Insurer Not Entitled to Summary Judgment on Construction Defect, Bad Faith Claims

Tred R. Eyerly | Insurance Law Hawaii | August 12, 2019

    The federal district court denied the insurer’s motion for summary judgment seeking to establish there was no coverage for construction defect claims and for bad faith. Country Mut. Ins. Co. v. AAA Constr. LLC, 2019 U.S. Dist. LEXIS 115935 (W.D. Okla. July 12, 2019).

    Jeffrey and Tammy Shaver entered two contracts with AAA Construction for the construction of a garage and of a barn on their property. After construction was completed, the Shavers sued AAA Construction for building the garage over two high-pressure gas pipelines and the utility easements associated with them. They alleged AAA Construction was negligent for constructing over a working utility line. AAA Construction’s insurer, Country Mutual Insurance Company (CMIC) denied coverage because the alleged faulty workmanship of AAA Construction did not constitute an “occurrence” under the policy. 

    CMIC sued AAA Construction for a declaratory judgment that it had no duty to defend or indemnify. CMIC moved for summary judgment. 

    The court denied the motion. A jury could find AAA Construction was negligent or engaged in other nonintentional conduct by failing to ascertain the location of the easement, meaning the possibility of coverage existed. Therefore, CMIC had a duty to defend.

    CMIC also argued that numerous exclusions were applicable to deny coverage. The court disagreed and found none of the raised exclusions applied. 

    Finally, the motion was denied regarding AAA Construction’s counterclaim for bad faith. Among other arguments, CMIC submitted it had not acted in bad faith by failing to to an adequate investigation. The court found the factual record on this issue was sparse. The record contained sufficient facts, however, upon which a reasonable juror could find the investigation conducted by CMIC was not reasonable. 

Ohio Supreme Court: All Claims for Defective Construction or Design Must Be Brought Within 10 Years of Substantial Completion

Peter Hahn | Benesch | July 19, 2019

The Ohio Supreme Court has ruled any lawsuit for defective and unsafe conditions arising from the design or construction of an improvement to real property must be brought within 10 years of substantial completion of the project—regardless of whether the lawsuit arises out of a breach of contract or a tort.

In a victory for Benesch’s Appellate Practice Group, the Court’s decision in New Riegel Local School District Board of Education, et al. v. The Buehrer Group Architecture & Engineering, Inc., et al. [1] interprets Ohio’s Statute of Repose, [2] which generally requires certain construction defect claims to be brought within 10 years of the date of substantial completion. At issue in the case was whether that statute applies only to tort claims (such as claims that the general contractor or architect negligently performed its work by failing to comply with the applicable standard of care), or also to breach of contract claims. In holding that the Statute of Repose applies to both types of claims, the Supreme Court reversed its own 1986 holding that the statute applied only to tort claims. 

In the New Riegel case, the New Riegel Local School District filed a lawsuit against its architect, general contractor, roofing subcontractor, and a surety for damages arising out of condensation, moisture intrusion, and other deficiencies allegedly resulting from improper design and construction. The lawsuit was filed more than 10 years after substantial completion. At the time the lawsuit was filed, the statute of limitations for a breach of contract action was 15 years and the school district’s lawsuit was filed within that time period. (The statute of limitations for breach of contract claims has since been amended to 8 years.)  But because the school district’s claims were for breach of contract, it argued that the Statute of Repose did not apply and that its claims were not time-barred.

Benesch represented the surety, Ohio Farmers Insurance, at oral argument before the Supreme Court. Tracing the history of the Statute of Repose, the Court first determined that the legislature materially amended that statute after the Supreme Court’s original 1986 decision limiting the application of the statute to tort claims. That earlier decision, therefore, did not apply to the current version of the Statute of Repose, giving the Court an opportunity for a fresh look at whether the legislature intended for the statute to apply to tort claims only or to both tort and contract claims.  The Court held that the new statute’s language made it clear that the legislature intended for the statute to apply to both types of claims.  The Court then sent the case back to the lower courts to determine whether, in view of the Supreme Court’s new interpretation of the Statute of Repose, New Riegel’s lawsuit should proceed or be dismissed.

As a result of this decision, parties to a construction project should assume that claims for defective and unsafe conditions arising from the design or construction of an improvement to real estate will expire 10 years after substantial completion, subject to certain exceptions in the statute (including, for example, claims discovered within two years of the expiration of the 10-year period).  It no longer matters whether those claims arise out of a breach of the parties’ contract or the neglect of a duty under tort law.

