Ensuing Loss Provision Does Not Salvage Coverage
December 9, 2011 — Tred R. Eyerly, Insurance Law Hawaii
Water intrusion caused by a construction defect was not covered under the all risk policy’s ensuing loss provision. See Friedberg v. Chubb & Son, Inc., 2011 U.S. Dist. LEXIS 123582 (D. Minn. Oct. 25, 2011).
Extensive water damage was discovered in the insureds’ home when a small hole in the exterior wall was being repaired. Chubb’s adjuster and an expert found water intrusion causing rot, mold, and damage to the home’s wood framing and insulation. Chubb denied coverage because water intruded through the roof and wall, resulting in gradual deterioration. The insureds filed suit.
The policy excluded coverage for construction defects, but insured "ensuing covered loss unless another exclusion applies."
The court agreed there was a prima facie case for coverage because the home suffered a physical loss.
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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com
Coverage for Construction Defects Barred by Business Risk Exclusions
September 1, 2011 — Tred Eyerley, Insurance Law Hawaii
Although the court determined there was an occurrence, coverage was excluded by the business risk exclusions. See Cont’l W. Ins. Co. v. Shay Constr. Co., 2011 U.S. Dist. LEXIS 82839 (D. Colo. July 28, 2011).
White was the general contractor on the project. White had three subcontracts with Shay to provide framing, siding, and related work on the project. Shay was insured under a CGL policy issued by Continental Western.
Two of Shay’s subcontractors furnished materials, labor and equipment to Shay. These subcontractors filed suit in state court alleging they had not been compensated for the work and materials. White and Shay were named as defendants. White cross claimed against Shay, alleging Shay had breached its obligations under the subcontracts. Several allegations sounded in contract. Other allegations, however, contended Shay had performed defective work and had damaged the work of other trades in correcting deficiencies in its own performance.
Shay sought coverage under Continental Western’s policy. Continental Western filed suit for a declaratory judgment and moved for summary judgment.
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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com
Nevada Assembly Sends Construction Defect Bill to Senate
June 6, 2011 — CDJ Staff
In a 26 to 16 vote, the Nevada Assembly has passed Assembly Bill 401, which extends the time limit for legal action over home construction defects. According to the Las Vegas Sun, Assembly member Marcus Conklin, Democrat of Las Vegas, said the bill was about “keeping the consumer whole.” However, Ira Hansen, Republican of Sparks, told the sun that suits are happening before contractors can make repairs. The bill would allow attorney fees even if repairs are made.
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Supreme Court of New York Denies Motion in all but One Cause of Action in Kikirov v. 355 Realty Assoc., et al.
April 28, 2011 — April 28, 2011 Beverley BevenFlorez - Construction Defect Journal
In the construction defect suit Kikirov v. 355 Realty Associates, LLC, et al., the Supreme Court of the State of New York granted a dismissal of the plaintiff’s fourth cause of action, but denied the defendants’ motion in all other respects. The plaintiff alleged breach of contract, among other claims. “355 Realty was the sponsor of 355 Kings Highway Condominium, a condominium project located at 355 Kings Highway, in Brooklyn, New York. The condominium units were allegedly marketed as ‘ultra luxury condos,’ and a ‘Manhattan style condominium building,’ which would be the ‘epitome of luxury and quality.’ The construction of the six-story 28 unit residential condominium building began in approximately November 2003. […] Plaintiff entered into a purchase agreement, dated December 21, 2005, with 355 Realty (which was executed on behalf of 355 Realty by Michael Marino, as its member) for the purchase of Unit 2G in the building.”
The plaintiff alleged that construction defects emerged soon after moving into the unit: “After taking occupancy of his condominium unit, plaintiff allegedly experienced serious leakage and moisture problems in his unit, which caused a dangerous mold condition to develop, in addition to causing actual damage to the structural elements of his unit. According to plaintiff, the walls, moldings, and wood floors of his unit are constantly wet and moist, and there is severe buckling of the wood floors. Plaintiff claims that these problems have caused his unit to be uninhabitable. Plaintiff alleges that he has been forced to remove all of his personal belongings from his unit and has been unable to occupy his unit.”
