Contractor Entitled to Defense for Alleged Faulty Workmanship of Subcontractor

Tred R. Eyerly | Insurance Law Hawaii

    Applying Nevada law, the Federal District Court in Florida found that the general contractor was entitled to a defense of claims based upon alleged faulty workmanship of a subcontractor. KB Home Jacksonville LLC v. Liberty Mutual Fire Ins. Co, 2019 U.S. Dist. LEXIS 151235 (M.D. Fla. Sept 5, 2019).

    KB Home completed six residential developments utilizing various subcontractors. One subcontractor was Florida State Plastering, LLC (FSP) for installing stucco. Eighty-eight complaints against KB Home implicated FSP’s stucco work. Plaintiffs alleged that the stucco subcontractor’s work suffered from construction defects, causing damages not only to the exterior stucco, but also the underling wire lath, paper backing, house wrap, wood sheathing, interior walls, interior floors and other property. 

    Ironshore insured FSP under a CGL policy. KB Home was an additional insured for liability for property damage caused by “your work.” KB Home was also insured under its own CGL policy with Liberty Mutual. Both insurers refused to defend.

    KB Home filed suit for a declaratory judgment. Liberty Mutual then agreed to defend. Ironshore argued that KB Home was not entitled to partial summary judgment because there were material facts in dispute. The court concluded that the underlying complaints alleged “property damage,” caused by an “occurrence” of FSP’s allegedly faulty workmanship. Further, there were allegations of damage to property other than FSP’s own work. The underlying complaints alleged that FSP’s faulty stucco installation caused damage to paper backing, house wrap, wood sheathing, interior walls and interior floors. 

    Ironshore next argued it still had no duty to defend because Liberty Mutual was providing KB Home a defense. The court disagreed. The presence of multiple insurers did not excuse any single insurer from fully defending the insured. Therefore, KB Home’s motion for partial summary judgment was granted to the extent Ironshore had a duty to defend. 

Endorsements Preclude Coverage for Alleged Faulty Workmanship

Tred R. Eyerly | Insurance Law Hawaii

    The court found coverage for alleged faulty workmanship was barred by the Combination Construction Related Endorsement and Roofing Endorsement. Evanston Ins. Co. v. A&S Roofing, 2019 U.S. Dist. LEXIS 142828 (W.D. Okla. Aug. 22, 2019).

    In 2010, A&S entered into a subcontract with the contractor to replace roofs on three buildings owned by Oklahoma Property Investors (OPI). Eagle was a subcontractor of A&S that installed the roofing. After the roofs were replaced, OPI filed suit against A&S, alleging that A&S provided 15-year warranties for the roofing work performed on the three buildings and that A&S breached each warranty by performing the work in a poor manner, resulting in failures to each of the roofs. OPI sought monetary relief including damages to its properties, of its tenants, and costs of repairs to its properties. 

    A&S’s insurer, Evanston, denied coverage. Evanston pointed to the”legally obligated to pay” language of the CGL policy and argued coverage only extended to tort-based claims. Evanston argued the OPI lawsuit did not allege any tort claims, only warranty claims arising from contract. Second, Evanston contended the alleged “poor craftsmanship” giving rise to the claims in the OPI lawsuit that did not constitute an “occurrence” under the policy. 

    A&S argued that OPI’s claims sounded in negligence. The court found that the OPI lawsuit alleged claims that arguably sounded in both contract and tort. Although the word “negligence” did not appear in the complaint, the claims alleged a breach of warranty due to the work being performed in “a poor craftsmanship like manner” and sought damages proximately caused by the poor performance of that work, i.e., damage to OPI’s properties (other than costs of repair or replacement) and damage to the property of OPI’s tenants. Such proximately-caused damages sounded in tort. Evanston was entitled to a declaratory judgment that it had no duty to indemnify with respect to the contract-based claims. But because the OPI lawsuit included allegations which rose the potential of liability with respect to tort-based claims, Evanston was not entitled to a declaratory judgment that the “legally obligated to pay” coverage language applied to relieve Evanston of its duty to defend.

    Regarding an “occurrence,” faulty workmanship gave rise to an occurrence where, as here, the work was not that performed by the insured but by a subcontractor of the insured, the property damage was not caused by purposeful neglect or knowingly poor workmanship and the damage included damage to the non-defective work product of the contractor and damage to the third-party property. Here, the undisputed factual record showed that Eagle, a subcontractor of A&S, installed the roofing. Accordingly, the court denied Evanston’s summary judgment motion on grounds no occurrence triggered coverage. 

    But the Combination General Endorsement exclusion barred coverage for breach of contract. Further, the Roofing Endorsement precluded coverage for operations involving membrane roofing. Evanston’s expert had found that membrane roofing was installed on the OPI buildings. Therefore, Evanston had neither a duty to indemnify nor a a duty to defend and was entitled to summary judgment. 

Insurer Must Pay Portions of Arbitration Award Related to Faulty Workmanship

Tred R. Eyerly | Insurance Law Hawaii | August 21, 2019

    The court determined that portions of an arbitration award against the insured contractor based upon faulty workmanship were covered by the policy. Wallace v. Nautilus Ins. Co., 2019 U.S. Dist. LEXIS 122219 (D. N. H. July 23, 2010). 

