2008 Construction Insurance Cases in Review

Where there is construction, disputes arise about insurance procurement, claims and coverage. From the deep and varied bench of 2008 insurance cases involving construction, some key areas of dispute involved questions about: (1) When is an insurance broker or agent responsible for failing to buy insurance? (2) Who is an additional insured? (3) When is damage from defective work covered as an "occurrence," or accident, despite exclusions for business risks or defective work? (4) Why should insureds worry about late notice of a claim? (5) How are pollution exclusions being enforced for present-day construction risks? and (6) What circumstances rise to the level of bad faith/estoppel?

When is an insurance broker or agent responsible for failing to buy insurance?

Longstanding requirements that parties to construction contracts purchase various insurance coverages were again included in the "General Conditions of the Contract for Construction," AIA Document A201 (2007 ed.). For example, Article 11, "Insurance and Bonds," requires contractors to purchase coverage for claims by employees, such as workers' compensation, disability benefits, and bodily injury claims, as well as coverage for non-employees for damages because of bodily injury, personal injury liability, property damage, completed operations and contractual liability, and for automobile liability claims. (Article 11, § 11.1.1.) Owner's insurance provisions address liability, "all-risk" property insurance, boiler and machinery insurance and loss of use insurance. (Article 11, §§ 11.2 – 11.3.) Similarly, under owner-architect agreements, such as the Standard Form, AIA Document B101 (2007 ed.), architect insurance provisions are also now specifically addressed in the contract to allow for identification of maintenance by the architect of listed coverages, including general liability, automobile liability, workers' compensation and professional liability coverages. (AIA Document B101, Article 2, Architect's Responsibilities § 2.5.)

Not surprisingly, several cases in 2008 address allegations of a failure to procure the requested coverages. In SMI Owen Steel Co. v. Marsh USA, Inc., 520 F.3d 432 (5^th Cir. 2008), for example, a subcontractor hired to design, engineer and install a hotel project's structural steel and foundation work sued the broker in charge of administering the "wrap-up" insurance program for the project known as a "Controlled Insurance Program" or "CIP". The CIP included policies such as commercial general liability, professional liability, pollution liability, subcontractor and excess liability coverage, but the contract between the general contractor and the owner did not require professional liability coverage for subcontractors. When professional liability coverage was purchased, the subcontractors were not listed as additional insureds. The broker, however, subsequently sent the subcontractor an Insurance Information Booklet, a Contractor Handbook and two insurance certificates indicating that the subcontractor had professional coverage under the CIP. As a result, the subcontractor argued that it detrimentally relied on the broker to procure the professional liability coverage and was forced to defend itself in a subsequent arbitration when the professional liability insurer denied coverage. Although the broker's documents evidencing coverage were erroneous and professional liability coverage had not been purchased for the subcontractor, the court ruled that a reasonable jury could find that the subcontractor had proven the causation element of its negligence claim and determined that the jury had properly awarded damages of approximately $7.8 million against the broker for the failure to procure promised insurance.

The broker's argument in its defense that Nevada's economic loss doctrine ("the well established common law rule" that "absent privity of contract or an injury to person or property, a plaintiff may not recover in negligence for economic loss") barred the claim against it for negligent failure to procure insurance was also rejected. In making an Erie guess about what the Nevada Supreme Court would do if faced with this question, the Fifth Circuit Court of Appeals concluded that "Nevada's economic loss doctrine does not bar negligence claims involving the violation of a professional, extra-contractual duty imposed by law." As such, believing that the Nevada Supreme Court has imposed "an independent duty of care" on insurance brokers, the Court concluded that the Nevada Supreme Court would hold that the economic loss doctrine does not bar a subcontractor's claim against the broker under the facts of this case. SMI Owen Steel Co. v. Marsh USA, Inc., 520 F.3d 432, 443-44 (5^th Cir. 2008).

