physical loss or damage caused by or resulting from the following:

a. . . . Faulty workmanship or faulty materials . . . .

   First Associates argued that the Faulty Workmanship Exclusion excluded losses arising only from errors or defects in the construction itself and not losses such as delays or cleanup costs arising from equipment failure on the construction site which did not impact the insured property. Continental , on the other hand, argued the Faulty Workmanship Exclusion precluded damages caused by the crane collapse because the collapse was the product of faulty workmanship in manufacturing the crane.

   The court agreed with First Associates. "Faulty Workmanship" referred to the work done by the insured to the insured property itself, not work done by the manufacturer of tools or equipment used on the premises. First Associates did not build the equipment which Continental asserted was the product of faulty workmanship, i.e., the crane. Accordingly, First Associates was entitled to coverage for losses incurred after the crane's collapse.

Fifth Circuit Reverses Insurers' Summary Judgment Award Based on "Your Work" Exclusion

   Application of the facts to the "your work" exclusion was the key to resolving coverage issued in Am. Home Assurance Co. v. Cat Tech L.L.C., 2011 U.S. App. LEXIS 21076 (5th Cir. Oct. 5, 2011).

   Ergon Refining, Inc. hired Cat Tech L.L.C. to service a hydrotreating reactor. In January 2005, Cat Tech replaced certain parts in the reactor. After Cat Tech finished the job and left, Ergon noticed a high pressure drop in the reactor, forcing it to be shut down. Cat Tech returned in February 2005, removed, repaired and replaced the damaged parts, and loaded new parts. After completion, a second large pressure drop occurred during the reactor's start-up process. The reactor was shut down until October 2005, when Ergon hired a different contractor to perform the repair work. Additional damage to the reactor was found.

   Cat Tech and Ergon went to arbitration. The arbitrators found Cat Tech was at fault and awarded Ergon $1.9 million in damages. Cat Tech sought indemnification from its insurers, American Home, under a CGL policy, and National Union, under an umbrella policy. American Home defended in the arbitration, but only paid its policy's per-occurrence limit of $1 million. National Union denied Cat Tech's claim in its entirety. The policies' "your work" exclusion barred coverage for "'property damage' to 'your work' arising out of it or any part of it . . . . "

   The insurers filed suit seeking a declaratory judgment to establish that the "your work" exclusion precluded coverage. The district court granted summary judgment to the insurers based upon the "your work" exclusion.

   The Fifth Circuit noted there were three categories of property damage potentially at issue. The first category encompassed property damage to the specific parts of Ergon's reactor upon which Cat Tech performed defective work. The second category was property damage to those parts of the reactor upon which Cat Tech performed non-defective work, but were nonetheless damaged. The third category encompassed other Ergon property upon which Cat Tech did not work, but was still damaged. The Fifth Circuit concluded that the "your work" exclusion only precluded coverage for damage to that portion of Ergon's property upon which Cat Tech performed repair work, defective or otherwise. It did not preclude coverage for any damage to Ergon's property that Cat Tech did not repair or service.

  The district court erroneously relied upon the arbitration award in deciding damage to Ergon's reactor was limited to those components that Cat Tech serviced. The Fifth Circuit determined the arbitration award was too vague in its description of the damage to the reactor and how that damage related to the work Cat Tech performed. While the award found Cat Tech responsible for the damage, this only resolved the issue of liability between Ergon and Cat Tech, not coverage between Cat Tech and its insurers.

  Accordingly, there was a disputed issue of fact as to whether the damage to the reactor was limited to the parts upon which Cat Tech worked, or whether other parts of the reactor were also damaged during Cat Tech's work in January and February 2005.

   Thanks to my blogging colleague, Rebecca Copeland (www.recordonappeal), for sending this case my way.

Coverage for Construction Defects Barred by Business Risk Exclusions

Although the court determined there was an occurrence, coverage was excluded by the business risk exclusions. See Cont'l W. Ins. Co. v. Shay Constr. Co., 2011 U.S. Dist. LEXIS 82839 (D. Colo. July 28, 2011).

White was the general contractor on the project. White had three subcontracts with Shay to provide framing, siding, and related work on the project. Shay was insured under a CGL policy issued by Continental Western.

