No “Occurrence” Found Where Contractor Intentionally Performed Defective Work With The Hope It Would Not Cause Property Damage

By and on February 6, 2017
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The California Court of Appeal, Fourth Appellate District, affirmed in part and reversed in part an order awarding an insurance company its $1 million policy limits used to settle a construction defect claim on behalf of an insured general contractor.

In Navigators Specialty Insurance Company v. Moorefield Construction, Inc., 2016 Cal. App. LEXIS 1132 (December 27, 2016), a building owner, JSL Properties, LLC (“JSL”), and a developer, D.B.O. Development No. 28 (“DBO”), sued a general contractor, Moorefield Construction, Inc. (“Moorefield”), for floor leaks which occurred at a Best Buy electronics store between 2003 and 2009. In its second amended complaint, JSL claimed that Moorefield had defectively installed flooring on top of a concrete slab despite knowing that the existing slab contained excessive moisture levels. Navigators Specialty Insurance Company (“Navigators”) defended Moorefield in the action subject to a reservation of rights under a commercial general liability insurance policy. The litigation settled for $1,310,000 of which Navigators contributed its $1 million policy limits.

Navigators filed a declaratory relief lawsuit against Moorefield seeking a declaration that it had no duty to defend or indemnify the general contractor in the underlying construction defect action. Following a bench trial, the trial court issued a decision in favor of Navigators and against Moorefield. The trial court found that the flooring defects did not constitute an “occurrence” or accident under the policy. The trial court also held that Navigators had no duty to make any payments under the “supplementary payments” portion of the policy. Navigators received an award which required Moorefield to reimburse Navigators its $1 million policy limits contributed to settle claim.

The Court of Appeal agreed with the trial court that Navigators had no duty to indemnify Moorefield in the underlying action. The appellate court found evidence which established that Moorefield knew about the excessive moisture in the concrete slab and that it deliberately installed the flooring despite this known condition. Thus, the Court of Appeal held that no unexpected or unintended event constituted an “occurrence” to trigger an indemnity obligation under the policy. Moorefield and amicus curiae argued that construction defects could not be considered intentional conduct unless the contractor expected or intended its work to be defective and cause property damage. The Court of Appeal rejected that argument by stating, on the record before it, Moorfield knew about and intended to perform defective work with the hope it would not cause property damage. Even though Moorfield did not intend to cause property damage, the insured’s subjective belief was irrelevant.

However, the Court of Appeal reversed the portion of the trial court’s ruling which found that Navigators had no duty to make payments under the “supplementary payments” provision of the policy. The Court of Appeal determined that Navigators owed a duty to pay for attorneys’ fees and costs as part of the settlement because such amounts were recoverable under the construction contract and were awardable as taxed costs in litigation. Although no duty to indemnify existed, the appellate court found that Navigators was obligated to pay “supplementary payments” as part of its broader duty to defend.

The Court of Appeal also found that the trial court had improperly determined that the entire $1 million settlement payment was made for damages, rather than attorneys’ fees. The evidence indicated that JSL and DBO had only incurred $377,000 in damages related to the floor leaks. The appellate court further held that the trial court had committed prejudicial error in placing the burden of proof for this issue on Moorefield. Accordingly, the Court of Appeal remanded the case for a new trial seeking allocation of the settlement payment between damages and attorneys’ fees.

Click here for the opinion.

The opinion in Navigators Specialty Insurance Company v. Moorefield Construction, Inc., 2016 Cal. App. LEXIS 1132 (December 27, 2016), is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority in California state courts.

Filed under Commercial General Liability, Construction Defect, Duty to Defend

District Court Holds California’s 10- Year State of Repose Effectively Bars General Liability Coverage For Construction Defect Claims

By on October 11, 2016
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On September 27, 2016 the U.S. District Court for the Northern District of California issued its opinion in Swiss Re International Se, et al. v. Comac Investments, Inc., et al., effectively closing the door on ISO form general liability coverage for construction defect claims that are subject to California’s 10-year statute of repose. 2016 U.S. Dist. LEXIS 132793 (N.D. Cal. Sept. 27, 2016).

