Insurance Law Hawaii

Insured Gives Timely Notice under Claims-Made Policy

     When the insured, Matkin, an architectural firm, was sued by GEWAC, Inc., shopping center owner, for improper drainage in a parking lot designed by Matkin, Everest, the insurer, refused to defend, contending Matkin had not given timely notice under the claims-made policy.  Matkin-Hoover Engineering, Inc. v. Everest National Ins. Co., No. 08-CV-0451, 2009 U.S. Dist. LEXIS 44057 (W.D. Texas May 26, 2009).  

    Everest issued two policies to Matkin, one with a policy period from April 15, 2005 to April 15, 2006 (2005 policy) and the second from April 15, 2006 to April 15, 2007 (2006 policy).  The policies required a claim first be made and reported within the same policy period.  The policies defined "claim" as a "demand for money or professional services received by the Insured for damages . . . alleging a wrongful act arising out of the performance of professional services."

    Matkin sued and Everest moved for summary judgment on its duty to defend.  The issue focused on a letter Matkin received from GEWAC on March 19, 2006, but not reported to Everest until August 30, 2006.  Matkin argued the letter was not a "claim" because it did not clearly indicate that GEWAC expected Matkin to pay to fix the defects.  Everest argued GEWAC's March 19, 2006 letter was a claim that should have been reported in the 2005 policy period because it: (1) demanded Matkin to perform professional services to repair the drainage problems; and (2) it alleged Matkin committed a "wrongful act" that arose out of the performance of a professional service. 

    The court disagreed.  Considering the circumstances known to the insured, the March 19, 2006 letter could be interpreted not as a demand but as a request for additional engineering services to help correct a construction defect for which Matkin was not responsible.  Because a reasonable person may not have viewed the letter as a demand for professional services for damages, a question of fact existed, precluding summary judgment.

     

No Coverage Where Each Possible Efficient Proximate Cause Excluded

    Coverage under a homeowners' policy was denied by State Farm when corrosion surrounding a nail driven through a pipe caused a leak and extensive water damage many years later.  See Freedman v. State Farm Ins. Co., B202617 (Cal. Ct. App. May 5, 2009)[here].  The policy provided "all-risk" coverage, but excluded loss from: (1) corrosion, electrolysis or rust; and (2) "water damage, meaning continuous or repeated seepage or leakage of water from a plumbing system."  Further, the policy excluded negligent conduct and defective workmanship by third parties whenever they interacted with an excluded peril.

    The insureds argued the contractor's negligence in driving the nail through the pipe was a covered peril and was the efficient proximate cause of the loss.  State Farm contended the identity of the efficient proximate cause of the loss did not matter because each of the possible efficient proximate causes was an excluded peril - corrosion and seepage or leakage of water were excluded, and third-party negligence was excluded whenever it interacted with an excluded peril.  The trial court granted  State Farm's motion for summary judgment.

    The Court of Appeal was influenced by the California Supreme Court's decision in Julian v. Hartford Underwriters Ins. Co., 35 Cal. 4th 747 (2005).  There, the all-risk homeowner's policy excluded: (1) earth movement; and (2) weather conditions whenever they interacted with an excluded peril to cause loss.  When heavy rains caused a landslide, damaging the Julians' home, there was no coverage because the policy excluded each of the efficient possible proximate causes of the loss.  

    A similar analysis applied here.  The third-party negligence provisions of the homeowners' policy excluded third parties' negligent conduct and defective workmanship when they interacted with an excluded peril.  Thus, the policy excluded contractor-negligence-induced corrosion and contractor-negligence-induced continuous or repeated seepage or leakage of water, just as the Julians' policy excluded a rain-induced landslide.

Construction Defects "Expected and Intended" Despite Insured's Claim of Ignorance

    Whether the insured  had sufficient knowledge of a construction defect to justify the insurer's denial of coverage was the issue in Far Northwest Dev. Co., LLC v. Cmty. Ass'n of Underwriters of Am., Inc., Case. No. C-05-2134, 2009 U.S. Dist. LEXIS 34521 (W.D. Wa. April 22, 2009).

    In the underlying case, the Homeowner's Association claimed Mr. Ghoddoussi, the condominium manager, failed to adequately investigate defects during the development of the complex, resulting in significant damage to the condominiums.  Ghoddousi tendered the defense to the insurer.  The tender was denied because the policy excluded coverage for "'property damage' expected or intended from the standpoint of the insured."

    Ghoddousi sued the insurer.  On the insurer's motion for summary judgment, the court determined the loss was "expected or intended" from the standpoint of Ghoddousi, thereby precluding coverage.  Ghoddousi acknowledged he was aware of the many problems that arose during the development.  Nevertheless, Ghoddousi argued he not an intentional wrongdoer.  Further, he was unaware of his fiduciary duties and was inexperienced in the construction industry.  Therefore, he could not have the subjective intent to cause property damage.

