Washington Construction Law Blog : Washington Construction Lawyer & Attorney : Davis Wright Tremaine Law Firm : Serving Seattle, Spokane, Tacoma, Bellevue, Everett & Yakima

On August 8, 2010, in Mattingly v. Palmer Ridge Homes LLC, Division II of the Washington Court of Appeals reversed summary judgment in favor of builder Palmer Ridge Homes.  A copy of the decision may be found here:  Download file  The decision is significant for what it says about the enforceability of limitations contained in third-party warranties and by demonstrating the difference between "completion" and "substantial completion" -- and what consequences might follow.

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Here is Division 1's most recent analysis on the arcane but important issue of how many policy limits are available in a situation where a carrier issues multiple year-to-year CGL policies and the insured becomes legally obligated to pay for damage that occurs over those multiple year but results from the same continuous or repeated cause (i.e., water seepage). 

The answer, at least in this case with this policy language was:  1 policy limit, under the clause known as the anti-stacking provision.

Copy of opinion also available here Download file

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This case, the latest from Division 1 in its treasure chest of condo defect / insurance coverage cases, contains two notable nuggets:

1. A 14 month delay in responding to a tender of defense and indemnity was bad faith as a matter of law, estopping the carrier from denying coverage under the additional insured endorsement it issued to a GC under a subcontractor's policy.  As a result, the carrier had to pay both the defense costs incurred by the GC as they pertained to the subcontractor's scope of work as well as the portion of a related settlement that the GC paid to the HOA.
2. That estoppel remedy, however, did not run so far as to sweep into the policy liability for claims made against the GC that arose from work not performed by the particular subcontractor that the carrier insured.  The Court rejected the GC's argument that bad faith in handling a claim related to a particular sub's work made the carrier liable for all of the GC's liabilities on the entire project, regardless of cause. 

Copy of opinion also available here Download file

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Walla Walla College hired a tank company in 1991 to install two underground gas storage tanks.  In 2001, approximately 10,000 gallons of gas leaked from one tank into the ground.  The tank installation contractor had two CGL policies in effect from 1990 to 1992. 

Seeking coverage under those policies to pay for the cleanup costs, the College claimed that the triggering "property damage" occurred at the time of installation in 1991 due to the installer's failure to use proper backfill which in turn set in motion stress to the tank which ultimately lead to the failure and leakage.  The carrier, on the other hand, claimed that there was no covered "property damage" until the leakage in 2001.

Division Three held that mere stress to the tank was not enough to constitute "property damage" and therefore denied coverage for the loss under the 1990-1992 policies.  First, the Court noted that the "your product" exclusion" negated any coverage for loss in value to the tank itself.  Next, the Court distinguished continuous trigger cases such as Groul Construction Co., Inc. v. Ins. Co. of North America, 11 Wn.App 632 (1974) by noting that while "a process began" in 1991, the "property damage did not occur until the tank failed in September 2001, long after the policies had expired."

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This new coverage case arose from a condo project with poorly installed siding that caused rot, mold and water damage to portions of the interior.  The siding sub was insured by Mutual of Enunclaw (MOE) which defended under reservation of rights.  After mediation, the siding sub settled for $3.3 million and a customary assignment of its coverage claims against MOE.  The trial court approved the settlement as reasonable, rejecting MOE's various claims that the sum was excessive (i.e., MOE contended that a "spot" or "surgical" repair was sufficient compared to plaintiffs' repair scope of stripping and re-siding the building).

On appeal, MOE sought to raise a defense to its insured's liability (specifically, a statute of limitations defense) that had not been fully litigated prior to the settlement.  The Supreme Court held that the insurer is not entitled to raise the issue anew, since it was "considered in the liability case and the parties reached a settlement which was judicially approved as reasonable."

The Court also considered MOE's claim that while some interior walls were damaged by water, the the siding itself was largely undamaged and therefore the cost to remove and replace the siding itself should be excluded.  Agreeing with the 9th Circuit's 2002 Dewitt case, the Court held the re-siding costs were covered because "removing and repairing the siding is simply part of the cost of repairing the damage to the interior walls." 

Copy of opinion also available here Download file

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The insurer in this new condo defect case received a tender of defense from a general contractor under its additional insured endorsement to a subcontractor's policy.  About 14 months later, the insurance company accepted defense under a reservation of rights but otherwise did nothing in that time to investigate the claim. Division 1 held this delay constituted bad faith sufficient to estop the carrier from denying coverage. 

For damages, the GC sought to hold the carrier liable for all of its exposure on the project, regardless of whether that exposure stemmed from the specific subcontractor at issue.  Division 1 rejected this argument.

Copy of opinion also available here Download file

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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.

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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.

 

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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

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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

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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

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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

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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

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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.

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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).

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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.

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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.

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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.

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