A Milestone Construction-Defect Case at New Hampshire Supreme Court

Boston Real Estate Times | August 16, 2019

Morrison Mahoney LLP, one of the northeast region’s leading litigation firms, announced that William A. Staar, a Partner in the firm’s Construction Litigation Practice, prevailed in a case before the New Hampshire Supreme Court (NHSC) on behalf of landscape architect, Wagner Hodgson, Inc.

At issue was whether New Hampshire’s eight-year statute of repose, which protects building professionals from direct claims, also protects those professionals from contribution and indemnity claims. Staar argued that the statute does offer that additional protection. The NHSC agreed, and this landmark decision will provide additional protection for building professionals operating within the state of New Hampshire.

Background

John C. Rankin & A. v. South Street Downtown Holdings, Inc.

South Street Downtown Holdings, Inc. v. Truexcullins and Partners Architects, et al.

The plaintiff is an older man who allegedly fell on a short set of exterior stairs and ramp that are part of a commercial property in Hanover, New Hampshire.  As a result, he purportedly suffered severe facial injuries.  The plaintiff sued the property owner, i.e., South Street, arguing that a defective design plagued the stairs and ramp and that such design caused him to fall.  South Street filed contribution and indemnity claims against several building professionals, including Wagner Hodgson, Inc., that allegedly designed and/or constructed the stairs and ramp approximately a decade before the subject accident.

Legal Argument

The Morrison Mahoney legal team, including Staar and firm associate Nicholas D. Meunier, moved to dismiss, arguing the following:

  1. A New Hampshire statute of repose, i.e., RSA 508:4-b (1990), bars all claims against building professionals “arising out of” allegedly defective construction that are over eight years post the date of substantial completion of a project, and
  2. South Street brought its third-party claims against Wagner Hodgson 8.5 years after the Town of Hanover issued a certificate of substantial completion.

South Street conceded that the third-party claims were late, but argued that the statute of repose (1) only barred direct claims against building professionals and (2) did not bar indemnity nor contribution claims.  It principally relied on the fact that the pre-1990 version of the statute did specifically bar indemnity and contribution claims and that the current version of the statute does not.  The trial court did not rule on the motion and, instead, passed the issue to the NHSC.

NHSC Ruling

The NHSC found that the current version of the statute bars both indemnity and contribution claims.  Its principal reasons were as follows:

  1. Although the current version of the statute does not explicitly bar indemnity and contribution claims as the prior one did, it contains broader language that does encompass such claims.  Specifically, the current statute bars “all actions” older than eight years against building professionals “to recover damages for . . . economic loss arising out of any deficiency in the creation of an improvement to real property.”  The Court found that a successful claim by the plaintiff against South Street would constitute an “economic loss” that “arose out of” such an alleged deficiency; and
  2. Excepting contribution and indemnity claims from the statute fundamentally would frustrate the central purpose of the statute, i.e., to allow building professionals to be free and clear from lawsuits pertaining to their work on a particular project eight years after the completion of such work.  As made clear by the legislative record for the statute, the goal of the statute was to protect such professionals from all claims arising out of their work.  The genesis of the statute was that, prior to its enactment, many building professionals operating in New Hampshire suffered severe financial strain by having to maintain liability insurance for their work sometimes decades after they had completed such work, including well into retirement.

The case was argued in the chamber of the New Hampshire House of Representatives on Tuesday, June 4, 2019, in celebration of the bicentennial anniversary of the state house, and the Court decision was released on August 6, 2019. The Court videotaped both oral argument and the Q&A, which is available here.

Alabama Supreme Court Reverses Determination of Coverage for Faulty Workmanship

Tred R. Eyerly | Insurance Law Hawaii | July 1, 2019

    Although the lower court held that the insured contractor was entitled to coverage and indemnification under a CGL policy despite claims based upon faulty workmanship, the Alabama Supreme Court reversed. Nationwide Mut. Fire Ins. Co. v. David Group, Inc., 2019 Ala. LEXIS 52 (Ala. May 24, 2019).

    The David Group (TDG) specialized in custom-built homes. The Shahs purchased a newly built home from TDG in October 2006. After moving in, the Shahs experienced problems with their new home that TDG was unable to correct. In February 2008, the Shahs sued TDG. The complaint alleged that serious defects existed, resulting in health and safety issues, building code violations, poor workmanship, misuse of construction materials, and disregard of property installation methods. The case went to arbitration and an award of $12,725 was issued to the Shahs.

    Nationwide was TDG’s CGL carrier and initially defended TDG. After Nationwide withdrew its defense, TDG sued seeking a judgment declaring that Nationwide was obligated to defend and indemnify. The trial court denied Nationwide’s motion for summary judgment and issued a partial summary judgment in favor of TDG on the issue of coverage. Nationwide appealed. 

