Group Builders Update - Tred Eyerly, Esq.


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Damon Key attorney Tred Eyerly's powerpoint presentation on the Group Builders issue (insurance coverage for construction defects). Hawaii State Bar Association Litigation Section - May 2013

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Group Builders Update - Tred Eyerly, Esq.

  1. 1. GROUP BUILDERS UPDATEHSBA Section of Litigation - May 21, 2013Tred R. EyerlyDamon Key Leong Kupchak Hastert(808) 526-3625te@hawaiilawyer.comBlog: www.insurancelawhawaii1964871
  3. 3. 3BackgroundInsuring Agreement – We will pay thosesums that the insured becomes legallyobligated to pay as damages because of . . .“property damage” to which this insuranceapplies.This insurance applies to “propertydamage” only if the “property damage” iscaused by an “occurrence” and the“property damage” occurs during thepolicy period.
  4. 4. 4“Property Damage” –(a) Physical injury to tangible property,including all resulting loss of use of thatproperty; or(b) Loss of use of tangible property that isnot physically injured
  5. 5. 5“Occurrence” – an accident, includingcontinuous or repeated exposure tosubstantially the same general harmfulconditions.
  6. 6. 6Business Risk Exclusions:(j) (6) This insurance does not apply to thatparticular part of any property thatmust be restored, repaired or replacedbecause “your work” was incorrectlyperformed on it.
  7. 7. 7Business Risk Exclusions:(l) This insurance does not apply to “propertydamage” to “your work” arising out of it or anypart of it . . .This exclusion does not apply if the damagedwork or the work out of which the damagearises was performed on your behalf by asubcontractor.
  8. 8. 8Duty to DefendDuty to Indemnify
  9. 9. 9Duty to DefendDetermined by the allegations in thecomplaint against the insured - is there anypossibility of coverage under the policy?Complaint Allegation Rule.Duty to Defend determined at the time oftender. Insurer cannot rely upon extrinsicevidence.
  10. 10. 10Duty to IndemnifyAfter the facts are established, must theinsurer pay claims under the policy?Insurer can rely on extrinsic evidence,i.e., facts established in the underlyingcase.
  11. 11. 11Nationwide Debate over Coverage forConstruction Defects:Does “property damage” caused by faultyworkmanship arise from an “occurrence”, i.e.,accident?”
  12. 12. One View:No Coverage for Construction Defects.12
  13. 13. Construction Defects do Not Arise fromOccurrence, but from: (1) expected orintended result; or (2) breach of contract.No Occurrence = No CoverageLeading Case: Weedo v. Stone-E-Brick, Inc.,405 A.2d 788 (N.J. 1979)Recent Case: Zurich Am. Ins. Co. v. R. M.Shoemaker Co., 2013 U.S. App. LEXIS 6093(3d Cir. 3/25/13) (Pennsylvania law)13
  14. 14. 14Another view:Construction Defects Covered
  15. 15. Property damage based upon faultyworkmanship arises from an “occurrence”(i.e., accident).Leading Case: Am. Family Mutual Ins. Co. v.Am. Girl, Inc., 673 N.W. 2d 65 (Wis. 2004).Recent case: K&L Homes, Inc. v. Am. FamilyMut. Ins. Co., 2013 N.D. LEXIS 61 (N.D.4/5/13)Once “occurrence” is established, turn toBusiness Risk exclusions. 15
  16. 16. Hawaii Case Law Prior to Group Builders.16
  17. 17. o Group Builders relies primarily onBurlington Ins. Co. v. Oceanic Design &Constr. Inc., 353 F.3d 940 (9th Cir. 2004)Burlington predicts how HawaiiSupreme Court would rule.17
  18. 18. o Group Builders I relies on Burlingtonfor guidance on Hawaii law.18
  19. 19. Burlington looks to upon federal district courtcases holding, in non-construction cases, thatan expected result of insured’s intentionalacts in performing a contract does not giverise to an “occurrence:”19WDC Venture v. Hartford Accident & Indem. Co., 938F. Supp. 671 (D. Haw. 1996)CIM Ins. Corp. v. Masamitsu, 74 F. Supp. 2d 975 (D.Haw. 1999)CIM Ins. Corp. v. Midpac Auto Ctr., Inc., 108 F. Supp.2d 1092 (D. Haw. 2000)
  20. 20.  Burlington also relies on Hawaiian HolidayMacadamia Nut Co. v. Indus. Indem. Co. 76Haw. 166 (1994) -Breach of contract case – intentionaldestruction of seedlings not accidental.20
  21. 21. o Hawaii Supreme Court cases ignored byBurlington and Group Builders:Sturla v. Fireman’s Fund, 67 Haw. 203(1984)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)21
