Insurance Law Hawaii

Some Insurers Dismissed, Others Are Not in Claims for Faulty Workmanship

    The insured Developer survived a motion to dismiss by one of several carriers who were asked to defend against claims for faulty workmanship. East 111 Assoc. LLC v. RLI Ins. Co., 2019 N.Y. Misc. LEXIS 5331 (Oct. 4, 2019).

    Developers sponsored a residential condominium project and sold all units. The owners subsequently sought damages for $881,450 for alleged design and construction defects, and asserting causes of action for, among other things, breach of contract, specific performance and negligence. The underlying action settled for $350,000. Developers sought coverage from its insurers. 

    The Developers sued the carriers for a declaratory judgment that they were entitled to a defense. Developers had a CGL policy issued by Mt. Hawley. Developers were also additional insureds in policies issued to subcontractors by James River, Admiral and Selective. The insurers moved to dismiss. 

    The insurers' breach of contract exclusion precluded coverage for "property damage . . . arising directly or indirectly out of . . . (a) Breach of express or implied contract; (b) Breach of express or implied warranty . . ." Developers argued that the owners' cause of action for negligence did not fall within this exclusion. However, the negligence cause of action alleged - as did the breach of contract - that Developers constructed the building with design and construction defects and not in accordance with the offering plan. Since all of the alleged "property damage arose directly or indirectly" from Developers' alleged breach of express or implied contract by their failure to deliver a building free of defects, the underlying action fell within the breach of contract exclusions. Therefore, motions to dismiss by James River, Admiral, and Mt. Hawley were granted.

    The Developers were additional insureds under the Selective policy issued to Walsh, a subcontractor. The underlying complaint carried the possibility that Walsh's allegedly fault workmanship damaged other parts of the building - which was not, as a whole, Walsh's work - an "occurrence" giving rise to "property damage" could exist under the Selective policy. Accordingly, the alleged water damage triggered Selective's duty to defend Developers. 

Third Circuit Remands Denial of Coverage Based on Expected and Intended Definition of Occurrence

    While affirming the district court's denial of coverage under policies that defined occurrence as an accident, the Third Circuit remanded for further consideration of the policies containing an expected and intended definition of occurrence. Sapa Extrusions, Inc. v. Liberty Mut. Ins. Co., 2019 U.S. App. LEXIS 27668 (Sept. 13, 2019).

    Sapa manufactured aluminum extruded profiles which were used for door and window frames. A pretreatment coating process was used in several aluminum clad windows and doors. Several stages were involved including cleaning and degreasing to remove organic and inorganic materials, chemical etching, and chemical coating to assist with paint adherence. For decades, Sapa supplied profiles to Marvin Lumber and Cedar Company. Marvin incorporated these extrusions with other materials to manufacture aluminum doors and windows. If an extrusion was defective, the whole window or door would have to be replaced. Between 2000 and 2010, Sapa sold 28 million windows and doors.

    Marvin sometimes received complaints from customers that the aluminum parts of windows or doors would corrode. At first, Sapa tried to determine the nature of the problems and fix them. In 2010, Marvin sued Sapa, alleging Sapa made specific warranties to Marvin about its extrusions. Marvin sought monetary damages for economic losses stemming from investigating and responding to consumer complaints, identifying and qualifying alternative extrusion suppliers, replacing the failed extrusions, and experiencing lost sales and profits.  On the eve of trial, the parties settled for a large sum.

    Sapa held 28 CGL policies through eight carriers, covering the relevant period during which Sapa did business with Marvin. Only one carrier, Zurich, accepted the defense under a reservation of rights. Sapa sued the remaining carriers, asserting breach of contract under the 28 policies and seeking a declaratory judgment to recover the cost of the underlying settlement.

    The district court found there was no occurrence under any of the policies and there was no duty to indemnify. 

    The Third Circuit analyzed the policies under Pennsylvania law. Nineteen of the policies defined an "occurrence" as an accident. Under these policies, faulty workmanship did not constitute an accident as required to set forth an occurrence under the CGL policies.  A degree of fortuity was not present in a claim for faulty workmanship.

