Insurance Law Hawaii

Insurers Must Defend Allegations of Faulty Workmanship

    Granting the insured's motion for partial judgment on the pleadings, the court determined the insurers had a duty to defend. Suez Treatment Solutions, Inc. v. Ace Am. Ins. Co. & Liberty Mut. Fire Ins. Co., 2022 U.S. Dist. LEXIS 59044 (S. D. N. Y. March 30, 2022). 

    Suez Treatment Solutions, Inc. held policies from Chubb and Liberty Mutual Fire Insurance Company to cover its operations in connection with the development of a pollution treatment system in North Carolina. When the project ultimately failed, an underlying action sought damages from Suez, alleging breach of contract, negligence, and fraud. Suez filed this case seeking a declaratory judgment that Chubb and Liberty were each obligated to defend and indemnify Suez in the underlying case. 

    The City of High Point hired Suez to upgrade the facilities at its wastewater treatment plant staring in 2021. Because mercury levels were too high in emissions from sewage-sludge incinerators, Suez began working on the installation of a Mercury Removal System. After installation, a leak occurred in a component known as the heat exchanger. The leak caused the system to shut down and weeks-long repairs began. 

    The underlying complaint alleged that the day after the system shut down for repairs, Suez and its subcontractor left and did not instruct High Point on how the system should be monitored during the shutdown. The shutdown caused an increase of the carbon monoxide levels. High Point contacted Suez who instructed the plant to open an outlet damper to evacuate the heat. This action caused temperatures to increase, however. A fire ignited, and the burning carbon created high concentrations of toxic sulphur-dioxide gas. It was alleged that fire created health and safety hazards at the treatment plant and surrounding area. The fire was finally extinguished almost a month after the shutdown by dumping the carbon out of the unit. 

    According to the City, Suez did nothing to repair the unit for months. When attempts to repair were made, they were fruitless. Another fire occurred during the planned start-up, causing extensive damage to the system. 

    High Point sued for breach of contract, breach of warranties, negligence, negligent misrepresentation, fraud, and unfair and deceptive trade practices.  

    When a defense was denied, Suez sued Chubb and Liberty for a declaratory judgment. The Chubb policy was a Contractors Pollution Liability and Errors & Omission Policy that ran from July 24, 2016 to July 24, 2017. Liberty issued a CGL policy with a policy period from March 1, 2016 to March 1, 2017. Suez moved for partial judgment on the pleadings.

    Chubb relied upon a Products Liability Exclusion to deny coverage. The exclusion barred coverage for any suit against Suez "arising out of or related to" "[a]ny goods, products or equipment designed, manufactured, sold, supplied or distributed by [Suez]." The underlying complaint alleged that Suez supplied the mercury removal system that caused the loss and that Suez served as a sales force and distributor. Other underlying allegations, however, related to professional services rendered at the facility, therefore falling outside the scope of the Products Liability Exclusion and triggering a duty to defend. There was a question of fact with respect to whether the damages arose entirely from the "design, manufacture, sale, supply or distribution" of the mercury removal system by Suez, or if other actions taken by Suez - such as a failure to train or supervise - also gave rise to the damage at the High Point facility. Therefore, the Products Liability Exclusion did not, at this stage, preclude coverage as a matter of law. 

    Numerous issues of fact meant that Liberty also had a duty to defend. Liberty argued there was no occurrence because the damage arose from faulty workmanship. But Liberty read the underlying complaint too narrowly. The complaint alleged damage beyond the property Suez supplied, caused by an accident or repeated exposure to conditions. For example, the underlying complaint alleged that the fire damaged other components of the system.

    The business risk exclusions in Liberty's policy also did not bar coverage because issues of fact were present. Further, although the underlying complaint alleged "design and oversight responsibilities" were breached, the Professional Liability Exclusion did not bar coverage because the underlying complaint did not allege that the property damaged arose solely out of a failure to render professional services. 

    Therefore, the court granted Suez's motion against both Chubb and Liberty, granting declaratory relief with respect to the duty to defend. 