According to the plaintiff, Foremost attempted to repair the defects, but only made the situation worse: “Specifically, plaintiff asserts that Foremost’s contractors opened his walls to remove the stained drywall, but never corrected the cause of the leaks, destroyed the walls, and never properly taped and painted the sheet rock. Plaintiff alleges that Foremost repaired the openings in a defective manner. Plaintiff also claims that his floor was repaired at that time by a subcontractor hired by Foremost, but the basic structural problem was never resolved and the leaks continued, compromising the beams and causing the mold conditions, in addition to all of the physical damage present in the unit. On or about July 16, 2009, plaintiff allegedly sent a notice of the defects to 355 Realty and to the managing agent designated by the condominium board, by certified mail, return receipt requested. Plaintiff asserts that defendants have failed and refused to repair and remedy the defective condition, and that the damage is extensive and requires major structural repairs.”
The plaintiff filed suit on May 4, 2010, and the original complaint asserted eight causes of action. “By decision and order dated September 13, 2010, the court granted a motion by defendants to dismiss plaintiff’s second cause of action for breach of implied covenants of good faith and fair dealing, his third cause of action for breach of implied warranties, his fifth cause of action for negligence as against 355 Realty, Michael Marino, Anthony Piscione, Ahron Hersh, and Toby Hersh, his seventh cause of action for negligence as against Vision, Foremost, and MMJ, and his eighth cause of action for violations of General Business Law § 349 and § 350, and granted plaintiff leave to replead his first cause of action for breach of contract as against 355 Realty, Michael Marino, Anthony Piscione, Ahron Hersh, and Toby Hersh, his fourth cause of action for breach of statutory warranties, and his sixth cause of action for breach of contract as against Vision, Foremost, and MMJ.”
The plaintiff amended their complaint on October 18, 2010, and “has repleaded these three causes of action by asserting a first cause of action for breach of contract as against 355 Realty, Michael Marino, Anthony Piscione, Ahron Hersh, and Toby Hersh, a second cause of action for breach of statutory warranties, and a third cause of action for breach of contract as against Vision, Foremost, and MMJ. In addition, plaintiff, in his amended complaint, has added a fourth cause of action for fraud.”
The defendants, on the other hand, “argue that each of the four causes of action alleged by plaintiff in his amended complaint fail to state a claim upon which relief may be granted, and that plaintiff’s amended complaint must be dismissed pursuant to CPLR 3211 (a) (7). Defendants also cite to CPLR 3211 (a) (1), and (5), asserting that dismissal is also required based upon documentary evidence and the Statute of Limitations contained in the limited warranty.” The defendants’ motion to dismiss the first cause of action, breach of contract against 355 Realty, was denied: “While defendants dispute that the alleged defects are actually structural in nature, plaintiff’s allegations as to their structural nature are sufficient, at this juncture, to withstand defendants’ motion to dismiss. Thus, dismissal of plaintiff’s first cause of action must be denied.”
Next, the court reviewed the second cause of action, which was breach of statutory warranties: “Defendants’ motion also seeks dismissal of plaintiff’s second cause of action for breach of statutory warranties, which alleges that, under applicable law, including General Business Law § 777-a, et seq., the sponsor warranted to purchasers of units that the units would be constructed in a skillful, careful, and workmanlike manner, consistent with proper design, engineering, and construction standards and practices, and free of material latent, design, and structural defects. Defendants argue that General Business Law § 777-a, known as the housing merchant implied warranty, is inapplicable to this case because it is limited to the construction of a ‘new home,’ defined in General Business Law § 777 (5) as ‘any single family house or for-sale unit in a multi-unit residential structure of five stories or less.’ As noted above, the building in which plaintiff’s condominium unit is located is a six-story building.”
The motion to dismiss the second cause of action is denied. The court provided this reasoning: “the full text of the offering plan has not been provided, the court is unable to examine the entire written agreement so as to determine the purpose of the inclusion of the text of General Business Law § 777.”
