Source: https://www.insurancelawhawaii.com/insurance_law_hawaii/2017/01/index.html
Timestamp: 2019-04-24 10:17:39+00:00

Document:
The Arkansas Court of Appeals affirmed the denial of coverage for the insured based upon the exclusion for "damage to your product." S.E. Arnold & Co. v. Cincinnati Ins. Co., 2016 Ark. App. LEXIS 625 (Ark. Ct. App. Dec. 7, 2016).
The homeowners paid the insured, S.E. Arnold & Company, over $78,000 to supply and install wood flooring in their residence. The homeowners eventually sued Arnold, alleging that the products and services as provided by Arnold had breached its contract, Arnold was negligent, and it violated applicable rules, regulations, and laws. Specifically, the homeowners alleged that the flooring as sold and installed had splinters, cupping occurred across the width of the individual pieces of flooring, and installation was in contradiction to industry standards and applicable building codes.
Cincinnati denied coverage based upon the CGL policy's exclusion for "damage to your product." The exclusion applied to "'property damage' to 'your product' arising out of it or any part of it." Arnold sued Cincinnati and both parties filed motions for summary judgment. The trial court granted Cincinnati's motion and Arnold appealed.
Arnold argued that the homeowners' complaint included one count for negligence, which was targeted more toward the work performed, rather than the product itself. There was no adjudication of these claims, so it was impossible to know whether the problems with the flooring were caused by a defective product or faulty workmanship.
Under Arkansas law, faulty workmanship was an "occurrence." Although the underlying complaint alleged problems with the installation of the flooring, which could be considered faulty workmanship, the only resulting damage was to the flooring itself, which was a product sold by Arnold. There was no uncertainty as to the effect of the damage to your product exclusion - it excluded coverage for property damage to Arnold's product arising out of it or any part of it.
The court relied upon a hypothetical. A roofing company sold defective shingles to a consumer. When the consumer's roof leaked, the water damaged the carpet and drapes in the consumer's home. While the latter damage would be covered by the roofing company's CGL policy, the insurer would not be obligated to replace the roof under the damage to your product exclusion.
Here, the homeowners alleged no damages beyond damage to Arnold's own product, which was the flooring itself. The damage to your product exclusion applied and precluded coverage, regardless of the inapplicability of the damage to your work exclusion. There was no possibility that the alleged damage would have been covered by Arnold's CGL policy in light of the damage to your product exclusion. Therefore, Cincinnati had no duty to defend or indemnify. The trial court's decision was affirmed.
The Arizona Court of Appeals overturned the trial court's determination that the general contractor was entitled to coverage under the subcontractor's exception to the "Your Work" exclusion. Double AA Builders v. Preferred Contrs. Ins. Co., 2016 Ariz. App. LEXIS 294 (Ariz. Ct. App. Dec. 30, 2016).
Harkins Theatres hired Double AA Builders, Ltd. to serve as general contractor to build a theater complex. Double AA subcontracted with Anchor Roofing, Inc. to install the roof. Anchor was the "Named Insured" under a policy issued by Preferred Contractors Insurance Company, LLC. Double AA was an "Additional Insured" under the Preferred policy.
After the theater project was completed, the roof began to leak, causing damage to work performed by other subcontractors. Double AA replaced the roof and sued Anchor and Preferred seeking indemnification. Double AA sought to recover only the cost of replacing the roof, and not the cost of the damage to other property.
Preferred and Double AA filed cross-motions for summary judgment on the question of whether Double AA's cost of replacing the roof was a covered loss under the policy. The court granted Double AA's motion, concluding that coverage was triggered by an "occurrence" and "property damage," and that the subcontractor exception clause removed the claim from the policy's "your work" exclusion.
The Court of Appeals reversed. The exclusion removed from coverage "'property damage' to 'your work' arising out of it or any part of it and included in the 'products completed operations hazard.'" The exception applied "if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor." "Your" and "your" meant "the Named Insured." "Products completed operations hazard" was defined as "including all . . . 'property damage' occurring away from the premises you own or rent arising out . . . 'your work.'"
