Judge Mollway, U.S. District Court Judge for the District of Hawaii, found the insurer was not in bad faith for allegedly leading its insured to believe that construction defects would be covered under the policy. The court, however, allowed the insured's negligent misrepresentation claim to survive summary judgment. Ill Nat'l Ins. Co v. Nordic PCL Constr., 2013 U.S. Dist. LEXIS 151748 (D. Haw. Oct. 22, 2013).
The insurer denied coverage when Nordic was sued for construction defects related to its construction of two Safeway stores in Honolulu. Prior to the issuance of the policies the Ninth Circuit had issued its opinion in Burlington Ins. Co. v .Oceanic Design & Constr., Inc., 398 F.3d 940 (9th Cir. 2004), which predicted that Hawaii appellate courts would rule that construction defects were not "occurrences." Nevertheless, Nordic's witnesses contended when the policies were purchased, they believed construction defects were covered. Specifically, Nordic thought the policies provided completed operations coverage for property damage arising out of Nordic's subcontractors' work.
Nordic further contended that only after the Hawaii Intermediate Court of Appeals decided in Group Builders, Inc. v. Admiral Ins .Co., 123 Haw. 142 (Haw. Ct. App. 2010) that construction defect claims did not constitute an "occurrence" did the insurer change its position and decide the policies did not cover construction defects.
The insurer now sought dismissal of Nordic's counterclaim for bad faith denial of coverage based on the insurer's reliance upon intervening case law. The insurer argued that under Act 83, implemented by the Hawaii legislature after Group Builders, it had to consider the Burlington decision, which was issued before the policies were entered. The court held that, even assuming the insurer believed that the policies covered property damage caused by subcontractors' defective work, the insurer did not act in bad faith. The insurer provided Nordic with a defense subject to a reservation of rights and filed a declaratory relief action for a ruling that there was no coverage under the policies given the Burlington decision.
Nordic's counterclaim also alleged negligent misrepresentation because the insurer knew that Nordic expected the policies to cover claims for property damage arising out of their subcontractor's work. Nordic argued that even after Burlington was decided in 2004, insurers routinely defended and settled claims regarding property damage arising out of subcontractors' work. Further, the premium charged for additional coverage for subcontractors' work indicated there was such coverage. The court agreed with Nordic and denied the insurer's motion for summary judgment on this counterclaim.
Finally, the court also denied the insurer's summary judgment motion for dismissal of Nordic's claim for reformation of the policies. Nordic alleged there was a mutual mistake as to whether the policies covered claims that both parties believed were covered. Nordic introduced evidence demonstrating that insurers in general were covering such claims and suggesting that the insurer did not initially intend to deny coverage based on Burlington. Under these circumstances, a reasonable jury could infer that, at the time the policies were issued, the insurer meant to cover claims arising out of the defective work of Nordic's subcontractors.