California Code of Civil Procedure §337.15 provides that latent construction defect claims are subject to a 10-year statue of repose, which commences upon substantial completion of the construction. The statue of repose is not subject to equitable tolling and the only exception to the statue of repose is provided in subsection (f), which allows for “actions based on willful misconduct or fraudulent concealment” See Lantzy v. Centex Homes, 31 Cal.4th 363, 367 (2003); Cal. Code. Civ. Proc. §337.15(f).

In Comac, the plaintiff homeowner’s association sued the insured builder, Comac, in connection with alleged construction defects at a residential project. The Plaintiffs, however, filed suit more than 10 years after the project’s completion. Nonetheless, the Plaintiffs alleged that Comac’s responsible managing officer observed the defective workmanship, did not correct the defects in order to avoid additional costs, and in some cases “directed [the] condition be covered up….” Seeking to skirt California’s 10-year statue of repose, Plaintiffs alleged that Comac’s actions “amount[ed] to reckless disregard and/or willful misconduct as defined by [C.C.P.] §337.15(f).”

Each of Comac’s insurance policies required that property damage be caused by an “occurrence,” which was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Rejecting the plaintiffs’ argument that Comac did not intend any injury, the court held the homeowners’ allegations of willful misconduct could not, by definition, be an “accident.” In so holding, the court noted that the claims against Comac were limited to claims that “Comac’s deliberate acts caused the property damage” and did not include any alleged intervening, unexpected causes. Central to the court’s analysis were the allegations that “any contractor who chose not to remedy [the defects] would be doing so with actual or constructive knowledge that injury was a probable result” and “any knowledgeable construction supervisor who chose not to direct the contractor to remedy the condition would have done so with actual or constructive knowledge that injury was a probable result.”

The court harmonized the term “willful” under Cal. Code. Civ. Proc. §337.15(f) and Cal. Ins. Code §533, finding both encompassed conduct where a reasonable person under the same or similar circumstances would be aware of the highly dangerous character of his or her conduct and that neither necessarily required an actual intent to injure. Thus, the court found that Comac’s alleged willful misconduct was also subject to the policies’ “expected or intended” exclusions and California Insurance Code §533.

Filed under California Insurance Code, Commercial General Liability, Construction Defect

New Jersey Supreme Court Latest to Weigh In on Insurance Coverage for Faulty Workmanship

By on August 15, 2016
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Perhaps unsurprisingly to those who enjoy following the trajectory of CGL coverage for faulty workmanship around the country, New Jersey recently joined those states which recognize faulty workmanship as an “occurrence” – at least in certain circumstances.

In Cypress Point, the New Jersey Supreme Court faced the question of “whether rain water damage caused by a subcontractor’s faulty workmanship constitutes ‘property damage’ and an ‘occurrence’” under a property developer’s CGL policy. Cypress Point Condominium Association, Inc. v. Adria Towers, LLC, et.al, (A-13/14-15) (076348) (N.J. Aug. 4, 2016).  In Cypress Point, condo owners complained of roof leaks and water intrusion at window jambs and sills, as well as water damage to the common areas and interior structures of the buildings in the new condominium development. The condo association sued the developers, alleging faulty workmanship and consequential damages including damage to steel supports, exterior and interior sheathing, and sheetrock and insulation in both condo units and common areas. The developers’ insurer denied coverage and ultimately two of the developers’ insurers were brought into the case to determine whether the policies should provide defense and indemnity to the developers.

The Court distinguished prior cases on this issue, Weedo v. Stone-E-Brick, Inc., 81 N.J. 233 (1979) and Firemen’s Insurance Co. of Newark v. National Union Fire Insurance Co., 387 N.J. Super. 434 (App. Div. 2006), primarily by focusing on the fact that both dealt with the 1973 ISO form, not the 1986 ISO form at issue in this case. The Court particularly focused on the fact that, in the 1986 ISO form, there is an exception to the “Your Work” exclusion which allows coverage for faulty workmanship where it is performed by a subcontractor.

