Washington Construction Law Blog

Sammamish Pointe, a condo association, made claims against the developer (Polygon) for defects and Polygon's insurers -- save one -- funded a $7.8 million settlement to the homeowners. 

The funding insurers then turned on the holdout -- Great American Insurance Company -- for contribution.   Division 1 held that Great American, an excess carrier, was required to kick into the settlement even though its underlying primary carrier was insolvent and thus didn't actually pay its underlying limits.  That and other complexities related to equitable contribution amongst carriers are addressed in this new case.

If you are a general contractor and your subcontractor does its books & records at the kitchen table rather than a legitimate IRS recognized place of business, be prepared to get hammered by L&I when the sub fails to pay its workers compensation insurance premiums.

In this case handed down yesterday, the Supreme Court held that a contractor's insurer was responsible for a $1.3 million settlement because it had waived its "your work" exclusion coverage defense by engaging in bad faith conduct.

The owner and insured/contractor were in a dispute and had scheduled an arbitration with the AAA.  The insurer had retained defense counsel under a reservation of rights and had filed a dec action to contest coverage.  So far, so good.

On the eve of the arbitration, however, the carrier served the arbitrator with a subpoena seeking to compel discovery of the grounds relied on by the arbitrator for whatever award the arbitrator eventually entered.  In a cover letter, the carrier explained that its purpose was in part to obtain proof on whether its "your work" exclusion defense was valid.

The Supreme Court found this conduct to be in bad faith because the insured at that time was attempting to prove just the opposite -- that its work was not defective and did not result in harm to the project.  By elevating its monetary interest in proving a coverage defense over the right of the insured to a strong defense on the merits of the claim, the Court held the carrier had committed bad faith. 

After also deciding that the carrier had failed to rebut the Butler presumption of harm and that the $1.3 million settled reached by the parties on the 6th day of the hearing was reasonable, the Court affirmed judgment against the insurance company.

Copy of opinion also available here Download file

Here, a jury rejected a condo developer's case against its property insurer (Safeco) for decay to the structure due to rainwater infiltration caused by poor construction & Division One affirmed because:

• The ultimate loss -- decay to the building -- was an excluded loss, and therefore the ensuing loss doctrine did not apply.
• The "collapse" provision of the policy -- which the Court held to mean there's coverage for any "substantial impairment of structural integrity" -- did not apply because the jury elected to believe Safeco's experts rather than the Owner's experts on the nature & severity of the decay, and
• There was no reversible error in Safeco's untimely disclosure of a draft expert report because there was insufficient prejudice to the Owner given that the report was made available toward the end of trial and counsel had the opportunity to cross-examine Safeco's expert on the draft report.

Copy of opinion also available here Download file

While it took four separate opinions involving the nine Justices, yesterday the Supreme Court decided in the Colorado Structures v. Ins. Company of the West case that:

1. By a 6-3 vote, the Obligee on a surety bond (i.e., the GC where a subcontractor bond is at issue, and the Owner where a GC bond is at issue) need not declare the Principal (the subcontractor or GC) to be in default before triggering the Surety's liability on the bond, and
2. By a 5-4 vote, the Olympic Steamship doctrine applies to surety bonds, which now means that the party seeking relief on the bond (normally the Obligee) is entitled to recover its attorneys fees as the prevailing party and that such recovery is not limited by the penal sum of the bond.

Of the two holdings, the Olympic Steamship may be the more durable because the surety industry presumably can (as signaled by the lead opinion) tinker with the language of the standard bond form to make a declaration of default -- which the Court defined as an intent to terminate the contract, as distinguished from a breach of the contract -- to be a true condition precedent to the surety's duty to pay.  The Olympic Steamship holding, by contrast, was the Court's policy determination that fees ought to be paid in this context just as they are paid in the liability insurance context

Copy of lead opinion also available here Download file

The loss in this case occurred when a dredging contractor, hired to remove biosolids from a city wastewater lagoon in Oak Harbor, accidentally punctured the lagoon's liner.

As with most all-risk policies (such as builder's risk policies), there was an exclusion which prohibited coverage for loss due to "faulty workmanship" of the builder.

Long story short: coverage denied.  The tearing and puncturing of the liner was bad workmanship whether looked at from a tort or contract standard, the Court held.