In the third cause of action, the plaintiff alleges “a breach of contract claim as against Vision, Foremost, and MMJ based upon their contract with 355 Realty, pursuant to which they agreed to be the general contractors/construction managers for the condominium, to undertake oversight responsibility for the design and construction of the condominium, to prepare and/or review drawings, plans, and specifications for the condominium, and to otherwise manage and oversee the project. Plaintiff alleges that Vision, Foremost, and MMJ breached their contractual obligations in that the condominium units were improperly and inadequately designed and constructed, and completed in an incompetent and unworkmanlike manner, with material design and construction defects.”
The motion to dismiss the third cause of action was denied as well: “Plaintiff alleges, in his amended complaint, that Vision, Foremost, and MMJ have acknowledged notice of the defects and have not denied that they are responsible for providing a warranty to plaintiff. Plaintiff also refers to this warranty, in his amended complaint, by noting that paragraph 16 of the purchase agreement stated that the ‘[s]eller shall not be liable to . . . the [p]urchaser for any matter as to which an assignable warranty . . . has been assigned . . . to [p]urchaser and in such case the sole recourse of such . . . [p]urchaser . . . shall be against the warrantor . . . except that in the event a contractor or subcontractor is financially unable or refuses to perform its warranty . . . [s]eller shall not be excused from its obligations enumerated in the [offering p]lan under Rights and Obligations of Sponsor.’ Consequently, the court finds that dismissal of plaintiff’s third cause of action as against Foremost and MMJ must also be denied.”
In the fourth cause of action, the plaintiff alleges “that defendants made false statements and representations orally, in advertisements, and in the purchase agreement, that the condominium was properly and adequately designed and constructed and completed in a competent and workmanlike manner, in accordance with the condominium plans and specifications and proper design, engineering, and construction standards and practices consistent with applicable standards for a first class, luxury condominium in Brooklyn.”
The court dismissed the fourth cause of action stating, “it must be dismissed because it is duplicative of his first cause of action for breach of contract.” Therefore, “defendants’ motion to dismiss plaintiff’s amended complaint is granted to the extent that it seeks dismissal of plaintiff’s fourth cause of action, and it is denied in all other respects.”
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Rihanna Finds Construction Defects Hit a Sour Note
August 2, 2012 — CDJ Staff
The pop singer Rihanna is suing the former owners of her Beverley Hills home among others in a construction defect lawsuit. She contends that Adriana and Heather Rudomin concealed defects in the home that lead to water leaks and flooding during a 2010 storm. The Beverly Hills Patch noted that the dollar amount of the singer’s suit was not specified.
The most recent court ruling denied a motion from the owners to be dismissed from the lawsuit. They remain part of it, along Landmark Design Group, LLC, which renovated the home before the sale, and Prudential California Realty which sold the home.
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Las Vegas Home Builder Still in Bankruptcy
October 23, 2012 — CDJ Staff
American West Development attempted to exit Chapter 11 bankruptcy on September 27, but their plan was turned down by U.S. Bankruptcy Court Judge Mike Nakagawa. According to the Las Vegas Review-Journal, Judge Nakagawa rejected the plan over a trust fund for construction defects. America West’s attorney said they were hoping to complete the process by the end of the year.
Under approved portions of the plan, America West’s owner, Lawrence Canarelli, will retain control of the corporation, although he must contribute $10 million into the firm and an additional $1.5 million into the fund for construction defects. America West faces charges for construction defects reported in the broad range of “less than $20 million” to “as much as $80 million.”
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Construction Firm Charged for Creating “Hail” Damage
June 19, 2012 — CDJ Staff
A Burlington County, Pennsylvania judge has sentenced a firm and its employee for insurance fraud. In the scam, representatives of Precision Builders visited homes after hailstorms and advised homeowners that they could get new roofs and sidings covered by insurance. Many of the homeowners noted that they had not noticed any hail damage.
After homeowners filed claims, employees of Precision Builders would visit the homes and damage the roofs and sidings consistent with the adjusters’ reports.
One employee of Precision Builders, Dominik Sadowski, has pleaded guilty to third-degree insurance fraud. He has been sentenced to four years probation and 100 hours of community service. Another defendant, Marcin Gradziel, is alleged to have visited and damaged properties. He has plead not guilty.
