Insurance Law Hawaii

Business Risk Exclusions Bar Faulty Workmanship Claim

    The manufacturer of roofing and waterproofing systems was unsuccessful in securing coverage for alleged faulty workmanship due to the "your work" and "your product" exclusions. Siplast, Inc. v. Emplrs Mut. Cas. Co., 2020 U.S. Dist. LEXIS 176539 (N.D. Texas Sept. 25, 2020). 

    Siplast was sued in New York by the Archdiocese for work done at Cardinal Spellman High School. The Archdiocese purchased a Siplast Roof System for the high school. Vema Enterprises installed the roof system. The roof system was covered by a guarantee. 

    After completion, school officials noticed water damage in the ceiling tiles throughout the school. A consultant hired by the Archdiocese concluded that the leaks were caused by the workmanship and the materials that were compromising the entire roof membrane and system. Siplast determined the guarantee was not applicable. The Archdiocese informed Siplast that it would repair the roof and hold Siplast liable for the costs. Siplast gave notice of the claim to Employers, but coverage was denied.

    The Archdiocese sued. The complaint alleged that the only way to remediate the leak issue was to replace the failed membrane and system with a new one. The consultant estimated the total cost of remediation would be $5,000,000. 

    Siplast sued Employers. Siplast maintained that the Archdiocese had alleged claims based on an "occurrence" because they alleged they sustained damage due to faulty work and products. The Archdiocese did not allege that Siplast expected or intended any damage. The court agreed with Siplast that there was an occurrence. The origin of the property damage was alleged to be defects with the workmanship and materials that comprised the roof membrane and system. There were no allegations that Siplast intended or expected its roofing system to fail. 

    However, the next inquiry was whether the business risk exclusions applied. The policy did not apply to "'property damage' to 'your product' arising out of it or any part of it." Nor did the policy apply to "'property damage'' to 'your work' arising out of it or any part of it." The "your work" exclusion reflected the intent of the insurer 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.

    Employers argued that the Archdiocese was seeking to recover from Siplast only the cost of a replacement roofing system, not any damage that resulted to the school from the defective roof. Siplast contended that because the interior damage to the school was separate from any damage to the Siplast materials on the school roof, Employers would not meet its burden to show the "Your Product/Your Work" exclusions applied. 

    The court concluded that although the underlying complaint mentioned damage to school property other than the Siplast roofing products, the Archdiocese did not make any allegations to recover from Siplast for any damage to the building caused by the leaky roof that was separate from the damage to Siplast's product. Siplast was sued based on its failure to replace the roof as required by the guarantee. The Archdiocese did not allege that Siplast's breach caused other damage. 

    Therefore, Employer did not have a duty to defend Siplast because the damages sought in the underlying suit fell within the "Your Work'Your Product" exclusions.

 

Hawaii Federal District Rejects Another Construction Defect Claim

    The Federal District Court, District of Hawaii, continued it long line of cases finding no coverage for claims of faulty workmanship. Nautilus Ins. Co. v. Summary Judgment RMB Enters., 2020 U.S. Dist. LEXIS 200468 (D. Haw. Oct. 28, 2020).

    Property owners entered a construction contract with RMB Enterprises to develop and construct residential structures and a pond. The pond walls enclosed residential spaces, providing structural foundations for the walls of the building. After completion of the project, the pond leaked into its pump room. RMB performed remedial work by injecting epoxy into cracks. Later, water from the pondleaked into the interior of a residence near a staircase. Water also leaked into the master bedroom area causing musty odor, mood growth, and increased humidity. 

    The owners sued RMB asserting breach of contract, breach of warranty, misrepresentation, and negligence claims. Nautilus denied coverage. The policy provided that faulty workmanship did not constitute an "occurrence." But when faulty workmanship caused property damage to property other than "your work," then such property damage would be considered caused by an occurrence. 

    Nautilus sued RMB for a declaratory judgment on coverage. RMB defaulted and the owners intervened. Nautilus moved for summary judgment.

    The court first determined that it could retain jurisdiction of the case. The court then found that there was no occurrence. It was well established under Hawaii law that contract and contract-based tort claims were not occurrences. Under governing law, breach of contract and breach of warranty claims were not covered. The same was true of misrepresentation and negligence claims. The negligence claims asserted that RMB owed a duty of care in the performance of its work and it breached that duty. These claims were predicated on the contractual relationship between the owners and RMB; they were not independent tort claims. Therefore, RMB's alleged acts were not "accidents" and were not covered. 

