Insurance Law Hawaii

Following Pennsylvania Law, District Court Determines No Coverage for Construction Defect Claim

    Bound by well-established case law in Pennsylvania, the federal district court ruled that there was no coverage for alleged faulty workmanship. Peerless Ins. Co. & Ohio Sec. Ins. Co. v. Manown Builders, 2016 U.S. Dist. LEXIS 85261 (W.D. Pa. June 30, 2016). 

    Manown was sued by the homeowners after they noticed in their recently constructed home that the floors were uneven and deflected. The complaint alleged failure to properly construct the residence in several ways.

    Peerless agreed to defend subject to a reservation of rights. Peerless initiated a suit against Manown for a declaratory judgment. Cross-motions for summary judgment were filed. 

    The federal court followed the Pennsylvania Supreme Court's decision in Kvaerner Metal Div. of Kvaerner U.S., Inc. v. Comm. Union Ins. Co., 908 A.2d 888 (Pa. 2006). There, the court held that claims for breach of contract and breach of warranty were, in reality, claims for faulty workmanship. Such claims did not present the degree of fortuity contemplated by the ordinary definition of "accident" in a general liability policy.

    Similarly, the claims here were based upon Manown's alleged failure to properly construct the dwelling. The underlying claims were therefore based upon faulty workmanship of the home itself. Kvaerner dictated that an "occurrence," as defined in the policy, had not been alleged in the four-corners of the underlying complaint because  faulty workmanship in the construction of a home was not, as a matter of law, an "accident." Therefore, Peerless had no duty to defend or indemnify Manown. 

Motion to Dismiss Coverage and Defense Under Umbrella Policies Denied

    The court denied National Union's motion to dismiss the insured's suit to compel a defense under the umbrella policies. San Diego Unified Port Dist. v. Nat'l Union Fire Ins. Co., 2016 U.S. Dist. LEXIS 88362 (S. D. Cal. July 6, 2016).

    National Union sold the insured primary and umbrella policies, promising to defend and indemnify against certain property damage liability claims. National Union issued four primary policies, two of which were exhausted. National Union also sold to the insured the first layer of insurance directly above the unexhausted and exhausted policies in the form of four umbrella policies. Coverage under the umbrella policies was triggered once the primary policies were exhausted.    

    According the insured's First Amended Complaint (FAC), the insured tendered and National Union agreed to defend under the unexhausted primary policies certain claims against the insured. National Union, however, subsequently informed the insured that it unilaterally would be assigning payments for one of the insured's defense experts against the unexhausted primary policies' limits. National Union then tendered the asserted remaining policy limits to the insured and considered the unexhausted primary policies to be exhausted. Therefore, National Union would cease defending the insured.

    In filing suit, the insured argued the unexhausted primary policies were not exhausted. Further, even if the unexhausted primary policies were exhausted, National Union was required to drop down under the umbrella policies to defend the insured.

    After the original complaint was filed, National Union acknowledged it had a defense obligation under the umbrella policies. As a result of National Union's failure to defend, however, the insured incurred its own defense costs for which it sought reimbursement.

    The insured's FAC sought a declaratory judgment that the unexhausted primary policies were not exhausted and National Union's duty to defend under these policies continued. A declaratory judgment was also sought to establish that National Union had a duty to defend under the umbrella policies. National Union moved to dismiss.

    National Union argued the FAC's allegations regarding its duty to defend under the umbrella policies in the event of exhaustion of the primary layer of insurance was moot and did not present a controversy ripe for determination. If the primary policies were not exhausted, there was no dispute about the umbrella policies. If the primary policies were exhausted, then National Union had acknowledged that it would defend under the umbrella policies.

    The court disagreed the dispute was moot. The pendency of a decision whether the unexhausted primary policies were exhausted did not moot the need for judicial relief. Whether the primary policies were already exhausted would be decided in this litigation. 