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Harmon Hotel Construction Defect Update
July 18, 2011 — CDJ Staff
Coverage of the ongoing litigation concerning the Harmon Hotel continues to proliferate. Architectural Record and a number of other news outlets continue to provide additional details and coverage of the matter. Chief among the conditions alleged are improperly installed reinforcing steel inside link beams on 15 floors. MGM Claims that the conditions amount to hundreds of millions of dollars in damages, while Perini (the builder) indicated in a July 12th statement that the buildings problems are related to the design, and the they are “fixable.”
There is significant speculation that MGM Resorts International isn’t interested in repairing the hotel due to a glut of hotel rooms attendant to the troubled economy. In a statement Tuesday Perini reportedly stated that “Repairing and opening the Harmon would only create a greater glut of unused hotel rooms for MGM,” “If market conditions were better and MGM found that demand existed for the Harmon hotel rooms, MGM would not be claiming that the Harmon is unstable.”
MGM asserts that Perini failed to ”properly construct” the project. Clark County’s Department of Development Services has reportedly asked MGM to provide a plan to fix the project by August 15th.
The Harmon is part of the $8.5 billion CityCenter project that opened in the fourth quarter of 2009 and is jointly owned by MGM Resorts and Dubai World.
Prior reports indicated that the owner (MGM) had considered razing the entire project. The future of the project remains uncertain.
Record-Setting Construction in Fargo
November 7, 2012 — CDJ Staff
Prairie Business reports that Fargo is experiencing the most new construction it has ever seen, totaling $434 million in value, which exceeds the previous high in 2006 of $428 million. Many of the construction starts are for single family homes, although there is also an increase in construction of apartments and townhomes.
The Home Builders Association of Fargo-Moorhead also noted that there was also a large of remodeling projects. Terry Becker, the president of the HBA, said that “remodeling is just huge right now.”
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Important Information Regarding Colorado Mechanic’s Lien Rights.
November 7, 2012 — David McLain, Colorado Construction Litigation
With payment problems in the construction economy having accelerated over the past few years, there has been a substantial increase in mechanic’s lien activity and associated litigation. The typical mechanic’s lien claimant is a material supplier, a trade subcontractor, or even a general contractor that has not been paid by the developer/owner of the construction project. The reason for filing a mechanic’s lien claim is that it offers the prospect in many cases to make the unpaid construction professional a priority creditor, with a lien on the real estate that is superior to the construction lender.
One of the primary rules governing a mechanic’s lien claim is that the creditor’s formal written “Notice of Intent to File a Mechanic’s Lien” (hereafter “Lien Notice”) must be (1) served on the owner of the property for which the work was done or the materials used, and (2) served at the same time on the general contractor who has handled the construction project. After the creditor has made service of the lien claim by USPS certified mail (using the green return receipt card for proof of service) or separate personal delivery of the notice to the property owner and general contractor, ten full days must pass (not including the date of mailing of the notices) before the lien notice is filed in the public records.
After ten days have expired following the date of mailing using certified mail, or personal delivery of the notice to the property owner and the general contractor, the lien notice can be filed to make the lien valid.
Reprinted courtesy of David M. McLain, Higgins, Hopkins, McLain & Roswell, LLC. Mr. McLain can be contacted at mclain@hhmrlaw.com
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Construction Defect Bill Introduced in California
June 10, 2011 — CDJ Staff
Linda Halderman (R-Fresno) has introduced a bill which would require lawyers soliciting clients for construction defect cases to provide their prospective clients with a statement including that sellers may be required to disclose that they were engaged in a construction lawsuit. Further, the bill would require lawyers to disclose that they cannot guarantee financial recovery.
Halderman was quoted by The Business Journal as saying, “Lawsuit abuse has been very damaging, especially to homeowners in the Valley.” Halderman hopes that her bill will discourage class action lawsuits against builders and that this will protect jobs in the construction industry.
