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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