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Hope On Insurance for Home Buyers, Builders and AOAO’s in Construction Defect Cases From New Ruling In Florida

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Burlington Ins. Co. v. Oceanic Design & Constr., 383 F.3d 940 (9th Cir. 2004) has created havoc for home buyers and condominium associations in Hawaii since it came out in 2004. The decision was not from the Hawaii Supreme Court but from the Ninth Circuit federal court. The decision was only a "prediction" from federal judges representing the western United States about what the Hawaii Supreme Court would rule in the case.

Specifically Burlington involved a single home owner who sued her builder for construction defects in her home. The builder turned the lawsuit over to its insurance company and the insurance company said there was no coverage because it did not insure the builders negligence in constructing the house.

Sound odd? You bet! But believe it or not the insurance industry has been working feverishly to put fine print in the insurance policies of builders that does just that; no insurance coverage for defects in the buildings they build. Why buy insurance? Good question but don’t expect anything to make sense when it comes to insurance. The most disrespected industry in the US – the insurance industry – has earned its lowly reputation by accepting premiums and then denying claims. The courts in recent years have been complicit in favoring the insurance industry in many rulings and abandoning former decisions that protected consumers such as the home buyer in the Burlington case and the builder in that case who paid good money for an insurance policy that didn’t cover the most needed aspect of the construction.

The legal reasoning in Burlington was that the home owner sued on a contract with the builder and that claims related to that contract did not trigger coverage unless an independent basis sounding in tort was alleged. Well the courts have also ruled that a homeowner can’t bring claims in "tort" when the home construction is based in contract. That is called the "economic loss rule" and is another obstacle, created by the courts, to bringing a construction defect claim. The legal analysis for those interested is whether a construction defect (i.e. a leaking roof) constitutes an “occurrence” under the definitions in the insurance policy (contract). The courts have favored the insurance industry side of cases by ruling often that there is an "occurrence" (and therefore insurance coverage) only if there is damage to “other property”. Then they say that "other property is something outside the building ( a roof tile blows off and hits a parked car) or inside the building but not part of the building (water dips onto a grand piano and damages it). As an example in American Family Mut. Ins. Co. v. American Girl, Inc. the court ruled that damage caused by a soil engineer was “property damage” caused by an “occurrence” as defined by Comprehensive General Liability (CGL)policies. This is the opposite of the Ninth Circuit federal decision in Burlington.

Hawaii consumers may benefit from a new construction defect case in which the Florida Supreme Court adopted the American Girl line of cases. See United States Fire Ins. Co. v. J.S.U.B., Inc., No. SC05-1295 (Fla. Sup. Ct., Dec. 20, 2007). This subject has been covered well for some time by the Damon Key firm in Honolulu that specializes in construction defect defense and insurance law and is considered an authority on insurance contract issues in construction. Here is their analysis of the Florida decision which I find excellent:

The court determined that defective work performed by a soil compacting subcontractor that causes damage to the contractor’s completed project and is neither expected nor intended from the standpoint of the contractor can constitute “property damage” caused by an “occurrence” under a standard commercial general liability policy.

Relying on American Girl, the Florida Supreme Court rejected U.S. Fire’s argument that a breach of contract can never result in an “accident” because this was not supported by the language of the policies. U.S. Fire’s assertion that damage resulting from a breach of contract is expected was also unpersuasive. This position would make the definition of “occurrence” dependent on whether the property damage is part of the construction contract or the homeowner’s separate property. The appropriate analysis focused on whether the damage was expected or intended from the standpoint of the insured, not whose property was damaged.

Further, reading the business risk exclusions, including the “your work” and “your product”, in conjunction with the insuring agreement supported the conclusion that a subcontractor’s defective work resulting in damage to the completed project can constitute an “occurrence.” Therefore, faulty workmanship that is neither intended nor expected from the standpoint of the contractor can constitute an “accident” and, thus, an ‘occurrence.” In the Florida case, the subcontractor’s defective soil preparation, which the insured contractor did not intend or expect, was an “occurrence.”

Finally, the Florida Supreme Court rejected U.S. Fire’s argument that faulty workmanship injuring only the work product itself does not result in “property damage.” Again relying on American Girl, the court determined the claim was not for the cost of repairing the subcontractor’s defective work, but rather a claim for repairing the structural damage to the completed homes caused by the subcontractor’s defective work. It was the subsequent soil settlement due to the subcontractor’s faulty workmanship that caused the structural damage to the homes. Because there was “physical injury to tangible property,” the court concluded that the structural damage to the homes was “property damage.”

The analysis of Tred Eyerly is spot on and should be of interest to every Hawaii insurance attorney and well as AOAO’s and home builders and buyers. Tred has also provided useful links to weblogs that reference Florida Supreme Court Departs from Burlington Reasoning in Construction Defect Case.