Two of Shay's subcontractors furnished materials, labor and equipment to Shay. These subcontractors filed suit in state court alleging they had not been compensated for the work and materials. White and Shay were named as defendants. White cross claimed against Shay, alleging Shay had breached its obligations under the subcontracts. Several allegations sounded in contract. Other allegations, however, contended Shay had performed defective work and had damaged the work of other trades in correcting deficiencies in its own performance.

Shay sought coverage under Continental Western's policy. Continental Western filed suit for a declaratory judgment and moved for summary judgment.

The federal district court agreed with Continental Western that a significant portion of the cross claims alleged the failure to provide services as promised in a contract, not property damage arising from an accident. The court noted the Colorado Court of Appeals had held that a claim for damages arising from poor workmanship, standing alone, did not allege an accident. See Gen. Sec. Indem. Co. of Arizona v. Mountain States Mut. Cas. Co., 205 P.3d 529 (Colo. App. 2009). Gen. Sec., however, noted under a corollary that an "accident" and "occurrence" were present when consequential property damage was inflicted upon a third party as a result of the insured's activity.

Here, the cross claims could be interpreted to allege an occurrence under the corollary in Gen. Sec.because Shay's defective work allegedly required repair that resulted in damage to the work product of other trades. These allegations showed not only poor workmanship, but also damage to a third party as a result.

Turning to the exclusions, however, the court determined there was no coverage based on Exclusions (j) (5) and (j) (6). Exclusion (j) (5) barred coverage for property damage to "That particular part of real property on which you . . . are performing operations, if the 'property damage' arises out of those operations." This exclusion applied to both Shay's allegedly defective work and the damage Shay allegedly caused to the work of other trades when it repaired its own work.

Similarly, Exclusion (j) (6) barred coverage for "that particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it." "Your work" was defined as any "work or operations performed by you or on your behalf." This was also broad enough to include both Shay's defective work and the damage it inflicted directly on other work in its repair of its poor workmanship.

Consequently, Continental Western had no duty to defend Shay.

Installation of Chinese Drywall Constitutes Separate Occurrence in Each Home

   Coverage for damage caused by the installation of Chinese drywall was the issue in Dragas Mgt. Corp. v. Hanover Ins. Co., 2011 U.S. Dist. LEXIS 80178 (E.D. Va. July 21, 2011).

   Dragas built housing developments. Dragas hired Porter-Blaine Corp. to supply and install drywall for the homes in two of its developments. Porter-Blaine installed defective Chinese drywall in seventy-four of the homes in the two developments. A high level of elemental sulfur contained in the Chinese drywall caused property damage in the homes, including corroding of HVAC coils, damaging wiring, tarnishing or corroding metal objects and causing bad odor.

   When Porter-Blaine refused to remove and replace the drywall, Dragas remediated the problem by having the homeowners temporarily move, tearing out the drywall, replacing it, and repairing the other property damage caused by the drywall, all at its own cost. Dragas then invoked the arbitration clause in its subcontract with Porter-Blaine and was awarded $4.9 million in damages. The award was converted into a judgment.

   Dragas sued Porter-Blaines' insurers to enforce the arbitration award. Citizens Insurance Co. of America had issued CGL policies to Porter-Blaine. Porter-Blaine also had an umbrella excess liability policy with The Hanover Insurance Company.

   Dragas moved for partial summary judgment on the Citizens' CGL policies. It first argued that the installation of and damage caused by the defective drywall constituted an occurrence. The court held that the replacement of the defective drywall was not an occurrence. However, any repair or replacement of non-defective components of the homes constituted an occurrence under the policies.

   Next, Dragas argued that each installation of the defective drywall constituted a separate occurrence because the introduction of the drywall was the cause of the resulting damage. Citizens argued that the damage had a single cause, the purchase of the defective Chinese drywall by Porter-Blaine. Following Virginia law, the court looked to the cause of the injury in deciding the number of occurrences. The court determined that each installation of the defective drywall constituted a separate occurrence. It was the act of installing the drywall in each home which set the chain of events culminating in the damage to that home. Thus, there were seventy-four occurrences, one for each affected home.

   Finally, Dragas argued that the "your work" exclusion did not bar coverage because Porter-Blaine used subcontractors to install the drywall in each of the homes. The court held that summary judgment on the "your work" exclusion was premature because it was unclear whether Porter-Blaine used subcontractors.

