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Recent developments in construction defect insurance

State and federal courts are divided on whether standard CGL policies cover construction defect claims

In the last few years, courts have issued a flurry of opinions on the subject of construction defect insurance, with particular regard to the question of whether the average commercial general liability (CGL) policy provides coverage for construction defect claims against a contractor insured. The most extreme opinions have held that such claims never trigger coverage, a result that prompted several states to enact legislation to the contrary. The courts, in turn, responded to this new legislation with varying results, discussed below.

The issue turns on a few key policy provisions. The standard CGL policy provides coverage for damages arising out of “property damage” to which the policy applies. The property damage must be caused by an “occurrence,” which is, in turn, defined in part as “an accident.” In light of these provisions, courts often are asked to decide whether construction defects (and/or the damage caused by such defects) qualify as “property damage” caused by an “accident” for the purpose of these policies.

It was perhaps not unexpected when, following the enactment of H.B. 924, some Hawaii courts recognized that it constituted a significant development in Hawaii law, while others held that Group Builders was not a deviation from prior Hawaii law, and continued denying coverage for construction defect claims. The District Court of Hawaii adopted the latter view most recently in Illinois National Insurance Company v. Nordic PCL Construction, Inc. The case arose out of alleged defects in two different projects for which Nordic was the general contractor. Nordic sought a defense from its insurers under a CGL and umbrella policy, as well as reimbursement for repairs that Nordic undertook at one of the projects.

Notwithstanding the passage of H.B. 924, the court granted summary judgment for the insurers, holding that the claims at issue were not covered. In doing so, the court relied on prior 9th Circuit and Hawaii state court decisions which, the court concluded, supported the proposition that claims arising from the alleged breach of a construction contract, including construction defect claims, do not involve accidents or “occurrences.”

Contributing Author

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Edward Weiman

Edward E. Weiman is a partner in the Los Angeles office of Kelley Drye & Warren LLP. Mr. Weiman represents film and television companies and...

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Contributing Author

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Audrey Jing

Audrey J. Jing is an associate with Kelley Drye & Warren LLP, who has specialized in insurance coverage disputes for clients in a wide range...

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