CONSTRUCTION DEFECT UPDATE - Insurance Coverage Litigation Section - September 27, 2013 - Tred R. Eyerly
CONSTRUCTION DEFECT UPDATE
Insurance Coverage Litigation Section
September 27, 2013
Tred R. Eyerly
Damon Key Leong Kupchak Hastert
DISPUTE OVER INSURANCE COVERAGE
FOR CONSTRUCTION DEFECTS
Insuring Agreement – We will pay those
sums that the insured becomes legally
obligated to pay as damages because of . . .
“property damage” to which this insurance
This insurance applies to “property
damage” only if the “property damage” is
caused by an “occurrence” and the
“property damage” occurs during the
“Property Damage” –
(a) Physical injury to tangible property,
including all resulting loss of use of that
(b) Loss of use of tangible property that is
not physically injured.
“Occurrence” – an accident, including
continuous or repeated exposure to
substantially the same general harmful
Business Risk Exclusions:
(j) (6) This insurance does not apply to that
particular part of any property that
must be restored, repaired or replaced
because “your work” was incorrectly
performed on it.
Business Risk Exclusions:
(l) This insurance does not apply to “property
damage” to “your work” arising out of it or any
part of it . . .
This exclusion does not apply if the damaged
work or the work out of which the damage
arises was performed on your behalf by a
Duty to Defend
Determined by the allegations in the
complaint against the insured - is there any
possibility of coverage under the policy?
Complaint Allegation Rule.
Duty to Defend determined at the time of
tender. Insurer cannot rely upon extrinsic
Duty to Indemnify
After the facts are established, must the
insurer pay claims under the policy?
Insurer can rely on extrinsic evidence,
i.e., facts established in the underlying
Nationwide Debate over Coverage for
Does “property damage” caused by faulty
workmanship arise from an “occurrence”, i.e.,
No Coverage for Construction Defects.
Construction Defects do Not Arise from
Occurrence, but from:
(1) expected or intended result; or
(2) breach of contract.
No Occurrence = No Coverage
• Leading Case: Weedo v. Stone-E-Brick, Inc.,
405 A.2d 788 (N.J. 1979)
· Peeling, cracking of stucco wall -
· Harm caused to neighbor -
Recent Case: Zurich Am. Ins. Co. v. R. M.
Shoemaker Co., 2013 U.S. App. LEXIS
6093 (3d Cir. 3/25/13) (Pennsylvania
Property damage based upon faulty
workmanship arises from an “occurrence”
Am. Family Mutual Ins. Co. v. Am. Girl, Inc.,
673 N.W. 2d 65 (Wis. 2004).
Am. Girl, Inc.
∙ Sinking, buckling of warehouse was
physical injury to tangible property.
· Faulty site preparation on advice of soil
engineer was accidental, not intentional.
But, once “occurrence” is established, turn to
Business Risk exclusions.
Several Recent Cases
Big-D Constr. Corp. v. Take It for Granite Too,
917 F. Supp. 2d 1096 (D. Nev. 1/22/13)
(Federal Court Prediction)
Cincinnati Ins. Co. v. AMSCO Windows, 2013
921 F. Supp. 2d 1226 (D. Utah 2/5/13)
(Federal Court Prediction)
K&L Homes, Inc. v. Am. Family Mut. Ins. Co.,
829 N.W. 2d 724 (N.D. 4/5/13)
More Recent Cases Finding Occurrence:
Capstone Bldg. Corp. v. Am. Motorists Ins.
Co., 67 A. 3d 961(Conn. 6/11/13)
Cherrington v. Erie Ins. Prop. & Cas. Co.,
745 S.E. 2d 508 (W.V. 6/18/13)
Taylor Morrison Serv. v. HDI-Gerling Am Ins.
Co., 2013 Ga. LEXIS 618 (Ga. 7/12/13)
Cherrington v. Erie Ins. Prop. & Cas. Co., 745
S.E. 2d 508 (W.V. 6/18/13)
· Coverage denied to contractor for
faulty construction of home.
· Reversing itself, Court finds defective
workmanship causing property damage
is an “occurrence.”
Hawaii Case Law Prior to Group Builders.
Group Builders, Inc. v. Admiral Ins. Co.,
123 Haw. 142, 231 P.3d 67 (Haw. Ct.
o Group Builders relies primarily on
Burlington Ins. Co. v. Oceanic Design &
Constr. Inc., 353 F.3d 940 (9th Cir. 2004).
Burlington predicts how Hawaii
Supreme Court would rule.
o Group Builders I relies on Burlington
for guidance on Hawaii law.
Burlington looks to federal district court, non-
construction cases, holding that an expected
result of insured’s intentional acts in
performing a contract does not give rise to an
WDC Venture v. Hartford Accident & Indem. Co., 938
F. Supp. 671 (D. Haw. 1996)
CIM Ins. Corp. v. Masamitsu, 74 F. Supp. 2d 975 (D.