No Duty to Defend Faulty Workmanship Under Hawaii Law, but All is not Lost for Insured Contractor

    The federal district court found no duty to defend claims of faulty workmanship under certain policies issued to the insured contractor, but rejected arguments made by the Insurers regarding various provisions of the general liability and excess policies. St. Paul Fire & Marine Ins. Co. v. Bodell Consr. Co., 2022 U.S. Dist. LEXZIS 79379 (D. Haw. May 2, 2022). (Note- our office represents the insured contractor).

    In 2003, Bodell was hired by developer Sunstone Realty Partners L LLC to be the general contractor for construction work on a condominium project, "Ali`i Cove." The project consisted of approximately 37 buildings and one recreation center that were constructed over the course of four years. On August 14, 2015, the AOAO of Ali`i Cove sued Sunstone, alleging that Sunstone developed, built, and sold condominium nits using embedded straps that did not meet building codes, instead of bolting house frames to their foundations. The AOAO filed a second amended complaint alleging numerous additional defects which were referenced in an expert report. These included additional alleged construction defects such as site conditions, structural issues, building envelope, roofing, general architecture, mechanical, plumbing and electrical. In all, the report purported to find approximately 281 instances of faulty workmanship.

    Sunstone then filed a third-party complaint against various entities, including Bodell. Sunstone alleged that Bodell oversaw the construction of the project, including he installation of the embedded straps in all units of the project. 

    Sunstone tendered the defense of the underlying litigation to the Insurers, St. Paul, Phoenix and Travelers Indemnity, as an additional insured under policies issued to Bodell. The Insurers agreed to defend under a reservation of rights. Bodell also tendered the underlying litigation to the Insurers. Two of Bodell's insurers, Phoenix and Travelers Indemnity, agreed to defend Bodell under a reservation of rights.

    The underlying litigation was stayed so that two arbitrations could proceed. The first arbitration between the AOAO and Sunstone was resolved in a settlement. Sunstone and its insurer, Steadfast Insurance Company, funded the settlement. In the second arbitration between Sunstone and Bodell, the arbitrator found in favor of Sunstone. In drafting her award, the arbitrator relied upon an expert report authored by Sunstone's expert, Trinity ("Trinity Report"), which addressed the 281 instances of alleged defects. The Trinity Report was used as a framework for identifying alleged defects, but did not differentiate between work done by subcontractors versus work done by Bodell. The arbitration award listed numerous defects for which Bodell was responsible or partly responsible. Some of the alleged defects involved work done by subcontractors, but again, the arbitration award did not identify such work. 

    Bodell's coverage included general liability and excess policies issued from 2003 to 2016. The court broke the various policies into two sets, the "First Policies" being policies issued before  September 2012, and the "Second Policies" issued after September 2012. 

    The Insurers sued for a declaratory judgment that they had no duty to defend or indemnify either Bodell or Sunstone. The Insurers filed two motions for summary judgment, the first seeking a ruling that there was no duty to defend under the First Policies and the second motion seeking a determination on the interpretation of various provisions in the First and Second Policies.

    The court granted the Insurers first motion, finding that under Hawaii law, faulty workmanship does not constitute an occurrence, and there was no duty to defend. The insureds argued that under Hawaii law, a building code violation was considered a negligent and therefore a tort. Consequently there was an occurrence. Further, Bodell and Sunstone argued that the Insurers had made partial payment to Sunstone, thereby conceding coverage under the First Policies. The court found that the Insurers carried their burden of showing an absence of genuine material fact with respect to the lack of coverage under the First Policies and were entitled to summary judgment on the first motion.

    Turning to the Insurers' second motion, the Second Policies contained an amended definition of occurrence. The first portion of the amended definition of occurrence was the same as used in the First Policies. Therefore, the court granted summary judgment as to this portion of the Occurrence Amendment because it provided no coverage under the Second Policies.

    The Occurrence Amendment went on, however, to further define "occurrence" as "[a]n act or omission, including all related acts or omissions, that causes 'subcontracted work property damage.'" The Occurrence Amendment also defined "subcontracted work property damage" as ""property damage" that "[i]s neither expected nor intended from the stand point of the insured" and "[i]s to 'your work' arising out of it or any part of it . .  if the damaged work out of which the damage arises was performed on your behalf by a subcontractor." The Insurers argued this definition only provided coverage for property damage caused by subcontractors, not work self-performed by Bodell. The court disagreed. The phrase "act or omission" was unencumbered by any of the limiting language that the Insurers appeared to believe should exist in order for the definition to not include work self-performed by Bodell. A plain and ordinary reading of the words "[an] act or omission" could include an act or omission committed by or at the direction of Bodell that then caused subcontractor work property damage. Therefore, the Insurers' argument that "occurrence" as defined under the Occurrence Amendment could not include work self-performed by Bodell was rejected.

