Construction Defect Claims Not Covered

Tred R. Eyerly | Insurance Law Hawaii

    The court found that the insured’s negligent acts causing damage to only the structure of the home it built were not covered under the CGL policy. Westfield Ins. Co. v. Zaremba Builders II LLC, 2022 U.S. Dist. LEXIS 36189 (N.D. Ill. March 2, 2022).

    Zaremba contracted to build a house for the Vrdolyak Trust. After completion of the home, the occupants found many problems, including painting defects such as bubbling and peeling, leaving the basement full of water for months, causing damage to ductwork, framing and piping in the house, etc. The Trust sued and Westfield denied a defense.

    Westfield filed a declaratory judgment action for a ruling that it had no duty to defend or indemnify. On Westfield’s motion for summary judgment, the court determined there was no property damage. Property damage included “physical injury to tangible property.” When the alleged damage occurred in the course of a construction project, tangible property had to be property outside the scope of the contract for project. 

    Zaremba’s construction project encompassed the entire home. The underlying complaint alleged only damage to the structure itself, or damage that fell within the scope of Zaremba’s contract. All the alleged damage constituted damage to the very house Zaremba was contracted to build. Therefore, it did not quality as “property damage” under the policy.

    Zaremba argued he purchased Products-Completed Operations coverage. But purchase of the coverage did not mean that, once the project is complete, any damage to the project itself was covered. While the Products-Completed Operations provision extended the grant of coverage in the insuring agreement to completed products or operations, it remained limited by the terms of that grant of coverage. Here, the insuring agreement required that an “occurrence” result in “property damage’ to trigger coverage. There was no property damage here when the underlying complaint alleged only construction defects causing damage within the scope of the contracted-for project. 

    Therefore, summary judgment was granted to Westfield. 

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.

Illinois Appellate Court Finds No CGL Coverage for Defective Elevator Suit

Andrew Daechsel | PropertyCasualtyFocus

In the recent decision of Korte & Luitjohan Contractors Inc. v. Erie Insurance Exchange, the Fifth District Appellate Court of Illinois reaffirmed that, under Illinois law: (1) construction defects generally do not trigger coverage under commercial general liability insurance policies; (2) such policies generally do not cover the cost to repair construction defects or economic losses resulting from construction defects; and (3) parol evidence is irrelevant to the interpretation of an unambiguous insurance policy.

image of a pair of elevators

The case involved Korte & Luitjohan Contractors Inc.’s claim for coverage under its commercial general liability policy issued by Erie Insurance Exchange for an underlying lawsuit filed against K&L by a library. In the underlying lawsuit, the library alleged that it hired K&L to complete a construction project at its building, which included the installation of two elevators. The elevators allegedly failed to perform properly. For example, the library alleged that the elevators occasionally trapped individuals, failed to go to the correct floors, failed to close, and failed to respond when called. Additionally, one of the elevators allegedly was out of order for approximately one month. The library alleged that it “incurred damages as a result of the failure of [K&L] to provide reliable, functioning elevators.” Based on these allegations, the library asserted claims against K&L for breach of contract, breach of implied warranty of merchantability, breach of warranty of fitness for a particular purpose, and breach of an express, written warranty.

In the coverage action, the trial court entered summary judgment in favor of Erie, holding that Erie had no duty to defend or indemnify K&L as to the underlying lawsuit. The appellate court affirmed. The appellate court explained that, for the underlying lawsuit to trigger the policy’s insuring agreement, it needed to allege “property damage” caused by an “occurrence.” Like many CGL policies, the policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions,” and the policy defined “property damage” as:

  1. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
  2. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.

The appellate court explained, “Although the policy does not define ‘accident,’ it has been defined throughout Illinois case law as ‘an unforeseen occurrence, usually of an untoward or disastrous character or an undesigned sudden or unexpected event of an inflictive or unfortunate character.’” Furthermore, “under Illinois law, construction defects do not constitute an accident or occurrence necessary to trigger coverage under commercial general liability policies.” The appellate court also stated: “[T]he policy at issue contains the standard policy definition of property damage … and ‘differentiates between physical damage to tangible property and intangible property losses, such as economic interests.’ ‘Courts do not consider the latter types of losses to be ‘property damage.’”

Based on this legal framework, the appellate court held that the policy did not provide coverage for the underlying lawsuit, explaining as follows:

[T]he underlying complaint alleges that [K&L] breached its contract by providing, through its subcontractor, elevators that were faulty and/or installed ineffectively. The complaint does not allege that any of the [library’s] property was damaged because of the faulty elevators. The complaint does not seek money damages for any property damage, but rather, seeks compensation for correctly completing the installation of the elevators, and for economic losses the [library] sustained because of having to use the faulty elevators until they could be repaired. Accordingly, we find that the underlying complaint does not allege “property damage” caused by “an occurrence” as required by the policy to trigger coverage.

The appellate court also affirmed the trial court’s order denying K&L’s motion to compel discovery of information regarding Erie’s correspondence with the Insurance Service Office (ISO) and other ISO information. The appellate court stated that this information was parol evidence, which was irrelevant because the policy was unambiguous and “[p]arol evidence is not appropriate to interpret policy language that is facially unambiguous.”