Similarly, in Nicotra Group, LLC v. American Safety Indemnity Co., 48 A.D.3d 253, 850 N.Y.S.2d 455, 2008 N.Y. Slip Op. 01080 (N.Y. App. Div., First Dep't, 2008), responsibility for a failure to procure "additional insured" status for a project owner with respect to a construction manager's work on the project on the construction manager's insurance policies rested with the owner's broker. An unsigned letter proposal relating to the construction manager's work did not qualify as a "written contract" that was "executed" before the bodily injury in question occurred, nor did it require that the owner be named as an additional insured. Moreover, testimony indicated that it was the owner's broker, not the wholesale broker through which the coverage was actually placed, that was responsible for the failure to procure the coverage. The wholesale broker was only carrying out the owner's broker's orders in returning the endorsement providing coverage "for flat cancellation," a term of art in the industry meaning cancellation as of its effective date.

In Coluccio Construction Co. v. King County, 136 Wn. App. 751, 150 P.3d 1147 (2007), the court determined that a county, which had contractually agreed to purchase and maintain property damage insurance on a public works project involving construction of a small utility tunnel, was responsible for the full amount of losses a general contractor sustained because the county did not purchase the promised insurance. A trial court award of $1.5 million plus $324,417.58 in attorneys' fees in favor of the general contractor was upheld on appeal. According to the court, the establishment of an insurer-insured relationship and the determination of whether the county breached is promise to provide All Risks Builder's Risk insurance coverage for the project were questions of fact. As such, having failed to provide the insurance pursuant to the terms of the parties' contract, the county assumed all risk of loss, including damages for the full amount that would have been covered by insurance. Although the court allowed the county to try to prove that every builders risk policy it could have purchased would have excluded the losses claimed, the county was not able to meet this burden. Citing to a treatise indicating that it would have been impossible for the county to make such a showing at trial, 9A Russ and Segalla, Couch on Insurance § 132:21 (3d ed. 1995), the court also relied on several cases discussing builder's risk policies which did not contain "faulty workmanship" exclusions as evidence that all builder's risk policies did not contain a "faulty workmanship" exclusion. Thus, the county could not escape liability for its failure to procure builder's risk coverage.

Who is an additional insured?

When contractors or subcontractors agree to list the parties with whom they contract as additional insureds on their general liability policies, disputes arise about whether a particular party is an additional insured and what the extent of coverage is for the additional insured. In 2008, additional insured status continued to present questions for the courts.

One such example is Weitz Co., LLC v. Mid-Century Insurance Co.,181 P.3d 309 (Colo. Ct. App. 2007)(petition for cert. denied April 7, 2008), where, in an apparent issue of first impression, the Colorado Court of Appeals addressed the issue of whether an additional insured endorsement covered completed operations when the endorsement extended coverage on the named subcontractor's commercial general liability policy to the general contactor as an additional insured "but only with respect to liability arising out of your [the subcontractor's] on-going operations performed for that insured." Noting that the form in question, ISO 20 10 93, had changed prior language providing additional insured coverage "arising out of ‘your work'" to reference instead additional insured coverage "arising out of your ongoing operations," the Court of Appeals determined that the endorsement did not require the subcontractor's insurer to defend or indemnify the general contractor for liability arising out of the subcontractor's completed work. In reaching this conclusion, the Court noted as dictum the only other published opinion addressing this issue, Pardee Construction Co. v. Insurance Co. of the West, 77 Cal. App. 4th 1340, 92 Cal. Rptr. 2d 443 (4th Dist. 2000), which reached a contrary conclusion because the policies at issue there referenced "operations" and "all operations," not "ongoing operations." According to the Colorado Court:

In our view, the policy is unambiguous as to the extent of coverage available to the additional insured. The term "completed operations" as used in the policy extends that coverage to the subcontractor or named insured, and the term "ongoing operations" used in conjunction with "only" in the endorsement limits the coverage provided by the general contractor or additional insured. The use of different terms in the policy signals that those terms should be afforded different meanings. See Carlson v. Ferris, 85 P.3d 504, 509 (Colo. 2003; cf. Freedom Newspapers, Inc. v. Tollefson, 961 P.2d 1150, 1153 (Colo. App. 1998) (absent a manifest indication to the contrary, the rule of consistent usage requires that the use of the same words or phrases in different parts of a statute should be given the same meaning). Therefore, we disagree with the general contractor's assertion that "ongoing operations" used in the endorsement to limit coverage has the same meaning as "completed operations" used elsewhere in the policy. (Internal citations omitted).