    National Union contended it had no duty to defend under the umbrella policies if the primary layer was exhausted because the umbrella policies only applied to suits, not claims. The insured argued, however, that the umbrella policies stated that "[t]his Insuring Agreement shall also apply to occurrences not covered by any underlying insurance due to exhaustion." And because the primary policies clearly covered claims, the reasonable interpretation of this provision was that the excess coverage included claims.  

    The court found the language ambiguous. The umbrella policies stated the insurer "shall defend any suit, but shall have the right to investigate, negotiate and settle any lawsuit." On the other hand, the policies stated the umbrella insurance applied "to occurrences covered under this policy but not covered by any underlying insurance . . . This policy shall also apply to occurrences not covered by any underlying insurance due to exhaustion." This second sentence conflicted with the language about the insurer's defense duty and created ambiguity that could not be resolved on a motion to dismiss.

Business Interruption Caused by Wildfire Smoke Covered

    The federal district court predicted that business interruption caused by smoke from a nearby wildfire would be covered under Oregon law. Oregon Shakespeare Festival Assoc. v. Great Am. Ins.. Co., 2016 U.S. Dist. LEXIS 74450 (D. Ore. June 7, 2016).

    The insured operated the Shakespeare Festival in three venues, one of which was an open-air, partially enclosed structure. During the summer of 2013, smoke from several different wildfires was present in the area. The fires caused smoke, soot, and ash to accumulate on the seats and concrete ground of the open-air theater. Consequently, the insured canceled a total of four separate evening performances due to health concerns from the poor air quality caused by the wildfire smoke. The air quality on the nights during which performances were cancelled ranged from "very unhealthy" to "unhealthy" conditions. 

    During July and August 2013, if a committee of the insured determined that the air quality rating was "unhealthy to hazardous," the performance would be cancelled. The four performances were cancelled based upon the committee's decision. No federal, state, local agency or public authority of any kind ordered cancellation of the performances due to air quality concerns. Further, the theater did not suffer any permanent or structural damage.

    The policy provided coverage for business income as follows:

We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your operations during the period of restoration. The suspension must be caused by direct physical loss of or damage to property at the premises.

    Coverage was denied and the insured sued. The insurer moved for summary judgment. The parties agreed that the theater was "covered property," but they disputed whether the smoke that filled the open-air facility constituted "direct physical loss or damage." The policy did not define "direct physical loss or damage."  

    It was undisputed that the interior of the building had to be cleaned, the air filters had to be changed multiple times, and smoke in the air within the theater had to dissipate before business could resume. The insurer claimed that the period of time during which operations had to be suspended could not be considered "restoration" because no structural repairs were necessary. The court found no such limitations within the policy, however. Adding the word "structural" to the provision to exclude the air within the building was beyond the plain meaning of the term "direct physical loss of or damage to property."

    The court also noted that the exclusions advanced by the insurer were not applicable. Based upon the text and context of the policy, it was not reasonable to exclude wildfire smoke from policy coverage.

    

    

   

Duty to Defend Public Adjuster Not Resolved By Motion

    The insurer unsuccessfully moved for a determination that it had no duty to defend a public adjuster. Singer v. Continental Cas. Co., 2016 U.S. Dist. LEXIS 82286 (E.D. Pa. June 24, 2016).

    Plaintiffs in the underlying action alleged that the public adjuster, Brian Singer, negligently performed his duties while assessing and inspecting a claimed loss at the plaintiffs' home. During the inspection, Singer identified and documented the existence of a damaged gas line. A month later, gas leaking from the damaged line allegedly caused an explosion, resulting in one death and other serious injuries. Plaintiffs alleged that Singer failed to close the valve of a propane tank connected to the gas line and never posted warnings about the gas line.

    Singer's employer, Alliance Adjustment Group, held a liability policy with Continental. The policy had a Professional Services Exclusion which excluded coverage for "bodily injury . . . caused by the rendering or failure to render any professional service." The service contract between the underlying plaintiff and Alliance provided that Sinter was "to advise and assist in the adjustment of an insurance claim at [the insured's] home."