Furthermore, in the trial court, K&L had attempted to introduce expert testimony regarding the correct interpretation of the policy. The appellate court affirmed the trial court’s decision to bar this expert testimony because the policy was unambiguous and, “[i]n the absence of ambiguity, expert testimony is inappropriate.”

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.

Fifth Circuit – – Damage to Property Beyond Insured’s Product/Work Not Precluded By ‘Your Product/Your Work Exclusion’

Anthony L. Miscioscia and Marianne Bradley | White and Williams

On January 11, 2022, the United States Court of Appeals for the Fifth Circuit issued its decision in Siplast, Incorporated v. Employers Mutual Casualty Company, 2022 U.S. App. LEXIS 795 (5th Cir. Jan. 11, 2022), finding that an insurer had a duty to defend its insured in a construction defect case where the underlying complaint alleged damage to property beyond the product and work of the insured.

Siplast, Inc. (Siplast) had contracted with the Archdiocese of New York (the Archdiocese) to install a roof membrane system at a high school in the Bronx, New York. Id. at *1. As part of the contract, Siplast guaranteed that the roof membrane system would remain in a watertight condition for at least twenty years. Id. at *2. If it did not, Siplast would repair the roof membrane system at its own expense. Id.

Several years after the installation, the Archdiocese observed water damage in the ceiling tiles at the high school. Id. The Archdiocese contacted Siplast, who attempted to repair the damage and prevent further leaks; however, leaks and resultant damage continued to occur. Id. Siplast subsequently refused to make any more improvements to the roof. Id.

The Archdiocese retained a consultant, who noted significant issues with both the workmanship and the materials used in the roof membrane system. Id. at *2-3. The consultant determined that the only way to remediate the issues would be to replace the failed membrane with a new one. Id. at *3.

The Archdiocese sued Siplast, which tendered its defense to Employers Mutual Casualty Company (EMCC) under several commercial general liability policies that Siplast had purchased from EMCC. Id. at *6. EMCC denied Siplast’s claim pursuant to, inter alia, the policies’ “Your Product/Your Work Exclusion.” Id.

Siplast filed a declaratory judgment action, seeking a declaration that it was entitled to coverage under the policies. Id. at 6. Both parties moved for summary judgment, and the District Court ruled in favor of the carrier, finding that – while the underlying complaint did allege “property damage” that was caused by an “occurrence” – the alleged damage nevertheless fit within the policies’ “Your Product/Your Work Exclusion.” Id. at *6-7.

The Fifth Circuit, applying Texas law, reversed. Relying on Wilshire Insurance Company v. RJT Construction, LLC, 581 F.3d 222 (5th Cir. 2009), and Building Specialties, Incorporated v. Liberty Mutual Fire Insurance Company, 712 F. Supp. 2d 628 (S.D. Tex. 2010), the Fifth Circuit explained that if a “complaint alleges damage to and seeks damages for any property that is not the insured’s product or directly subject to the insured’s work,” then the “claim falls outside of a ‘your product/your work’ exclusion” and the insurer has a duty to defend.” Id. at *12. If, however, a complaint “solely alleges facts and damage to the insured’s own products, or solely seeks to recover the costs to repair the insured’s work, then it is covered by a ‘your product/your work’ exclusion and the duty to defend remains dormant.” Id.

The Fifth Circuit specifically disagreed with the District Court’s finding that – while the underlying complaint mentioned damage to property other than Siplast’s roofing products – coverage was not owed as the Archdiocese did not actually make a claim to recover for any such damage. Id. at *13-14. Such a reading, explained the Fifth Circuit, was “overly narrow” where the factual allegations raised by the underlying complaint “repeatedly point to damage to property other than Siplast’s roof membrane system.” Id. at *14. For example, the underlying complaint “alleges that there was ‘water damage in the ceiling tiles throughout the [school] after a rainstorm’ and that Siplast recommended the Archdiocese ‘contact a designated Siplast roofing contractor to address the damage and leak.’” Id. (emphasis in original).

According to the District Court, such factual allegations create inferences that: (1) the Archdiocese asserted their cause of action based not only on damage to the roof membrane, but also on property damage to other parts of the school; and (2) that the water damage to non-roof-membrane property was caused by the failure of Siplast’s faulty roof membrane system. Id. at *15. Because the underlying complaint alleged damage to property beyond the product and work of the insured, the damages fell outside of the “Your Product/Your Work Exclusion” such that EMCC owed a duty to defend. Id. at *16.

The Fifth Circuit also affirmed the District Court’s finding that the underlying complaint sought damages for “property damage” caused by an “occurrence” – defined, in part, as an “accident” – as: (1) the complaint contained factual allegations that Siplast’s negligence led to the failure of the roof membrane, which caused damage to both the roof itself and to the school as a whole; and (2) there were no allegations that the failure of the roof and attendant damage were intended by Siplast or the ‘natural and expected result’ of Siplast’s actions. Id. at *20-21.

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.