Weitz Co., LLC v. Mid-Century Ins. Co., 181 P.3d 309, 313-14 (Colo. Ct. App. 2007).

Following Weitz, the Washington Court of Appeals reached a similar conclusion on the same issue in Hartford Insurance Co. v. Ohio Casualty Insurance Co., 145 Wn. App. 765, 189 P.3d 195 (Wash. Ct. App. 2008). Finding that the general contractor for a condominium project was not covered as an additional insured on the subcontractors' policies for completed operations, the Court found:

the discussion in Pardee persuasive. We therefore conclude that since the additional endorsement … in the American States policies was limited to "ongoing operations," American States was correct in its argument that the additional insured endorsement "limited [the general contractor's] coverage to property damage arising out of the subcontractors' work in progress only.

Hartford Ins. Co. v. Ohio Cas. Ins. Co., 145 Wn. App. 765, 778,189 P.3d 195, 202 (Wash. Ct. App. 2008).

In another additional insured endorsement case, Pekin Insurance Co. v. United Parcel Service, Inc., 381 Ill. App. 3d 98, 885 N.E.2d 386, 319 Ill.Dec. 115 (Ill. App. Ct. 1^st Dist. 2008), determined that the insurer did not have a duty to defend UPS, an additional insured on a general liability policy issued to a machinery installer, when the installer's employee fell from a ladder and was injured while working at a UPS site. The additional insured endorsement named UPS as an additional insured "only with respect to liability incurred solely as a result of some act or omission of the named insured and not for its own independent negligence or statutory violation." Id. at 100, 389, 118. UPS, against which a direct claim of negligence was pled, argued that it was an additional insured because as pled, there was a possibility that UPS could be found vicariously liable for the negligent acts or omissions of the insured machinery installer, thereby satisfying the requirement that liability be incurred "solely as a result of some act or omission" of the insured. The Court disagreed. Highlighting the importance of the actual allegations and facts on coverage analysis, the mere theoretic possibility of liability for vicarious liability was insufficient to create coverage.

While we agree that "[t]he question of coverage should not hinge on the draftsmanship skills or whims of the plaintiff in the underlying action," nothing in the [plaintiff's] complaint suggests that UPS retained any control, let alone sufficient control, over the manner of [the insured's] work so as to be vicariously liable for the acts or omissions of [the insured].

Pekin Insurance Co. v. United Parcel Service, Inc., 381 Ill. App. 3d 98, 107, 885 N.E.2d 386, 394, 319 Ill.Dec. 115, 123 (Ill. App. Ct.. 1^st Dist. 2008)(citation omitted).

Similarly, in American Economy Insurance Co. v. DePaul University, 383 Ill. App. 3d 172, 890 N.E.2d 582, (App. Ct. of Ill., 1^st Dist., 6^th Div. 2008), an electrical subcontractor's insurer denied that it had a duty to defend an additional insured, DePaul University, against a personal injury suit brought against the University by a city of Chicago risk manager who alleged that she sustained sudden illness from exposure to unfiltered and undiffused fluorescent lighting in her work area, which had been leased by the city from DePaul University. As an additional insured, DePaul University sought a defense from the insurer of the electrical subcontractor which installed the lighting. Arguing that the only allegations against the named insured, the electrical subcontractor, were found in DePaul University's third party complaint, not in the plaintiff's complaint, the insurer denied a defense to the additional insured University. The Court disagreed. Looking at the allegations in the third party complaint, even if drafted by the additional insured, as well as examining the uncontested facts actually known to the insurer, the Court found that the insurer could not artificially limit its knowledge, which included knowledge that the plaintiff alleged selection and installation of the lighting caused her injuries, as well as the subcontract included in the record that provided for the subcontractor's responsibility for construction of "the complete operating electrical system," resulted in a duty to defend the additional insured University.

