Insurance Law Hawaii

Insurer Must Cover Construction Defects Claims Under Actual Injury Rule

   The Texas Court of Appeals held that the insured need not prove the exact dates physical damage occurred in order to trigger defense and indemnity coverage. Vines-Herrin Custom Homes, LLC v. Great Am. Lloyds Ins. Co., 2011 Tex. App. LEXIS 10027 (Tex. Ct. App. Dec. 21, 2011).

   In 1999, the insured built a home. He was insured under a CGL policy issued by Great American from November 9, 1998 to November 9, 2000. Thereafter, the insured held a CGL policy issued by Mid-Continent from November 9, 2000 to September 18, 2002.

   After construction was completed, the insured sold the house to the buyer in May 2000. After moving in, the buyer found numerous construction defects in the home, including water entering cracks in the home, and sinking and sagging of parts of the house. The buyer sued the insured, who sought coverage under the two policies. When the insurers refused to defend the underlying suit, the insured sued for a declaratory judgment.

   The underlying case went to arbitration and an award of $2.4 million was granted to the buyer. The insured assigned to the buyer his claims against the insurers.

   In the coverage action, the trial court initially applied the manifestation rule and imposed a duty to defend only if the property damage became apparent during the policy period. The court found for the buyer, but during the post-judgment motions, the Texas Supreme Court adopted the "actual injury" trigger. See Don's Bldg. Supply, Inc. v. One-Beacon Ins. Co., 267 S.W. 3d 20 (Tex. 2008). Under the "actual injury" approach, property damage occurred when actual physical damage took place rather than when it became discoverable. The trial court ruled for the insurers because the insured failed to show, by expert testimony, when the actual physical damage to the property occurred.

   The Court of Appeals reversed. Don's Buildingheld only that property damage under the CGL policy "occurred when actual physical damage to the property occurred." Id. at 24. So long as the damage occurred within the policy period, coverage was provided. Applying the eight-corners rule, the pleadings sufficiently alleged the policies were in effect prior to construction and actual damage occurred sometime during or after construction during the policy periods. Therefore, the underlying pleadings adequately plead that actual physical damage to the property potentially occurred during the policy periods and a defense was owed.

    Further, Great American's duty to indemnify was triggered. The lower court determined that the property damage manifested in May 2000, during Great American's policy period. As a matter of law, when the damage manifested, it had necessarily occurred under the actual injury rule. The evidence showed Great American's duty to indemnify was triggerd and expert testimony to establish the exact date of injury was not required to trigger the duty.

Granting Stay, Federal Court Reviews Construction Defect Coverage in Hawaii

   The federal district court ultimately stayed a construction defect case, but offered comments on the current status of coverage disputes for such defects in Hawaii. See National Union Fire Ins. Co. of Pittsburgh, Pa. v. Simpson Mfg. Co., 2011 U.S. Dist. LEXIS 128481(D. Haw. Nov. 7, 2011).

   National Union filed a complaint for declaratory relief to establish it had no duty to defend or to indemnify Simpson Manufacturing Company in four actions pending in the Hawaii state courts. The state court actions concerned allegedly defective hurricane strap tie hold downs that were manufactured and sold by Simpson. The hurricane ties allegedly began to prematurely corrode and rust, causing cracking, spalling and other damage to homes.

   National Union contended the underlying allegations did not constitute "property damage" caused by an "occurrence," as defined in the policies. National Union relied upon Group Builders, Inc. v. Admiral Ins. Co.,231 P.3d 67 (Haw. Ct. App. 2010), where the Hawaii appellate court held, "under Hawaii law, construction defect claims do not constitute an occurrence under a CGL policy." Id. 73.

   Simpson moved to dismiss, urging the court to decline jurisdiction because of the four actions pending in Hawaii state court which would potentially address the existence of any property damage and the cause of such damage. Simpson also argued the court would have to untangle unsettled questions of Hawaii law, including the continued viability of Group Builders in the face of H.B. 924. This legislation stated that "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 court agreed to stay the proceedings pending the outcome of certain state court cases that would resolve relevant factual and legal issues. The court noted that the state of Hawaii insurance law was very much in flux given Group Builders and H.B. 924. Therefore, a stay was appropriate.

   Simpson argued, in the alternative to dismissal,that the case should be transferred to the Northern District of California, where a related case was pending. The court rejected this effort. Hawaii's strong public policy interest in insurance law in the construction context, which was expressly stated in H.B. 924, outweighed the risks and inefficiencies associated with parallel proceedings pending in California. Although not as clearly drafted as it might be, the court noted under H.B. 924,"the purpose of this Act is to restore the insurance coverage that construction industry professionals paid for and to ensure that the good-faith expectations of parties at the time they entered into the insurance contract are upheld."

