Insurance Law Hawaii

Federal Court Again Confirms No Coverage For Construction Defects in Hawaii

    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.  

Bad Faith Attorneys' Fees Decided After Verdict May Be Included in Punitive Damage Calculation

       The California Supreme Court considered whether the calculation for punitive damages may include attorneys' fees expended to obtain benefits determined after the jury has rendered its punitive damages verdict. Nickerson v. Stonebridge Life Ins. Co., 2016 Cal. LEXIS 3757 (Cal. June 9, 2016).

    The insured broke his leg on February 11, 2008, when he fell from the wheelchair lift on his van. He was treated in the emergency room and then admitted to the hospital. After spending several weeks confined to a hospital bed, he was permitted to move to his wheelchair, but could tolerate sitting in the wheelchair for only limited periods of time. On May 19, 2008, the insured's doctor determined he was ready to return home except that he was unable to maneuver through his home without a particular part for his wheelchair. After obtaining the part, the insured was released from the hospital on May 30, 2008. He had been hospitalized for 109 days.

    Following his release from the hospital, the insured sought benefits from Stonebridge Life Insurance Company under a policy that promised to pay him $350 per day for each day he was confined in a hospital for necessary care and treatment. Invoking the policy's definition of "necessary treatment", Stonebridge determined, without consulting the views of the insured's treating physicians, that his hospitalization was "medically necessary" only from February 11 to 29. Stonebridge sent the insured a check for $6,450, which represented payment of $150 for one visit to the emergency room and $6,300 for 18 days of hospitalization at $350 per day.

    The insured file suit, alleging that Stonebridge breached the policy by failing to pay him benefits for the full 109 days of his hospital stay and that Stonebridge breached the implied covenant of good faith and fair dealing by denying him his full policy benefits. The parties stipulated before trial that if the insured succeeded on his complaint, the trial court could determine the amount of attorneys' fees to which the insured was entitled under Brandt v Superior Court, 37 Cal. 3d 813 (1985). Under Brandt, if the insurer withholds policy benefits in bad faith, attorneys' fees incurred to compel payment of the benefits are recoverable as an element of the plaintiff's damages.

    The jury awarded the insured $31,500 in unpaid policy benefits and $35,000 for emotional distress. The jury also found that Stonebridge engaged in fraud and awarded $19 million in punitive damages. After the jury rendered its verdict, the parties stipulated that the amount of attorneys' fees to which the insured was entitled under Brandt was $12,500, and the court awarded this amount.

    Stonebridge moved for a new trial seeking a reduction in the punitive damages award. The trial court agreed and granted Stonebridge a new trial unless the insured consented to a reduction of the punitive damages award to $350,000. In calculating the permissible amount of punitive damages, the court considered only the $35,000 the jury had awarded in compensatory damages for emotional distress for Stonebridge's tortious breach of the implied covenant of good faith and fair dealing; it did not include the $12,500 in Brandt fees.

     The insured rejected the reduction in punitive damages and appealed the order granting a new trial. The Court of Appeal affirmed, rejecting the insured's argument that the trial court should have taken in to account the $12,500 in Brandt fees.

    The California Supreme Court granted review, limited to the following question: "is an award of attorneys' fees under Brandt properly included as compensatory damages where the fees are awarded by the jury, but excluded from compensatory damages when they are awarded by the trial court after the jury has rendered its verdict?" In other words, should the $12,500 that was awarded as attorneys' fees be included in the calculation of the ratio of punitive damages to compensatory damages for the purpose of determining whether, and by what amount, the jury's $19 million punitive damages award exceeded constitutional limits?

    Stonebridge argued that when a trial court determines Brandt fees after the jury has already rendered its punitive damages verdict, the fees should not be considered in calculating the punitive-compensatory ratio.

    The Supreme Court disagreed. There was no reason to exclude the amount of Brandt fees from the constitutional calculus merely because they were determined, pursuant to the parties' stipulation, by the trial court after the jury rendered its punitive damages verdict. To exclude the fees from consideration would mean overlooking a substantial and mutually acknowledged component of the insured's harm. Therefore, the judgment of the Court of Appeals was reversed and the case was remanded to the Court of Appeals for further proceedings.

Iowa Court Holds Defective Work Performed by Insured's Subcontractor Constitutes an "Occurrence"

    The Iowa Supreme Court held that property damage caused by a subcontractor's defective work was an "occurrence." Nat'l Sur. Corp. v. Westlake Invs., LLC, 880 N.W. 2d 724 (Iowa 2016). 