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Defect Claims as Occurrences? Check Your State Laws
July 10, 2012 — CDJ Staff
Although four states have defined construction defect claims as occurrences, contractors are still dealing with “coverage gaps for faulty work construction,” says Mike Tsikoudakis in a piece at Business Insurance. He quotes Julian Ehrlich, the senior VP of claims for Aon Risk Services that “one of the interesting and compelling aspects of the issue of coverage for defective construction is that jurisdictions differ, so policyholders don’t know what they’re going to get.” He further notes that “in context of construction defect, the term ‘occurrence’ is ambiguous.”
One problem, as noted by Jeffrey J. Vita, a partner at Saxe Doernberger & Vita, is that construction firms end up needing to simultaneously defend against defect claims and to also file suit to be certain their insurance firms will cover claims. Insurance for construction defect claims is described as “expensive and somewhat limited.” Mr. Vita expects more states to help this situation with new laws, clarifying what is an occurrence.
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Texas contractual liability exclusion
May 18, 2011 — May 18, 2011 - CDCoverage.com
In Ewing Construction Co., Inc. v. Amerisure Ins. Co., No. C-10-256 (S.D. Tex. April 28, 2011), insured Ewing was the general contractor for an athletic facility constructed for a school district. The school district sued Ewing alleging defective construction of the project. The underlying complaint included contract and negligence causes of action, and sought damages for the repair of the damages and loss of the use of the project. The complaint did not allege damage to any property other than the project itself. Ewing tendered its defense to its CGL insurer Amerisure. Amerisure denied a defense and Ewing filed suit against Amerisure. The federal district trial court entered summary judgment for Amerisure. Applying Texas law, the court held that all of the damages fell within the “contractual liability†exclusion precluding any duty to defend or indemnify.
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Reprinted courtesy of CDCoverage.com
Georgia Supreme Court Rules Construction Defects Can Constitute an Occurrence in CGL Policies
April 5, 2011 — April 5, 2011 Beverley BevenFlorez - Construction Defect Journal
Recently, the Supreme Court of Georgia reversed the decision in American Empire Surplus Lines Insurance Company v Hathaway Development Company, Inc. stating that because Whisnant’s faulty workmanship caused damage to the surrounding properties, the construction defects constituted “occurrences” under the Commercial General Liability (CGL) policy. Unlike the South Carolina Supreme court ruling in the case of Crossman Communities v Harleysville Mutual, the Georgia Supreme Court stated that an accident can happen intentionally if the effect is not the intended result.
Interestingly, the only dissenting judge, J. Melton, disagreed with his colleagues on the basis that “although the term ‘accident’ is not specifically defined in the policy, it is axiomatic that an ‘accident’ cannot result from ‘intentional’ behavior.” It is clear that what constitutes an occurrence in CGL policies is still being hotly debated.
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Statute of Limitations Upheld in Construction Defect Case
September 30, 2011 — CDJ Staff
The Missouri Court of Appeals has ruled in Ball v. Friese Construction Co., finding that Mr. Ball’s claims were barred by the statute of limitations.
Mr. Ball hired Friese Construction Company to build a single-family home. The sale was completed on March 29, 2001. That December, Mr. Ball complained of cracks in the basement floor. SCI Engineering, n engineering firm, hired by Friese, determined that the home’s footing had settled and recommended that Mr. Ball hire a structural engineer to determine if the footings were properly designed and sized. In September 2002, the structural engineer, Strain Engineering, determined that the cracks were due to slab movement, caused in part by water beneath the slab, recommending measures to move water away from the foundation. In 2005, Mr. Ball sent Friese correspondence “detailing issues he was having with the home, including problems with the basement slab, chimney structure, drywall tape, and doors.” All of these were attributed to the foundation problems. In 2006, Friese stated that the slab movement was due to Ball’s failure to maintain the storm water drains.
In 2009, Ball received a report from GeoTest “stating the house was resting on highly plastic clay soils.” He sued Friese in May, 2010. Friese was granted a summary judgment dismissing the suit, as the Missouri has a five-year statute of limitations. Ball appealed on the grounds that the extent of the damage could not be determined until after the third expert report. The appeals court rejected this claim, noting that a reasonable person would have concluded that after the conclusion of SCI and Strain Engineering that “injury and substantial damages may have occurred.”