    The court next turned to the "Non-Cumulation Amendment," which the Insurers argued meant that if the same occurrence caused property damage in multiple policy years, the amount of money paid with respect to such a occurrence was limited by what was paid under prior policies. The court agreed that if property damage over multiple policy periods involved just one occurrence, the amount paid would be reduced by the amount of each payment made under prior policies because of the same occurrence. 

    The Insurers next argued that the underlying litigation involved a single occurrence because the damages at issued arose from a single project, at a single site, pursuant to Bodell's single construction agreement. The court could not agree, however that the myriad of alleged deficiencies in the project's construction constituted but one occurrence. It was alleged in the underlying litigation that there may be up to 281 alleged defects, including deficiencies as varied as biological growth, improper window installations and shower assemblies, cracked concrete, downspout inversions, and loose guardrails. A layperson with reasonable expectations would not construe "one occurrence" to mean 281 alleged defects in the construction of a condominium project and even more so when these alleged defects did not involve the same deficiency or field. 

    Therefore, the Insurers' second motion was granted in part and denied in part. 

Subsidence Exclusion Bars Coverage for Damage Caused by Landslide

    The Ninth Circuit affirmed the district court's order granting summary judgment to the insurer who denied coverage based upon the policy's subsidence exclusion. Atain Spec. Ins. Co. v. JKT Associates, 2022 U.S. App. LEXIS 6351 (9th Cir. March 11, 2022). 

    JKT was hired by Lora Eichner Blanusa in 2011 to perform landscape and hardscape work at her house. After selling the house to Richard Meese, a catastrophic landslide occurred in 2019. Portions of the rear of the property slid downhill by 15 feet. Meese sued JKG and others. The owner of an adjacent property, Kristi Synek, filed a separate action against JKT and others. JKT tendered both suits to Atain, who defended under a reservation of rights.

    Atain filed a coverage action in federal district court regarding both underlying suits. The district court granted summary judgment to Atain, ruling there was no duty to defend or to indemnify.

    The Ninth Circuit affirmed. The subsidence exclusion read:

This insurance does not apply and there shall be no duty to defend or indemnify any insured for any "occurrence", "suit", liability, claim, demand or cause of action arising, in whole or part, out of any "earth movement." This exclusion applies whether or not the "earth movement" arises out of any operations by or on behalf of any insured.

    Because a landslide was an "earth movement," the terms of the exclusion barred any coverage for any claim "arising, in whole or pert," from the landslide or from any "settling" or "slipping" that preceded the landslide, and did so regardless of the case of the landslide.

    The Meese complaint did not allege any facts or claims concerning injuries that occurred independent of the occurrence of the landslide and the earth movement that preceded it. Nothing in the underlying complaint suggested that Meese suffered any relevant injuries that were independent of the landslide. Because all injuries connected to the Meese complaint "aris[e] in whole or part, out of . . . 'earth movement,'" there was no possibility of coverage. 

    The same conclusion was reached as to the Synek complaint. JKT could not point to any allegation in the complaint that sought compensable damage flowing from the alleged encroachment apart from its subsequent contribution to the landslide,.

 

Construction Defect Claims Not Covered

    The court found that the insured's negligent acts causing damage to only the structure of the home it built were not covered under the CGL policy. Westfield Ins. Co. v. Zaremba Builders II LLC, 2022 U.S. Dist. LEXIS 36189 (N.D. Ill. March 2, 2022).

    Zaremba contracted to build a house for the Vrdolyak Trust. After completion of the home, the occupants found many problems, including painting defects such as bubbling and peeling, leaving the basement full of water for months, causing damage to ductwork, framing and piping in the house, etc. The Trust sued and Westfield denied a defense.

    Westfield filed a declaratory judgment action for a ruling that it had no duty to defend or indemnify. On Westfield's motion for summary judgment, the court determined there was no property damage. Property damage included "physical injury to tangible property." When the alleged damage occurred in the course of a construction project, tangible property had to be property outside the scope of the contract for project. 