    Nor did RMB's work fall within the policy's exception to the definition of occurrence. The owners suggested that damage to the residence was an "occurrence," as it was property other than the pond. The court determined this description misrepresented the nature of the property, a residential compound integrating and connected to the pond. And even if the pond and residence were independent of one another, the dispositive inquiry was whether RMB caused property damage to property other than its work. The underlying complaint alleged that RMB caused property damage to its own work. 

    Therefore, summary judgment was granted to Nautilus. 

Sellers' Alleged Misrepresentation Does Not Amount To An Occurrence

    The insurer successfully established on summary judgment that the insureds' alleged misrepresentation in the sale of a condominium was not an occurrence. Novak v. St. Maxent-Wimberly House Condo., 2020 U.S. Dist. LEXIS 167397 (E.D. La. Sept. 14, 2020). 

    State Farm issued the sellers a condominium unit owner's policy. The buyers sued the sellers, contending the sellers had made misrepresentations in the sale process. The sellers allegedly failed to disclose defects in the condominium before and at the time of the sale. State Farm intervened, seeking a declaration that it was not required to defend or indemnify the sellers because there was no occurrence.

    The sellers asserted that the buyers could be seeking damages for physical damage to and loss of use of the condominium. While this could constitute "property damage" under the policy, the sellers failed to explain how the damage could be considered to be caused by an occurrence. Therefore, State Farm's motion for summary judgment was granted. 

    

Business Risk Exclusions Dismissed in Summary Judgment Motion

    While the court denied summary judgment on whether the alleged damage was due to faulty workmanship and not covered, it granted summary judgment for dismissal of several business risk exclusions the insurer asserted against the developer. United Specialty Ins. Co. v. Dorn Homes, 2020 U.S. Dist. LEXIS 138431 (D. Ariz. Aug. 4, 2020). 

    Dorn, a residential home developer, developed a 350 single family residential home division. Dorn did not perform the actual construction, but contracted with various subcontractors. 

    After completion, Dorn began to receive complaints from homeowners about interior damage to some of the homes. Inspections showed interior cracking, wall separation and foundation movement. Dorn ultimately installed an unvented foam insulated roof system to address these issues. Therefore, it did not repair the faulty workmanship of its subcontractors because it would not have been efficient or as effective. Dorn paid for the repairs to the 87 homes at issue.

    Dorn sought reimbursement from its insurer, United. United notified Dorn that the costs of replacing the insulation was likely not considered as property damage under the policy.

    Dorn filed for declaratory relief. Both parties moved for summary judgment. The court first considered whether there was an occurrence under the policy.

    Under Arizona law, faulty workmanship that caused damage to other property could equate to property damage. Although faulty workmanship was not covered, damage to other property caused by or resulting from the defect could be covered.

    Here, the court found there were genuine issues of material fact as to whether Dorn's attic remediation issues were for the purpose of repairing faulty workmanship itself, or to damage resulting from the faulty workmanship. Further, there were genuine issues of material fact regarding the extent of preventative measures. Summary judgment on these issues was denied to both parties.

    Dorn also argued that the court should find that subcontractor faulty workmanship standing alone constituted an occurrence. Dorn argued that Exclusion L, the "your work" exclusion, demonstrated that subcontractor faulty workmanship was covered. The exclusion barred coverage for "property damage to 'your work' arising out of it or any part of it and included in the 'products-completed operations hazard.'" The exclusion did not apply "if the damaged work or the work out of which the damage arose was performed on your behalf by a subcontractor." The court again declined to be the first to apply Arizona law and hold that faulty subcontractor work, standing alone, constituted an occurrence.

    The court next turned to the exclusions raised by United. Exclusions J(5) and J (6) provided that the policy did to apply to 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 or property that must be restored, repaired, or replaced because "your work" was incorrectly performed on it.

The parties agreed that these exclusions only applied to claims arising from ongoing operations. Dorn agued that the exclusions did not apply because all of the underlying losses or damages arose after construction on each affected residence was completed. The court agreed and granted summary judgment on these exclusions to Dorn.

    Under Exclusion K, the policy did not apply to property damage to "'your product' arising out of it or any part of it." "Your product" meant "any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by You." Dorn argued it developed real property and improvements or fixtures that because part of that real property, so the exclusion did not apply, The court agreed and granted Dorn summary judgment on this issued.