    Singer testified at his deposition that he would occasionally tell an insured not to make permanent repairs until the insurer conducted its own inspection. Otherwise, the insurer may resist paying for the claim. Singer further testified, however, that he never told the underlying plaintiff not to have the gas line fixed.

    Continental denied coverage. Singer sued Continental for breach of contract. Continental filed counterclaims against Singer and Alliance seeking a declaratory judgment that it had no duty to defend or indemnify. Both parties moved for judgment on the pleadings.

    The central issue in both motions was whether Singer's alleged failures, i.e., failing to close the valve of the propane tank and/or failing to post warning signs regarding the damaged gas line, fell under the professional services exclusion. The court had to examine the character of the alleged conduct and the nature of the services performed by the insured to determine whether the insured's liability flowed directly from a professional activity.

    On this record, the court could not determine as a matter of law that no material issues of fact existed. Singer, Alliance and Continental all denied each other's material allegations regarding both the home inspection and Singer's duties as a public adjuster. Whether Singer had to make repairs, hire someone to make repairs or simply notify the underlying plaintiff that repairs were needed within a certain time frame was unclear. The extent to which the allegations in the underlying complaint flowed directly from Singer's professional services as a public adjuster was also a disputed issue of fact.

    Accordingly, both motions were denied.  

    

New Jersey Court Finds Property Damage Caused by Subcontractor's Faulty Workmanship Is An Occurrence

    Distinguishing its seminal case on coverage for construction defects, Weedo v. Stone-E-Brick, Inc., 81 N.J. 233 (1979), the New Jersey Supreme Court determined that rain damage to the building caused by a subcontractor's faulty workmanship constituted "property damage" and an "occurrence" under the property developer's CGL policy. Cypress Point Condo. Ass'n v.Towers, 2016 N.J. LEXIS 847 (N.J. Aug. 4, 2016). 

    The condominium association sued the developer/general contractor for damage to the interior structure, residential units and common areas of the condominium complex, alleging the damage was the result of defective work performed by subcontractors. After the project was completed, several owners began experiencing problems such as roof leaks, and water infiltration at the interior window jambs and sills of the residential units. The owners alleged consequential damages, consisting of, among other things, damage to steel supports, exterior and interior sheathing and sheetrock, and insulation, to Cypress Point's common areas, interior structures,and residential units. 

    During construction, the developer was insured under four successive policies issued by Evanston Insurance Company. The policies eliminated coverage for "'[p]roperty damage' to 'your work' arising out of it or any part of it . . ." The exclusion, however, did not apply "if the damaged work or the work out of which the damage arises was performed on the insured's behalf by a subcontractor." Evanston denied coverage based upon the "your work" exclusion. 

    The Association sued the developer and also its insurer, Evanston, seeking a declaration that claims against the developer were covered by the policies. The trial court found the subcontractor's faulty workmanship did not constitute an "occurrence" and that the consequential damages were not "property damage" under the terms of the policies because the damage arose entirely from faulty work performed by or on behalf of the developer. The Appellate Division reversed the trial court's grant of summary judgment in favor of the insurers, holding that unintended and unexpected consequential damages to the common areas and residential units caused by the subcontractor's defective work was "property damage" and an" occurrence." The Appellate Division opinion was addressed in a prior post. 

    On appeal, Evanston argued that CGL policies were only intended to provide coverage for damage caused by faulty workmanship to other property and not to the project itself. Damage to any portion of the project caused by defective construction was not accidental because it was one of the normal, frequent, and predictable consequences of the construction business.

    The Association argued that courts had consistently found that while a construction defect itself was not covered under a CGL policy, the damage caused as a consequence of the defect was covered. Thus, consequential damages stemming from faulty workmanship constituted an "occurrence" under the policies.

    The Association also noted that this case involved a 1986 ISO form CGL policy, which contained a subcontractor exception to the "your work" exclusion that was not included in the 1973 ISO form. The subcontractor exception implied that the policies' definition of an "occurrence" included construction defect claims, because interpreting the contract otherwise would render the subcontractor exception meaningless. The exception to the "your work" exclusion provided that the exclusion "does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor."

