No Duty to Defend Construction Defect Claims

Tred R. Eyerly | Insurance Law Hawaii

    The court determined the insurer had no duty to defend construction defect claims asserted against the insured. Pa. Nat’l Mut. Cas. Ins. Co. v. River City Roofing, 2022 U.S. Dist. LEXIS 38226 (E.D. Va. March 3, 2022).

    Branch Builds, Inc, was the general contractor for Shock Valley View Genesis, LLC (“Genesis”) in charge of constructing apartments. River City Roofing was a subcontractor for all roofing, aluminum and composition siding at the project. River City contracted and warranted its materials and work, agreed to indemnify Branch, and agreed to make Branch an additional insured under its CGL policy. 

    After completion of the project, Genesis reported defects in the construction. The roof, aluminum and composition siding allowed water intrusion and property damage to the apartments. Branch repaired and compensated Genesis for all damage done to the apartments. Branch then sued River City and another subcontractor and demanded judgment of $3,000,000. 

    River City’s CGL policy was issued by plaintiff insurer. River City failed to pay premiums and the policy was cancelled while construction was ongoing. The insurer filed suit seeking a declaratory judgment that it had no duty to defend or indemnify River City. Branch answered the complaint, but River City never made an appearance or filed an answer. 

    The insurer argued there was no duty to defend because the policy was cancelled. The underlying complaint, however, did not say that the policy was cancelled before the end of the policy period. Consequently, the policy cancellation did not guide the court’s determination on the duty to defend. 

    The court looked to the exclusions. The “Your Work” exclusion barred coverage for “property damage to your work arising out of it or any part of it.” The alleged damage to the apartments was River City’s own work. River City was hired to handle the roofing, which Genesis alleged was faulty and led to water intrusion. Any resulting damage to the portion of the property not built by River City, but which was caused by River City’s defective job performance, would be property damage “arising out of” River City’s work.

    The “impaired property’ exclusion barred coverage for damage to certain portions of the property other than River City’s work. Branch argued the work by River City was defective in workmanship and materials and that defective work caused damage to the roof itself, and other parts of the property. Further, Branch repaired the roofing deficiencies. Therefore, the exclusion applied. 

    Every allegation Branch alleged against River City was excluded by on the the exclusion. No accident occurred, and the alleged damage was entirely attributable to River City’s own work, or arose out of River City’s work, and was able to be repaired. Therefore, summary judgment was granted to plaintiff on the duty to defend.

    The motion was denied, however, on the duty to indemnify. A ruling on the duty to indemnify had to be deferred until after a final ruling in the underlying case.  

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Insurer Must Defend Faulty Workmanship Claims

Tred R. Eyerly | Insurance Law Hawaii

   The court determined that the insurer improperly denied a defense for construction defect claims made against the insured. Amerisure Mut. Ins. Co. v. McMillin Tex. Homes, 2022 U.S. Dist. LEIS 40363 (W.D. Texas March 8, 2022). 

    McMillin was a developer, general contractor and home seller. It constructed multiple homes in various communities in the San Antonio area. After the homes were completed, homeowners observed defects in the artificial stucco exterior finish. After claims were lodged against McMillin, the various claims were tendered to Amerisure. Amerisure filed for declaratory judgment that it had to duty to defend or indemnify and moved for summary judgment.

    Amerisure first argued the homeowners’ faulty workmanship claims did not allege “property damage” under the policies. It argued there were no allegations that any property damage existed, but merely that the stucco suffered from construction defects. The court disagreed. Among the allegations was the statement that due to the construction defects, the homes suffered damage “not only to the exterior stucco, but also to the underlying wire lath, paper backing, house wrap, flashing, water resistive barriers, sheathing, interior walls, interior floors and/ or other property.” Consequently, the underlying claims amounted to property damage.

    The court then considered exclusions relied upon by Amerisure. Exclusions J (5) and (6) precluded coverage for faulty workmanship. Both were limited by the phrase “that particular party” of property damaged due to the insured’s work. This limitation precluded application of the exclusions to damage on other parts of the home or non-defective portions of the insured’s work. Here, several of the homeowners alleged damage to parts of the house beyond the stucco system, including interior walls, interior floors and other property. Therefore, Amerisure failed to establish as a matter of law that Exclusions J (5) and (6) prohibited coverage for the homeowners’ claims. 

    Next the court determined that Exclusion k did not apply to the construction of a building because buildings were constructed or erected, not manufactured. 

    Exclusion L, Damage to Your Work, only applied to exclude damages to the insured’s “competed” work. The underlying complaints did not specifically allege when property damage from McMillin’s work occurred. The property damage could have occurred before, during, and after completion of McMillin’s work. 