Although Property Damage Arises From An Occurrence, Coverage Barred By Business Risk Exclusions

   The homeowners hired the insured to raise the structure of their home twenty-four inches above the flood zone. Lafayette Ins. Co. v. Peerboom, 2011 U.S. Dist. LEXIS 58985 (S.D. Miss. June 2, 2011). When the insured's crew returned from lunch one day, they found the house had fallen from hydraulic jacks being used to raise the structure a few inches at a time. There was substantial damage to the entire structure.

   The homeowners sued, asserting several claims, including negligence and breach of contract. The complaint alleged the homeowners entered a contract with the insured to raise their structure while maintaining its integrity. However, the insured failed to use proper equipment, which caused the house to fall and be completely destroyed.

   The insured tendered the claim to its insurer, Lafayette Insurance Company. Lafayette defended under a reservation of rights and filed suit for a declaratory judgment. Lafayette's subsequent motion for summary judgment contended there was no "occurrence" alleged in the underlying complaint and, even if there was, the business risk exclusions barred coverage.

   The court first determined there was an "occurrence." Even though the homeowners did not know precisely how their home was damaged, it was possible it was caused by an accident. Therefore, the claimed "property damage" was the result of an "occurrence."

   The court next turned to the business risk exclusions to see if they negated coverage. Exclusion j (5) excluded coverage for property damage when the insured was "performing operations" and the "property damage" arose out of those operations. Exclusion j (6) barred coverage for "that particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it." Some cases found the business risk exclusions inapplicable if the insured was working only on the foundation and the entire structure was damaged. 

   Here, however, it was clear from the underlying complaint that the insured was hired to raise the entire house and then construct a new concrete foundation on which the house would ultimately rest. Therefore, the risk that the house would fall and sustain damage was not merely a fortuitous event, but a business risk which fell squarely within the exclusions j (5) and j (6). Accordingly, Lafayette's motion for summary judgment was granted.

   In Group Builders v. Admiral Ins., 123 Hawaii 142, 231 P.3d 67 (Haw. Ct. App. 2010), the Intermediate Court of Appeals' analysis differed from that utilized in Lafayette Ins. Co.  Group Builders never made an initial determination on whether there was an occurrence, nor did it consider the business risk exclusions. Instead, the court simply found the construction defects were not covered because they were based on contract and did not constitute an occurrence. Id. at 148, 231 P.3d at 73.

   Thanks to Honolulu attorney Bruce Wakuzawa for the heads up on the Lafayette Ins. Co. case.

Documented Prior Knowledge of Defect Eliminates Coverage

   Sorting out whether the contractor had coverage for alleged construction defects under the subcontractor's policies was the issue in Travelers Cas. and Sur. Co. v. Dormitory Auth., State of New York, 2010 U.S. Dist. LEXIS 79024 (S.D. N.Y. July 30, 2010).

   Trataros Construction, Inc. was the general contractor on the project.  Trataros contracted with Crocetti to install an epoxy terrazzo flooring throughout various public spaces within the building.  Due to design or construction errors, some portions of the concrete subfloor were insufficiently level to allow for the installation of the epoxy terrazzo flooring directly on the concrete subfloor.  A change order granted the additional cost of installing a self-leveling floor fill (the "underlayment") on top of the concrete subfloors.  Bartec Industries, Inc. was the subcontractor for furnishing and installing the underlayment.  Bartec was required to add Trataros as an additional insured under Bartec's CGL policies.

   Bartec installed the underlayment.  Thereafter, problems with the completed flooring system began to manifest.  Hollow spots were detected in the underlayment, and the epoxy terrazzo did not properly bind to the underlayment.  The epoxy terrazzo flooring and underlayment had to be removed and replaced. 

   Trataros was sued by the owner for construction defects, including the defective installation of the flooring system.  The owner sought damages of $20 million on the construction defect claim and a further $8 million on the delay, disruption, and impact claims.  Trataros sought coverage under Bartec's policies.  The Insurers denied coverage and eventually moved for summary judgment on various grounds.  The district court granted summary judgment to the Insurers.  

   One Insurer was granted summary judgment because of a failure to provide adequate notice of an additional insured.  An endorsement to the policy permitted inclusion of a general contractor as an additional insured where a certificate of insurance showing that organization as an additional insured had been issued and received by the Insurer.  It was undisputed that no certificate of insurance was ever issued to Trataros.  Because this condition precedent was not satisfied, Trataros was not an insured within the meaning of the policy.