    The Supreme Court surveyed other decisions which had considered whether coverage for consequential damages caused by faulty workmanship was covered under the 1986 ISO standard form CGL policy and the subcontractor exception to the "your work" exclusion.

    The Court then engaged in a three-step process to determine whether the consequential water damage caused by the subcontractor's faulty workmanship was covered. First, the consequential damages and resulting loss of use of affected areas was "[p]hysical injury to tangible property including  all resulting loss of use of that property." Therefore, the consequential damages were covered "property damage" under the policies. Further, there was an accident, which encompassed unintended and unexpected harm caused by negligent conduct. The result of the subcontractors' faulty workmanship - consequential water damage to the completed and non-defective portions of the project - was an "occurrence" that would be covered so long as the other parameters set by the policies were met.

    The next two steps were to examine the exclusions and, if applicable, any exceptions to the exclusions. The "your work" exclusion would appear to eliminate coverage for the water damage to the completed portions of the project. But the exception narrowed the exclusion by stating it did not apply "if the damaged work or the work out of which the damages arises was performed on your behalf by a subcontractor." Here, because the water damage to the completed portions of the project were alleged to have arisen out of faulty workmanship performed by subcontractors, it was a covered loss.

When Does Duty to Defend End

    My colleagues Rina Carmel, Karin Aldama and I authored an article entitled, "Determining Whether and When the Duty to Defend Ends."  The article appears in the current edition of Coverage, published by the Insurance Coverage Litigation Committee of the ABA. The article is here.

    The article discusses common issues that arise in determining whether the duty to defend has ended. It begins with a review of exhaustion and whether and when the underlying action is deemed final for purposes of the duty to defend. Next, it explores settlement; in particular, settlement of less than the entire underlying action. It then discusses an insurer’s options if the policyholder fails to cooperate. Finally, the article addresses withdrawal procedures, including the formal options of declaratory relief and interpleader as well as informal withdrawals by letter.

Insured Need Not Own Property When Property Damage Occurs

    The federal magistrate predicted that the Oregon appellate courts would not adopt the owner-claimant rule, restricting recovery under the policy to the time period during which the insured owned the property. Am. States Ins. Co. v. PIH Beaverton LLC, 2016 U.S. Dist. LEXIS 83188 (D. Or. May 3, 2016).

    PIH purchased a hotel in 2006. It later discovered the hotel had a number of construction defects, including problems stemming from the subcontract work performed by Portland Plastering. During the time Portland Plastering performed the work, it was insured by American States. The policy periods ran from 1994 to 2000.

    PIH sued Portland Plastering, alleging it had negligently installed a stucco cladding system, resulting in water intrusion and property damage to the hotel. American States defended Portland Plastering subject to a reservation of rights. The jury found in favor of PIH on its negligence claim. Based upon the jury's apportionment of fault, judgment was entered against Portland Plastering in the amount of $617,856.60.

    American States filed suit against PIH, seeking a declaration that it was not obligated to pay the judgment rendered against Portland  Plastering. The parties filed cross-motions for summary judgment.

    Addressing American State's motion, the court noted that no evidence suggested that the judgment against Portland Plastering was limited only to damage incurred after PIH purchased the property in 2006. Rather, PIH attempted to collect on a judgment for continuous and progressive damages resulting from negligence.

    American States argued that the "owner-claimant rule" should apply. The rule provided that the damaged property must be owned by the claimant at the time of the property damage in order for the liability to be covered. The court noted that a majority of courts rejected the rule because there was nothing in the policy which supported such a limitation on coverage. The federal district court predicted that the Oregon appellate courts would reject the rule as well. The policy provided that coverage turned on whether the property was damaged during the period of coverage, not on when the insured's liability was assessed or who owned the property in question during the period of coverage. Therefore, the magistrate recommended that American State's motion for summary judgment be denied.