    Seven policies defined "occurrence" as "an accident, including continuous or repeated exposure to conditions, which results in . . . property damage neither expected nor intended from the standpoint of the Insured." The district court considered these policies together with the "accident" policies. The Third Circuit held the district court should have considered these poliies separately. The expected and intended definition of "occurrence" in these policies was ambiguous. Under the expected and intended definition, an "occurrence' included those conditions not of the same general type which the insured intended to cause.

    Two policies contained the injurious exposure definition of "occurrence."  The definition in these policies was identical to the expected and intended definition, except that it used the term "injurious exposure" instead of "accident. The district court did not analyze these policies separately, despite their unique wording. Therefore, the district court's decision was vacated as it related to these two policies and remanded for further individualized consideration. 

    

Insurer Granted Summary Judgment on Denial of Construction Defect Claim

    The court granted the insurer's motion for summary judgment, confirming there was no duty to defend or indemnify a construction defect claim against the insured. Fontaine Bros. v. Acadia Ins. Co., 2019 U.S. Dist. LEXIS 148056 (D. Mass. Aug. 29, 2019). 

    The City of Worcester contracted with Fontaine Brothers, Inc. to install a new ice refrigeration system at the City's indoor ice rink. After construction, the condensers in two chiller units eroded and stopped operating. 

    The City sued Fontaine for the costs of leasing temporary chillers and installing new ones. The City alleged that Fontaine installed condensers with carbon steel tubes instead of contractually required stainless stell tubes.Further, Fontaine and its subcontractors did not adequately maintain the condensers, in breach of the contract.

    Fontaine's insurer, Acadia Insurance Company, denied coverage. Fontaine sued Acadia. The court noted that the City's complaint plainly alleged faulty workmanship by Fontaine. However, the City's complaint did not allege that Fontaine intended the condensers to corrode and left open the possibility that Fontaine was unaware of any potential problem or did not foresee the corrosion likely to result from the use of carbon steel components or the maintenance work being done by its subcontractor. Therefore, the Cit's complaint did not foreclose the possibility that the corrosion resulting from Fontaine's alleged faulty workmanship and maintenance might be shown to be an unforeseen or unintended consequence of reckless or negligent conduct. Accordingly, it was possible that there was an occurrence under the policy language. 

    But the court found that a  business risk exclusion applied to relieve Acadia of any duty to defend or indemnify. The Impaired Property Exclusion, subsection (m), excluded "property damage to impaired property or property that has not been physically injured, arising out of (1) A defect, deficiency, inadequacy or dangerous condition in 'your product' or 'your work'; or (2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms." The damage and resulting loss arose from Fontaine's work in the form of faulty parts or equipment and Fontaine's failure to perform an agreement in accordance with its terms. Further, the property was "restored to use" by the removal and repair of Fontaine's product and work. The faulty condensers were equipment furnished in connection with work or operations performed by Fontaine or on its behalf, and the condensers impaired the operations of the ice rink. 

    Because the complaint left open no question that the Impaired Property exclusion applied, Acadia had no duty to defend or indemnify. 

Injury Caused by Drunk Driver is "Accident" Covered by Policy

    Noting that only an insurance company could suggest no coverage for an injury caused by a drunk driver, the Fifth Circuit rejected the insurer's argument. Frederking v. Cincinnati Ins. Co., 2019 U.S. App. LEXIS 19796 (5th Cir. July 2, 2019).

    Carlos Sanchez was driving under the influence of alcohol when he failed to yield the right of way, and collided with a car driving by Richard Frederking. Sanchez was driving a truck while working for Advantage Plumbing Services, who was insured by Cincinnati. 

    Frederking sued both Sanchez and Advantage. The jury held Sanchez and Advantage jointly and severally liable for $137,025 in compensatory damages. It further awarded $207,500 in exemplary damages for Sanchez's gross negligence. 