Here, the exclusion applied because the case related only to Anchor's defective work. The exception did not apply, however. The only Named Insured was Anchor, and Anchor performed the defective work itself - not through a subcontractor. The reference in the "subcontractor exception" to work "performed on your behalf by a subcontractor' referred to work performed by a subcontractor of Anchor only - not to Anchor's work performed as a subcontractor of Double AA. Because the policy defined "you" and "your" as the "Named Insured," the exception applied when someone else did work as the named insured's subcontractor, not when the named insured was a subcontractor. Double AA was an "Additional Insured", not a "Named Insured" under the policy.
The Colorado Supreme Court ordered the insurer to produce documents after failing to demonstrate the documents contained were trade secrets. In Re Rumnock v. Anschutz, 2016 Colo. LEXIS 1228 (Colo. Dec. 5, 2016).
Stephen Rumnock was involved in an auto accident with an uninsured driver. Rumnock brought negligence claims against the driver and uninsured/underinsured motorist claims against his insurers, including American Family Insurance Company. American Family initially refused to pay benefits, but eventually paid him policy limits. Rumnock then amended his complaint to add bad faith and abuse of process claims against American Family.
Rumnock requested that American Family produce documents showing, among other things, its procedures, policies, and guidelines for handling uninsured motorist claims. American Family did not request an extension and failed to produce the documents.
A motion to compel hearing was held seven weeks after the discovery responses were due. The trial court ordered American Family to respond fully to the discovery by the close of business on November 6 and ruled, "All objections are waived." At 5:06 p.m. on November 6, American Family provided some of the requested documents. Two hours later, it filed a motion for a protective order. The motion asserted the internal documents governing claims handling were trade secrets, and sought to limit their use and disclosure to the needs of the current litigation.
The trial court conducted another hearing. The court ordered Rumnock not to share the alleged trade secrets with American Family's competitors, but refused to order the broader limitations American Family had requested, including not using the documents beyond the current litigation. The court reasoned that granting the full protection sought would be inconsistent with its earlier order imposing discovery sanctions against American Family.
On appeal the Colorado Supreme Court concluded that American Family failed to present evidence that the documents allegedly in need of protection as trade secrets were, in fact, trade secrets or otherwise confidential information. Whether information was confidential commercial information was a question of fact to be determined by the trial court. Where there was no genuine dispute of fact, however, the court could decide as a matter of law whether the information was a trade secret or otherwise confidential.
Here, American Family had the burden to establish the need for the protective order, yet it presented no evidence from which the court could have determined that the documents were actually trade secrets or otherwise confidential. No affidavits or testimony were submitted. Nor were the alleged documents submitted under seal for in-camera review. So the trial court's partial denial of American Family's request for a protective order was affirmed.
The California Court of Appeal overturned the trial court's issuance of summary judgment based upon the possibility of continuing property damage during the insurer's policy period. Tidwell Enters. v. Fin. Pac. Ins. Co., 2016 Cal. App. LEXIS 1038 (Cal. Ct. App. Nov. 29, 2016).
Financial Pacific insured Greg Tidwell, Tidwell Enterprises, Inc. and Tidwell Enterprises Fireplace Division (Tidwell) under CGL policies issued between March 2003 and March 2010. In 2006 or 2007, Tidwell installed a fireplace in a home. On November 11, 2011, 20 months after the end of the last policy period of Financial Pacific's coverage, the home owned by Kendall Fox, was damaged by fire. Fox was insured by State Farm. State Farm's attorney advised Tidwell of the fire, and Tidwell forwarded the information to Financial Pacific.
State Farm hired an investigator who reported that the fire was caused by the installation of an "unlisted shroud at the top of the chimney chase". This prevented the fireplace from drafting properly, resulting in overheating of the fireplace and heat transfer to the surround wood framing members. This resulted in the ignition of the framing members at the sides, top and bottom of the fireplace. State Farm sent the report to Financial Pacific.
State Farm then sued Tidwell under its subrogated claim for negligence. Tidwell tendered the complaint to Financial Pacific, who denied the tender, claiming the fire occurred on November 11, 2011, long after Financial Pacific's policies had expired. Tidwell's attorney wrote back asserting that based on the allegations and expert reports, Financial Pacific could not conclude that there was no continuous and progressive property damage occurring during the policy period. There could have been occurrences of property damage long before the fire manifested itself on the date provided in the complaint.
