Source: https://www.insurancelawhawaii.com/insurance_law_hawaii/construction_defects/
Timestamp: 2019-04-22 10:26:15+00:00

Document:
The Michigan Court of Appeals found there was no coverage for a lawsuit filed against the insureds for faulty workmanship. Skanska United States Bldg. v M.A.P. Mech. Contrs., 2019 Mich App. LEXIS 529 (Mich. Ct. App. March 19, 2019).
Contractor Skanska United States Building was the construction manager on a renovation project for the medical center. The heating and cooling portion of the project was subcontracted to M.A.P. Mechanical Contractors (MAP). MAP had a CGL policy from Amerisure Insurance Company. Skanska and the medical center were named as additional insureds on the policy.
After installation of the steam boiler and related piping, it was discovered that the heating system did not function property. Skanska discovered that MAP had installed some of the expansion joints backward, causing damage to concrete, steel, and heating system. The medical center sent a demand to MAP. Skanska performed the repairs and replaced the damaged property. Skanska then submitted a claim to Amerisure, which was denied.
Skanska filed suit against MAP and Amerisure. The trial court denied Amerisure's motion for summary judgment. The court found that the parties injured by MAP's negligence did not anticipate, foresee or expect backward expansion joints or property damage to the entire length of the underground steam lines. Michigan courts had consistently focused on the particular property damaged to determine whether an "occurrence" had happened. The unforeseen incident meant an "occurrence" may have happened, which triggered Amerisure's duty of coverage.
The court of appeals found that the trial court had erred. It was well established that an "occurrence' could not include damages for the insured's own faulty workmanship. Consequently, there was no "occurrence" here. Amerisure presented evidence to demonstrate that all of the repair and replacement work was within the scope of Skanska's original project. Once Amerisure presented this evidence, the burden shifted to Skanska to present evidence that the repair and replacement work included tasks or property beyond the scope of the original project.
Amerisure was entitled to judgment as a matter of law because coverage was not triggered due to lack of an "occurrence" and there were no genuine issues of material fact that the only damage was to Skanska's own work product, or that of its subcontractor.
Damage to the concrete floor installed by the insured subcontractor was not property damage and thus not covered under the insured's CGL policy. Kalman Floor Co. v. Old Republic Gen. Ins. Corp., 2019 U.S. Dist. LEXIS 3319 (D. Colo Jan. 8, 2019).
In 2007, Kalman Floor Co. was subcontracted to construct over 158,000 square feet of concrete flooring for a cold storage facility. The concrete floor was completed in late 2008. In late 2009, the contractor notified Kalman that pockmarks, or "pop-outs," were visible on the concrete flooring. The only damage to tangible property in the facility caused by the pop-outs was the concrete flooring itself.
On January 31, 2009, Old Republic issued a general liability policy to Kalman for one year. The policy excluded for damage to "your work," defined as "work or operations performed by you or on your behalf." Old Republic denied coverage for damage to the concrete floor. Kalman sued, seeking a declaration that the exclusions did not bar coverage.
Under Tenth Circuit law, as established in Greystone Const, Inc. v. Nat'l Fire & Marine Ins. Co., 661 F.3d 1272 (10th Cir. 2011), the term "occurrence" in a CGL policy encompassed unforeseeable damage to non-defective property arising from faulty workmanship. The policy was intended to protect the insured business from claims by third parties concerning personal injury or property damage resulting from accidents. In discovery, Kalman admitted the pop-outs in the concrete floor "did not physically injure or damage any tangible property other than the floor system it installed." Thus, under the terms of the policy, property damage did not occur.
Consequently, Old Republic's motion for summary judgment was granted and the case dismissed with prejudice.
Interpreting Florida law, the federal district court found that the insurer must defend the subcontractor for claims based upon faulty workmanship. S. Owners Ins. Co. v. Gallo Bldg. Servs., 2018 U.S. Dist. LEXIS 212961 (M.D. Fla. Dec. 18, 2018).
Gallo Building Services entered a subcontract with KB Homes, developer, related to the construction of a condominium project. All of the work was subcontracted by KB Homes to subcontractors, suppliers and material men. After completion of the project, the Condominium Association found a number of alleged construction defects at the project. KB Homes notified the subcontractors and tendered its defense. The subcontractors rejected the tender.