    The evidence showed, however, that Ghoddoussi was fully aware of the problems that arose during the development of the condominiums.  His declaration stated, among other things, the general contractor failed to supervise the framing and mistakes were made in installation of siding and framing.  As a result, Ghoddoussi had a thorough understanding of the problems that arose during the development stage, but chose to ignore them.  Therefore, the damage was "expected or intended" from the standpoint of the insured, precluding coverage.

Coverage Denied for Subcontractor's Defective Work

    Coverage for a subcontractor's defective work was the issue presented in Westfield Ins. Co. v. Sheehan Constr. Co., No. 08-3463, 2009 U.S. App. LEXIS 9021 (7th Cir. April 29, 2009). 

    Moisture problems were found in a residential subdivision for which Sheehan was the general contractor.  An investigation determined defective work by one of Sheehan's subcontractors caused the problem.  In the underlying suit, Sheehan settled for $2.8 million and then sought indemnity from Westfield.  The district court found there was no coverage.

    The CGL policy did not cover property damage to a contractor's own work, denoted in the policy as "your work."  Sheehan argued the problem stemmed not from its work but from the subcontractor's work.  Further, the standard CGL form was revised in 1986 to remove subcontractors' work from the definition of "your work." 

    The Seventh Circuit agreed the standard form changed in 1986 by adding the phrase, "[t]his 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."  Sheehan, however, did not purchase a policy with this language.  It bought a policy that lacked the "does not apply to subcontractors' work" language.  Instead, Sheehan's policy defined "your work" to include, "[w]ork or operations performed by you or on your behalf."  Sheehan's premiums presumably reflected the difference in language.

    Thanks once again to my Damon Key colleague and fellow blogger, Robert Thomas (inversecondemnation.com), for sending me this case.

Florida Supreme Court Departs from Burlington Reasoning in Construction Defect Case

     In an earlier post, Robert discussed the impact of the Ninth Circuit’s decision in Burlington Ins. Co. v. Oceanic Design & Constr., 383 F.3d 940 (9th Cir. 2004) on Hawaii insurance law. Robert pointed out in Burlington, the Ninth Circuit predicted that under Hawaii insurance law, the Hawaii Supreme Court would find that claims related to a contract would not trigger coverage unless an independent basis sounding in tort was alleged.  The post pointed out the distinction between the Weedo v. Stone-E-Brick, Inc. line of cases, finding that a construction defect constitutes an “occurrence” only if there is damage to “other property” and the American Family Mut. Ins. Co. v. American Girl, Inc. analysis, holding that damage caused by a soil engineer was “property damage” caused by an “occurrence” as defined by CGL policies.

     Hawaii insurance practitioners will want to take note of a recent construction defect case in which the Florida Supreme Court adopted the American Girl line of cases.  See United States Fire Ins. Co. v. J.S.U.B., Inc., No. SC05-1295 (Fla. Sup. Ct., Dec. 20, 2007).  The court determined that defective work performed by a soil compacting subcontractor that causes damage to the contractor’s completed project and is neither expected nor intended from the standpoint of the contractor can constitute “property damage” caused by an “occurrence” under a standard commercial general liability policy.

     Relying on American Girl, the Florida Supreme Court rejected U.S. Fire’s argument that a breach of contract can never result in an “accident” because this was not supported by the language of the policies.   U.S. Fire’s assertion that damage resulting from a breach of contract is expected was also unpersuasive.  This position would make the definition of “occurrence” dependent on whether the property damage is part of the construction contract or the homeowner’s separate property.  The appropriate analysis focused on whether the damage was expected or intended from the standpoint of the insured, not whose property was damaged.

     Further, reading the business risk exclusions, including the “your work” and “your product”, in conjunction with the insuring agreement supported the conclusion that a subcontractor’s defective work resulting in damage to the completed project can constitute an “occurrence.”  Therefore, faulty workmanship that is neither intended nor expected from the standpoint of the contractor can constitute an “accident” and, thus, an ‘occurrence.”  In the Florida case, the subcontractor’s defective soil preparation, which the insured contractor did not intend or expect, was an “occurrence.”

     Finally, the Florida Supreme Court rejected U.S. Fire’s argument that faulty workmanship injuring only the work product itself does not result in “property damage.”   Again relying on American Girl, the court determined the claim was not for the cost of repairing the subcontractor’s defective work, but rather a claim for repairing the structural damage to the completed homes caused by the subcontractor’s defective work.  It was the subsequent soil settlement due to the subcontractor’s faulty workmanship that caused the structural damage to the homes.  Because there was “physical injury to tangible property,” the court concluded that the structural damage to the homes was “property damage.”