The federal district court in Hawaii determined a subcontractor had no coverage under his homeowner's and umbrella policies for claims based on faulty workmanship. State Farm Fire & Cas. Co. v. Kaaihue, 2013 U.S. Dist. LEXIS 175395 (D. Haw. Dec. 13, 2013).
Allstate Insurance Personal Lines pursued a subrogation claim in state court against Henry K. Kaaihue and his company, Advanced Home Builders. Allstate alleged its insured was having a new house built. Kaaihue and his company were hired to assist with the construction project. Allstate alleged Kaaihue was responsible for causing two water lines to separate, creating substantial damage to the home. Allstate paid its insured $150,731.44 and pursued subrogation against Kaaihue and Advanced Home Builders for breach of contract and negligence.
Kaaihue tendered the defense of Allstate's claim to State Farm, his carrier under homeowner's and umbrella policies. Advanced Home Builders was not named as an additional insured under either policy.
Judge Mollway determined neither the breach of contract or negligence claims triggered a duty to defend or indemnify because they were not based upon an occurrence. The court found support for its position in the Ninth Circuit's decision in Burlington Ins. Co. v. Oceanic Design and Constr., Inc., 383 F.3d 940 (9th Cir. 2004) and the Hawaii Intermediate Court of Appeals' opinion in Group Builders, Inc. v. Admiral Ins. Co., 123 Haw. 142, 231 P.3d 67 (Haw. Ct. App. 2010). Both cases held that construction defect claims do not constitute an "occurrence." Further, breach of contract claims based on allegations of shoddy performance were not covered.
The homeowner's and umbrella policies here were occurrence based. The claims against Kaaihue were based upon allegations of poor workmanship, which were not "occurrences." Instead, it was alleged Kaaihue did not properly connect water pipes, making it reasonably foreseeable that property damage would flow from the allegedly shoddy workmanship. The policies also excluded liability "arising out of' a contract. Even though Kaaihue denied that he installed the faulty pipes, the court was obligated to consider the underlying allegations, not an insured's defense.