    In 2002, the insureds, the developers and general contractor, began construction on an apartment complex. While the complex was still under construction, it was purchased by Westlake Investments, LLC. 

    During construction, numerous problems surfaced, including visible water penetration issues in several buildings. In February 2008, Westlake sued the insureds, seeking to recover lost profits, repair costs, and other damages under tort and contract theories. Arch Insurance Group defended under the primary policy. A settlement was eventually reached whereby a consent judgment for $15,600,000 was entered against the insureds and in favor of Westlake. Arch contributed its policy limits of $1,000,000 to the settlement. Other third party defendants contributed $1,737,500, leaving $12,762,500 of the judgment unsatisfied. The insureds assigned rights under their excess policy with National Surety Corporation (NSC) to Westlake. NSC's policy was a following-form policy. 

   NSC filed suit against Westlake for a declaratory judgment. On cross-motions for summary judgment, the court ruled in favor of Westlake, agreeing that property damage resulting from defective work performed by an insured's subcontractor may constitute an accident and an occurrence.

    The case then went to trial. NSC objected to the jury instruction defining the terms "accident" and "occurrence." NSC proposed an instruction that defined the term "accident" as an "undesigned, sudden and unexpected event." The trial court overruled NSC's objections and instructed the jury that whether there was an "accident" must be determined from the viewpoint of the insureds and what they intended or should reasonably have expected. The trial court further instructed the jury that the term "accident" means "an unplanned, sudden, and unexpected event . . . determined from the viewpoint of the insureds and what they intended or should reasonably have expected." The jury was further instructed that defective construction work performed by subcontractors could be an "occurrence." 

     The jury returned a verdict in favor of Westlake. The trial court entered a judgment awarding Westlake $12,439,500. NSC's motion for a directed verdict was denied.

    NSC appealed. The court methodically described the history of CGL policies and the coverage issues surrounding construction defect claims. The trial court had correctly instructed the jury to determine whether the claimed damages arose due to an accident that constituted an occurrence by considering the viewpoint of the insureds and what they intended or should reasonably have expected.

    Turning to the directed verdict, NSC argued claims for defective workmanship could not constitute an accident or occurrence in Iowa as a matter of law. The court determined that a reasonable person reading the policy's subcontractor exception to the "your work" exclusion would believe it covered defective work performed by the insured's subcontractor unless the resulting property damage was specifically precluded from coverage by an exclusion or endorsement. Accordingly, the insuring agreement was interpreted to provide coverage for property damage arising out of defective work performed by an insured's subcontractor unless the resulting property damage was specifically precluded from coverage by an exclusion or endorsement. Further, the defective work performed by the insureds' subcontractors fell within the definition of "occurrence" in the policy's insuring agreement.

Policy Does Not Commit Insurer to Provide Supersedeas Bond

    The insured's claim that the insurer improperly refused to provide a supersedeas bond was rejected by the federal district court. James River Ins. Co. v. Interlachen Property Owners Ass'n v. Kuepers Constr., 2016 U.S. Dist. LEXIS 71825 (D. Minn. June 1, 2016).

      Kuepers Construction, Inc. constructed a townhome project on property owned by the Association. After completion of the project, the Association sued Kuepers for construction defects on the project. Kuepers tendered its defense to State Auto Insurance Company, its CGL carrier. Later, the Association amended its complaint to assert claims for professional engineering negligence and professional design negligence. Kuepers tendered these claims to James River, who had issued  an Architects and Engineers professional Liability policy. James River agreed to defend subject to a reservation of rights.

      On summary judgment in the underlying case, the design claims were dismissed as well as certain construction defect claims. The remaining claims continued to trial. James River agreed to continue to provide a defense to the action pending and through any appeal of the summary judgment order.

      The remaining construction defect claims were tried and the jury returned a verdict against Kuepers. Judgment was entered against Kuepers for $2,147,000. Kuepers requested State Auto to post a supersedeas bond to stay execution while the case was appealed. State Auto refused. Kuepers then demanded that James River post the bond. James River also refused, relying on policy language that provided James River would pay,

reasonable and necessary fees, costs and expenses resulting from the investigation, adjustment, defense and appeal of a "claim", including the cost of appeal bonds, however, we shall not be obligated to apply for or furnish appeal bonds on your behalf.

     The Association filed a notice of appeal, seeking to reinstate the design defect claims against Kuepers that had been dismissed by summary judgment. An agreement was reached whereby Kuepers stipulated to a $2,000,000 judgment on the design defect claims and assigned its rights under the James River policy to the Association. The agreement was then sent to James River.