Copy of decision also available here Download file

Division 1 not only barred coverage due to late notice in this case -- a hard enough feat under Washington's relatively liberal test for deciding whether a failure to comply with an insurance policy's notice clause will forfeit the insured's rights -- but it did so on summary judgment.

So what was the prejudice to the carrier caused by the late notice?  It happened when the insured (without notice to the carrier) agreed to submit to arbitration of defect claims made by a homeowner's association.  This waiver of judicial remedies, the Court said, was "significant" enough to constitute prejudice as a matter of law.  Coverage denied.

Copy of decision also available here Download file

Under the late tender rule in Washington, an insurance company must prove it was substantially prejudiced by late notice before its obligations to the insured are excused. 

This construction defect case applies the late tender rule to a dispute between carriers.  The case arose from a condo defect case where the insured had three carriers.  Two carriers settled with the insured, received an assignment of the insured's claims against non-settling entities and then brought a contribution action against the third carrier.

Division 1 held that two settling carriers now stood in the shoes of the insured and were thereby protected by the late tender rule.  The trial court, by contrast, had held  that the insured's selective choice not to tender the suit to the third carrier in itself barred the contribution claim by the other two carriers.

Lots to chew on in this new case from Division 1 arising from a King County project where a subcontractor to Coluccio experienced a tunnel shaft "blow-in" which in turn lead to project delays and costs of repair.  Main holdings appear to be:

1. An owner who promises to buy property insurance (i.e., All Risk coverage under a builders risk policy) but then fails to do so "assumes all risks of loss" and is thereby responsible for "the full amount that would have been covered by insurance" had the policy been purchased.  In other words, the owner steps into the shoes of the insurer.
2. The initial burden is on the claimant (here, Coluccio) to establish the loss would have fallen within the coverage of the policy -- in this case, that the "blow-in" was a fortuitous event.
3. If established, the burden shifts to the owner to prove that coverage would be negated by any exclusion.  In fact, the owner can "only escape liability for the losses suffered by proving at trial that every all risk builder's risk insurance policy available for purchase, without exception, would have excluded the losses" claimed by Coluccio.
4. King County in this case failed to prove that the "faulty workmanship" exclusion would have applied, according to the Court, because some builder's risk policies only negate coverage under this exclusion if the contractor was negligent (and here, there was no finding of negligence).

The case is Coluccio Construction Company vs. King County.  In addition to the $1.5 million verdict, Coluccio was awarded over $300,000 in legal fees and costs under RCW 39.04.240 (the offer of settlement fee statute applicable to public works projects).

At the crossroads between agriculture and insurance, Division 3 recently held as follows in a case of rotten onions damaged when someone who was instructed to turn off the irrigation instead turned it on, causing said onions to, well, rot:

• Turning on the water -- while an intentional act in itself -- was nonetheless a covered accidental "occurrence" within the meaning the policy because the wrongdoer did not intend the adverse consequence of his act .  Nationwide Mutual Ins. Co. v. Hayles (1/04/07).

This holding has application to construction defect claims.  For example, if a drywall sub intentionally deviates from the installation details in the design, the resulting damage is still covered unless the sub also intended for that resulting damage to occur.

And lest there be any doubt, Division 3 also settled this significant issue: "An onion is not the same thing as the soil it is grown in."   Enough said.

On the advice of a structural engineer -- who believed an occupied building was about to collapse -- the bank occupant evacuated the building at considerable disruption and expense.  Turns out the engineer was wrong.  After settling its malpractice claim against the engineer, the bank sought coverage under its property policies for economic losses incurred in the evacuation.

Division 1 said there was no coverage.  Not only did the bank fail to show the existence of any ""direct physical loss" in fact, the bank's preventive evacuation was not compensable under the "Sue and Labor" clause because no collapse in fact occurred even though the bank had a reasonable belief that collapse was imminent.

In a coverage dispute stemming from construction of a custom home, Division I has delivered a victory to Mutual of Enumclaw (MOE). The trial court had concluded that MOE committed bad faith sufficient to estop its coverage denial by disrupting the private arbitration between its insured and the home's owner. Division I's opinion provides guidance on how an insurer defending under a reservation of rights in Washington is allowed to seek information pertinent to coverage without necessarily committing bad faith.