    Plaintiffs, owners of adjoining homes, hired McPhail Roofing, LLC to replace the roofs of their houses. After installation, the plaintiffs found several problems with their roofs and withheld roughly a third of the agreed-upon contract price from final payments due to McPhail. A roofing consultant found evidence of water leaking through both roofs during rainstorms. Improper installation of the shakes on the roofs allowed rain to seep through to the roof decks (the plywood underneath the roofs) and eventually into the houses. The only way to cure the installation defects was to remove and replace the roofs entirely. 

    Plaintiffs and McPhail went to arbitration. Plaintiffs sought compensation for the damage caused by the leaking and for the replacement costs of the roofs. McPhail sought the remaining payment under the contracts. Nautilus defended McPhail under this CGL policy. 

    The arbitrator issued awards against McPhail, $140,053.50 to one owner and $160,065.62 to the other owner. Pursuant to the parties’ stipulation, the arbitrator also awarded plaintiffs $176,898.95 for attorneys’ fees, expert witness fees and other expenses, including pre- and post- judgment interest.

    Nautilus paid a portion of the award for attic cleaning and re-insulation, repainting, expert witness fees and expenses. Nautilus determined the rest of the award, including replacing the roofs and award of attorneys’ fees, was not covered under the policy. McPhail declared bankruptcy and plaintiffs obtained an assignment of McPhail’s claims against Nautilus, eventually bringing suit against Nautilus. 

    Agreeing that defective workmanship alone was not an occurrence under New Hampshire law, plaintiffs argued that the occurrence here was not the defective workmanship itself, but rather the leaking caused by the defective roofs, which resulted in property damage. The court agreed.

    The damage for the cost of replacing the roofs was not covered, however. The arbitrator found that plaintiffs were entitled to the replacement cost of the roofs because: (1) the roofs were installed defectively; and (2) plaintiffs’ consultant advised them that the only way to cure the installation defects was to remove and replace the roofs. No New Hampshire case held that a CGL policy covered the cost of replacing defective work any time property damage resulted from it. 

    Next, the court turned to whether the policy covered the award of attorneys’ fees. The Supplementary Payments provision included Nautilus’ obligation to pay “costs taxed against the insured.” Plaintiffs argued the phrase was ambiguous and should be construed in their favor. The court noted that several jurisdictions had interpreted the phrase to include an award of attorneys’ fees, but noted that a Hawaii federal district court case held that the phrase excluded attorneys’ fees. CIM Ins. Corp. v. Masamitsu, 74 F. Supp. 2d 975 (D. Haw. 1999). The court went the the majority position, finding that “costs taxed against the insured” in the Supplementary Payments provision included attorneys fees. 

Is Faulty Workmanship an “Occurrence” Under a CGL Policy?

Larry P. Schiffer | Squire Patton Boggs | September 16, 2019

Manufacturers often face multiple lawsuits when their products fail to perform as expected. Sometimes, the cause of the product’s failure is the faulty workmanship of a component manufacturer. When that is the case, the product manufacturer will seek damages from the component manufacturer for the underlying product defect claims. The component manufacturer will then turn to its insurance carriers to cover it for the dispute with the product manufacturer. In a recent case, the Third Circuit Court of Appeals addressed claims by a window component manufacturer against its insurance carriers after the insurance carriers disclaimed coverage for a settlement between the component manufacturer and the product manufacturer.

In Sapa Extrusions, Inc. v. Liberty Mutual Insurance Co., No. 18-2206 (3rd Cir. Sep. 13, 2019), the district court granted summary judgment to the insurance carriers, finding that the product defect claims were not covered under the various CGL policies. The circuit court affirmed in part and vacated in part. The court held that “recovery turns on the language of the specific insurance policies at issue” under Pennsylvania law.

The court first discussed how Pennsylvania law required the strict application of the “four-corners” rule and that if the court determines that there is no duty to defend, then there is no duty to indemnify. The court also discussed in detail how Pennsylvania law requires courts to interpret insurance policies. Here, the court focused on the definition of “occurrence” found in the 28 applicable insurance policies. The court organized the policies into three groups: (a) the “Accident Definition”; (b) the “Expected/Intended Definition”; and (c) the “Injurious Exposure Definition.” The details of this analysis are in the opinion. The basis for the division was the differences in the occurrence wording.

The first definition, which covered 19 of the policies, focused on the term “occurrence” being defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Under Pennsylvania law, this definition required fortuity and “faulty workmanship” did not come within that definition. Thus, held the court, the factual allegations of the product manufacturer’s complaint did not amount to an occurrence that could trigger coverage. The allegations of faulty workmanship, said the court, did not amount to an unforeseeable, fortuitous event. Thus, the court affirmed the grant of summary judgment for those 19 policies.

The court vacated the judgment and remanded the remaining 9 policies back to the district court to consider the implications of the latter two occurrence definitions. The differences in the definitions, held the court, were unique and the district court should have considered those policies separately. The court declined to interpret these 9 policies other than to say that the additional language was not mere surplusage and may be considered ambiguous under Pennsylvania law.

The court held that the rule it reemphasized in this opinion was simple: “in Pennsylvania, insurance policies must be interpreted and applied in accordance with their plain language and relevant Pennsylvania law.” The remand, said the court, was to give the district court the opportunity to give the latter two categories more consideration based on the difference in the language so as to determine if coverage is triggered.

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.