2019—A Year in Review

A Look at Significant Construction-Defect Decisions Around the Country

April 01, 2020 Photo

Several important decisions emerged in 2019 with the potential to impact insurance coverage in construction-defect cases. In this article, we take a look at some of the most significant ones around the country and examine how they potentially change the landscape for insurers and attorneys.

The first case is Sapa Extrusions v. Liberty Mut. Ins. Co., 939 F.3d 243 (3d Cir. 2019), where the 3rd Circuit addressed “whether, under Pennsylvania insurance law, a manufacturer may recover from its liability insurers the cost of settling a lawsuit alleging that the manufacturer’s product was defective.”  In Sapa, the insured, Sapa, manufactured aluminum parts that were later permanently incorporated into Marvin Lumber and Cedar Company’s windows and doors. Marvin received complaints about its doors and windows from customers in coastal areas because the aluminum parts began to corrode or oxidize. Marvin then brought suit against Sapa for breach of express warranties and alleged that Sapa’s products failed to meet specifications. After a substantial settlement with Marvin, Sapa sued its insurance carriers for reimbursement of the settlement and defense costs.

Three important holdings emerged from the 3rd Circuit’s decision, which affirmed the district court’s ruling in favor of the insurers. The first is that Pennsylvania’s “four-corners” rule governs an insurer’s duty to indemnify, and courts should only consider the facts as alleged in the complaint. Thus, the court rejected Sapa’s argument that the court may rely on extrinsic facts, or facts developed in discovery, to determine whether Sapa was entitled to reimbursement for the settlement with Marvin. 

Second, the 3rd Circuit determined there was no coverage under the policies that provided an “accident definition” of “occurrence,” i.e., defining “occurrence” as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The court held that Pennsylvania’s Kvaerner rule applied to policies containing such “occurrence” definitions, even when the defective product may cause damage to the property of others.

Third, the 3rd Circuit, relying on cases from Pennsylvania lower courts, found that there was potential for coverage for policies that contained a definition of “occurrence” that narrowed the category of “accident” by including only conditions that are “neither expected nor intended from the standpoint of the insured.” Under these types of policies, only damage of the same general type that the insured subjectively intended or expected was not covered. Until the Pennsylvania Supreme Court addresses this issue, the Kvaerner rule may not apply to a policy that contains a definition of “occurrence” with an “Expected/Intended” provision.

Two Key Holdings in Illinois Case

The second decision of note is Acuity Ins. Co. v. 950 W. Huron Condo. Ass’n, 2019 IL App (1st) 180743 (March 29, 2019). There, an Illinois intermediate appellate court addressed whether a subcontractor’s defective work that damages the work of other contractors or other property is covered. The case involved a fairly typical situation where a condominium association sued its general contractor and construction manager to recover for alleged defects in the construction of a building, and the general contractor filed a third-party complaint against its subcontractors. The subcontractor held two CGL policies during the relevant policy periods: one with Acuity Insurance Company, and one with Cincinnati Insurance Company. After Acuity denied that it had a duty to defend, Cincinnati agreed to defend the subcontractor and brought suit against Acuity. 

Two important holdings emerge from this case. The first is that a subcontractor is entitled to coverage when the underlying complaint alleges that a subcontractor’s negligence caused damage to something other than work within the subcontractor’s scope of work. Though the Illinois Supreme Court has not yet ruled on this issue, there appears to be a strong trend in Illinois toward allowing coverage for damage caused by a subcontractor to the work of others. The second holding is that Cincinnati could pursue Acuity for equitable contribution. Though the insurers issued consecutive policies, the court permitted reimbursement, explaining “[i]nsurance policies in Illinois need not temporally overlap in order to cover the same risk for purposes of equitable contribution.”  

Connecticut—A Shaky 
Foundation

The third noteworthy decision is the Connecticut Supreme Court’s decision in Karas v. Liberty Ins. Corp., No. 20149, 2019 WL 5955947 (Conn. Nov. 12, 2019). There, the court addressed whether collapse coverage in a first-party homeowners policy applies to the widespread failure of basement foundation walls from defective concrete. Plaintiffs were residential homeowners who purchased a home with a basement foundation that was constructed using concrete from J.J. Mottes Concrete. A Connecticut governmental study found that the stone aggregate used in Mottes concrete between 1983 and 2010 contained significant amounts of a substance that caused the concrete to prematurely deteriorate. Approximately 34,000 homes in Connecticut were affected by the defective concrete, but it appears likely that the statute of repose and/or other impediments prevent recovery from Mottes directly. The plaintiffs submitted a claim to their homeowners carrier for their crumbling basement foundation walls under the policy’s collapse coverage, and the carrier denied coverage since the house had not actually fallen down. 