    Exclusion M stated the insured did not apply to:

"Property damage" to "impaired property" or property that has not been physically insured, arising out of

(1) A defect, deficiency, inadequacy or dangerous conditions 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.

This exclusion does not apply to loss of use of other property arising out of sudden and accidental physical injury to "your product" or "your work" after it has been put to its intended use.

 Impaired property was "tangible property, other than 'your product' or 'your work" that cannot be used or is less useful because it incorporates 'your product' or 'your work' that is . . . defective, deficient, inadequate or dangerous . . ."

    This exclusion was commonly called the "impaired property" exclusion and was designed to prevent the insured from claiming economic losses resulting from the insured's work or work product. The court agreed with other courts that the exclusion was ambiguous and confusing.

    Nevertheless, Exclusion M applied where the insured's work was incorporated into other property and that other property is not able to be used because of a defect in the insured's work. To apply here, Exclusion M would require property damage, caused by Dorn's work to impaired property or property that had not been physically injured.  United had not presented a genuine issued of material fact that a similar circumstance exited in this case. Mere allegation and speculation did not create a factual dispute for purposes of summary judgment. Accordingly, Dorn was entitled to summary judgment on Exclusion M. 

 

 

Carrier Has Duty to Defend Claim for Active Malfunction of Product

    Rejecting that the underlying claim was based solely on faulty workmanship, the Third Circuit held the insurer had a duty to defend allegations of a malfunctioning product. Nautilus Ins. Co. v. 200 Christina Street Partners LLC, 2020 U.S. App. LEXIS 22118 (3d Cir. July 16, 2020).

    The insureds were sued by homeowners in two separate suits alleging defects in the construction of their homes. Nautilus defended under a reservation of rights. Nautilus filed suit in District Court and moved for judgment on the pleadings. The District Court denied the motion, finding Nautilus had a duty to defend because the underlying claims sufficiently alleged product--related tort clams that could fall within the scope of coverage under the relevant policies.

    The Third Circuit affirmed. There was a distinction between a claim of faulty workmanship, for which the insurer did not have a duty to defend, and a claim of "active malfunction" of a product, for which an insurer did have such a duty. An active malfunction was sufficiently fortuitous as to constitute an "occurrence."  

    Nautilus argued that the underlying claims stemmed from the insureds' alleged faulty workmanship, so the defects alleged were not "occurrences." Liberally construing the underlying complaints in favor of the insureds, however, the complaints alleged the use of faulty materials, and the active malfunction of products, such as windows and moisture barriers. These active product malfunctions constituted "occurrences" under the policies. Thus, the District Court properly held that Nautilus had a duty to defend the underlying cases. 

 

Michigan Finds Coverage for Subcontractor's Faulty Work

    The Michigan Supreme Court held that under a CGL policy, an "accident" may include unintentional subcontractor work that damages the insured's work product. Skanska USA Building Inc. v. M.A.P. Mechanical Contractors, Inc., et al., 2020 Mich. LEXIS 1194 (Mich. June 29, 2020).

    Skanska USA Building Inc. was the construction manager on a renovation project for a medical centre. The heatng and cooling portion of the project was subcontracted to M.A.P. Mechanical Contractors, Inc. (MAP). MAP installed a steam builder and piping for the heating system. The installation included several expansion joints. After completion, Skanska learned that MAP had installed some of the expansion joints backward. This caused significant damage to concrete, steel and the heating system. The medical center sent a demand letter to Skanska, who send a demand letter to MAP. Skanska did the repairs and replacement of the damaged property. Skanska then submitted a claim of $1.4 million for its work to Amerisure Insurance Company. The claim was denied. 

    Skanska sued Amerisure. The trial court rejected Amerisure's motion for summary judgment which argued MAP's defective construction was not a covered "occurrence." The Court of Appeals reversed and ordered that summary judgment be granted to Amerisure. The court reasoned that there was no "occurrence" because the only damage was to the insured's own work product. 

    The Michigan Supreme Court reversed the Court of Appeals. Under Michigan law, an "accident" was "an undefined contingency, a casualty, a happening by chance, something out of the usual course of things, unusual, fortuitous, not anticipated and not naturally to be expected." Generally, faulty work by a subcontractor could fall within the plain meaning of most of these terms. The accident happened by chance, was outside the usual course of things, and was neither anticipated nor naturally expected. 

