In Nautilus Insurance Company v. 3Builders, Inc., Civil No. 11-00303 LEK-RLP, 2013 WL 3223643 (D. Haw. June 24, 2013), the United States District Court for the District of Hawaii, applying Hawaii state law, granted Nautilus Insurance Company's ("Nautilus") motion for summary judgment ("Motion") on its complaint for declaratory judgment and held that Nautilus did not have a duty to defend or indemnify defendant 3Builders, Inc. ("3Builders") for alleged damages flowing from the faulty installation of metal roofs on apartment buildings because 3Builders' substandard construction work was a foreseeable breach of contract and therefore did not constitute an "occurrence" under Nautilus' commercial general liability ("CGL") policies.  

Nautilus issued three CGL policies to 3Builders for the period from January 2008 to January 2011.  In 2008, 3Builders' bid for a multi-building roof replacement project (the "Project") was accepted.  The building's owner experienced numerous problems with the Project and, after having paid 3Builders approximately $250,000 for work completed, terminated the Project's contract.  The Project's construction manager then filed an arbitration demand against the building owner, who cross-claimed against 3Builders in the arbitration and filed a complaint in state court against 3Builders and others involved in the Project.  3Builders tendered defense of both the lawsuit and the arbitration to Nautilus.  Nautilus accepted 3Builders' tender pursuant to a reservation of rights and filed its own complaint in federal district court seeking a judicial determination that it had no duty to defend or indemnify 3Builders in either the state court lawsuit or the arbitration. Nautilus had been providing 3Builders with a defense in both actions for approximately three years at the time of the filing of the Motion.

The federal district considered Nautilus' obligations to 3Builders upon Nautilus' filing of the Motion.  The court first determined that the events underlying the allegations in the Project owner's complaint took place during the first two Nautilus policies, and then proceeded to determine whether the building owner's claims gave rise to coverage under the terms of those policies.  Following the district court's analysis in Burlington Insurance Co. v. Oceanic Design & Construction Inc., also applying Hawaii state law, the federal district court in Nautilus held the relevant analysis was whether the origin of the underlying claims, including those sounding in tort, were premised on a contractual relationship or based on an independent tort claim under state law.  518 F. Supp. 2d 1241, 1249-1251 (D. Haw. 2007); 3Builders, 2013 WL 3223643 at *38.  In Burlington the federal district court held that there was no duty to defend or indemnify an insured where all of the claims in the underlying proceedings were dependent on the existence of the insured's contracts and none of the claims alleged an independent duty "which transcends the underlying contracts or warranties."  Burlington, 518 F. Supp. 2dat 1252.  The federal district court in 3Builders  then found that all claims in the building owner's lawsuit and Project manager's arbitration arose from the Project contract or from the contractual relationship and therefore did not constitute an "occurrence" under Nautilus policies.  3Builders, 2013 WL 3223643 at *42.

The 3Builders case continues a national trend of courts' reluctance to characterize colorable negligence claims as "occurrences" under CGL policies in construction defect actions, where the conduct complained of is faulty workmanship and therefore a foreseeable breach of a contractual relationship.  See Town & Country Prop., LLC v. Amerisure Ins. Co., 111 So.3d 699, 706 (Ala. 2011) ("[W]e ... conclude that faulty workmanship itself is not an occurrence[.]"); Cincinnati Ins. Co. v. Motorists Mut. Ins. Co., 306 S.W.3d 69, 76 (Ky. 2010) ("Simply put, faulty workmanship is not an accident [.]" (internal quotations and footnote omitted)); Concord Gen. Mut. Ins. Co. v. Green & Co. Bldg. & Dev. Corp., 8 A .3d 24, 28 (N.H. 2010) ("[D]efective work, standing alone, does not constitute an occurrence." (citation omitted)); Westfield Ins. Co. v. Custom Agri Sys., Inc., 979 N.E.2d 269 (Ohio 2012) ("Claims of defective construction or workmanship brought by a property owner are not claims for 'property damage' caused by an 'occurrence under a commercial general liability policy.")

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