KB Homes filed suit against Gallo and other subcontractors. Claims against Gallo included breach of contract, breach of express and implied warranty, negligence and indemnity. Specific allegations against Gallo included failing to install all necessary control joints, installing incorrect mid-wall flashing, installing stucco in direct contact with dissimilar materials, etc.
Southern Owners Insurance Company filed suit for declaratory judgment that it had no duty to defend or indemnify its insured, Gallo. Gallo was subsequently dissolved. A default judgment was entered against Gallo, but KB Homes moved to set the default judgment aside, which was granted. KB Homes then moved for summary judgment in favor of Gallo.
The court noted that under Florida law, there was no property damage if there was no damage beyond the faulty workmanship, unless the faulty workmanship damaged some otherwise nondefective component of the project. Here, the court found that the underlying complaint alleged physical injury to tangible property by claiming that, in addition to faulty workmanship, defects in Gallo's work caused damage to other building components, damage to other property, and property damage to the work of KB Homes and other subcontractors.
Nevertheless, Southern argued two exclusions barred coverage. The Your Work Exclusion excluded coverage for "property damage" to "[Gallo's] work arising out of it or any part of it and included in the 'products-completed operations hazard.'" The policy defined "your work" to included "work or operations performed by [Gallo] or on [Gallo's] behalf. The "products-completed operations hazard" meant Gallo's completed work. Southern argued that the alleged construction defects arouse out of Gallo's own work and the policy contained no subcontractor exception. Typically, a CGL policy included an exception to the Your Work Exclusion for work performed by the insured's subcontractor.
Here, Gallo was a subcontractor responsible for a limited scope of work within the much larger general condominium project. The underlying complaint did not allege that Gallo's scope of work encompassed construction of the overall project. Rather, the underlying complaint alleged Gallo's limited scope of work. Further, the underlying complaint alleged that alleged defects "caused damage to other building components, damage to other property, loss of use, and required relocation of residents." Thus, damage beyond the scope of Gallo's work was alleged in the underlying complaint and the exclusion did not bar coverage.
Southern also argued there was not duty to defend because the allegations in the underlying complaint fell within the Stucco Exclusion. This exclusion barred coverage for any suit for property damage which "is in any way related to or arising out of an exterior finishing system or exterior stucco application." KB Homes argued that Gallo performed multiple scopes of work unrelated to stucco or an exterior finishing system and the underlying complaint contained allegations entirely unrelated to the application of either exterior. Consequently, this exclusion did not apply, either.
Finally, although Southern had a duty to defend, it was premature to determine whether there was a duty to indemnify because there had been no factual determination as to liability in the underlying case.
The insured's failure to verify that subcontractors had CGL policies and to provide a contract stating that the subcontractors would indemnify the insured as required by the policy's endorsement meant there was no coverage for the insured. Cincinnati Spec. Underwriters Ins. Co. v. Milionis Constr., Inc., 2018 U.S. Dist. LEXIS 199658 (E.D. Wash. Nov. 26, 2018).
The homeowners filed suit against Milionis, the general contractor for construction of a home. The underlying suit alleged that Milionis breached the parties' agreement by leaving the home unfinished. Cincinnati defended Milionis under a reservation of rights.
Cincinnati filed for a declaratory judgment while the underlying action was still pending, seeking a declaration that it had no duty to defend or indemnify Milionis. Cincinnati's initial motion for summary judgment arguing that it had no duty to defend was rejected by the court. In a renewed motion after the underlying action was concluded, ?Cincinnati sought a determination that there was no duty to indemnify.
The policy issued by Cincinnati had an endorsement requiring Milionis to: (1) obtain a formal written contract with subcontractors verifying that they had valid CGL insurance; (2) obtain a formal written contract stating that the subcontractors agreed "to defend, indemnify and hold Milionis harmless from any and all liability;" and (3) verify in the contract that the subcontractors had named Milionis as an additional insured on their CGL policy.
On the construction project, Milionis had subcontractors perform all the work. Milionis never sent Cincinnati any subcontractor contracts or proof of Milionis's additional insured status as required by the endorsement.