    Cincinnati agreed to pay Frederking the compensatory damage award, thereby discharging Advantage's liability. But Cincinnati refused to pay Sanchez's exemplary damages. Frederking sued Cincinnati, arguing Sanchez's actions were intentional.

    The policy issued to Advantage covered damages resulting from "accidents." The policy did not define accident. As a matter of plain meaning and common usage, "accident" included the drunk driving collision that gave rise to the dispute. 

    The Supreme Court of Texas defined the term "accident" as a "fortuitous, unexpected and unintended event." Further, "accident" was defined by what it excluded - intentional acts. Automobile collisions were commonly described as "accidents." There was no reason to describe the automobile collision in this case as anything other than an "accident." No one contended that Sanchez intended his vehicle to collide with Frederking's vehicle. Nor did anyone suggest that Sanchez drank in hopes of causing an automobile collision. Therefore, this case fell well within the common understanding of the term "accident." 

    If Cincinnati's contention was correct, a collision caused by texting while driving would not be an accident. The driver made an intentional decision that contributed to the accident. But this was implausible on its face. 

    The court reversed the grant of summary judgment to Cincinnati and remanded the case for further consideration. 

"Occurrence," "Bodily Injury" Adequately Alleged, Triggering Defense

    The court determined that there was a duty to defend despite the insurer's contention that no "occurrence"  or "bodily injury" had been alleged. Zurich Am. Ins. Co. v. Electricity Main, LLC, 2019 U.S. App LEXIS 18074 (1st Cir. June 17, 2019).

    Electricity Maine, LLC had a D&O policy with Zurich. In November 2015, a class action was brought against Electricity Maine. Two customers sought to represent a class of nearly 200,000 of the company's customers. The complaint alleged that Electricity Maine had engaged in misconduct that resulted in customers receiving higher bills than Electricity Maine had represented they would be. 

    Electricity Maine tendered notice of the suit to Zurich. Zurich filed for a declaratory judgment that it had no duty to defend because the underlying action failed to allege that Electricity Maine engaged in conduct that qualified as an "occurrence" or that caused any "bodily injury." The parties cross-moved for summary judgment and the district court ruled for Electricity Maine.

    The First Circuit noted that the complaint in the underlying case set forth a number of claims for intentional torts, but also included a claim for "negligence" and a claim for "negligent misrepresentation." Zurich argued that the facts alleged in the complaint made it impossible to sustain the fiction that Electricity Maine was "negligent" and expected no harm to its customers. When the complaint incorporated by reference the same factual allegations into its claims for for negligence and negligent misrepresentation, they were not necessarily read as alleging that Electricity Maine acted intentionally rather than inadvertently. Such claims did not require proof of intentional conduct. The court acknowledged that the negligent misrepresentation claim or the negligence claim may not have merit. But even a broad, conclusory allegation, such as negligence that is legally insufficient to withstand a motion to dismiss will trigger an insurer's duty to defend whenever the allegations showed a potential that liability would be established under the policy. 

    Regarding "bodily injury," the policy's definition included "mental injury, shock or fright resulting from bodily injury." The definition did not state that it excluded coverage for "bodily injury" caused by those markers of emotional distress. Because Maine law required the court to construe ambiguous language in favor the the insured, the court rejected Zurich's restrictive construction of the policy. 

    Therefore, the district court's granting of summary judgment to Electricity Maine was affirmed. 

Insurer's Motion for Judgment on the Pleadings Over Construction Defect Claims Denied

    The insurer was unable to escape coverage obligation over claims for construction defects when its motion for judgment on the pleadings was denied. Jei Solutions v. Burlington Ins. Co., 2019 U.S. Dist. LEXIS 95068 (E.D. La. June 4, 2019). 

    JEI was hired as a contractor to renovate a building. JEI subcontracted the entire scope of work to Ja'Lia Construction, LLC. Before the project was completed, the owner unilaterally terminated the contract and filed an arbitration demand against JEI, seeking damages for faulty workmanship. Burlington denied coverage and a defense on the ground that an alleged breach of contract did not constitute an "occurrence." 

