Important News Regarding CGL Policies

On May 19, 2010, the Intermediate Court of Appeals of the State of Hawai’i held that under Hawai’i law:
[C]onstruction defect claims do not constitute an “occurrence” under a CGL policy [Commercial General Liability policy]. Accordingly, breach of contract claims based on allegations of shoddy performance are not covered under CGL policies.  Additionally, tort-based claims, derivative of these breach of contract claims, are also not covered under CGL policies.

In Group Builders, Inc. and Tradewind Insurance Company, LTD. v. Admiral Insurance Company and National Interstate Insurance Company, Group Builders was subcontracted by Hawaiian Dredging (the general contractor) to install an exterior insulation finishing system and sealant, spray-applied fireproofing, building insulation, and metal wall framing on the Kalia Tower at the Hilton Hawaiian Village.  Hilton Hotels Corporation (HHC) and the Hilton Hawaiian Village, LLC (HHV) filed suit in 2003 against numerous defendants including Group Builders, for construction defects and the resulting closure of the Kalia Tower.

Group Builders' coverage was as follows:

  • From October 1, 1999 to October 1, 2000 coverage by Tradewind
  • From October 1, 2000 to December 1, 2000 coverage by Admiral
  • After December 1, 2000, coverage by Zurich and Fireman’s Fund

After receiving notice of the lawsuit, Admiral refused to defend, indemnify, or otherwise provide insurance coverage to Group Builders, claiming that there was no property damage caused by an occurrence during Admiral’s Policy Period.  The underlying suit with HHC and HHV was settled with Group Builders, Tradewind, Zurich and Fireman’s Fund; Group Builders then assigned its claims against Admiral to Tradewind.

On May 30, 2006, Tradewind filed a First Amended Complaint against Admiral for its refusal to defend, indemnify, or otherwise provide insurance coverage to Group Builders for the claims asserted in the underlying suit by HHC and HHV.  During the proceedings, Admiral filed a Motion for Partial Summary Judgment Re: No Duty to Indemnify which the Circuit Court granted.  Plaintiffs appealed.

There was no question that mold damage and resulting loss of use of the Kalia Tower qualified as “property damage” under the policy.  The sole issue was whether “alleged faulty construction work, giving rise to contractual claims, constitutes an ‘occurrence’ under a CGL policy.” 

The Court of Appeals noted that in Burlington Insurance Co. v. Oceanic Design & Construction, Inc., the Ninth Circuit observed that “[a]llowing recovery for disputes between parties in a contractual relationship over the quality of work performed would convert this CGL policy into a professional liability policy or a performance bond.”  The Ninth Circuit went on to note that its holding is "consistent with the line of cases from the District of Hawaii that hold that contract and contract-based tort claims are not within the scope of CGL policies under Hawaii law.”  [NB: A federal court sitting in diversity must apply state law; however, absent clear Hawaii case law, federal court can only “predict” how Hawaii would decide the issue. Thus, the Burlington case is persuasive, but not controlling in Hawaii.]

This case is a huge victory for CGL carriers.  It is bad for design professionals since it eliminates insurance coverage for a contractor who is in privity of contract with the owner/Plaintiff.  CGL carriers could pull coverage in these types of cases. Thus, in some instances, the only party with insurance coverage could be the design professional (since the case does not affect Professional Liability policies). 

This case is also very bad for contractors as well, since they could be exposed to damages without insurance coverage.  A contractor, hired by an owner, whose poor performance results in construction defects would not have coverage under a CGL policy in a suit by the owner.

To view a copy of this decision, please click HERE.  Should you have any questions or comments, please contact Bennett Chin or any other attorney with the Law Offices of Frank K. Goto, Jr.

Posted: June 1, 2010

The Law Offices of
Frank K. Goto, Jr.

The Law Offices of Frank K. Goto, Jr. is located in Downtown Honolulu, on the Island of Oahu, Hawaii. We are a small boutique litigation firm that specializes in the representation of design professionals. The Law Offices of Frank K. Goto, Jr. handles a wide variety of matters for design professionals, including construction litigation defense, corporate matters, collections and contract preparation and negotiation.

The Law Offices of Frank K. Goto, Jr. strives to keep our clients and colleagues updated as to legal developments that affect design professionals. Should you have any questions or comments regarding the foregoing, please contact one of our attorneys.

Mahalo,

Law Offices of Frank K. Goto, Jr.


For more information, please contact:

Bennett J. Chin, Esq.
Law Offices of Frank K. Goto, Jr.
888 Mililani Street, Suite 300
Honolulu, Hawaii 96813
Tel: (808) 531-4686
Fax: (808) 531-4680
Email: bchin@frankgotolaw.com

Disclaimer: This communication is published as an informational service for clients and friends of the firm and is made available with the understanding that it does not constitute the rendering of legal advice or other professional service. Some jurisdictions may require that this material be labeled “Attorney Advertising.” Any discussion of prior results does not guarantee a similar outcome.
© 2010 Law Offices of Frank K. Goto, Jr.