After observing that courts across the country were trending toward faulty workmanship as an “occurrence” (although not discussing neighboring Pennsylvania’s fairly recent decisions), the Court turned to the definitions of “property damage” and “occurrence” in the policies at issue. The Court determined that (1) the consequential damages fell within the policies’ definition of “property damage” and (2) that ‘accident’ encompasses unintended and unexpected harms caused by negligently performed work, and thus the consequential water damage was an “occurrence.” Having determined the loss fell within the coverage grant of the policies, the Court then considered the “Your Work” exclusion and its subcontractor exception and determined that, as the work was clearly performed by a subcontractor, this was still a covered loss.

Importantly, while this case addresses a common situation of the property developer’s CGL coverage, it is not necessarily universally applicable to all contexts in which a faulty workmanship claim may arise. It remains to be seen whether New Jersey courts will apply this holding broadly or more narrowly, i.e. whether faulty workmanship be an “occurrence” in the absence of consequential damage, or where no subcontractor was involved.

Filed under Commercial General Liability, Construction Defect

Connecticut Legislation Requiring Homeowners Policies to Provide Coverage for Collapse and Mitigation Crumbles, But All Is Not Lost for Homeowners

By on July 27, 2016
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*Republished with permission of the Connecticut Law Tribune and The Insurance Coverage Law Bulletin.

A bill requiring homeowners insurance policies in Connecticut to provide coverage for the peril of collapse and mitigation undertaken to prevent all or part of a covered dwelling from falling down or caving in recently failed in the Connecticut Legislature. Following a very narrow 10-9 joint favorable report from the Insurance and Real Estate Committee, the Connecticut Legislature did not act on House Bill No. 5522, An Act Concerning Homeowners Insurance Policies and Coverage For The Peril Of Collapse (“HB 5522”). The demise of HB 5522 is significant for insurers since homeowners policies are not intended to serve as a home warranty or cover non-fortuitous/non-accidental losses, latent defects, improper workmanship/construction and defective materials. More significantly, HB 5522, aside from myriad coverage issues created by the bill’s language, would have likely resulted in premium hikes for Connecticut homeowners to cover what courts have repeatedly found to be uncovered claims.

HB 5522 would have required every insurance company delivering, issuing for delivery, renewing, amending, or endorsing a homeowners policy in Connecticut on or after the effective date (from passage of the legislation) to provide coverage for:

  1. the peril of collapse, including partial or total impairment of a covered dwelling’s structural integrity due to facts such as (a) hidden decay or (b) defective materials or construction methods used in constructing or renovating part or all of the building; and
  2. any mitigation taken to prevent all or part of a covered dwelling from falling down or caving in.

The impetus behind HB5522 is to provide insurance coverage to homeowners for the period of collapse and mitigation following the discovery of crumbling concrete foundations of numerous homes generally located in eastern Connecticut. The cause(s) of the crumbling foundations is unclear at this point, though it appears that the mineral pyrrhotite in stone aggregate used in the production of concrete is a factor in crumbling foundations. It has been alleged that degradation to foundations has happened over a period of years, and appears to impact homes built in the 1980s and 1990s. The crumbling concrete issue has spawned numerous individual and class action lawsuits by impacted property owners seeking coverage under their homeowners policies.

But All Is Not Lost

Despite HB5522’s loss of footing, the Connecticut Legislature overwhelmingly passed House Bill No. 5180/Public Act 16-25, An Act Concerning Concrete Foundations (“PA 16-25”). Governor Dannel P. Malloy signed the legislation on May 25, 2016. PA 16-25, which has various effective dates, establishes requirements concerning residential and concrete foundations, including: (1) establishing additional requirements to obtain a certificate of occupancy for a new residential or commercial building for which a concrete foundation was installed on or after October 1, 2016; (2) requiring municipalities, at the owner’s request, to reevaluate residential properties with foundations made from defective concrete; (3) requiring the Connecticut Department of Consumer Protection, after consulting with the Connecticut Attorney General, to investigate the cause(s) of failing concrete foundations and submit the report to the Legislature’s Planning and Development Committee no later than January 1, 2017; and (4) requiring executive agencies to maintain records concerning faulty or failing concrete foundations in residential buildings as confidential for at least seven years (notably P.A. 16-25 exempts these records from disclosure under the Connecticut Freedom of Information Act).

