190 F. Supp. 3d 1003
D. Haw.2016Background
- State Farm (plaintiff) sought a declaratory judgment that it has no duty to defend or indemnify GP West and Air Conditioning of Maui (AC Maui) in an underlying Hawaii construction lawsuit alleging defective HVAC installation, property damage (mold, ceiling collapse, corrosion, electrical damage), and contract- and tort-based claims.
- The underlying plaintiffs sued for breach of contract, breach of warranties, negligence, and (intentional/negligent) misrepresentation, alleging defects and resulting property damage after completion and warranty repairs failed.
- State Farm issued successive CGL-type policies to AC Maui (2009–2015), including Contractors and Businessowners forms; policies require property damage to be caused by an "occurrence" and include products-completed-operations language and an "other insurance"/additional-insured endorsement naming GP West.
- GP West tendered defense to State Farm; State Farm initially denied tender (citing lack of an "occurrence" and other exclusions) and later agreed to participate under reservation of rights; GP West counterclaimed for a duty to defend/indemnify and bad-faith breach of the covenant of good faith and fair dealing.
- The district court evaluated (1) whether the underlying claims allege an "occurrence" giving rise to coverage (duty to defend/indemnify), (2) effect of products-completed-operations language, and (3) whether State Farm acted in bad faith by relying on other-insurance/primary-insurer issues in denying tender.
Issues
| Issue | Plaintiff's Argument (State Farm) | Defendant's Argument (GP West / AC Maui) | Held |
|---|---|---|---|
| Duty to defend/indemnify: do the underlying claims arise from an "occurrence"? | Underlying claims are contract- or contract-based tort claims (no "occurrence") and thus outside CGL coverage. | Some alleged damage is to "other property" (mold, ceiling, fixtures) creating a possibility of coverage; negligence/misrepresentation could be independent torts. | State Farm: granted. Court held claims arise from contractual relationship or are derivative of contract; no "occurrence," so no duty to defend or indemnify. |
| Products-completed-operations (PCO) — does PCO create separate coverage for construction defects? | Even if PCO exists, coverage still requires an "occurrence"; PCO is an exception to exclusions, not a separate insuring clause creating coverage for purely contractual defects. | PCO aggregate and separate declaration-line show parties intended post-completion coverage for defects; thus a possibility of coverage exists. | State Farm: granted. Court held PCO does not override the occurrence requirement; absent an occurrence, PCO does not create coverage. |
| Negligence / building-code exception — do code-violation-based torts create independent coverage? | The negligence and misrepresentation claims are premised on the contract/warranties and are not independent torts for coverage. | Newtown Meadows and building-code exceptions allow independent tort claims based on code violations, which could create coverage. | State Farm: granted. Court rejected extension of building-code exception to commercial construction here and found negligence claims arise from contractual duties. |
| Bad faith / implied covenant — did State Farm breach by denying GP West’s tender relying on other-insurance? | Denial was grounded in governing law and a reasonable interpretation (State Farm was not GP West’s primary insurer; endorsement made it excess); reasonable coverage interpretation is not bad faith. | Nautilus prohibits a primary insurer from disclaiming defense by pointing to another policy; State Farm relied on Nationwide and thus breached the covenant. | State Farm: granted. Court held Nautilus inapplicable because State Farm was not GP West’s primary insurer; denial was reasonable and not bad faith. |
Key Cases Cited
- Burlington Ins. Co. v. Oceanic Design & Const. Inc., 383 F.3d 940 (9th Cir.) (CGLs do not cover contract- or contract-based tort claims; distinguishes coverage for independent torts to "other property")
- Anthem Elec., Inc. v. Pac. Emp’rs Ins. Co., 302 F.3d 1049 (9th Cir.) (explains general rule that defective workmanship is a commercial risk and not covered by liability insurers unless it causes damage to other property)
- Group Builders, Inc. v. Admiral Ins. Co., 231 P.3d 67 (Haw. App.) (construction-defect and related tort claims do not constitute an "occurrence" under CGL policies under Hawai‘i law)
- Tri-S Corp. v. W. World Ins. Co., 135 P.3d 82 (Haw.) (duty to defend arises whenever there is mere potential for coverage; insurer bears burden to show no possibility of coverage)
- Nautilus Ins. Co. v. Lexington Ins. Co., 321 P.3d 634 (Haw.) (a primary insurer may not rely on another policy to disclaim its duty to defend — limited to a primary insurer situation)
- Association of Apartment Owners of Newtown Meadows v. Venture 15, Inc., 167 P.3d 225 (Haw.) (recognized narrow building-code exception to economic-loss rule for residential construction negligence claims)