    Nationwide argued that the “defects” alleged by the Shahs and identified by the arbitrator were the result of faulty work performed by TDG. The defects were not “occurrences” under the policy. The court had repeatedly held that faulty workmanship itself was not an occurrence under a CGL policy. Faulty work could lead to an occurrence and trigger coverage under a CGL policy if the work subjected personal property or other parts of the damaged structure to continuous or repeated exposure to some other general harmful condition, and, as a result, personal property or other parts of the structure were damaged. The complaint alleged faulty workmanship, but did not allege additional or resulting damage to their house or to their personal property as a result of the faulty workmanship. 

    Under these circumstances, there was nothing demonstrating that there was property damage or personal injury resulting from an occurrence that triggered coverage under a CGL policy. The trial court’s judgment was reversed.

Builder’s Risk Coverage – Construction Defects

Brian Hearst | Construction Executive | June 15, 2019

COVERAGE FOR LOSS ENSUING FROM FAULTY WORKMANSHIP

Part I tackled the standard builder’s risk exclusion that applies to losses arising from faulty materials or workmanship. Traditionally, carriers do not have an appetite for covering a contractor’s failure to perform their work properly. There is one exception, which is coverage is available for ensuing loss – or the resulting damage to other property from faulty workmanship. 

If the excluded cause of loss (i.e., faulty workmanship) causes resultant damage, the builder’s risk policy will cover the damages to the extent the peril of fire is covered. The ensuing loss exception limits the faulty work exclusion to costs directly related to repairing or replacing the faulty work. 

For example, suppose faulty wiring work leads to a fire which damages part of a structure under construction. The faulty workmanship exclusion would apply to the actual faulty wiring work, but if fire is a covered peril under the policy (this is nearly always the case), the policy would respond to the structure’s fire damage.

Coverage for ensuing loss is either stated as an exception to the faulty workmanship exclusion or by limiting the faulty workmanship exclusion language. Working with a broker to assure a properly written ensuing loss provision is critical.

LEG – LONDON ENGINEERING GROUP EXCLUSIONS

The London Engineering Group serves as a consulting body to various insurance and reinsurance companies, as well as various Lloyds syndicates providing, among others, construction insurance. LEG published three variations of defects exclusions, known as LEG 1, LEG 2 and LEG3, with increasing levels of coverage for defective construction. While initially available through London markets, these endorsements, or similar “cost of making good” endorsements are increasingly available from domestic insurers. 

  • LEG 1. Broad Exclusion serves as a baseline endorsement broadly excluding “loss or damage due to defects of material workmanship, design, plan or specification.” This can also serve to exclude ensuing loss, as mentioned above. 
  • LEG 2. Compromise Exclusion provides coverage for costs to remedy ensuing loss to covered property and costs to remedy damage to property supported by defective property. LEG 2 excludes the costs incurred to remedy a defect immediately before the damage occurred. 
  • LEG 3. Narrow Exclusion is most broad by only limiting the exclusion to costs incurred to improve original materials, workmanship, design, plan or specification. Thus, in addition to the cover provided under LEG 2, LEG 3 will respond to the costs to remedy damage to defective property, costs to put right defective “part, portion or item,” and loss, damage or expenses incurred to access defective parts (rip and tear). 

Under both LEG 2 and LEG 3, an ensuing loss exception is no longer necessary. The policy states that the entire loss will be covered less a specified amount. The loss payable is the total amount of the covered loss minus what it would have cost to replace the faulty work prior to the loss (LEG 2) or the cost to improve the original materials, workmanship or design (LEG 3). 

Any claim under LEG 2 or LEG 3 will only respond if the project suffers damage or destruction. Rectification of a known defect, part or system that has not manifested damage is not an insured loss.

LEG – LOSS EXAMPLE

An HVAC unit placed between floors of a partially completed five story building is being commissioned. A fire occurs and causes $3 million in damage to the HVAC unit and parts of the building surrounding the unit. It is determined insufficient electrical wires were installed. To access and replace the fire-damaged HVAC unit, $400,000 of undamaged property will need to be ripped out to replace the damaged unit. Engineers determine the wiring requires an upgrade at an additional cost of $65,000. A $75,000 policy deductible will apply. LEG response:

  • LEG 1 – Loss is not covered;
  • LEG 2 – Pays $3,000,000 damage to covered property less $65,000 the before-loss cost to replace the inadequate wiring less $75,000 deductible. Final Claim Value is: $2,860,000; or
  • LEG 3 – Pays $3,000,000 damage to covered property plus $400,000 rip and tear costs less $75,000 deductible. Final Claim Value is: $3,325,000.

The language in the builder’s risk policy matters. If a construction loss occurs, it can determine the company’s financial future. An insurance broker can help review, construct and understand policies, ensuring critical loss is a covered matter.