    Ultimately, an adverse judgment was rendered against JEI for $89,239.25. JEI then sought to recover this amount from Burlington. Burlington moved for judgment on the pleadings or summary judgment. 

    The court found that JEI's failure to perform the work called for in the contract did not constitute "property damage" caused by an "occurrence," and Burlington correctly noted that defects in construction, alone, did not trigger coverage under a CGL policy. However, coverage was triggered when the defect caused physical injury to tangible property. Here, the arbitrator awarded damages against JEI for inadequate and incomplete work. The list of damage in the arbitration included damage resulting from poor workmanship, such as:

• inside/outside wall showed signs of water damage from roof leak
• Places where outside could be seen form inside
• stud integrity weakened by excess cutouts. 

    Nevertheless, Burlington argued that coverage was barred by exclusions j (5) and (6), which excluded:

"Property damage" to:

(5) that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the "property damage" arises out of those operations; or

(6) that particular part of any property that must be restored, repaired, or replaced because "your work" was incorrectly performed on it. 

Paragraph (6) of this exclusion does not apply to "property damage" included in the "products-completed operations hazard."

. . . 

16. Products-completed operations hazard

a. Includes all "bodily injury" and "property damage" occurring away from premises you own or rent and arising out "your product" or "your work" except:

(1) Products that are still in your physical possession; or

(2) Work that has not yet been completed or abandoned . . .

    The "work product" exclusions reflected the insurer's intent to avoid the possibility that coverage under a CGL policy would be used to repair and replace the insured's defective products and faulty workmanship. Importantly, exclusions j (5) and j (6) applied only while the insured's work was in progress. When the work was complete, the products complete operations hazard provision provided coverage for property damage arising out of faulty work. 

    If the damage considered in the arbitration occurred while JEI's work was ongoing, exclusions J (5) and j (6) barred coverage. But if the damage occurred after the owner terminated the contract, they would not. There was a genuine question of fact as to when the covered property damage occurred and, therefore, whether coverage was barred by j (5) and j (6). Accordingly, the motion was denied. 

 

Alabama Supreme Court Reverses Determination of Coverage for Faulty Workmanship

    Although the lower court held that the insured contractor was entitled to coverage and indemnification under a CGL policy despite claims based upon faulty workmanship, the Alabama Supreme Court reversed. Nationwide Mut. Fire Ins. Co. v. David Group, Inc., 2019 Ala. LEXIS 52 (Ala. May 24, 2019).

    The David Group (TDG) specialized in custom-built homes. The Shahs purchased a newly built home from TDG in October 2006. After moving in, the Shahs experienced problems with their new home that TDG was unable to correct. In February 2008, the Shahs sued TDG. The complaint alleged that serious defects existed, resulting in health and safety issues, building code violations, poor workmanship, misuse of construction materials, and disregard of property installation methods. The case went to arbitration and an award of $12,725 was issued to the Shahs.

    Nationwide was TDG's CGL carrier and initially defended TDG. After Nationwide withdrew its defense, TDG sued seeking a judgment declaring that Nationwide was obligated to defend and indemnify. The trial court denied Nationwide's motion for summary judgment and issued a partial summary judgment in favor of TDG on the issue of coverage. Nationwide appealed. 

    Nationwide argued that the "defects" alleged by the Shahs and identified by the arbitrator were the result of faulty work performed by TDG. The defects were not "occurrences" under the policy. The court had repeatedly held that faulty workmanship itself was not an occurrence under a CGL policy. Faulty work could lead to an occurrence and trigger coverage under a CGL policy if the work subjected personal property or other parts of the damaged structure to continuous or repeated exposure to some other general harmful condition, and, as a result, personal property or other parts of the structure were damaged. The complaint alleged faulty workmanship, but did not allege additional or resulting damage to their house or to their personal property as a result of the faulty workmanship. 

    Under these circumstances, there was nothing demonstrating that there was property damage or personal injury resulting from an occurrence that triggered coverage under a CGL policy. The trial court's judgment was reversed.