    Zaremba's construction project encompassed the entire home. The underlying complaint alleged only damage to the structure itself, or damage that fell within the scope of Zaremba's contract. All the alleged damage constituted damage to the very house Zaremba was contracted to build. Therefore, it did not quality as "property damage" under the policy.

    Zaremba argued he purchased Products-Completed Operations coverage. But purchase of the coverage did not mean that, once the project is complete, any damage to the project itself was covered. While the Products-Completed Operations provision extended the grant of coverage in the insuring agreement to completed products or operations, it remained limited by the terms of that grant of coverage. Here, the insuring agreement required that an "occurrence" result in "property damage' to trigger coverage. There was no property damage here when the underlying complaint alleged only construction defects causing damage within the scope of the contracted-for project. 

    Therefore, summary judgment was granted to Westfield. 

Burden to Prove Exception to Exclusion Falls on Insured

    In a dispute between two insurers, the Ninth Circuit relied upon Nevada law in finding that the burden of proving that an exception to the exclusion applies was on the insured. Zurich Am. Ins. Co. v. Ironshore Specialty Ins. Co., 2022 U.S. App. LEXIS 1626 (9th Cir. Jan. 20, 2022). 

    Ironshore insured seven subcontractors. The policy included an exclusion providing there was no coverage for any property damage for the subcontractors' for "work performed prior to the policy inception." An exception to the exclusion provided that the exclusion did not apply to property damage that was "sudden and accidental and takes place within the policy period."

    The seven subcontractors were sued for work they had performed. Zurich defended and indemnified the subcontractors. Zurich then sued Ironshore seeking contribution and indemnification for defense and settlement costs. The parties stipulated that all construction work at issue had been completed before the inception of Ironshore's policy and that none of the complaints against the subcontractors alleged that sudden and accidental damage had occurred after the inception of Ironshore's policy. 

    After a bench trial, the district court ruled in favor of Zurich on the ground that Ironshore failed to carry its burden of showing the that the exception to the exclusion was not applicable. Ironshore appealed. 

    The Ninth Circuit found that the district court erred in holding that Zurich was entitled to judgment because Ironshore failed to meet its burden of proving that the exception to the exclusion was not applicable. The Nevada Supreme Court had held that (1) the burden of proving the applicability of an exception to an exclusion for coverage fell on the insured, and (2) the insured "may rely on any extrinsic evidence that was available to the insurer at the time the insured tendered the defense."

    Therefore, the burden of proving that the exception to the exclusion for coverage was applicable fell on Zurich. The judgment issued by the District Court was reversed.

 

Prior Occurrence Exclusion Bars Coverage for Construction Defects

       While the insured's faulty work constituted an occurrence under Florida law, a prior occurrence exclusion barred coverage. Pro-Tech Caulking & Waterproofing v. TIG Ins. Co., 2022 U.S. Dist. LEXIS 12319 (S.D. Fla. Jan. 19, 2022).

    Pro-Tech was a waterproofing subcontractor for construction of a oceanfront condominium building and was responsible for the installation of waterproofing systems on the Project. Pro-Tech entered into a separate contract with the developer, BRE Point Parcel, LLC to install a traffic coating on the garage floors.

    BRE sued the general contractor, Pro-Tech and others for construction defects. The underlying action alleged that Pro-Tech, among other things, failed to wrap the filter fabric to protect the weep holes, improperly installed sealants between the stucco and the underside of the horizontal tile at the balcony slab edge, and failed to properly install traffic coating in one garage. The underlying complaint did not state exactly when the "property damage" resulting from Pro-Tech's alleged defective work occurred.

    Pro-Tech tendered under its CGL policy to TIG. The policy excluded prior occurrences and pre-existing damage. The policy stated, in part, "It is agreed that this insurance does not apply to any 'occurrence' of incident, claim or 'suit' which first occurred prior to the inception date of this policy . . ." The tender was denied. Pro-Tech sued TIG. TIG moved for summary judgment,

    The court concluded that TIG was entitled to summary judgment. Coverage did not apply because the relevant "occurrences" were in the process of occurring at the inception of the policy period. Pro-Tech's alleged defective work was fully performed prior to the start of the policy period. Accordingly, TIG did not have a duty to defend and summary judgment in TIG's favor was warranted. 