    Regarding PIH's cross-motion for summary judgment, the court considered: (1) whether the judgment awarding damages against Portland Plastering reflected property damage that occurred during the policy period; and (2) if so, the amount of damages that were covered under American States' policy.

    PIH met its prima facie burden on property damage during the policy period. The progressive water intrusion could reflect a jury award of damages for property damage that occurred entirely during the policy period. Further, PIH could not have prevailed without proving that Portland Plastering negligently caused damage to PIH's property. As a result of the jury's verdict, Portland Plastering became legally obligated to pay damages resulting from property damage. Again, PIH met its prima facie duty to prove that the judgment reflected damages for property damage that occurred (at least in part) during the policy period.

    Therefore, the burden shifted to American States to prove that an exclusion applied. American States relied upon the "your work" exclusion, barring coverage for "property damage to your work arising out of it or any part of it and included in the products-completed operations hazard." Whether the jury awarded damages for the cost of repairing or replacing Portland Plastering's own defective work was a disputed material fact. PIH sought damages stemming from Portland Plasteirng's negligent installation of EIFS, which resulted in cracking of the waterproof layer of the EIFS cladding. Accordingly, there was also a genuine issue of material fact as to whether the "your work" excluded coverage for some portion of the judgment.

    Consequently, the magistrate recommended that both parties' motions for summary judgment be denied. 

No Defense Owed for Suit Alleging Bodily Injury Outside Policy Period

    The Court granted the insurer's motion to dismiss because the injury occurred after the policy period had expired. Goins v. C&S Global Imports, Inc., 2016 U.S. Dist. LEXIS 79160 (W.D. Ky. June 17, 2016). 

    Plaintiff James Goin visited the site of a deer hunt on property owned by Kevin Turn, d/b/a/ Turner Outdoors. While touring the property, Turner encouraged Goins to climb into an elevated tree stand. After Goins did so, the stand collapsed, causing injury to Goins. 

    Goins sued C&S Global Imports, the manufacturer of the tree stand. C&S was insured by Pekin Insurance Company. Pekin filed a coverage action seeking a declaratory judgment that it had no duty to defend C&S. Pekin submitted that the policy provided coverage from January 2011 until January 2013, and that the injury occurred in June 2013. 

    Goins argued that Pekin improperly cancelled the policy on January 23, 2013, seven days before the policy was to expire. Pekin explained it cancelled the policy upon the request of C&S, which had shut down its business. Goins argued that, nevertheless, the notice was ineffective for failing to give thirty-day notice before the cancellation, as stated in the policy.

    The Court denied Goins' request to submit additional briefing because it was unnecessary. Even if Goins prevailed on his argument that the policy was improperly cancelled, Goins did not explain how this would benefit him. Even if Pekin's cancellation was ineffective, the policy would still expire according to its terms on January 31, 2013. Goins' claim arose five months after expiration of the policy and was therefore not covered. 

Lessor Not Covered by Lessee's Policy

    The court granted the insurer's motion to dismiss a lessor's complaint seeking coverage because the lessor was not insured under the lessee's policy. Dynasty Int'l LLC v. Lexington Ins. Co., 2016 U.S. Dist. LEXIS 78443 (N.D. Ind. June 16, 2016).

    Plaintiffs leased property to Chrysler Realty Company LLC (CRC). The lease required CRC to obtain a policy naming plaintiff as an insured and covering plaintiffs' interest in the property. CRC's parent, Chrysler, LLC, obtained a policy from Lexington. The policy did not explicitly name plaintiffs as insureds. 

    Aon issued a certificate of insurance which named plaintiffs as additional insureds. The certificated stated, "This certificate is issued as a matter of information only and confers no rights upon the certificate holder." The policy provided, "Aon may issue certificates of insurance for informational purposes only."

    While the policy was in effect, plaintiffs' property was damaged. The claim was submitted to Lexington, but was denied because plaintiffs were not insureds under the policy.