When Financial Pacific still refused to defend, Tidwell sued for declaratory relief, breach of contract, and tortious breach of contract. The trial court granted summary judgment to Financial Pacific because its policy lapsed on March 1, 2010, long before the fire on November 11, 2011.
The Court of Appeal reversed. There was a possibility that damages occurred because of earlier physical injury to the house for which Tidwell was responsible, and thus there was a possibility that the damages State Farm sought fell within the coverage provided by the terms of Financial Pacific's policies. Therefore, Financial Pacific owed Tidwell a duty to defend.
Under the policy language, Financial Pacific would be liable for any sums Tidwell became legally obligated to pay as damages because of physical injury to tangible property that: (1) occurred during a policy period; and (2) was caused by continuous or repeated exposure to substantially the same general harmful conditions.
Consequently, there was a possibility of coverage based on the allegations of State Farm's complaint and the facts known to Financial Pacific. There was reason to believe Tidwell might have negligently installed a custom top on the chimney that restricted the flow of air in the chimney. This might have resulted in excess heat in the chimney every time a fire was burned in the fireplace from the time the house was built. The fires may have altered the chemical composition of the wood framing the chimney chase, thereby reducing the temperature at which it would ignite, until eventually, on November 11, 2011, the wood framing the chimney chase did ignite, which resulted in the fire that damaged the Fox's house.
Therefore, the judgment in favor of Financial Pacific was reversed and the case remanded with instructions to vacate the order granting summary judgment and to enter a new order denying summary judgment.
The federal district court found there was no coverage for the insured contractor under Arkansas law when sued for construction defects by two homeowners. Auto-Owners Ins. Co. v. Hambuchen Constr., 2016 U.S. Dist. LEXIS 160364 (W.D. Ark. Nov. 18, 2016).
In one case, the Pierces hired Hambuchen, the insured contractor for the construction of a new home, which was completed in 2006. Two years after moving in, the Pierces experienced water leaks at various locations inside the home and the basement flooded. Water damage rendered the back deck unstable. In 2010 and 2011, Hambuchen made repairs to stop leaks on the decks, but in 2012 the back deck again showed signs of water damage. The Pierces sued, and Auto-Owners provided a defense under a reservation of rights.
In the second case, the Lessmanns hired Hambuchen in 2005 as general contractor to construct their new home. Following completion of the home, the Lessmanns complained about scratched windows. The Lessmanns filed suit against Hambuchen for breach of the construction contract by failing to build their home in a workmanlike manner. The Lessmanns filed suit in May 2009. Auto-Owners was not aware of the suit until 2015 when it received notice that the Lessmanns had filed an amended complaint. The Lessmans' suit went to trial and Hambuchen prevailed.
Auto-Owners filed suit against Hambuchen for a declaratory judgment regarding coverage for the two cases under the CGL policy. Both parties moved for summary judgment. Under Arkansas law, defective workmanship standing alone, resulting in damages only to the work product, was not an occurrence. The Eighth Circuit recognized that when faulty workmanship resulted in damage to the work product, there was no coverage to the work product itself, but the insurer may still be obligated to reimburse the insured for collateral damage to other property.
The Pierces alleged that defective workmanship caused damage to the exterior decks and other exterior and interior areas of their home. The Pierces hired Hambuchen to build an entire home, and the exterior decks and porches were individual parts of the entire construction project. Therefore, the Pierces sought damages for defective workmanship that resulted in damages only to the work product itself, which did not qualify as property damage caused by an "occurrence."
Similarly, the Lessmanns claimed that Hambuchen failed to build their home in a skillful and workmanlike manner, which resulted in a shifting foundation and scratched windows. There was collateral damage caused by the shifting foundation, including damage to sheet rock and sod. Although damage to sod might qualify as collateral damage to other property, damaged sheet rock resulting from a shifting foundation was classified as damage to the work product itself.
Auto Owners asserted that if there was coverage under the insuring agreement, the "Damage to Your Work" exclusion would apply. Coverage was excluded for "property damage to your work arising out of it or any part of it and included in the products-completed operations hazard." Here, Auto Owners carried its burden of showing that the property damage claimed in the underlying lawsuits fell under the "Damage to Your Work" exclusion.