   As the state judiciary had not yet addressed the continuing viability of Group Builders and H.B. 924, and because Simpson had indicated it intended to seek to apply California law to the policies, Hawaii's public policy interest in the case provided compelling weight in favor of retaining the case.

 

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.

No Duty to Defend Before SIR Satisfied

   The insured, Georgia-Pacific, sued USF&G for failing to defend in three underlying lawsuits. Georgia-Pacific LLC v. United Stated Fidelity & Guar. Co., 2011 U.S. App. LEXIS 18014 (11th Cir. Aug. 29, 2011). The district court granted USF&G's motion for summary judgment because the policy's Self-Funded Retention Endorsement had not been satisfied.

   The Eleventh Circuit affirmed. The Retention Endorsement was equivalent to a deductible of $2.5 million per "incident," which modified the CGL Coverage Form. Admittedly, the Retention Endorsement in the policy was atypical. The Endorsement acknowledged USF&G's right and duty to defend covered claims, but effectively delegated that duty to Georgia-Pacific. USF&G had no obligation to indemnify Georgia-Pacific for any litigation expenses until Georgia-Pacific paid damages exceeding the $2.5 million self-funded retention.

   Georgia-Pacific had undoubtedly negotiated for this policy. The $2.5 million self-funded retention surely resulted in a premium substantially less than the premium that would have been payable without the self-funded retention.

"Other Insurance" and Indemnity Provisions Determine Which Insurer Must Cover

   A policy's "other insurance" clause and a contractual indemnity provision were at the root for determining which of two insurers had to cover for injuries at a construction site. Valley Forge Ins. Co. v. Zurich Am. Ins. Co., 2011 U.S.Dist. LEXIS 76061 (N.D. Calif. July 14, 2011).

   Hathaway was the general contractor at a demolition and construction project. Hathaway was insured by Zurich. Reinhardt Roofing was the roofing subcontractor. Reinhardt was insured by Valley Forge under a policy which named Hathaway as an additional insured. The subcontract also required Reinhardt to indemnify Hathaway for acts or omissions arising from Reinhardt's work unless Hathaway was solely negligent.

   Four of Reinhardt's workers were injured when a canopy roof on which they were working collapsed. At the time of the accident, Hathaway's on-site supervisor was inspecting a gap in the canopy roof, but did not order Reinhardt's workers to stop working. 

   The four injured workers sued Hathaway. Valley Forge defended and paid for the settlement. The Zurich policy stated if any other policy covered Hathaway as an additional insured, then Zurich's policy would be excess over the other insurance. Therefore, Zurich refused to participate in the defense or settlement of the underlying case.

   Valley Forge filed suit against Zurich seeking reimbursement.  Cross motions for summary judgment were denied.

   When Zurich moved for reconsideration, Valley Forge contended Zurich's policy was not a true excess policy, but a primary policy with an excess only "other insurance clause." The Court agreed.  An "other insurance" clause attempted to reduce the insurer's liability under the policy to the extent another policy covered the same risk.  A policy with an excess only "other insurance clause" was a primary policy, not a true excess or secondary insurance.

   Genuine issues of fact remained, however, with regard to whether Reinhardt was solely negligent and therefore whether Zurich's "other insurance clause" would contractually preclude recovery by Valley Forge. If the terms of the indemnification provision were satisfied, then the indemnification, not the insurance policies, would determine whether Valley Forge could recover from Zurich.  Genuine issues of fact existed with regard to the negligence of Hathaway as general contractor, Reinhardt as roofing subcontractor, and a third party, the architect of the project.

   In summary, if Zurich established that the indemnification agreement applied, Valley Forge could not recover from Zurich. If Zurich was unable to show the accident was connected with Reinhardt's work, the indemnification provision would not apply and the insurance policies would take effect.

After Breaching its Duty to Defend, Insurer Must Indemnify

   In a brief decision analyzing Oregon law, the Ninth Circuit determined that once an insurer breaches its duty to defend, it must indemnify. See Desrosiers v. Hudson Speciality Ins. Co., 2011 U.S. App. LEXIS 12591 (9th CIr. June 21, 2011).

   The victim secured a judgment against the insured after he was beaten by another patron outside the insured's bar. Hudson Speciality Insurance refused to defend the insured, claiming the injury arose from an assault and battery, which excluded coverage. The personal injury suit settled and the insured bar assigned its claim to the victim. When the victim sued the insurer, the district court granted summary judgment to Hudson, concluding there was neither a duty to defend nor a duty to indemnify the insured bar.

   The Ninth Circuit reversed. Hudson had a duty to defend because the underlying complaint alleged alternative theories. First, the victim's injuries were caused by the negligence of both the patron and the bar. Second, the patron intentionally attacked the victim. Merely because the complaint described the incident as an "assault" was not determinative. The negligence allegations triggered Hudson's duty to defend.