    This action was filed by James River, seeking a determination that the agreement was collusive and unenforceable. Kuepers filed counterclaims, seeking a declaratory judgment that James River breached the policy by failing to provide the supersedeas bond and that the agreement with the Association was reasonable and enforceable.

    James River moved for summary judgment. It argued it did not neglect its duty to defend and was under no obligation to post the supersedeas bond. Kuepers breached the policy's cooperation clause by stipulating to a judgment and assigning rights under the policy to the Association. Kuepers argued that failure to provide the supersedeas bond was a material breach by James River, voiding Kuepers' cooperation obligation.

    The court disagreed with Kuepers. The policy did not obligate James River to post the supersedeas bond. The bond would have stayed execution of judgment for damages arising from the jury verdict on the construction defect claims, liabilities that James River did not agree to cover. Requiring James River to post the supersedeas bond would extend its duty to indemnify beyond the policy's coverage, since the posting of a supersedeas bond bound the appellant and its surety to pay the judgment if the appeal was unsuccessful.

    Further, since James River did not breach the policy, Kuepers was required to provide notice to James River of the stipulated judgment and assignment of policy rights. Therefore, James River's motion for summary judgment was granted.

    

       

Case Remanded After Insurer Fails to Carry Burden on Amount in Controversy

    The insured successfully remanded the case back to state court when the insurer could not substantiate that the amount in controversy would exceed $75,000. Puente v. State Farm Lloyds, 2016 U.S. Dist. LEXIS 58103 (S.D. Texas March 28, 2016).

    The insured's property was damaged in a wind and hail storm. State Farm denied coverage because the claimed damages were not covered by the policy. The insured hired a public adjuster and submitted another claim for $29,870. State Farm continued to deny the claim.

    The insured filed suit in state court, seeking actual damages, punitive damages, pre- and post-judgment interest, court costs and attorneys' fees. Additional damages under the Texas Insurance Code, which allowed an award up to three times the amount of actual damages if the insurer knowingly committed the act complained of, were also requested.

    State Farm removed the case to federal court, alleging that the amount in controversy at the time of removal exceeded $75,000. The insured filed a motion to remand the case to state court. She argued that the amount in controversy had not been met because the pre-suit letter only identified a total damage amount of $29,870. 

    The federal magistrate noted that the insured was seeking $12,673.88 for policy claims and $5,000 for mental anguish, for actual damages in the amount of $17,673.88. If she were successful in obtaining treble damages, the insured could receive $53,021.64 in total damages. 

      In her demand letter, the insured sought $7,874.54 in past attorneys' fees. When added to the potential treble damage award, the total amount could be $62,924.02. State Farm argued that, given how the insured's attorney incurred $7,874 in fees in the first month of representation, fees to be incurred over the course of the litigation would be substantially higher. But State Farm provided no evidence establishing that the insured would continue to incur $7,800 a month in fees until the case was concluded. Rather, State Farm asked the court to engage in conjecture as to the trajectory that the attorneys' fees would take.

    Therefore, State Farm failed to carry its burden to establish that the claims in the case would meet or exceed $75,000. The magistrate recommended that the motion to remand be granted.

Hawaii Supreme Court Finds Subcontractor Has No Duty to Defend Under Indemnity Provision

    The Hawaii Supreme Court vacated the decision of the Intermediate Court of Appeals [see prior post here] and determined that a subcontractor did not have a duty to defend the developer upon tender under an indemnify provision in the parties' contract. Arthur v. State of Hawaii, 2016 Haw. LEXIS 155 (June 27, 2016). 

    A simplified version of the detailed facts and procedural history follows. The case involved the wrongful death of Mona Arthur. Mona typically gardened on the hillside behind her home. She would cross a concrete drainage ditch and climb over a two-foo-high chain length fence to reach the hillside.

    Mona was found lying in a concrete ditch with severe head injuries, which ultimately led to her death. Her husband and estate sued for her wrongful death. Claims were asserted for negligence in failing to build a fence higher than two feet, which would have prevented Mona from having access to the garden. Defendants included the Department of Hawaiian Home Lands; Kamehameha Investment Corporation ("KIC"), the developer; Design Partners, Inc., the architect; Coastal Construction Company, the general contractor; and Sato and Associates, the civil engineer. The second amended complaint sought punitive damages against KIC.

    A Project Consultant Agreement between KIC and Sato described Sato's scope of work to include grading and drainage plans, and site work civil drawings for various permit applications. The indemnity provision stated that Sato would indemnify, defend and hold harmless KIC from all claims, demands, lawsuits, etc., arising out of the work undertaken by Sato "and/or out of the negligence or any willful act or omission" of Sato. KIC tendered its defense to Sato pursuant to this provision. KIC tendered to other parties involved in the project, as well. 