The underlying facts established that there was an occurrence and property damage. But Milionis did not dispute that it did not meet the conditions precedent to coverage - obtaining subcontractor contracts and being named as an additional insured on the subcontractors' liability policies. This was prejudicial to Cincinnati. Milionis's noncompliance with the endorsement left it with no contractual indemnification claims that it would have asserted to compel the subcontractors to contribute to the Milionis's defense or settlement. Moreover, it deprived Milionis of the ability to have direct contractual rights to a defense and coverage from the subcontractors' insurers. Consequently, Cincinnati was left with no other insurers and parties to share in the costs of defending and indemnifying Milionis.
Cincinnati was therefore relieved of its duty to indemnify under the policy.
Finding various exclusions inapplicable, the Federal District Court ruled that the insurer owed a defense to the general contractor based upon Texas law. Mt. Hawley Ins. Co. v. Slay Engineering, 2018 U.S. Dist. LEXIS 139363 (W.D. Texas Aug. 15, 2018).
Huser Construction had a CGL policy issued by Mt. Hawley Insurance Company. Huser contracted to design and construct a municipal sports complex with the City of Jourdanton. The project consisted of four baseball fields, a softball field, parking lots and swimming pool. Huser subcontracted with Cody Pools, Inc. to design and build the swimming pool. Huser also subcontracted with Q-Haul, Inc. to perform earth work, grading and storm drainage work at the site.
After substantial completion of the project, a Huser employee noticed cracks in the pool and parking lot paving. Cody Pool began repair work, but the problem was not cured. The City later notified Huser of several alleged deficiencies involving the swimming pool structure, asphalt paving, concrete flatwork and curbing, and overall drainage. When repairs were not performed to the satisfaction of the City, it sued Huser alleging breach of contract and negligence.
Huser notified Mt. Hawley. Coverage was denied based on certain exclusions. Mt. Hawley then filed suit seeking a judgment that it had no duty to defend or indemnify Huser. Mt. Hawley relied upon the Your Work Exclusion which precluded coverage for "property damage to your work arising out of it or any part of it and included in the products-completed operations hazard." The policy further stated that the exclusion did not apply "if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor." The policy included a separate endorsement that excluded coverage arising out of a breach of "express or implied contract, breach of express or implied warranty . . . regarding the formation, terms or performance of a contract."
The parties both moved for summary judgment. The court rejected Mt. Hawley's argument on the breach of contract exclusion. Merely because Huser may ultimately be liable for certain of the City's economic losses under a breach of contract theory did not mean that all of the alleged property damage was causally attributable to Huser's alleged breach of its contract with the City. The fact that all claims contained in the underlying suit have some relation to Huser's contract with the city or that Huser was sued for breach of contract were not enough to trigger the exclusion. To accept Mt. Hawley's argument, the facts alleged in the underlying suit would have to demonstrate that there were no other independent, coverage (non-excluded) "but for" caused of the alleged property damage.
The underlying suit alleged that "work performed by [Huser], its subcontractors and suppliers, was defective." Therefore, the underlying suit alleged that entities other than Huser were responsible for the allegedly defective work and the resulting damage. Accordingly, the allegations left open the possibility that the property damage may have occurred even in the absence of a breach of contract or implied duty by Huser.
Mt. Hawley argued that the subcontractor exception to the Your Work Exclusion was irrelevant because it was overridden by the endorsement containing the Breach of Contract Exclusion. But it was not natural to interpret the Breach of Contract Exclusion to encompass all work incidentally related to the project regardless of the party that performed the work or the capacity in which it did so. The court rejected the sweeping interpretation asserted by Mt. Hawley and instead found that the policy should be interpreted such that the subcontractor exception to the Your Work Exclusion still had meaning. Therefore, Mt. Hawley had a duty to defend.
Mt. Hawley's motion as to the duty to indemnify was also denied because it was premature to determine whether it had such a duty.
The court granted the insured's motion for summary judgment despite the insurer's denial based upon faulty workmanship. Engineered Structures, Inc. v. Travelers Prop Cas. Co. of Am., 2018 U.S. Dist. LEXIS 102822 (D Idaho June 18, 2018).
Engineered Structures, Inc. (ESI) contracted with Fred Meyer Stores, Inc. to build a fuel center. The contract called for the installation of two underground storage tanks (USTs) for storage and sale of fuel. ESI contracted with 3 Kings Environmental, Inc. (3 Kings) to install the Liquid Fuel Distribution and Electrical systems.
The installation manual for the USTs called for the tank to be ballasted to keep the tank protected against flotation until the tank was fully backfilled and the top slab was in place. Ballast was a temporary element of the installation much like roofers use a tarp to cover an unfinished roof as the work progresses. When the work was complete, no water (ballast) was present in the tank.