   Hudson conceded that once an insurer breached its duty to defend, it could not later argue it had no duty to indemnify.

Insurer Must Defend Claims Against Supplier of Chinese Drywall

   The insurer sought to avoid coverage for claims against its insured, a supplier of Chinese drywall. The court ruled, however that the exclusions relied upon by the insurer did not bar coverage. See Auto-Owners Ins. Co. v. Am. Building Materials, Inc., 2011 U.S. Dist. LEXIS 52837 (M.D. Fla. May 17, 2011).

   The insured, American Building Materials, Inc., was a supplier of drywall and other building materials. ABM supplied Chinese drywall to KM Home, a builder who install the drywall in numerous homes it was building. The homeowners complained of emissions of smelly gasses, the corrosion and blackening of metal wiring, surfaces and objects, and the failure of HVAC units and appliances. Numerous lawsuits were filed against KB Home.

   KB Home, in turn, filed suit against ABM, seeking to recover damages suffered by KM Home arising out the defective drywall supplied by ABM. ABM sought coverage under its CGL policy. The insurer filed for a declaratory judgment that it had no duty to defend or indemnify, relying on various exclusions in its policy.

   The insurer first relied on the pollution exclusion, which provided an exclusion for,

(1) . . . "[P]roperty damage" arising out of the actual alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants:

(d) At or from any premises, site or location on which any insured or any contractors or subcontractors working directly or indirectly on any insured's behalf are performing operations:

    (i) if the pollutants are brought on or to the premises, site or location in connection with such operations by such insured, contractor or subcontractor.

    The court determined the pollution exclusion was not applicable. ABM, as a material supplier, completed its "operations" when the materials were delivered to the job site. The property damage allegedly arising from completed installation of drywall was not while ABM was performing operations, and, therefore, was not excluded under the pollution exclusion.

   Next, the insurer relied upon the "sistership" exclusion, Exclusion 2.n. This exclusion barred coverage for any expense incurred for the loss of use, recall, inspection, removal, etc.,of an insured's product if such product was "withdrawn or recalled from the market . . . because of a known or suspected defect . . . ." Here, there was no allegation that the Chinese drywall had been recalled from the market.

   Finally, the insurer relied upon the "your products" exclusion. The policy excluded coverage for "'property damage' to 'your product' arising out of it or any part of it." The policy defined "your product" as "any goods or products, other than real property." Under Florida law, improvements to real property were included in the definition of real property. Because the drywall became "real property" once it was installed, it was not within the definition of "your product" under the policy.

Insured's Claim Against Agent Survives Statutue of Limitations Challenge

   After being sued for failure to secure a policy, the insurance agents sought dismissal of the insured's suit on statute of limitations ground.  Kelly v. Lodwick, 2011 Fla. App. LEXIS 4810 (Fla. Ct. App. April 6, 2011).

   A private school was notified its policy would not be renewed after it lapsed on March 1, 2004 at 12:01 a.m.  The school's insurance agents received a commitment from a second insurer which agreed to issue a new policy.  The insurer required the agents, however, to provide written confirmation indicating that the school desired the policy. The agents failed to provide such written confirmation and the school became uninsured on March 1, 2004 at 12:01 a.m.

   During the afternoon of March 1, 2004, a student was injured due to the alleged negligence of a school employee. When the school notified its insurer, it was informed it had no coverage.

   On April 20, 2005, the student and her mother sued the school.  On January 8, 2009, the parties settled for a final judgment in the amount of $500,000.  In return for an assignment of the school's causes of action against its insurance agents, the plaintiffs agreed abstain from executing on the judgment against the school.  

   On February 9, 2009, the plaintiffs sued the agents.  The agents moved to dismiss, arguing that the four-year statute of limitations commenced on March 1, 2004, when the school discovered it lacked coverage.  The plaintiffs responded that the limitations period commenced when the final judgment was entered on January 8, 2009.  The circuit court granted the motion to dismiss after holding the limitations period commenced on March 2, 2004.

   On appeal, the plaintiffs argued that the statute of limitations did not commence until damages occurred.  Here, damages to the school did not occur until April 20, 2005 at the earliest, when the school was forced to defend itself against the plaintiffs' claims.

   The appellate court agreed with the plaintiffs.  Because the school had no coverage, it had to defend itself against plaintiffs' claims and thereby incurred damages.  Once the school incurred damages, the four-year limitations period commenced.  Thus, the agents motion to dismiss based on the expiration of the limitations period should not have been granted.