Business Risk Exclusions Bar Coverage Whether or Not Operations Completed

    The federal district court found that exclusions j (5), (6) and l barred coverage for damage caused to the city's water main collector system. Sunwestern Contractors, Inc. v. Cincinnati Indem. Co., 2019 U.S. Dist. LEXIS 82642 (D. Ariz. May 15, 2019).

    Sunwestern contracted with the city of Tucson for the construction of a water main collector system. During the project, Sunwestern conducted a pressure-test of the pipeline when several flanges, which connected the pipe sections, came apart. The flange failure caused water to tear out gaskets, seriously damage the pipeline, components of the pipeline, and surrounding areas. Four million dollars in damage was caused. 

    Sunwestern had a CGL policy with Cincinnati. Coverage was denied by Cincinnati when it determined there was no "occurrence."

    There was no dispute that the work was faulty. The relevant inquiry was whether Sunwestern's faulty workmanship resulted in property damage. It was uncontroverted that it did. Improper installation of pipe components led to damage to the pipeline and surrounding areas. The flanges were improperly installed. Sunwestern showed that serious property damage resulted from its defective work and consequential property damage resulting from the faulty work was an occurrence under the policy. 

    The court then turned to the business risk exclusions. Exclusion j (6) precluded coverage for incorrectly performed work. But the exclusion included an exception for completed operations. Further the exclusion did not exclude coverage for property damage for non-defective property that resulted from faulty workmanship. Thus, while exclusion j (6) unambiguously excluded coverage for damage to the flanges and other incorrectly constructed portions of the pipeline, if they were not "completed," it did not exclude coverage for consequential damage to non-defective property caused by that incorrectly performed work. 

    Exclusion j (5) barred coverage for property damage to "that particular part of real property on which you or any contractors or subcontractors working . . . on your behalf are performing operations, if the 'property damage' arises out of those operations." Like exclusion j (6), exclusion j (5) only precluded coverage for work that was still in progress. The court found that exclusions j (5) and j (6) unambiguously precluded coverage for the incident and all residual property damage stemming from the incident. However, exclusions j (5) and j (6) only precluded damage to work that was not yet completed, or still in progress. 

    Exclusion (l), however, applied, excluding property damage to "work or operations performed by" Sunwestern that was included in the products-completed operations hazard. Consequently, exclusion (l) precluded coverage for Sunwestern's completed work.

    In all, if the work was completed, it was excluded by exclusion (l). If it was not completed, it was excluded by exclusions j (5) and j (6). The products-completed operations hazard provision was still subject to any relevant exclusions and any faulty work that was encompassed in the products-completed operations hazard provision was unambiguously excluded from coverage by exclusion (l). 

    There was no ambiguity in the exclusions. Exclusions j (5) and j (6) unambiguously precluded coverage for incorrectly performed work. While exclusions j (5) and j (6) did not preclude coverage for incorrectly performed work that was completed, exclusion (l) unambiguously did. Therefore, Sunwestern was not entitled to coverage and Cincinnati's motion for partial summary judgment was granted. 

    

One Occurrence Means One Deductible

    The court held that claims regarding the negligent supervision of an independent contractor who engaged in the sexual abuse of three victimes amounted to one occurrence, requiring a single deductible. Scott Fetzer Co. v. Zurich Am. Ins. Co., 2019 U.S. App. LEXIS 13023 (6th Cir. April 30,2019). 

    In 2013, three women filed suit against Scott Fetzer Company (dosing business as Kirby Company), Crantz Development LLC, and John Fields. The women alleged that John Fields had sexually assaulted them on numerous occasions between May 2012 and January 2013. Fields was an independent dealer of vacuum cleaners who worked for Crantz, a factory distributor of Kirby vacuums, which were manufactured by Fetzer. The women alleged multiple instances of verbal abuse and harassment, inappropriate touching, force sexual acts, and rape. The women asserted that Fetzer and Crantz Development were negligent in hiring Fields as an independent dealer, allowing Fields to go on sales trips with the women, and failing to have policies and procedures in place to prevent sexual harassment.