The Supreme Court of Connecticut first determined that the “substantial impairment of structural integrity” standard applied to the policy’s collapse coverage. The court confirmed that “collapse” does not require that the structure be “reduced to a flattened form or rubble,” but includes “settling or cracking that results in substantial impairment of a home’s structural integrity.” 

The Supreme Court next explained that the “substantial impairment of structural integrity” standard requires proof that the home is in “imminent” danger of collapse. Therefore, it is not enough to show that the building will eventually fall in, or that the building is impaired; instead, there must be “an impairment so severe as to materially impair a building’s ability to remain upright.”

Finally, the court determined that the exclusion in the policy for the collapse of the home’s “foundation” included the basement walls of the home. In so ruling, the court disagreed with a Rhode Island Supreme Court decision on the issue and seemingly dealt a blow to the thousands of Connecticut homeowners whose basement walls are deteriorating due to the defective Mottes concrete.

A Look Out West

Two of the more impactful decisions in 2019 came from the state of Washington. The Keodalah v. Allstate, 449 P.3d 1040 (Wash. 2019) (see the Winter 2019 issue of Construction Claims) and T-Mobile USA v. Selective Insurance Company of America, 450 P.3d 150 (Wash. 2019) (see pg. 14) cases have been separately profiled in Construction Claims.  These are important decisions claims representatives should know when handling Washington claims. 

Construction Claims has also profiled the new Arizona Revised Statute §12-1362-1364 enacted in 2019 (see Fall 2019 issue), which sets forth an updated process for handling construction-defect cases involving dwellings in the state. 

Besides the above significant Western region cases and statutes from 2019, claims professionals should also be aware of State Farm Fire & Casualty Company v. Evans Construction & Siding Corp., (2019 WL 4723783 (D. Ore. Sept. 26, 2019). Evans is a recent federal district court decision out of Oregon that could have a significant impact on the duty to defend. The Evans court carved out an exception to the “eight corners” rule when an insurer is evaluating a duty to defend. Specifically, the court recognized an exception when looking at facts outside the complaint in determining whether the policies were issued before construction of the project began. Given that the underlying complaint in that case did not allege a specific start date for the construction project, the insured argued that a duty to defend was triggered and that the insurer could not look outside the complaint to determine if its policies pre-dated construction.

The court, relying on the Fred Shearer v. Gemini Ins. Co., 240 P.3d 67 (Ore. 2010) case, recognized an exception because the plaintiff in the underlying lawsuit would have no reason to include facts pertinent to the relationship between the contractor and its insurer. In Fred Shearer, the Oregon Court of Appeals held that an insurer was not limited to the allegations when determining whether the party was an “insured” within the meaning of the policy. The Evans decision takes the Fred Shearer ruling one step further and opens the door for insurers to look at evidence of timing of construction when determining whether a policy predates the construction. We note that the Evans decision is only a district court decision, and has not been adopted by the Oregon Supreme Court.


On the opposite end of the spectrum, the KB Home Colorado v. Peerless Indemnity, 2019 WL 1077352 (D. Colo. March 7, 2019) decision held that a provision in a construction contract, which required additional insurance during term of contract “and thereafter,” would require additional insurance for a general contractor indefinitely. The Peerless court held that the subcontractor’s insurer had to defend the general contractor even though it insured the subcontractor several years after the end of the construction. Peerless juxtaposes Evans as to how different courts and different jurisdictions handle policy timing issues when determining a duty to defend.

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About The Authors
Multiple Contributors
Lance J. Kalik

Lance J. Kalik is co-managing partner at Riker Danzig Scherer Hyland & Perretti LLP, and co-chair of its Insurance and Reinsurance Group. lkalik@riker.com

Jessica K. Formichella

Jessica K. Formichella is an associate in Riker Danzig’s Insurance and Reinsurance Group. jformichella@riker.com

Ryan Hesselgesser

Ryan Hesselgesser is of counsel at Forsberg & Umlauf, P.S.  rhesselgesser@FoUm.law

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