    The policy as a whole confirmed this interpretation. The policy contained an exclusion precluding coverage for an insured's own work product, but it contained an exception for work performed by a subcontractor on the insured's behalf. If faulty workmanship by a subcontractor could never constitute an "accident" and therefore never be an "occurrence" triggering coverage in the first place, the subcontractor exception would be nugatory. Therefore, given the plain meaning of the word "accident," faulty subcontractor work that was unintended by the insured could constitute an "accident" under a CGL policy. 

    The context and history of CGL policies supported the court's conclusion that an "accident" could include damage to an insured's own work product. In 1986, the ISO added the policy language on a subcontractor's faulty work. It adopted changes to expand coverage to include some of the business risks that were previously excluded, specifically damage caused by a subcontractor's faulty workmanship (with no carveout based on whose property was damaged). The 1986 reformation of the scope of coverage under the CGL policies underscored a plain reading of "accident" - that faulty subcontractor work may fall within the policy's coverage. 

 

Gross Negligence May Constitute an Occurrence

    The Iowa Supreme Court reversed the trial court and held that alleged acts of gross negligence may constitute an occurrence. T.H.E. Insurance Co. v. Glen, 2020 Iowa LEXIS 64 (Iowa June 5, 2020).

    Stephen Booher was a seasonal employee at Adventureland Amusement Park. He had been recently employed as a loading assistant on the Raging River ride. Stephen Glen was the ride operator of the Raging River. Booher allegedly suffered fatal injuries when he was jerked of his feet and fell onto the moving belt of the ride. Plaintiffs, Booher's estate, alleged Glen had been grossly negligent by among other things, failing to check the ride before starting it, starting the ride without knowing whether Booher was ready, causing Booher to topple on the ride's exposed conveyor belts, failure to watch the ride for the entirety of its operation, etc.

   When the estate sued, Adventureland tendered to its insurer, T.H.E. Insurance Company (THE). THE filed a declaratory judgment action, alleging that the allegations of gross negligence did not amount to an "accident" and caused an "expected" injury under the CGL policy. The parties cross-moved for summary judgment. The lower court granted summary judgment to THE. 

    On appeal, the Iowa Supreme Court considered whether the gross negligence claim brought by the Booher estate was covered. Gross negligence was defined by Iowa statute as an act "amounting to wanton neglect for the safety of another." Based upon Iowa case law, it was possible that a factfinder could determine that a co-employee acted without intent to harm. Further, one could act with the expectation that an injury was more likely than not, but not with the expectation that the injury was highly likely or substantially certain to result. Therefore, some, but not all, acts of gross negligence could be accidents.

    At this early stage of the proceeding, the court was unable say there was no possibility that the Booher estate could not convince a factfinder that it had a claim that amounted to gross negligence but was within the scope of coverage under the CGL policy. 

No Coverage for Counterclaim Arising from Insured's Faulty Workmanship

    The Eighth Circuit found there was no coverage for the insured's faulty workmanship. Am. Family Mut. Ins. Co., S.I. v. Mid-American Grain Distributors, LLC, 958 F.3d 748 (8th Cir. 2020).

    Mid-American contracted with Lehenbauer to design and construct a grain storage and distribution facility for Lehenbauer. Before the work was competed, Lehenbauer terminated Mid-American's services. Mid-American then sued Lehenbauer for breach of contract. Lehenbauer counterclaimed against Mid-American, alleged breach of "implied duties of workmanlike performance and fitness for a particular purpose" and negligence. Mid-American tendered the counterclaim to American Family. American Family accepted the tender under a reservation of rights, but sued Mid-American for a declaratory judgment.

    The district court granted American Family's motion for summary judgment, concluding that the counterclaims did not allege an occurrence. 

    On appeal, the Eighth Circuit noted that under Missouri law, an "accident" did not include acts that resulted in expected or foreseeable damage. But must the accident be foreseeable to the actual insured, subjectively speaking, or to a reasonable insured, objectively speaking? Here, foreseeability could be inferred as a matter of law given the nature of the act and they type of damages at issue even under the subjective standard.

    The damages in question were the inherent results of shoddy workmanship. Therefore, Mid-American's alleged defective construction work was not an "occurrence." Lehenbauer's damages were the normal, expected consequence of Mid-American's work. They were foreseeable as a matter of law, so Mid-American's work was not an "accident," and thus not an "occurrence." The district court decision was affirmed. 