CIM Ins. Corp. v. Midpac Auto Ctr., Inc., 108 F. Supp.
2d 1092 (D. Haw. 2000)
Burlington also relies on Hawaiian Holiday
Macadamia Nut Co. v. Indus. Indem. Co. 76
Haw. 166 (1994) -
Breach of contract case – intentional
destruction of seedlings not accidental.
o Hawaii Supreme Court cases ignored by
Burlington and Group Builders:
Sturla v. Fireman’s Fund, 67 Haw. 203
Hurtig v. Terminex Wood Treating &
Contracting Co., 67 Haw. 480 (1984)
Sentinel Ins. Co. v. First Ins. Co. of Hawaii,
Ltd., 76 Haw. 277 (1994)
o Sturla – Risks insured by policy
are “injury caused by a faulty
product or workmanship.” Id.,
67 Haw. at 210.
o Hurtig –Business risk exclusions do
not bar coverage.
Before reaching business risk
exclusions, must first find there was
o Sentinel – Court found defense owed
where construction defects alleged.
Even though breach of contract and
breach of warranty claims alleged,
Court found coverage.
• In response to Group Builders,
legislature enacts Act 83 (codified at
Haw. Rev. Stat. 431:1-217)
“The meaning of the term
‘occurrence’ shall be construed in
accordance with the law as it existed
at the time that the insurance policy
What was the meaning of “occurrence”
when policy issued?
Reaction of U.S. District Court (Hawaii) to
• State Farm v. Vogelgesang, 2011
U.S. Dist. Ct. LEXIS 72618 (D. Haw.
Insureds made no effort to
demonstrate what the state of the
law was when policy entered.
• Illinois Nat’l Ins. Co. v. Nordic PCL Constr., 2012 U.S.
Dist. LEXIS 58464 (D. Haw. 2012).
Judge Mollway felt compelled to follow Burlington.
Court also assumed Burlington and Group Builders
must have taken Sturla, Hurtig, and Sentinel into
account – even though this trilogy of cases is never
mentioned in either Burlington and Group Builders.
Evanston Ins. Co. v. Nagano, 2012
WL 3800320 (D. Haw. Aug. 31,
Judge Kobayashi largely follows
Judge Mollway in Nordic PCL.
Actions of contractor arise from
contract and are not occurrences.
• Nautilus Ins. Co. v. 3 Builders, Inc., 2013 U.S.
Dist. LEXIS 88480 (D. Haw. 6/24/13)
Policy issued before Burlington.
Judge Kobayashi finds meaning of “occurrence”
controlled by Burlington – Suit for breach of
contract after building sub-standard home was
• Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v.
Simpson Mfg. Co., 2011 U.S. Dist. LEXIS
128481 (D. Haw. 2011)
Judge Kay – “Hawaii legislature has specifically
denounced Group Builders in very strong
• Some Hawaii Circuit Courts have
different interpretation of Group
Builders and Act 83.
o Judges Chang, Border, and
Sakamoto questioned the viability
of Group Builders in light of Act 83.
Three Circuit Court Cases:
• Nat. Union Fire Ins. Co. of Pittsburgh, PA v.
Sunset Heights Hawaii, LLC, Civil No. 10-1-
• Coastal Constr. Co. v. N. Am. Specialty, Civil
• The Pinnacle Honolulu, LLC v. Am. Int’l
Specialty Lines Ins. Co., Civil No. 12-1-0526
o Judge Chang specifically agreed that
the state of the law when the policy
was issued was as stated in Sentinel,
Sturla, and Hurtig.
Group Builders, Inc. v. Admiral Ins.
Co., 2013 Haw. App. LEXIS 207 (Haw.
Ct. App. April 15, 2013)
Duty to Defend construction defect
claims based upon policy language
and allegations in underlying
Admiral refused to defend because
construction completed after its policy
Trial Court found duty to defend.
To deny duty to defend, Admiral would
have to prove it would be “impossible”
for Hilton to prevail against Group
Builders on a claim covered by the
Admiral relied on expert testimony –
mold growth commenced after
Admiral’s policy period.
But Hilton’s complaint did not
specify when mold growth began,
when any property damage
occurred, or what caused the mold
ICA assumes property damage
occurred during Admiral’s policy
Were damages caused by defective
workmanship an “occurrence” in 2003
during Admiral’s policy period?
Admiral owed a defense – courts were
split on whether construction defect
claims constituted an “occurrence.”
But what about Sentinel, Sturla and
Admiral argues Business Risk
(j) (5) – excludes coverage for damages
to that particular property resulting
from or arising out of the ongoing
operations of the insured.
But Hilton’s complaint does not specify
which installation was defective, nor
which parts of the construction project
Possibility existed that the exclusions
would not preclude coverage for all of
Hilton’s claims against Group Builders.
Therefore, Admiral had a duty to
In 2010, ICA established no indemnity
coverage for construction defects.
In 2011, legislature enacted Act 83.
In 2013, Group Builders II finds duty to
defend construction defect cases