    Finally, there was a duty to defend rip and tear allegations. Amerisure asserted that the policy did not cover tear-out work performed to remove and replace the stucco system because defective work itself did not constitute covered “property damage” and any ensuing tear-out work would not qualify for independent coverage under the policies. The extent of any property damage and whether repair or removal of the stucco exterior was necessary to fix any covered damages would depend upon the facts in each instance. For the duty to defend analysis, the insured needed only to demonstrate the potential that tear-out work would be necessary. 

    The duty to indemnify could only be determined when the underlying suit was concluded.

    Consequently, Amerisure’s motion for summary judgment was denied. 

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Texas Federal Court Delivers Another Big Win For Policyholders on CGL Coverage for Construction-Defect Claims and “Rip-and-Tear” Damages

Blake A. Dillion, Jared DeJong and Scott S. Thomas | Payne & Fears

Insurers regularly argue that commercial general liability (“CGL”) policies are not performance bonds and therefore there is no coverage for claims seeking damages for defective or faulty workmanship. Insurers also argue there is no coverage for so-called “tear-out” or “rip-and-tear” damages, where fixing property damage requires replacing defective work that has not itself been damaged. Fortunately, in a newly decided case, a Texas federal district court rejected both arguments by an insurer. Amerisure Mutual Insurance Company v. McMillin Texas Homes, LLC, No. SA-20-CV-01332-XR, 2022 WL 686727 (W.D. Tex. Mar. 8, 2022).

As with most construction-defect claims, this case involved homeowner claims against a residential developer, McMillin Texas Homes (“McMillin”). After the homes were completed, homeowners complained about defects in the artificial stucco exterior finish and filed suit. McMillin tendered to its insurer, Amerisure Mutual Insurance Company (“Amerisure”). Amerisure then sued McMillin for declaratory relief, arguing that it had no duty to defend or indemnify the homeowner claims. McMillin filed a counterclaim alleging Amerisure breached its policies by refusing to defend or indemnify McMillin.

Amerisure moved for summary judgment, arguing that because its CGL policies are not performance bonds, claims arising out of McMillin’s faulty workmanship on the stucco are not covered. The insurer also made a number of other arguments, including that so-called “rip-and-tear” damages are not covered under Texas law.

The court rejected each of Amerisure’s arguments. First, the court explained, citing Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 10 (Tex. 2007), that coverage turns on the precise language used in the policy and not on arguments that simply compare a CGL policy to a performance bond. After reviewing the policy and homeowner allegations, the court ruled that the underlying complaints alleged the potential for a covered claim for damage to property other than the faulty stucco work. Second, the court held that because the faulty stucco work is alleged to have damaged other property, the “rip-and-tear” costs of replacing the faulty but undamaged stucco was potentially covered, since replacing stucco was necessary to fix the damaged property that lay beneath the stucco.

Takeaways

Policyholders can breathe a collective sigh of relief knowing that Texas courts continue to find coverage for construction-defect claims under CGL policies, and Texas courts continue to issue common-sense rulings that benefit policyholders that operate in the home-building and construction industries. Amerisure also gives policyholders a big win on the hotly contested issue of coverage for “rip-and-tear” costs by clearly stating that such costs are at least potentially covered where there are allegations of damage to property other than the faulty work and replacing the faulty work is necessary to fix the damaged property. This is an issue that is frequently litigated, and Texas continues to do a splendid job of explaining when and why “rip-and-tear” damages are covered under CGL policies.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Pennsylvania Federal Court Confirms: Construction Defect Claims Not Covered by CGL Policies

Nathan Cazier and Scott Thomas | Payne & Fears

The construction industry operates under the constant spectre of claims seeking damages for defective or faulty workmanship. Fortunately, the law in most states treats these claims as covered under commercial general liability (“CGL”) policies. A small minority of states take a much stingier view. In a newly decided case, a Pennsylvania federal court confirmed that Pennsylvania belongs to this small group of states that regard construction claims as not worthy of liability insurance coverage. Main St. Am. Assurance Co. v. Howard Lynch Plastering, Inc., No. CV 21-3977, 2022 WL 445768, (E.D. Pa. Feb. 14, 2022).

Main St. involves a typical construction defect case: W.B. Homes (“W.B.”) developed a residential community, contracting with various trades to build the homes. W.B. required these subcontractors to obtain liability insurance covering their work and, when homeowners sued W.B. for damages due to allegedly faulty work, W.B. tendered the claim to these insurers. One of them, Main Street Assurance Co. (“Main Street”) then sued W.B. for declaratory relief, arguing that under Pennsylvania law, it had no duty to defend W.B.

Following Pennsylvania precedent, Main St. held that faulty workmanship is not an “occurrence” and, thus, claims grounded in faulty workmanship are not covered under CGL policies. See Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Com. Union Ins. Co., 908 A.2d 888 (Pa. 2006). Kvaerner – and now Main St. – reason that CGL policies, which cover only liability caused by an “occurrence,” define “occurrence” as an “accident,” and “faulty workmanship does not constitute an ‘accident.’” Id. at 899–900.