Between December 15 and 17, 2015, the USTs were lowered into the ground, seated into bedding material, strapped down via anchor straps and partially backfilled with gravel. On December 23, 2014, it rained. On the morning of December 24, 2014, ESI and 3 Kings discovered that the larger UST had displaced the surrounding soils and emerged from the excavation. At that time the backfill was at least up to the top of the tank. By floating out of the backfill that surrounded it, the UST sustained damage, which required repair before the UST could be reinstalled, and delayed the project schedule. At the time of the loss, the UST had been lowered into the excavation and partially backfilled, but it had not yet successfully undergone post-installation testing required by the manual.
ESI incurred costs to re-excavate the hole and reinstall the UST. Further costs were incurred for having the UST inspected and repaired before it was reinstalled. All of the damage to the UST occurred because it floated.
On January 6, 2015, EST submitted a claim to Travelers under its builders' risk policy. Travelers had the site inspected. It was determined that the UST should have been filled with ballast, to a level of not more than 12-inches above the groundwater level in the excavation, following installation and partial backfilling. Travelers denied the claim based upon the policy's exclusion for faulty workmanship.
ESI sued for breach of contract and the parties moved for summary judgment. Travelers contended that the faulty workmanship provision precluded the claim because had it not been for the failure to properly ballast the UST, it would not have floated out of the ground. Travelers argued that, under either under a "flawed product" or "flawed process" analysis, the faulty workmanship exclusion was applicable. ESI responded that the faulty workmanship provision did not apply to a work in progress because the provision applies to a finished work product.
There was no dispute that the work was in complete because ESI had not completed ballasting the tank, nor had it completed the subcontract for installation of the Liquid Fuel Distribution & Electrical Systems, or the fueling station as a whole. Therefore, the faulty workmanship exclusion did not apply.
The policy covered resulting loss or damage, which may have been caused in part by the negligent practices of ESI. If Traveler's intent was to exclude liability from all losses caused by negligence by ESI, it was not clearly express in the policy. Instead, the policy excluded coverage for damage resulting from defective materials incorporated into the structure itself, or from defects in the produce caused by faults in the construction process.
Therefore, the court found the term s faulty workmanship ambiguous, and applied the construction most favorable to the insured. The UST sat in the ground without incident from the time it was filled with ballast on December 17, until December 24, when it rained. Under the flawed product interpretation, the exclusion did not apply because ESI's losses were not caused by a flawed product, but by failure to adequately protect against flotation during the installation of the USTs. This installation was a component part of he completion of the fuel center. ESI's motion for summary judgment on the breach of contract claim was granted.
The Third Circuit upheld the district court's order granting summary judgment in favor of the insurer on a claim seeking coverage for construction defects. Lenick Constr. v. Selective Way Ins. Co., 2018 U.S. App. LEXIS 15197 (3d Cir. June 6, 2018).
Westrum was the general contractor for a 92 unit development, and it subcontracted with Lenick to perform rough and finish carpentry and to install paneling, windows, and doors provided by the developer. After the project was completed, it was discovered that some units experienced water infiltration, leaks and cracked drywall.
The condominium development sued Westrum, alleging contract and warranty claims. Westrum impleaded Lenick, asserting claims for breach of contract and indemnification. Lenick sought a defense from its insurer, Selective. Selective defended under a reservation of rights.
Lenick then sued for a declaratory judgment that Selective was obligated to defend and indemnify. The parties filed cross-motions for summary judgment. The district court found that the allegations in the underlying case against Lenick were not covered and Selective had no duty to defend or indemnify.
On appeal, Lenick argued that under Pennsylvania law, the damage occurred to areas of the property on which Lenick did not work, invoking coverage. The court disagreed. Damages that were a reasonably foreseeable result of faulty workmanship were not covered, even when damages occurred to areas outside the work provided by the insured.
Lenick also argued that the property damage was caused by defects in the materials provided to it by the developer. But this theory was not supported by the underlying pleadings, only by extrinsic evidence. Because the pleadings did not contain allegations sufficient to support a claim that the windows, doors, and/or panels used by Lenick malfunctioned, causing the property damage to the project, the argument for coverage failed.
The district court's granting of summary judgment to Selective was affirmed.

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