The additional insured endorsement provided coverage for liability arising out of [the electrical subcontractor's] work for DePaul. As we previously stated, "arising out of" is to be liberally construed in favor of the insured and only a "but for" causation is required. It is uncontested that [the subcontractor] installed the fluorescent lighting. The [plaintiff's] complaint against DePaul alleged that she was injured because of the selection and installation of the fluorescent lighting without UV diffusers. Therefore, there is the potential for liability of DePaul because "but for" [the subcontractor's] work, the installation of the fluorescent lighting without diffusers, [the plaintiff] would not have been injured. These facts demonstrate [the insurer] had a duty to defend DePaul under the additional insured endorsement afforded in its policy.

American Economy Ins., Co. v. DePaul University, 383 Ill.App.3d 172, 182, 890 N.E.2d 582, 591-92, 321 Ill. Dec. 860, 869-70 (Ill. App. Ct., 1^st Dist. 2008)(citation omitted).

However, limitations on the information outside of the pleadings that can be considered to determine the duty to defend an additional insured was evidenced by a California Court of Appeal decision. In Monticello Insurance Co. v. Essex Ins. Co., 162 Cal. App. 4th 1376, 76 Cal. Rptr. 3d 848 (Cal. App.2nd Dist. 2008), a drywall subcontractor's insurer was not required to defend an additional insured general contractor sued in a construction defect suit. The complaint did not allege that any damages were related to the subcontractor's drywall work and a defect list created by the plaintiff's counsel was not provided to the insurer while it still had the opportunity to participate in the defense. Thus, the defect list could not be used to create a duty to defend after the fact. Moreover, although the general contractor cross-claimed against the subcontractor alleging negligent work, the cross-complaint for indemnity "does nothing to alter the fact that the Goldmans, the plaintiffs in the main action, the action for which a defense is sought, did not allege covered damages against [the drywall subcontractor]. [The general contractor's] cross-complaint for indemnity cannot substitute for the absence of such allegations by the Goldmans." Monticello Ins. Co. v. Essex Ins. Co., 162 Cal. App. 4th 1376, 1389, 76 Cal. Rptr. 3d 848, 859 (Cal. App. 2nd Dist. 2008).

In Evanston Insurance Company v. Atofina Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008), a property owner was found to be an "additional insured" on a contractor's general liability excess policy even if the sole case of the death of the contractor's employee was the property owner's own negligence. The contractor's employee was killed when he fell through the corroded roof of a storage tank at the owner's refinery and drowned in fuel oil. Although the owner/contractor construction contract excepted coverage if the owner was solely negligent, the language of the additional insured endorsement governed the coverage determination, not the construction contract. As such, because one of two different additional insured provisions in the excess policy extended coverage to the owner "only with respect to operations performed by" the contractor, the Texas Supreme Court held that this language extended excess coverage to losses caused by an additional insured's sole negligence – refusing to read a limitation in one of two "who-is- an-insured" clauses in the excess policy into the provision which granted the coverage to the owner. The court also rejected a fault-based interpretation of the additional insured language, thereby abrogating Granite Construction Co. v. Bituminous Insurance Cos., 832 S.W.2d 427 (Tex.App.–Amarillo 1992, no writ).

When is damage from defective work covered as an "occurrence," or accident, despite exclusions for business risks or defective work?

Whether faulty workmanship is an "occurrence" is also a question courts continue to grapple with and respond to differently, depending on the jurisdiction and the particular facts at issue.

In Webster v. Acadia Insurance Co., 156 N.H. 317, 934 A.2d 567 (2007), damaged purlins or ceiling beams from a negligently installed seamless metal roof membrane installed by the contractor-insured on a school building was found to be property damage caused by an "occurrence." The New Hampshire Supreme Court found that the buckling, bowing, lateral movement and separation of the beams from the building frame, which was first caused or aggravated by a heavy snowstorm, was unexpected from the insured's standpoint, especially given that the insured's work did not include the purlins. In addressing the insurer's argument that the claim was for faulty workmanship, not property damage caused by an "occurrence," the court highlighted the fact that the contractor's defective work did not stand alone. Rather, actual damage to the purlins was alleged, in addition to allegations about the defective roof, and the purlin damage was damage to property other than the work of the insured.