Georgia's Cause Theory Means One Occurrence in Multi-Car Accident

    The Eleventh Circuit, following Georgia law, found the cause theory meant there was a single occurrence in a multi-car accident. Grange Mut. Cas. Co. v Slaughter, 2020 U.S. App LEXIS 14057 (11th Cir. May 1, 2020).

    Driving a truck owned by Four Seasons Trucking (FST), Mark Lucas crossed the center lane and collided with two vehicles, one right after the other. Grange insured the truck. Grange sued for declaratory relief, asking the district court to establish its obligations under the policy. 

    The district court concluded there was a single accident. Georgia used the cause theory to define the word "accident" in the policy. Under this theory, the number of accidents was determined by the number of causes of the injuries, with the court asking if there was but one proximate, uninterrupted, and continuing cause which resulted in all of the injuries and damage.

    The policy defined "accident" to incur continuous or repeated exposure to the same conditions resulting in "body injury" or "property damage." Further, the limit of insurance clause in the policy applied "regardless of the number of . . . vehicles involved in the 'accident'." The district court concluded that FST's argument that any time separate collisions occurred, there were different "conditions" would read that language out of the policy. The court also rejected FST's suggestion that any time there was a multi-auto collision, there were multiple accidents.

    The Eleventh Circuit agreed. Under the cause theory adopted in Georgia, courts looked to whether, after the cause of the initial collision, the driver regained control of the vehicle before a subsequent collision, so that it could be said there was a second intervening cause and therefore a second accident. 

    Here, there was no evidence that Lucas regained control of the truck as he crossed the centre line and collided with the two vehicles. The policy's limit of insurance clause also contemplated that multiple vehicles could be involved in a single accident. 

 

Dispute Over Number of Occurrences Remanded by Alaska Supreme Court

    The Alaska Supreme Court remanded to the trial court to determine whether the parties reached agreement in their settlement on the number of occurrences. McCormick v. Chippewa, Inc., 2020 Alaska LEXIS 20 (Alaska March 20, 2020).

    Brent McCormick was injured while working aboard the vessel owned by Chippewa, Inc. McCormick sued Chippewa. 

    Chippewa had a policy with a $500,000 per-occurrence limit less defense costs. McCormick's attorney, Gerald Markham, sent Chippewa an offer to settle the lawsuit "for any and all injuries occurring or arising out of Mr. McCormick's employment on the vessel in exchange for the policy limits" of Chippewa's insurance policy. The offer described two accidents McCormick suffered during this time. Chippewa accepted the "demand for payment of the remaining policy limits."

    Thereafter, Markham called Chippewa's attorney, Laura Farley, to discuss the settlement. The next day, he sent a letter to Farley indicating a dispute existed regarding the number of occurrences under the policy. The letter suggested that Farley had stated that  the insurer accepted McCormick's policy limits offer to pay limits "whatever they might be." Markham attached a signed settlement agreement, releasing Chippewa from liability "in consideration of the remaining policy limits available." Markham dismissed the lawsuit.

    Chippewa sent McCormick a letter stating that the remaining policy limit after deduction of defense costs was $424,040.05, which would be paid to McCormick. McCormick did not respond to the letter.

    McCormick then filed a new lawsuit, seeking enforcement of the purported settlement agreement. In a motion for partial summary judgment, McCormick clarified that he believed there had been three "occurrences," under the policy, which would triple the available policy limits. The trial court granted Chippewa's motion for summary judgment, concluding the parties had entered into a binding settlement agreement, leaving only an issue of interpreting the phrase "remaining policy limits" in the agreement,. The court concluded that "remaining policy limits" referred to the remainder of a single limit of $500,000, not the sum of multiple occurrences with each having a $500,000 limit.

    The Alaska Supreme Court reversed. The record indicated that the expressed intent of the parties regarding an essential term of the purported settlement agreement was in dispute. Markham submitted an affidavit detailing the phone call between the attorneys. He stated his belief that there was more than one occurrence, but the attorneys agreed to settle while leaving the number of occurrences unresolved. In light of this account, when McCormick signed the purported settlement agreement, it could have been with the understanding that the parties had not yet decided on the limits. Markham's account was contradicted by Farley, who testified in an affidavit and deposition that the parties never discussed the number of occurrences during the call.

    Given the interplay between the number of occurrences and policy limits, the conflicting evidence abut the phone call presented a genuine issue of material fact. The case was remanded to allow the trier of fact to determine whether the parties reached an agreement and, if so, what terms they agreed to.