The court concluded that as there were not “continuing wrongs causing new and distinct damages,” he should have filed his lawsuit after the first two expert reports, not waiting seven years for a third expert to opine.
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Another Guilty Plea in Las Vegas HOA Scandal
December 20, 2012 — CDJ Staff
A twenty-eighth person has plead guilty in the ongoing Las Vegas HOA scandal. Dax Louderman, who had been a construction company manager had acknowledged that he stole more than $495,000 from his former employers, Alpha 1 Construction and the Stone Canyon Homeowners Association, and further that he did not report this improper income on his tax returns. He has agreed to work with prosecutors and to pay $134,860 to the IRS. His actual sentencing will happen on June 24.
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Analysis of the “owned property exclusion” under Panico v. State Farm
March 8, 2011 — March 8, 2011, Colorado Construction Litigation
The U.S. Court of Appeals for the Tenth Circuit recently concluded that the “owned property exclusion” applied to bar coverage for claims of property damage. See Panico v. State Farm Fire and Cas. Co., 2011 WL 322830 (10th Cir. 2011). In Panico, the plaintiffs sold property in Aspen, Colorado to the Taylors, who sued the Panicos upon discovering the property was not as represented. After refusing to defend, the Panicos sued State Farm for breach of contract. The district court concluded that the Taylors’ claims were not covered under the Panicos insurance policies and granted summary judgment in State Farm’s favor. The U.S. Court of Appeals for the Tenth Circuit affirmed.
Mr. Panico built the house on the property as well as several additions to the house. As the Taylors lived in Florida, they primarily relied on their real estate agent and an inspector to ensure the property was acceptable. According to their complaint, the Taylors discovered that the house was “virtually uninhabitable due to serious design and construction defects, mold, rodents, and drainage problems.” Id. at *1. In their complaint, the Taylors asserted three claims for relief against the Panicos based upon misrepresentation and fraudulent concealment about the condition of the property.
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Reprinted courtesy of Heather M. Anderson of Higgins, Hopkins, McClain & Roswell, LLP. Ms Anderson can be contacted at anderson@hhmrlaw.com
Insurer Not Liable for Construction Defect Revealed by Woodpecker
September 13, 2012 — CDJ Staff
The Eighth Circuit Court of Appeals has ruled that an insurance provision that excluded construction defects must stand in Friedberg v. Chubb, granting a summary judgment to the insurance firm.
The Friedbergs discovered extensive water damage to their home after a woodpecker drilled a hole in a vertical support. They sought insurance coverage under their Chubb “Masterpiece” policy. The decision quotes the policy as covering “all risk of physical loss” “unless stated otherwise or an exclusion applies.” These exclusions included “gradual or sudden loss,” “structural movement,” and “faulty planning, construction or maintenance,” but the policy covered “ensuing covered loss unless another exclusion applies.”
Chubb’s expert determined that the Friedbergs’ home had defective construction, and “attributed the damage to the beams and walls below the beam to a failure to install control joints.” After Chubb denied coverage, the Friedbergs sued, although the court ruled that “even under the Friedbergs’ theory, the water damage was a loss caused by faulty construction and therefore excluded under the policy.”
On appeal, the Friedbergs argued that “the loss resulted from the combination of both faulty construction and the presence of water” and that Minnesota’s “concurrent causation” doctrine must apply, which according to the decision, “when a loss results from both a covered peril and an excluded peril, coverage exists unless the excluded peril is the ‘overriding cause’ of the loss.” The court rejected this reasoning, noting that “once the house was plagued with faulty construction, it was a foreseeable and natural consequence that water would enter.”
The Friedbergs also contended that “the damage caused by the intrusion of water into their home is an ‘ensuing covered loss’ for which they are due coverage.” The court also rejected this claim, noting that Minnesota law excludes defective construction from the ensuing loss provision. The court said that “the Friedbergs’ reading of their ensuing-loss clause, by contrast, would dramatically limit their policy’s faulty-construction exclusion, because almost ‘any loss cause by’ faulty construction could also be characterized as an ensuing loss under an all-risk policy.”
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