   Even if Trataros was an additional insured, coverage was only provided for the additional insured's vicarious liability for acts or omissions of the named insured.  Here, Bartec ceased its work installing the underlayment on Trataros' behalf before the policy took effect.  While Trataros argued that the "continuous trigger" doctrine mandated coverage, this doctrine applied to the unrelated question of determining when "property damage" occurs, not whether the construction operations by the named insured were "ongoing." 

   A second Insurer prevailed on summary judgment because its policy included an exclusion for coverage of known-injury-or-damage.  If an insured party became aware that property damage had occurred or had begun to occur prior to the policy period, then the insured could not seek coverage for that property damage, even if such damage continued during the policy period.  Here, it was undisputed that Trataros was put on formal notice of the flooring problem when it was advised prior to commencement of the policy that portions of the terrazzo flooring installation had separated and areas of delamination of layers existed. 

   Finally, considering another Insurer's policy, the court agreed that, when read jointly, the three business risk exclusions - Exclusion j (5), Exclusion j (6), and Exclusion m - were fatal to Trataros' claim.  Therefore, no coverage was available for the alleged flooring failure under the policy.

Business Risk Exclusions Not Applicable For Damage To Building Caused By Installation of Carpet

    Exclusions (k) and (m) in comprehensive general liability policies were the focus of a recent decision from the First Circuit.  See Essex Ins. Co. v. BloomSouth Flooring Corp., No. 06-2750, 2009 U.S. App. LEXIS 7896 (1st Cir. April 16, 2009) [here]. 

    Boston Financial Data Services (BFDS) hired Suffolk Construction Corporation as general contractor for a tenant improvement project.  Suffolk subcontracted with BloomSouth to install carpet throughout the building.  The subcontract required BloomSouth to perform minor preparation work on the concrete floor before laying the carpet.

    After BloomSouth installed the carpet, BFDS employees moved back into the building.  The employees, however, noticed an odor.  BloomSouth scraped up the original carpet adhesive and re-carpeted the floor.  The odor, however, spread to other parts of the building.  BFDS presented a claim to Suffolk and demanded that the carpet be removed and the smell be eliminated.  Suffolk, in turn, demanded that BloomSouth respond to BFDS's claim.  When BloomSouth refused, Suffolk paid BFDS $1.4 million for remediation efforts. 

    BloomSouth had commercial general liability policies with Essex.  Suffolk was an additional insured on the policies.  Suffolk notified Essex of BFDS's claim and demanded that Essex defend and indemnify.  Essex denied coverage.

    Suffolk sued BloomSouth, alleging BloomSouth's negligent and defective work caused Suffolk to spend money in an attempt to eliminate the alleged odor.  Essex then sued Suffolk and BloomSouth for a declaratory judgment on its coverage obligations. 

     The district court granted Essex's motion for summary judgment.  The court agreed Suffolk's underlying complaint alleged property damage.  But Exclusion (m) barred coverage for property damage to "impaired property," defined as property that had not been physically injured.  This exclusion barred coverage because Suffolk's allegation that an unwanted odor permeated the building was an allegation of "impaired property."  Exclusion (k) excluded coverage for property damage to the insured's own product.  This exclusion applied to Suffolk's allegation that the concrete floor had to bead-blasted prior to the installation of the replacement carpet.  

    The First Circuit reversed, finding neither exclusion barred coverage.  First, Exclusion (m) was not applicable because Suffolk's complaint alleged that odor "permeated the building," which could reasonably be interpreted to mean the odor physically injured the property.  Further, property could only be "impaired property" if it could not be restored to use by "the repair, replacement, adjustment or removal of [the insured's] product or work."  A fair reading of Suffolk's complaint suggested the property could not be restored to use simply by repairing, replacing, adjusting, or removing BloomSouth's product or work. 

    Second, Exclusion (k) eliminated coverage for "property damage to 'your product' arising out of it or any part of it."  "Your Product" meant "[a]ny good or products, other than real property, manufactured, sold, handled or distributed or disposed of by . . . You . . . ."  Here, Suffolk's complaint alleged damage to "real property," BFDS's concrete floor.  Further, there was no indication that BloomSouth "manufactured, sold, handled, or distributed or disposed of" the concrete floor.

    Finally, BloomSouth was entitled to attorney's fees.  In Massachusetts, an insured could recover attorney fees incurred in establishing that the insurer breached its duty to defend.  Therefore, Massachusetts law on the insured's recovery of fees after successfully establishing coverage is similar to Hawai`i statute on fees.  See Haw. Rev. Stat. 431:10-242.