GROUP BUILDERS UPDATE - PowerPoint Presentation

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GROUP BUILDERS UPDATE

HSBA Section of Litigation - May 21, 2013Tred R. EyerlyDamon Key Leong Kupchak Hastert(808) 526-3625te@hawaiilawyer.comBlog: www.insurancelawhawaii196487

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GROUP BUILDERS UPDATE

DISPUTE OVER INSURANCE COVERAGE FOR CONSTRUCTION DEFECTS2Slide3

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Background 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 applies. This insurance applies to “property damage” only if the “property damage” is

caused by an “occurrence”

and the “property damage” occurs during the policy period.Slide4

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“Property Damage” – (a) Physical injury to tangible property, including all resulting loss of use of that property; or(b) Loss of use of tangible property that is not physically injuredSlide5

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“Occurrence” – an accident, including continuous or repeated exposure to substantially the same general harmful conditions.Slide6

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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.Slide7

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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 subcontractor.Slide8

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Duty to DefendDuty to IndemnifySlide9

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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 evidence.Slide10

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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 case.Slide11

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Nationwide Debate over Coverage for Construction Defects:Does “property damage” caused by faulty workmanship arise from an “occurrence”, i.e., accident?”Slide12

One

View:No Coverage for Construction Defects.12Slide13

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)

Recent Case

:

Zurich Am. Ins. Co. v. R. M. Shoemaker Co.

, 2013 U.S. App. LEXIS 6093 (3d Cir. 3/25/13) (Pennsylvania law)

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Another view: Construction Defects CoveredSlide15

Another view

Property damage based upon faulty workmanship 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. Family Mut. Ins. Co

., 2013 N.D. LEXIS 61 (N.D. 4/5/13)

Once “occurrence” is established, turn to Business Risk exclusions.

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Hawaii Case Law Prior to

Group Builders.16Slide17

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.

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Group

Builders I relies on Burlingtonfor guidance on Hawaii law.

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Burlington

looks to

upon federal district court cases holding, in non-construction cases, that

an expected result of insured’s intentional acts in performing a contract does not give rise to an

“

occurrence:”

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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. Haw. 1999)

CIM Ins. Corp. v. Midpac Auto Ctr., Inc

.

, 108 F. Supp. 2d 1092 (D. Haw. 2000)Slide20

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.

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Hawaii Supreme Court cases ignored by

Burlington 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)

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Sturla

– Risks insured by policy are “injury caused by a faulty product or workmanship.” Id., 67 Haw. at 210.

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Hurtig

–Business risk exclusions do not bar coverage. Before reaching business risk exclusions, must first find there was an occurrence.

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Sentinel

– Court found defense owed where construction defects alleged. Even though breach of contract and breach of warranty claims alleged, Court found coverage.

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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 was issued.”

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Issue: What was the meaning of “occurrence” when policy issued?Slide27

Reaction of

U.S. District Court (Hawaii) to Act 83.27Slide28

State

Farm v. Vogelgesang, 2011 U.S. Dist. Ct. LEXIS 72618 (D. Haw. 2011). Insureds made no effort to demonstrate what the state of the law was when policy entered

.

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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

.

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Evanston Ins. Co. v. Nagano

, 2012 WL 3800320 (D. Haw. Aug. 31, 2012) Judge Kobayashi largely follows Judge Mollway in Nordic PCL.Actions of contractor arise from contract and are not occurrences.30Slide31

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 terms.”31Slide32

Several construction defect cases pending in

Hawaii Circuit Courts.32Slide33

Judges Chang, Border, and Sakamoto questioned the viability of

Group Builders in light of Act 83. 33Slide34

Three Circuit Court Cases:

Nat. Union Fire Ins. Co. of Pittsburgh, PA v. Sunset Heights Hawaii, LLC, Civil No. 10-1-2184-10Coastal Constr. Co. v. N. Am. Specialty, Civil No. 11-1-0417-3The Pinnacle Honolulu, LLC v. Am. Int’l Specialty Lines Ins. Co., Civil No. 12-1-052634Slide35

Judge Chang specifically agreed that the state of the law when the policy was issued was as stated in

Sentinel, Sturla, and Hurtig.35Slide36

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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 complaint.Slide37

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Admiral refused to defend because construction completed after its policy period.Trial Court found duty to defend.Slide38

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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 policy. Slide39

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Admiral relied on expert testimony – mold growth commenced after Admiral’s policy period.Slide40

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But Hilton’s complaint did not specify when mold growth began, when any property damage occurred, or what caused the mold to grow. ICA assumes property damage occurred during Admiral’s policy period. Slide41

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Next Issue:Were damages caused by defective workmanship an “occurrence” in 2003 during Admiral’s policy period?Slide42

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Admiral owed a defense – courts were split on whether construction defect claims constituted an “occurrence.” But what about Sentinel, Sturla and Hurtig?Slide43

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Admiral argues Business Risk Exclusions apply:(j) (5) – excludes coverage for damages to that particular property resulting from or arising out of the ongoing operations of the insured.Slide44

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But Hilton’s complaint does not specify which installation was defective, nor which parts of the construction project were damaged.Possibility existed that the exclusions would not preclude coverage for all of Hilton’s claims against Group Builders.Therefore, Admiral had a duty to defend.Slide45

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Summary: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 casesWhat now?Slide46

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Rule 15, Rules of Appellate Procedure – Reserved Questions.Slide47

MAHALO

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Thank You

Tred R. EyerlyDamon Key Leong Kupchak Hastert1600 Pauahi Tower1003 Bishop StreetHonolulu, Hawaii 96813(808) 526-3625te@hawaiilawyer.comBlog: www.insurancelawhawaii

#196487

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