Federal Court Rules On Consequences Of Insurer’s Alleged Change Of Coverage Position Predicated On Post-Contracting Case Law

In Illinois National Insurance Company v. Nordic PCL Construction, Inc., No. 11-0515, 2013 WL 5739639 (D. Haw. Oct. 22, 2013), the United States District Court for the District of Hawaii, applying Hawaii law, granted summary judgment to commercial liability insurers on their policyholder's bad faith counterclaim and request for punitive damages while reserving for trial counterclaims for negligent misrepresentation and reformation arising out of alleged construction defects at a newly constructed store. Id. at *1.

The policyholder, a general contractor, had purchased comprehensive general liability (CGL) and umbrella insurance policies in 2007, the terms of which provided coverage for "bodily injury" and "property damage" caused by an "occurrence." Id. at *1-2. At the time of contracting, the Ninth Circuit had predicted that, "if the Hawaii Supreme Court examined the matter, it would rule that, for purposes of insurance coverage, construction defects were not 'occurrences.'" Id. at *2 (citing Burlington Ins. Co. v. Oceanic Design & Constr., Inc., 383 F.3d 940, 948 (9th Cir. 2004)). In January 2008, the contractor was notified of alleged defects in the store roof causing water leaks and property damage, and in October 2008 it filed a claim with its insurers. Id. at *1-2. In May 2010, the Hawaii Intermediate Court of Appeals, "not[ing] that authorities were split as to whether defective workmanship was an 'occurrence' for purposes of a CGL policy, . . . adopted the majority position and held that, 'under Hawai'i law, construction defect claims do not constitute an 'occurrence' under a CGL policy.'" Id. at *4 (quoting Group Builders, Inc. v. Admiral Ins. Co., 231 P.3d 67, 73 (Haw. Ct. App. 2010)). Thereafter, "the Insurers took the position that no money would be offered to [the store] . . . in light of [the 2010 decision]," and they sought a declaration that they need not defend or indemnify their policyholder with respect to the construction defect claims. Id. at *1, 4. The policyholder filed counterclaims for bad faith, negligent misrepresentation, reformation, and punitive damages, all predicated on the allegation that the parties had entered the contracts intending coverage for such claims notwithstanding the case law. Id. at *1-3.

The court granted the insurers' motion for summary judgment on the bad faith counterclaim. It first explained that the policyholder was "not arguing . . . that the Insurers . . . acted in bad faith by...