Breach-of-Contract Claims not Covered by Commercial General Liability Insurance Contracts (but we don't know why).

Group Builders, Inc. v. Admiral Ins. Co. (ICA May 19, 2010)

Background. Group Builders installed exterior insulation finishing system and sealant, fireproofing, and other exterior finishing on the hotel tower at the Hilton Hawaiian Village in Waikiki. Group's insurance carrier for commercial general liability was Admiral. After the tower was finished and opened to the public, mold and other structural defects were found. The Hilton sued alleging breach of contract, negligence, breach of warranty, and negligent misrepresentation. Admiral refused to defend or otherwise provide insurance for Group Builders. Group Builders sued Admiral for its refusal. The circuit court dismissed the claims for lack of jurisdiction. Group Builders appealed.

The Issue: Interpreting the Insurance Policy. Under the insurance policy, Admiral must pay for sums that Group Builders "becomes legally obligated to pay as damages because of 'bodily injury' and 'property damage.'" Bodily injury and property damage hinge on an "occurrence," which is defined as "an accident including continuous or repeated exposure to substantially the same general harmful conditions." The material defects formed the basis of the Hilton's complaint against Group Builders. The ICA characterized the issue as whether these material defects and shoddy construction work underlying the breach-of-contract complaints were insured.

Federal Courts Interpreting Hawai'i law Reject Coverage for Breach-of-Contract Claims. The ICA turned to federal courts that have interpreted Hawai'i law. First, there is WDC Venture v. Hartford Accident & Indemnity Co., 938 F. Supp. 671, 677 (D. Haw. 1996), in which the United States District Court held that breach of contract claims were not covered as a matter of public policy. "A breach of contract is an uninsurable activity, as to hold otherwise would invite such misbehavior." Id. at 679. Then there is Burlington Insurance Co. v. Oceanic Design & Construction, Inc., 383 F.3d 940, 948 (9th Cir. 2004), in which the Ninth Circuit rejected the argument that claims of "negligent breaches of contract" were covered by a commercial general liability policy. Finally, there is Burlington Ins. Co. v. United Coatings Manuf. Co., 518 F.Supp. 2d 1241, 1249 (D. Haw. 2007), where the USDC held that "under Hawai'i law, 'contract and contract-based tort claims are not within the scope of [commercial general liability] policies."

ICA Sides with Majority Jurisdictions on the Split in Authority for Coverage of Defective Construction Claims. The ICA also indicated that the courts are split on the issue of whether construction defects are covered under the commercial general liability policies. The line of federal cases interpreting Hawai'i law are in step with the majority of jurisdictions that omit coverage. See Gen. Sec. Indem. Co. v. Mountain States Mut. Cas. Co., 205 P.3d 529, 535 (Colo. Ct. App. 2007). Plaintiffs, according to the ICA, urged the minority position that characterize faulty workmanship as an accident, which is a covered occurrence. Id.

The ICA--without offering an explanation of its own--held that "under Hawai'i law, construction defect claims do not constitute an 'occurrence' under a CGL policy." That meant that breach-of-contract claims and torts based on the breached contract are not covered by the policy.

Federal Interpretations of Hawai'i law aren't Really Binding. The ICA did not explain why it sided with the majority of jurisdictions. Perhaps the reasons are obvious. The federal courts have interpreted Hawai'i law in that manner so it would seem to make sense that the ICA would follow the feds. But even then, the ICA was not required. The ICA has more authority to determine Hawai'i law than any federal court. Technically speaking, the federal courts--when they interpret state law--are just guessing, which is why, when the matter calls for it, they sometimes submit certified questions to the HSC. So implicit in today's holding is the ICA's approval of the reasons given by federal courts.

So what were the ICA's Reasons for Siding with the Majority of Jurisdictions? We just don't know. The ICA did not have to side with federal courts and the majority of jurisdictions. It just did. The ICA did not give its reasons. That is particularly troubling since the minority position has some appeal. Insurance policies "should be interpreted according to their plain, ordinary, and accepted sense in common speech unless it appears from the policy that a different meaning is intended." Dairy Rd. Partners v. Island Ins. Co., 92 Hawai'i 398, 411-12, 992 P.2d 93, 106-07 (2002). Furthermore, policies are construed against the insurer. Allstate Ins. Co. v. Pruett, 118 Hawai'i 174, 179, 186 P.3d 609, 614 (2008). Here, under the policy, an "occurrence" is "an accident." An accident--in its plain and ordinary sense--would include unintentional and shoddy work performance. That interpretation points to the minority of jurisdictions that would include these claims under the policy.

But then again, the counter argument is that an interpretation--even one true to the plain language of the contract--cannot violate public policy. Guajardo v. AIG Hawai'i Ins. Co., Inc., 118 Hawai'i 196, 201-202, 187 P.3d 580, 585-586 (2008) ("insurers have the same rights as individuals to limit their liability and to impose whatever conditions they please on their obligation, provided they are not in contravention of statutory inhibitions or public policy."). And a violation of public policy is one of the reasons why the federal courts refused to include these claims under the commercial general liability clauses. See WDC Venture v. Hartford Accident & Indemnity Co., 938 F. Supp. 671, 677 (D. Haw. 1996). Whatever the ICA's reasons may have been, it simply didn't tell us. We can only speculate.


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