    

    

Michigan Court of Appeals Remands Construction Defect Case

    After its prior decision holding there was no coverage for faulty workmanship was remanded by the Michigan Supreme Court, the Court of Appeals remanded to the trial court. Skanska United States Bldg. v. M.A.P. Mech. Contrs., 2021 Mich. App. LEXIS 7336 (Mich. Ct. App. Dec. 28, 2021). The post summarizing the Supreme Court decision is here.

    Skanska USA Building was the construction manager on a renovation project at a medical center. Skanska subcontracted the heating and cooling portion of the project to defendant M.A.P. MAP held a CGL policy from Amerisure. Skanska and the medical center were named as additional insureds. 

    MAP installed a steam boiler and related piping for the heating system. When completed, the heating system did not function properly. MAP installed some of the expansion joints backwards, causing damage to concrete, steel, and the heating system. 

    MAP notified Amerisure. After making repairs, Skanska also submitted a claim to Amerisure. The claims were denied. Skanska filed suit against MAP and Amerisure. The trial court denied Amerisure's motion for summary judgment. All parties agreed that the damage was caused by an unforeseen accident. There were material issues of fact as to whether there was an occurrence. 

    The Court of Appeals reversed, holding that an occurrence could not include damages for the insured's own faulty workmanship. There was no genuine issue of material fact that plaintiff sought coverage for replacement of its own work product. The Supreme Court then reversed the Court of Appeals decision, holding that "an 'accident' may include unintentionally faulty subcontractor work that damages an insured's work product."

    Now, on remand, the Court of Appeals remanded to the trial court in light of the Supreme Court's decision. Amerisure urged the court to follow the majority approach and hold that, while faulty subcontractor work that damages an insured contractor's work product may be an accident, an insured's own faulty workmanship that damages only its own work product, requiring the product to be repaired or replaced, is not. The issue, however, was not presented previously to the trial court.

    The trial court was directed to determine whether an occurrence took place and, if so, the scope of coverage in light of the Supreme Court's decision.  

    

Insurer Has Duty to Defend Sexual Abuse of Minor Claims

    The court granted summary judgment to the school district, finding the insured was entitled to a defense against sexual abuse claims alleged against its employee. West Bend Mut. Ins. Co. v. Cmty. Unit Sch. Dist. 300, 2021 Ill. App LEXIS 622 (Ill. App. Ct. Nov. 12, 2021).

    The School District rented space to the Bays & Girls Clubs for after school programs. As part of the agreement, the District was named as an additional insured under the Club's CGL policy with West Bend.

    In 2018 and 2019, the District and Club were named as defendants in several complaints filed by unnamed minors. The complaints alleged the minors were abused by the Club's instructor, Carlos Bedoya. The complaints alleged claims for willful and wanton hiring and retention of Bedoya (Count I) and wilful and wanton supervision of Bedoya (Count V). Each count also alleged that the District "knew or should have known" of the potential abuse.

    The complaints were tendered to West Bend, who defended under a reservation of rights. West Bend then sued for a declaratory judgment that it had no duty to defend or to indemnify. The parties cross-moved for summary judgment.

    West Bend argued there was no occurrence and that the policy's physical abuse and sexual molestation liability endorsement barred coverage. The endorsement provided, in part:

We will pay those sums the insured becomes legally obligated to pay as damages because of "physical abuse," "mental injury" or "sexual molestation" arising out of the negligent:

. . .

    (c) supervision;

. . .

    (e) or retention of any person for whom the insured is legally responsible.

    The District argued that the willful and wanton theories raised against it did not defeat West Bend's duty to defend, because willful and wanton conduct is a form of negligence. The trial court granted the District's Motion and denied West Bend's Motion. The trial court found that willful and wanton conduct was "a heightened form" of negligent conduct.

    On appeal, the District argued that the underlying complaints alleged that the District had a duty to exercise reasonable care and acted willfully and wantonly in the hiring, retention, and supervision of Bedoya. The complaints also alleged the District "knew or should have known" of the potential abuse. Thus, the underlying complaints alleged a negligence standard of care.