    Fetzer settled with the three women and then sought reimbursement from Zurich under two general liability policies. Under the policies, Zurich agreed to pay $2 million per "occurrence" of bodily injury, but Fetzer was responsible for paying the first $1 million for each "occurrence." Of the three settlements, only one exceeded the per-occurrence deductible amount. Zurich paid the amount that exceeded the deductible, but it refused to pay anything for the other two settlements. Fetzer contended that the "occurrence" was its negligent hiring and supervision of Fields, which limited the number of occurrences to one, and therefore, Fetzer would have to pay only one deductible. Zurich argued that Fields's actions against each individual woman were all separate occurrences, meaning that there were three occurrences and Fetzer was responsible for paying three separate deductibles.

    The district court found that there were three separate occurrences. The Sixth Circuit reversed.

    Under Fetzer's interpretation of "occurrence," the "accident" was not that the women were exposed to Fields, but that they were exposed to Fetzer's negligent supervision of Fields. Ohio courts had determined that the relevant "occurrence" could fairly be interpreted as negligent supervision, not the acts perpetrated by the bad actor. The court agreed that the relevant occurrence was Fetzer's negligent supervision of Fields.

    If the relevant "occurrence' was negligent supervision, there was only one occurrence. Ohio followed the cause test. The number of occurrences was determined by reference to the cause or causes of the damage or injury, rather than the number of individual claims. Because the occurrence was the negligent supervision of Fields, it was reasonable to read the policy to mean there was only one occurrence.

Subcontractor Entitled to Defense for Defective Work Causing Property Damage Beyond Its Scope of Work

    The Illinois Court of Appeals found the subcontractor was owed a defense for alleged property damage caused by its faulty workmanship, but outside its scope of work. Acuity Ins. Co. v. 950 W. Huron Condo. Ass'n, 2019 Ill. App. LEXIS 208 (Ill. Ct. App. March 29, 2019).

    The condominium association sued its general contractor, Belgravia, for alleged defects allowing water to infiltrate and cause damage. Belgravia filed a third-party complaint against its subcontractors, including the carpentry subcontractor Denk & Roche. Denk & Roche held a CGL policy with two insurers during the relevant period, one with Cincinnati Insurance Company for the period January 1, 2000 through June 1, 2007, and another with Acuity Insurance Company, effective June 1, 2007, through December 31, 2013.

    Denk & Roche tendered its defense to both insurers. Cincinnati agreed to defend and contributed to a settlement of the AOAO's claims. Acuity denied a defense, contending that the underlying claims did not trigger a duty to defend. Acuity's declaratory judgment suit sought a determination that it had no duty to defend. Cincinnati intervened and argued it was entitled to equitable contribution from Acuity.

    On cross-motions for summary judgment, the trial court found that Acuity had no duty to defend.

    On appeal, the court noted that while a CGL policy would not insure a contractor for the cost of correcting construction defects, damage to something other than the project itself did constitute an occurrence under a CGL policy. Here, the duty to defend Denk & Roche turned n what qualified as damaged beyond "the project itself" where the insured was a subcontractor performing discrete work on a project and the subcontractor had no control over other aspects of the project. 

    From the eyes of the subcontractor, the "project" was limited to the scope of its own work. The precise nature of any damage that might occur for something outside of that scope was as unknown or unforeseeable as damage to something entirely outside of the construction project. Therefore, when the underlying complaint alleged that a subcontractor's negligence caused something to occur to a party of the project outside of the subcontractor's scope of work, there was an occurrence under a CGL policy, even though it would not be an occurrence from a general contractor or developer's perspective. Consequently, the court drew a major distinction between coverage for faulty workmanship performed by a subcontractor versus a general contractor or developer. Summary judgment for Acuity was reversed.

    The court also found that Cincinnati was entitled to equitable contribution from Acuity for undertaking the subcontractor's defense. The case was remanded for a determination on the exact amount of contribution to be made.