Proposed Changes To Florida’s Statutes Of Limitations And Repose Would Greatly Impact Construction Defect Litigation

Elizabeth Ferguson and Taylor A. Naughton | Marshall, Dennehey, Warner, Coleman & Goggin

A new bill has been proposed in the Florida Legislature that would amend the statutes of limitations and repose greatly impacting construction defect litigation.

The original bill proposed to rewrite Fla. Stat. 95.11(3)(c) by completely eliminating the ten-year statute of repose for latent defects, instead requiring all actions founded on the design, planning, or construction of an improvement to real property to be filed within four years. The proposed four-year time period would begin from the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion of the contract or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest.

After introduction of the bill, the Committee on Community Affairs proposed a complete overhaul of 95.11, as it relates to construction defect litigation. The Committee proposes a new subsection be added to Fla. Stat. 95.11, subsection 12, titled “ACTIONS RELATING TO AN IMPROVEMENT TO REAL PROPERTY.” This new section lays out 4 categories of improvements:

Category 1 improvements cover detached single-family home, including pre-manufactured homes, or standalone building structures intended for use by a single business, occupant or owner, not exceeding three stories in height and related improvements to such homes, buildings or structures.

Category 2 improvements include single-family dwelling units not exceeding three stories in height which are constructed in a series or group of attached units or a commercial or nonresidential building not exceeding three stories in height and related improvements to such dwellings, buildings or structures.

Category 3 improvements include commercial or residential buildings or structures of four or more stories in height and related improvements to such buildings or structures.

Category 4 improvements is a catchall for any improvement that does not fall under Categories 1-3.

Further, the proposal amends the statute of limitations to read: “An action founded on the design, planning, or construction of an improvement to real property may be commenced within 4 years after the time to commence an action begins to run.” The repose period would be shortened to five years after the time for commencing an action begins to run for category 1 improvements; seven years for category 2 improvements; 12 years for category 3 improvements, and 10 years for category 4 improvements. The time to commence such an action would begin to run from the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion of the contract or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is earliest.

The proposed amendment contains a limited one-year extension of time for counterclaims, cross-claims, and third-party claims that arise out of the conduct, transaction, or occurrence set out or attempted to be set out in a pleading that the current statute contains. It also maintains that warranty work or correction or repair of defects to completed does not extend the period of time within which an action must be commenced.

If signed into law, these amendments would apply to any action commenced on or after July 1, 2022, regardless of when the cause of action accrued. However, any action that would not have been time barred before the amendments may be commenced before July 1, 2023. Any action not commenced by July 1, 2023, that is barred by the amendments is barred.

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.

Owner’s Design Defects Can Excuse Contractor’s Own Defective Performance

James Yand | Miller Nash

Generally, the implied warranty of the adequacy of the plans and specifications, also known as the Spearin Doctrine, allocates risk to the owner for any defect in the design of the project. This influential federal decision has been applied by state courts across the country, including its adoption as part of Washington construction law.

Recently, the Washington Supreme Court, in Lake Hills Investments, LLC v. Rushforth Construction Co., Inc., affirmed the long standing precedent that limits a contractor’s liability for defects when the contractor follows the owner provided plans and specifications. This tracks Washington’s public policy that allocates risk and liability on construction projects between the owner, architect and contractor based on each party’s role. The decision affirms the rule that a contractor can apply the Spearin defense to reduce its liability even if some of the defects were caused in part by its own defective work.

The owner in Lake Hills had withheld millions of dollars in progress payments and proceeded to file suit against the contractor for breach of contract. The contractor responded to this lawsuit by claiming that the delays and defects had resulted from faulty design specifications and plans provided by the owner and its design team. After a two month trial, the jury returned a split decision.

On appeal, the Court of Appeals found that the jury instruction for the affirmative defense of faulty plans or specifications was misstated and therefore, prejudiced the owner. The question before the Washington Supreme Court was whether the use of the word “solely” in the Spearin Doctrine jury instruction was incorrect.

The Supreme Court explained that the Spearin defense is “based on control” or lack thereof by the contractor. Specifically, where an owner is contractually responsible for providing the design and it provides defective or incomplete plans, a contractor should not be responsible for damage caused since it was “not the source of the defects.” As applied, the Spearin Doctrine is a “complete defense” to design defect claims only if the damage is “solely due” to the defective design. If the defect is not due solely to defective design, the jury must allocate between design and installation defects. Each side bears the risk for their role in the defects.

This decision clarifies that Spearin still applies even if the owner is able to point to areas that contractor failed to properly perform.

Practice Tip

Contractors should be aware of the many implied obligations in construction contracts when they negotiate their scope of work with owners and other contractors. A contractor generally has a contractual duty to perform work in a workmanlike manner and free from defects in materials or workmanship. An owner who furnishes plans and specifications for the work impliedly warrants to the contractor that they will be sufficient for the intended purpose. Each side normally bears the burden of performing their respective obligations.

Be aware of contract clauses that seek to override the implied warranty of the adequacy of plans and instead shifts the design responsibility onto the contractor. This leaves the contractor holding the bag for any defects, even if the root cause was the flawed plans and specification prepared by the owner.

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.