    Comparing the allegations of the underlying complaints with the West Bend policy, the court of appeals found that the alleged facts potentially fell within the policy's coverage for certain negligent acts. Therefore, the trial court correctly awarded summary judgment on the issue of whether the underlying complaints willful and wanton allegations triggered a duty to defend. The allegations potentially alleged ordinary negligence. It was possible that, ultimately, the underlying plaintiffs could prove the elements of an ordinary negligence claim but be unable to establish the heightened mental state required to show willful and wanton misconduct/gross negligence. In such a case, the allegations would fall within the policy's coverage for certain negligent acts.

 

 

Contractor Entitled to Continued Defense Against Allegations of Faulty Construction

    The U.S. District Court found that the contractor was entitled to a defense in the underlying state court action. Pa. Nat'l Mut. Cas. Ins. Co. v. Zonko Builders, 2021 U.S. Dist. LEXIS 168855 (D. Del. Sept. 7, 2021).

    Zonko was the general contractor for building the Salt Meadows Townhomes Condominium. This included supervising subcontractors in the installation of siding, house wrap, and flashing in five buildings between 2005 and 2007. In 2016, Salt Meadows and its individual members ("Association") found property damage in the condominiums.

    The Association sued Zonko in state court, alleged that resulting damages included drywall damage in ceilings or walls, flooring and carpet, water damage around window trim, rot on window frames, incorrect flashing around roofs and windows, possible ridge vent leaks, and possible foundation issues. 

    Zonko tendered to Penn National, who agreed to defend. Penn National then filed this suit and a motion for judgment on the pleadings, hoping to no longer have to pay defense costs. 

    The court first determined an occurrence was alleged in the underlying case. The policy's Subcontractor Exception confirmed that Penn National would provide coverage for the faulty workmanship of subcontractors.  The endorsement provided coverage for "property damage" to "your work" if such "'property damage' is the result of work performed on your behalf by a subcontractor that is not a Named Insured." The underlying lawsuit alleged that subcontractors performed defective work causing property damage, which constituted an occurrence.

    Further, none of the exclusions raised by Penn National applied. The "your product" exclusion was not applicable because it "your product" was defined as "goods or products, other than real property." The underlying complaint concerned property damage to real property, not damage to Zonko's products or equipment.

    The "contractual liability" exclusion did not bar coverage because the underlying action also plead negligent construction and respondeat superior theories. The court similarly found that the exclusions for "damage to impaired property," "recall of products," and "fungi or bacteria" were not applicable. 

    Therefore, Penn National's motion for judgment on the pleadings was denied.

"Your Product" Exclusion Bars Coverage

    The insurer's motion for summary judgment was granted based upon the "your product" exclusion. Lacaze Land Dev. v. Deere & Co., 2021 U,S. Dist LEXIS 162175 (W.D. La. Aug 26, 2021).

    Lacaze filed suit against John Deere, the supplier of a compact loader, skid steer and mulching head, W.L. Doggett L.L.C., and Doggett's insurer, Amerisure. Lacaze alleged the loader-mulched combination was defective because the loader overheated when used in combination with the mulching head. Lacaze sought damages for loss of purchase price, finance charges, insurance premiums, maintenance and repair costs, and economic loss limited to the loss of use of the loader. Lacaze did not claim consequential damages to or loss of use of any other property. 

    Amerisure moved to dismiss the claims filed against it arguing that there was no occurrence and, if there was, the "your product" exclusion applied. 

    The court first determined there was an occurrence. Lacaze's claim was for an unforeseen and unexpected loss to the loader caused by a defect in the loader-mulching head combination. 

    However, the policy excluded "'property damage' to 'your product' arising out of it or any part of it." Here, "your product' referred to the loader and mulching head as goods "sold, handled distributed or disposed of by" Doggett. Louisiana courts consistently held that this exclusion eliminated coverage for the cost of repairing or replacing the insured's own defective work or defective product. Lacaze's loss of use claim pertained to property that was clearly sold or distributed by the insured. Because Lacaze failed to claim a loss of use of property other than that provided to him by Doggett, the claim against Amerisure was preclude by the "'property damage' to 'your product' arising out fit or any part of it." exclusion. Summary judgment was granted to Amerisure.