Additionally, on October 6, 2015, in response to the crumbling concrete issue, the Connecticut Insurance Department issued a formal notice (“Notice”) to all insurers writing homeowners insurance in Connecticut. The Notice informs insurance companies that they cannot cancel or non-renew a homeowner’s policy due to a crumbling foundation. The Notice specifically “directs that no insurer take any action to cancel or non-renew an affected homeowner’s insurance coverage as a result of a foundation found to be crumbling or otherwise deteriorating.” The Notice warned that any non-renewal action taken by an insurer be strictly in accordance with its underwriting guidelines and rules filed with and recorded effective by the Insurance Department.

The State Continues to Investigate

In July 2015, Connecticut Governor Dannel P. Malloy called on the Department of Consumer Protection and the Office of the Attorney General to conduct an investigation into the crumbling foundation issue. The focus of the investigation is to determine if there is a basis to initiate legal action under the Connecticut Unfair Trade Practices Act, based on the manufacture, sale or installation of concrete foundations in eastern Connecticut. As part of that investigation, the state has retained a civil engineer to take core samples from crumbling foundations in eastern Connecticut and test and analyze them to determine the cause of the deterioration and determine the number of impacted homeowners. At this point, the investigation has determined that pyrrhotite is a factor in crumbling foundations, and the investigation continues to search for other conditions that contribute to deteriorating foundations, but that it does not appear that any consumer protection laws were violated. And only a month ago the state reached an agreement with two eastern Connecticut companies taking concrete products off the residential foundation market until June 2017.

To view the CT Law Tribune article, click here.

Filed under Collapse, Construction Defect, First Party Policy

BREAKING: Connecticut Legislation Requiring Homeowners Policies to Provide Coverage for Collapse and Mitigation Crumbles

By on May 6, 2016
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A bill requiring homeowners insurance policies in Connecticut to provide coverage for the peril of collapse and mitigation undertaken to prevent all or part of a covered dwelling from falling down or caving in failed in the Connecticut Legislature. Following a very narrow 10-9 joint favorable report from the Insurance and Real Estate Committee, the Connecticut Legislature did not act on the bill. The demise of House Bill No. 5522, An Act Concerning Homeowners Insurance Policies and Coverage For The Peril Of Collapse (“HB 5522”), is significant for insurers since homeowners policies are not intended to serve as a home warranty or cover non-fortuitous/non-accidental losses, latent defects, improper workmanship/construction and defective materials. More significantly, HB 5522, aside from myriad coverage issues created by the bill’s language, would have likely resulted in premium hikes for Connecticut homeowners to cover what courts have repeatedly found to be uncovered claims.

HB 5522 would have required every insurance company delivering, issuing for delivery, renewing, amending, or endorsing a homeowners policy in Connecticut on or after the effective date (from passage of the legislation) to provide coverage for:

  1. the peril of collapse, including partial or total impairment of a covered dwelling’s structural integrity due to facts such as (a) hidden decay or (b) defective materials or construction methods used in constructing or renovating part or all of the building; and
  2. any mitigation taken to prevent all or part of a covered dwelling from falling down or caving in.

The impetus behind HB5522 is to provide insurance coverage to homeowners for the period of collapse and mitigation following the discovery of crumbling concrete foundations of numerous homes generally located in north-central and northeastern Connecticut. The cause of the crumbling foundations is unclear at this point, and it has been alleged that degradation to foundations has happened over a period of years, and appears to impact homes built in the 1980s. In July 2015, Connecticut Governor Dannel P. Malloy called on the Department of Consumer Protection (“DCP”) and the Office of the Attorney General to conduct an investigation into the crumbling foundation issue. Since that time, other state agencies, including the Insurance Department, Department of Banking, Department of Administrative Services, and Department of Housing, as well as federal, state and municipal officials, have worked with DCP on the issue. During this time, numerous individual and class action lawsuits have been instituted by impacted homeowners seeking coverage under their policies.