W.B. anticipated this reasoning, and tried to get around it in two ways: First W.B. argued that the construction defect claim was grounded in product liability (which might be covered by CGL policies in Pennsylvania). The court rejected this argument, since the homeowners never actually alleged that any product caused damage. Next, W.B. argued that the policy’s “Products Completed Operations Hazard” exclusion, (eliminating coverage for certain damages caused by faulty workmanship) implies that the policy was intended to treat faulty workmanship as an “occurrence” – otherwise the exclusion would be unnecessary. Main St. rejected this argument because, in the court’s view, it doesn’t overcome W.B.’s threshold problem: faulty workmanship is not an “occurrence” in Pennsylvania. Thus, the court reasoned, because the “occurrence” requirement in the insuring agreement was never satisfied, the court need not consider whether exclusions and their exceptions apply.

Takeaways

Main St. makes it clear that risk transfer strategies for Pennsylvania projects based on traditional general liability insurance coverage will continue to be problematic. Negotiating during the procurement process (when possible) for amended language that broadens coverage, or for favorable choice-of-law provisions, may help. Manuscripted OCIP’s specifically designed to provide coverage for construction defect claims may also be an alternative.Finally, negotiating favorable indemnity agreements with trades and suppliers – which has its own set of challenges and limitations – becomes even more important. But there are no convenient solutions to Pennsylvania’s outlier perspective on insurance coverage for construction defect claims.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Do Not Ignore Construction Defect Claims if You Are on Inquiry Notice

Ryan A. Bennett | White and Williams

In Ryan Altenbaugh, et al. v. Benchmark Builders Inc., et al., No. 120, 2021, 2022 Del. LEXIS 24, the Supreme Court of Delaware recently affirmed the lower court’s ruling that the statute of limitations barred the homeowners’ negligent construction claims. Although the court applied the discovery rule to toll the running of the three-year statute of limitations, it found that the homeowners were on inquiry notice of the defects within their home eight years before filing suit.

Mr. Altenbaugh and his wife (Plaintiffs) purchased their home in 2008 from Benchmark Builders, Inc. (Benchmark). One year into homeownership, Plaintiffs reported water leaking into the kitchen from windows to Benchmark. Two years later, in January 2011, Plaintiffs wrote a letter to Benchmark notifying it of a water issue in the basement. Specifically, the letter described a 15’ x 4’ section of wall that was “soaked,” including the fiber glass insulation. Benchmark’s representative examined the area and told Plaintiffs the issue was limited to a small area and that it had been repaired.

In 2019, during a separate bathroom repair, a contractor noted rotting wood behind the drywall. Plaintiffs conducted a moisture survey which revealed “systemic and catastrophic water intrusion.” The cause of the water intrusion purportedly related to a failure to install adequate flashing around penetrations through the stucco exterior dating back to the original construction. Plaintiffs filed suit against Benchmark and Delaware Roofing & Siding Company L.L.C. (referred to collectively with Benchmark as Defendants) in November 2019.

Defendants filed a motion for summary judgment and the trial court granted the motion, stating that Plaintiffs had actual knowledge of the construction defects by at least 2011— the time at which Plaintiffs sent their letter to Benchmark. Plaintiffs unsuccessfully argued that summary judgment was not appropriate because questions of fact remained with respect to the discovery rule.

On appeal, Plaintiffs argued that despite reporting issues in 2009 and 2011, they were unaware that water had been systemically penetrating the stucco and infiltrating their home. Thus, the discovery of the systemic water intrusion did not take place until 2019. The court disagreed. As the high court noted, in construction defect actions, the cause of action accrues at the time of construction unless the discovery rule tolls the running of the three-year statute of limitations. While Plaintiffs attempted to argue that they did not possess specialized home construction knowledge, the Supreme Court believed their letter to Benchmark noting “construction defects” and the discovery of soaked walls was enough to show awareness of the issue. Because the court agreed that they were on “inquiry notice” of the claim in 2011, when their injury was no longer inherently unknowable, the Supreme Court of Delaware affirmed the Superior Court’s grant of summary judgment based on the statute of limitations.

When investigating a construction defect loss in Delaware (a jurisdiction that applies the discovery rule to latent construction defect claims), it is important to keep in mind not only the date the defect was discovered, but whether the facts suggest that the plaintiff was on “inquiry notice” of the claim. In cases where the plaintiff was on “inquiry notice” of the claim, a court may find that, because the plaintiff was on inquiry notice, the statute of limitations was not tolled until the time of actual discovery. As the court found in this instance, because the plaintiffs were on inquiry notice of the claim more than eight years prior to the time the suit was filed, their claim was barred by Delaware’s three-year statute of limitations.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.