Georgia Court Finds Faulty Workmanship Can Arise From an Occurrence

   Georgia has joined the growing legion of high state courts to find that faulty workmanship can arise from an occurrence, invoking coverage for a contractor.  See Am. Empire Surplus Lines Ins. Co. v. Hathaway Dev. Co., Inc., 2011 Ga. LEXIS 177 (Ga. March 7, 2011). 

   Hathaway Development Co., a general contractor, sued its plumbing subcontractor, Whisnant Contract Company, Inc., for negligent plumbing work at three job sites.  Hathaway sought to recover the costs of repairs required to fix Whisnant's plumbing mistakes and costs to repair water and weather damage to surrounding properties. 

   After a default judgment was entered against Whisnant, Hathaway sought payment from Whisnant's insurer, American Empire Surplus Lines Insurance.  The insurer denied liability because the claim did not arise from an occurrence.  American argued Whisnant's negligent workmanship could not be deemed an "accident."  The trial court agreed and granted summary judgment to American.  The Court of Appeals reversed, holding that because Whisnant's faulty workmanship caused damage to the surrounding properties, the acts of Whisnant constituted an "occurrence." 

   The Georgia Supreme Court affirmed.  The plumber's acts constituted an "occurrence."  On one project, Whisnant installed four-inch pipe on an underslab, although the contract specified six-inch pipe.  On another project, Whisnant improperly installed a pipe which separated under hydrostatic pressure.  Each of these missteps damaged neighboring property being built by Hathaway.  These acts could not be considered to be intentionally performed.  Instead, an occurrence could arise where faulty workmanship causes unforeseen or unexpected damage to other property. 

    Hawaii has not joined this growing trend.  While the Hawaii Supreme Court has never addressed whether construction defects arise from an occurrence, the Intermediate Court of Appeals decided in Group Builders that construction defects arise from contract, and consequently there is no coverage when contractors are sued for such defects.  [See prior Group Builders' post here].

Additional Insured Has No Coverage for Operations Completed

   Whether coverage existed for property damage occurring after the subcontract finished its work on the project was the issue presented in United Fire & Cas. Co. v. Boulder Plaza Residential, LLC, 2011 U.S. App. LEXIS 1694 (Jan. 27, 2011).

   Boulder Plaza Residential, LLC ("BPR"), a real estate developer, and McCrery & Roberts Construction Co. ("M&R") entered a contract in which M&R agreed to serve as the general contractor for the interiors of condominiums BPR was building.  The contract provided M&R would indemnify BPR from claims "arising out of or resulting from performance of the Work, . . . but only to the extent caused in whole or in part by negligent acts or omissions of the Contractor or Subcontractor. "

   M&R subcontracted with Summit Flooring, LLC to install hardwood floors in the condominiums.  Summit agreed "to indemnify and save M&R harmless against all claims for damage to persons and property growing out of the execution of the work." 

   Summit obtained a CGL policy from United Fire covering "bodily injury" or "property damage" caused by any "occurrence" which subjected Summit to liability.  M&R was listed as an Additional Insured in an endorsement.  The endorsement provided coverage only with respect to Summit's liability which could be imputed to M&R directly arising out of Summit's ongoing operations. 

   Upon completion of the condominiums, owners notified BPR of damage to the floors.  BPR notified M&R.  M&R sent a claim to United Fire.  After investigation, United Fire determined the floor damage was caused by excessive moisture in the concrete floor and the wood floors at the time of installation, but that Summit's work was sound.  Accordingly, United Fire denied coverage to M&R. 

   When BPR sued M&R and Summit, M&R requested a defense. United Fire denied coverage because the policy only covered M&R with respect to Summit's "ongoing operations." The underlying complaint alleged that damage to the floors was first observed only after Summit had completed installation.  M&R eventually settled and assigned its claims against United Fire to BPR.  United Fire filed suit for a declaratory judgment that it had no duty to defend or indemnify M&R.  

   The district court granted summary judgment to BPR.  United Fire then sought reconsideration based upon a subsequent decision by the Colorado Court of Appeals, General Security Indemn. Co. of Arizona v. Mountain States Mut. Cas. Co. General Security held that a claim for damages arising from poor workmanship, standing alone, did not allege an accident that constituted a covered occurrence.  Based on General Security, the district court granted reconsideration, concluding there was no duty to defend or indemnify.

   On appeal, the Tenth Circuit noted the Colorado legislature had enacted legislation providing that "in interpreting a liability policy issued to a  construction professional, a court 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."  Nevertheless, the court felt it could resolve the issue of whether a duty to defend or indemnify was owed without reference to General Security or the legislation.

   Any claimed damage was alleged to have arisen after operations were completed.  Under the additional insured endorsement, which limited coverage to liability arising out of the insured's ongoing operations, there was no duty to defend or indemnify M&R.  Therefore, the district court decision was affirmed.