Also significant for insurers is that on October 6, 2015, in response to the crumbling concrete issue, the Connecticut Insurance Department issued a formal notice (“Notice”) to all insurers writing homeowners insurance in Connecticut. The Notice informs insurance companies that they cannot cancel or non-renew a homeowner’s policy due to a crumbling foundation. The Notice specifically “directs that no insurer take any action to cancel or non-renew an affected homeowner’s insurance coverage as a result of a foundation found to be crumbling or otherwise deteriorating.” The Notice warned that any non-renewal action taken by an insurer be strictly in accordance with its underwriting guidelines and rules filed with and recorded effective by the Department.

Filed under Collapse, Construction Defect, First Party Policy

California Appeals Court Rejects Insurer’s “Escape” Clause And Confirms Tolling Of Statute Of Limitations For Equitable Contribution Claims

By on November 4, 2015
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In Underwriters of Interest v Probuilders Specialty Ins. Co. (Case No. D066615, filed 10/23/15), the California Court of Appeal for the Fourth District, Division One, rejected an insurer’s “escape” clause, ruled that a Contractors Special Conditions endorsement was inapplicable, and confirmed that the statute of limitation for an insurer’s claim for equitable contribution against a co-carrier is tolled until it makes its last defense payment.

Construction siteUnderwriters insured Pacific Trades Construction & Development (“PTCD”) from 2001 to 2003. Probuilders insured PTCD from 2002 to 2004. Pursuant to its policies, Underwriters agreed to defend PTCD in a construction defect action arising out of the construction of single family homes. In contrast, Probuilders denied PTCD’s tender arguing that its policies only provided a duty to defend when “no other insurance affording a defense against such a suit is available to [the insured].” In addition, Probuilders argued its policy included a Contractors Special Conditions (“CSC”) endorsement which provided that as a “condition precedent to this policy applying to any claim in whole or in part based upon work performed by independent contractors,” PTCD must have: (1) written indemnity agreements with each subcontractor hired; (2) certificates of insurance from each subcontractor’s insurer showing PTCD as an additional insured; and (3) maintained records evidencing PTCD’s compliance with these obligations.

Turning first to Probuilders’ defense obligation, the Appellate Court, citing Edmondson Property Management v. Kwock (2007) 156 Cal.App.4th 197, 203-204, held that Probuilders’ other insurance clause was an “escape” clause disfavored under the law.

[C]ourts have considered this type of “other insurance” clause as an “escape” clause, a clause which attempts to have coverage, paid for with the insured’s premiums, evaporate in the presence of other insurance….Escape clauses are discouraged and generally not given effect in actions where the insurance company who paid the liability is seeking equitable contribution from the carrier who is seeking to avoid the risk it was paid to cover.

Reasoning the policies issued by Underwriters and Probuilders were not completely overlapping and provided coverage for at least different periods of time, the Appellate Court refused to enforce Probuilders’ other insurance clause.

The appeals court also rejected Probuilders’ argument that its CSC endorsement obviated a duty to defend because PTCD had failed to secure indemnity and/or additional insured coverage from all of its subcontractors. Noting Probuilders had not conclusively established that all of the claims against PTCD were limited to work performed by subcontractors and that while there was evidence of incomplete compliance with the CSC endorsement at least one subcontract had complied, the court found there was a question of fact precluding summary judgment in Probuilders’ favor.

Next, the appeals court found Underwriter’s equitable contribution claim was timely because while the claim first accrued at the time Probuilders first refused to participate in PTCD’s defense, the statute of limitations was “tolled until all of the defense obligations in the underlying action are terminated by final judgment.”

While not a departure from current case law, the case confirms California’s rejection of “escape” type clauses in contribution disputes between carriers and that under the right set of facts, endorsements requiring insureds to secure additional insured coverage from subcontractors may serve as a means to limit or possibly obviate the duty to defend and/or indemnify.

Filed under Construction Defect, Contribution Actions, Other Insurance, Statute of Limitations