    On motions for partial summary judgment, the trial court apportioned KIC's defense costs between Sato and others pursuant to the indemnity provisions.

    Appeals were filed. Sato argued the circuit court erred in apportioning KIC's defense costs partly to Sato under the indemnity agreement. Sato argued the indemnity provision should have been strictly construed. Consequently, Sato would not be liable for KIC's defense costs until a finding of liability against Sato on the Arthur claims was made. Sato further argued its indemnity obligations should apply only to those claims which "arise out of" its own wrongful conduct.

    Sato also argued that Haw. Rev. Stat. 431:10-222 voided, as against public policy, construction contracts that purported to indemnify another for the other's own negligence. The statute stated that any contract,

purporting to indemnify the promisee against liability for bodily injury to persons or damage to property caused by or resulting from the sole negligence or willful misconduct of the promisee . . . is invalid as against public policy, and is void and unenforceable. . . 

Despite the statute, the ICA found Sato had a duty to defend. Relying on Pancakes of Hawaii, Inc. v. Pomare Prop. Corp., 85 Haw. 286, 944 P.2d 83 (Haw. Ct. App. 1997), the ICA concluded that under the Project Consultant Agreement, Sato has a duty to defend KIC upon KIC's tender of the defense to Sato. 

    The Supreme Court thoroughly reviewed the legislative history of Haw. Rev. Stat. 431:10-222, which stated, "The purpose of this Act is to invalidate, as against public policy, the prevalent practice in the construction industry of causing contractors to assume liability for the negligence of others by contract . . . The practice is, and precipitates further, a form of economic coercion by placing contractors in the inequitable position of paying prohibitive insurance premiums . . .  "

    The Court further found that when enacting the statute, the legislature was concerned with the prohibitive costs of insurance  policies to contractors - particularly, small contractors and subcontractors - due to the inclusion of "hold harmless" clauses in their contracts with owners. Without the statute, high insurance premiums caused higher construction costs, which would negatively impact Hawaii's economy. 

    Accordingly, pursuant to Haw. Rev. Stat.431:222, a contractor was not contractually liable for the sole negligence or willful misconduct of another, or for the defense thereof. KIC's defense costs associated with defending against the Arthurs' punitive damages claim had to be borne solely by KIC. 

    Finally, the Court addressed the ICA's determination that under Pancakes, the duty to defend was determined when the complaint was filed. The Supreme Court held that Pancakes did not apply to construction contracts. Haw. Rev. Stat. 431:10-222 and the legislature's express intent meant that each party to a construction contract be responsible for its "sole negligence or willful misconduct." In a construction contract, the scope of a promisor's duty to defend was to be determined at the end of the litigation. Haw. Rev. Stat. 431:10-222 rendered coextensive the duties to indemnify and defend in construction contracts. 

    Accordingly, the ICA's Judgment on Appeal was vacated and the case was remanded to the circuit court for further proceedings consistent with the Court's opinion. 

    Hat tip to Kevin P.H. Sumida, Esq., counsel for Sato and Associates, Inc., for giving me first notice of this case.

Subsurface Water Exclusion Found Unambiguous

    The Eighth Circuit rejected the policyholder's appeal on the ambiguity of a subsurface water exclusion. Bull v. Nationwide Mut. Fire Ins. Co., 2016 U.S. App. LEXIS 9703 (8th Cir. May 27, 2016). 

    Michael Bull, the insured, experienced a leak from a buried pipe beneath his garage slab. The leak caused settling and mold, including the settling and cracking of his foundation, a brick walkway, and interior walls.

    Bull submitted a claim to Nationwide. Nationwide denied coverage based upon an exclusion for loss caused by "water . . . below the surface of the ground." Bull sued, arguing the exclusion was ambiguous because it should apply only to water from a natural source and not to water from a pipe. The district court disagreed, concluding on summary judgment that the exclusion's language broadly applied to water below the surface of the ground, regardless of whether the water came form a pipe. 

    Bull appealed. The Eighth Circuit found the exclusion unambiguous on its face. The exclusion could not be limited to naturally occurring water, as contrasted with water from a pipe, without grafting onto the phrase an unwritten, implicit limitation.

    Bull nonetheless argued the language ambiguous because other courts had found the language ambiguous. The Eighth Circuit rejected this argument because the Arkansas Supreme Court had held that a disagreement between other courts over the meaning of a term did not show the term is ambiguous. 

    Therefore, the district court granting of summary judgment to Nationwide was affirmed.