Hambuchen argued that the "products-completed operations hazard" served as an exception to the "your work" exclusion. The policy defined "products-completed operations hazard" as "all . . . property damage occurring away from premises you own or rent and arising out of . . . your work except work that has not yet been completed or abandoned." The Eighth Circuit had noted that the risk intended to be insured by a products hazard and completed operations provision was the possibility that the goods products or work of the insured, once relinquished or completed, would cause bodily injury or damage to property other than to the product or completed work itself, and for which the insured may be found liable. Here, the Pierces and Lessmanns sought relief for damage to the product or completed work itself.
Therefore, the "Damage to Your Work" provision excluded coverage for all property damage claimed in the underlying lawsuits, including property damage that fell under the policy's "products-completed operations hazard" definition. Auto-Owners had no duty to defend or indemnify under the Pierces lawsuit and no duty to defend the Lessmanns' lawsuit.
Finally, Hambuchen failed to give timely notice under the policy of the Lessmanns' lawsuit. The Hambuchen's attorney gave notice of an amended complaint be filed four years after the initial lawsuit commenced.
Consequently Auto Owners motion for summary judgment was granted and Hambuchen's cross motion was denied.
The federal district court for the District of Hawaii continued its longstanding pattern of finding no coverage for claims based upon construction defects. Am. Auto. Ins. Co. v. Haw. Nut & Bolt, 2016 U.S. Dist. LEXIS 174243 (D. Haw. Dec. 16, 2016).
Safeway filed a complaint against Hawaii Nut & Bolt (HNB). The complaint involved issues pertaining to the construction of the roof deck at a Safeway store. HNB was a subcontractor hired to supply a coating system on the roof of the store to make it waterproof. The product was manufactured by VersaFlex. After the store opened, there were water leaks from the roof. This disrupted business operations and caused damage to Safeway's business and reputation. HNB tendered the claims to its CGL carrier, Fireman's Fund Insurance Corporation (FFIC). FFIC defended the underlying lawsuit for six years under a reservation of rights.
FFIC eventually filed suit for Declaratory Judgment against HNB to establish it had no duty to defend or to indemnify HNB. HNB settled the underlying lawsuit with Safeway. As part of the settlement HNB entered into a stipulated judgment in which it assigned its claims against FFIC to Safeway. Safeway was granted leave to join FFIC lawsuit.
Safeway and HNB filed a Second Amended Counterclaims (SACC) raising claims against FFIC for breach of contract, bad faith, negligent misrepresentation and reformation. FFIC moved to dismiss the SACC.
The court first granted dismissal of Count I of the SACC for breach of contract. Under the Ninth Circuit's decision in Burlington Ins. Co. v. Oceanic Design & Const., Inc., 383 F.3d 940 (9th Cir. 2004) there was no coverage under a CGL policy for contract and contract-based tort claims. Further, in Group Builders, Inc. v. Admiral Ins. Co., the Hawaii Intermediate Court of Appeals held that under Hawaii law, construction defect claims did not constitute an "occurrence." Id., 231 P.3d 67, 73 (Haw. Ct. App. 2010).
The underlying complaint alleged that HNB entered into contracts with the general contractor to supply the VersaFlex products and with another subcontractor to aid in supplying the VersaFlex products. The underlying complaint further alleged that Safeway was the third-party beneficiary of these contracts. Therefore, the underlying claims for breach of contract, breach of the covenant of good faith and fair dealing, and breach of implied warranties were all contract-based and not covered.
The negligence and gross negligence claims alleged that HNB owed to Safeway a duty to perform work and provided products free from defects in accordance with the construction contract and all laws, codes and regulations applicable to such work. Thus, these claims also arose from HNB's alleged contracts and warranties.
Finally, the reformation claim was not pled with sufficient particularity. The SACC failed to plead facts regarding who at FFIC was mistaken about the scope of the policy's coverage and when and how such facts regarding the mutual mistake arose. The SACC also failed to include details of any statements or representations made by FFIC regarding its alleged mistake.
So FFIC's motion to dismiss was granted.

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