    Plaintiffs brought suit. Lexington moved to dismiss. Plaintiffs first argued that the certificate of insurance issued by Aon added them to the policy as additional insureds. But plaintiffs failed to allege an agency relationship between Aon and Lexington. This precluded plaintiffs from arguing that the certificate modified the policy.

    Next, plaintiffs argued they were covered under the text of the policy. The policy named as insureds,

Chrysler LLC and all subsidiary affiliated, associated, or allied companies, corporations, entities or organizations as may now or hereafter be constituted, for which the Insured has the responsibility for purchasing insurance and for which coverage is not otherwise more specifically provided.

Plaintiffs did not allege facts indicating that they had such a relationship with Chrysler. Their complaint alleged only that they and CRC were in a landlord-tenant relationship. Entering into a commercial leasing relationship with a Chrysler subsidiary did not make Plaintiffs a "subsidiary affiliate, associated, or allied" entity of Chrysler.

    Accordingly, the complaint was dismissed without prejudice.

Whether Duty to Defend Extends to Counterclaim Certified to State Court

        The First Circuit Court of Appeals certified questions to the Massachusetts Supreme Judicial Court (SJC) on whether the insurer's duty to defend required paying for the insured's pursuit of counterclaims. Mount Vernon Fire Ins. Co. v. VisionAid, Inc., 2016 U.S. App. LEXIS 10464 (1st Cir. June 9, 2016).

      VisionAid fired its Vice President of Operations, Gary Sullivan. A year later, Sullivan filed a claim with the Massachusetts Commission Against Discrimination (MCAD), alleging that VisionAid had terminated him because of age. Mt. Vernon, VisionAid's employment practices liability carrier, appointed counsel to defend VisionAid. The claim was defended on the basis that Sullivan's performance was sub-par and he had misappropriated company funds. Although Sullivan initially demanded $400,000, he eventually agree to walk away with no money if VisionAid would sign a mutual release. VisionAid did not agree because it wanted to pursue Sullivan for money he had allegedly stolen. Sullivan then voluntarily dismissed his MCAD complaint.

    A few months later, Sullivan filed an age discrimination complaint against VisionAid. Mt. Vernon continued to defend under a reservation of rights. VisionAid informed Mt. Vernon it wanted to pursue a counterclaim against Sullivan and asked Mt. Vernon to pay for counsel to do so. Mr. Vernon responded that the policy was strictly for defense and it was not required to pay for the prosecution of counterclaims. Mt. Vernon advised VisionAid it could hire and pay for its own lawyer to pursue the counterclaim.

    Mt. Vernon then filed suit for a declaratory judgment seeking a determination on whether it was required to pay for the prosecution of VisionAid's proposed counterclaim. The parties cross-moved for summary judgment. The district court granted Mt. Vernon's motion and denied the motion filed by VisionAid. 

    On appeal, VisionAid argued that while "Defense Costs" as "fees and expenses incurred by [Mt. Vernon]. . . to defend [VisionAid]," the policy did not elaborate on what was included in such a defense. Mt. Vernon responded that the term "Defense Costs" was not ambiguous and was specifically limited to expenses resulting from the defense of a claim as defined by the policy. 

    Because Massachusetts courts had not weighed in on whether an insurer's duty to defend included affirmative claims by the insured and what the scope of that duty might be, the First Circuit certified questions to the Massachusetts SJC as follows:

    1) Does an insurer owe a duty to prosecute an insured's counterclaim(s) for damages, where the policy provides that the insurer has a "duty to defend any Claim"?

    2) Does an insurer owe a duty to fund the prosecution of the insured's counterclaim(s) for damages, where the policy requires the insurer to cover "Defense Costs"?

    3) Assuming the existence of a duty to prosecute the insured's counterclaim(s), if the insurer has an interest in devaluing or otherwise impairing such counterclaim(s), does a conflict of interest arise that entitled the insured to control and/or appoint independent counsel to control the entire proceeding, including both the defense of any covered claims and the prosecution of the counterclaim(s)?