  22. 22. o Sturla – Risks insured by policyare “injury caused by a faultyproduct or workmanship.” Id.,67 Haw. at 210.22
  23. 23. o Hurtig –Business risk exclusions donot bar coverage.Before reaching business riskexclusions, must first find there wasan occurrence.23
  24. 24. o Sentinel – Court found defense owedwhere construction defects alleged.Even though breach of contract andbreach of warranty claims alleged,Court found coverage.24
  25. 25. • In response to Group Builders,legislature enacts Act 83 (codified atHaw. Rev. Stat. 431:1-217)“The meaning of the term‘occurrence’ shall be construed inaccordance with the law as it existedat the time that the insurance policywas issued.”25
  26. 26. 26Issue:What was the meaning of “occurrence”when policy issued?
  27. 27. Reaction of U.S. District Court (Hawaii) toAct 83.27
  28. 28. • State Farm v. Vogelgesang, 2011U.S. Dist. Ct. LEXIS 72618 (D. Haw.2011).Insureds made no effort todemonstrate what the state of thelaw was when policy entered.28
  29. 29. • 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 Buildersmust have taken Sturla, Hurtig, and Sentinel intoaccount – even though this trilogy of cases is nevermentioned in either Burlington and Group Builders.29
  30. 30. Evanston Ins. Co. v. Nagano, 2012WL 3800320 (D. Haw. Aug. 31,2012)Judge Kobayashi largely followsJudge Mollway in Nordic PCL.Actions of contractor arise fromcontract and are not occurrences.30
  31. 31. • Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v.Simpson Mfg. Co., 2011 U.S. Dist. LEXIS128481 (D. Haw. 2011)Judge Kay – “Hawaii legislature has specificallydenounced Group Builders in very strongterms.”31
  32. 32. • Several construction defect casespending in Hawaii Circuit Courts.32
  33. 33. o Judges Chang, Border, andSakamoto questioned the viabilityof Group Builders in light of Act 83.33
  34. 34. Three Circuit Court Cases:• Nat. Union Fire Ins. Co. of Pittsburgh, PA v.Sunset Heights Hawaii, LLC, Civil No. 10-1-2184-10• Coastal Constr. Co. v. N. Am. Specialty, CivilNo. 11-1-0417-3• The Pinnacle Honolulu, LLC v. Am. Int’lSpecialty Lines Ins. Co., Civil No. 12-1-052634
  35. 35. o Judge Chang specifically agreed thatthe state of the law when the policywas issued was as stated in Sentinel,Sturla, and Hurtig.35
  36. 36. 36Group Builders, Inc. v. Admiral Ins.Co., 2013 Haw. App. LEXIS 207 (Haw.Ct. App. April 15, 2013)Duty to Defend construction defectclaims based upon policy languageand allegations in underlyingcomplaint.
  37. 37. 37Admiral refused to defend becauseconstruction completed after its policyperiod.Trial Court found duty to defend.
  38. 38. 38To deny duty to defend, Admiral wouldhave to prove it would be “impossible”for Hilton to prevail against GroupBuilders on a claim covered by thepolicy.
  39. 39. 39Admiral relied on expert testimony –mold growth commenced afterAdmiral’s policy period.
  40. 40. 40But Hilton’s complaint did notspecify when mold growth began,when any property damageoccurred, or what caused the moldto grow.ICA assumes property damageoccurred during Admiral’s policyperiod.
  41. 41. 41Next Issue:Were damages caused by defectiveworkmanship an “occurrence” in 2003during Admiral’s policy period?
  42. 42. 42Admiral owed a defense – courts weresplit on whether construction defectclaims constituted an “occurrence.”But what about Sentinel, Sturla andHurtig?
  43. 43. 43Admiral argues Business RiskExclusions apply:(j) (5) – excludes coverage for damagesto that particular property resultingfrom or arising out of the ongoingoperations of the insured.
  44. 44. 44But Hilton’s complaint does not specifywhich installation was defective, norwhich parts of the construction projectwere damaged.Possibility existed that the exclusionswould not preclude coverage for all ofHilton’s claims against Group Builders.Therefore, Admiral had a duty todefend.
  45. 45. 45Summary:In 2010, ICA established no indemnitycoverage for construction defects.In 2011, legislature enacted Act 83.In 2013, Group Builders II finds duty todefend construction defect casesWhat now?
  46. 46. 46Rule 15, Rules of Appellate Procedure –Reserved Questions.
  47. 47. MAHALO47
  48. 48. Thank YouTred R. EyerlyDamon Key Leong Kupchak Hastert1600 Pauahi Tower1003 Bishop StreetHonolulu, Hawaii 96813(808) 526-3625te@hawaiilawyer.comBlog: www.insurancelawhawaii#19648748