In United States Fire Insurance Co. v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007), a subcontractor's use of poor soil and improper soil compaction and testing damaged homes built by the general contractor-insured. The general contractor's insurer denied coverage under a commercial general liability policy on the basis that there was no "occurrence" when the subcontractor's negligent workmanship caused structural damage to the homes. The court disagreed and found that damage to the foundations, drywall and interior portions of the homes after they were completed and delivered to the homeowners was neither expected nor intended from the standpoint of the general contractor and, so, was an "occurrence."

In sum, we reject a definition of "occurrence" that renders damage to the insured's own work as a result of a subcontractor's faulty workmanship expected, but renders damage to property of a third party [here the homeowners' personal property, such as wallpaper] caused by the same faulty workmanship unexpected. There is simply nothing in the definition of the term "occurrence" that limits coverage in the manner advanced by [the insurer].

Id. at 885.

Similarly, in MW Builders, Inc. v. Safeco Insurance Co. of America, 267 Fed. Appx. 552, 2008 WL 422222 (9th Cir. Feb. 15, 2008), the 9th Circuit Court of Appeals determined that a builder was covered under a commercial general liability policy for water damages to a hotel that occurred as a result of an exterior insulation and finishing system ("EIFS") by a subcontractor. According to the court, damages to the hotel from the faulty installation of an EIFS by the subcontractor satisfied the requirement for an "occurrence" under the policy, defined to require an "accident." Although "accident" was not defined by the policy, the court noted that the term "accident" had previously been defined by the Oregon Supreme Court as an act "that happened by chance, without design and contrary to intention and expectation." St. Paul Fire & Marine Insurance Co. v. McCormick & Baxter Creosoting Co., 324 Or. 184, 923 P.2d 1200, 1213 (1996). The water damage to the hotel was, therefore, caused by an "accident" and covered under the CGL policy. See also Grimes Construction, Inc. v. Great American Lloyds Insurance Co., 248 S.W.3d 171, 51 Tex. Sup. Ct. J. 545 (Tex. 2008) (contractor's allegedly defective work was an "occurrence" within the meaning of coverage issued to the contractor as the insured. Allegations of unintended constructions defects might constitute an "accident" as required for a duty to defend and indemnify.); Auto Owners Insurance Co. v. Newman, 2008 WL 648546 (S.C. Mar. 10, 2008) (homebuilder's commercial general liability policy covered claim for water instruction damages caused by the alleged negligence of a stucco subcontractor. "[T]he stucco subcontractor's faulty workmanship led to an ‘occurrence' justifying coverage for the resulting property damage under the terms of the CGL policy.").

On the other side of the issue, in Millers Capital Insurance Co. v. Gambone Brothers Development Co., 941 A.2d 706 (Pa. Super. Ct. 2007, reargument denied Mar. 5, 2008), water damage from a subcontractor's faulty work done for a home builder was found not to be caused by an "occurrence" as required for commercial general liability coverage. According to this Pennsylvania appellate court, because the allegations were premised in part on faulty workmanship of the subcontractor, "claims predicated on faulty workmanship cannot be considered ‘occurrences' for purposes of an occurrence based CGL policy as a matter of plain language and judicial construction." Id. at 717.

Although the insured argued that the policy was intended to provide coverage for faulty workmanship of subcontractors given that language in the "your work" exclusion included an exception for work performed for the insured by a subcontractor, the court disagreed. If, for example, a subcontractor confused job orders and worked on a part of the project it was not contracted to work on, there could be an "occurrence" as well as coverage for subcontractor work which would not be defined as faulty workmanship and would fit into the "your work" exclusion. However, without this type of "accident" as to the subcontractor, the court declined to find coverage for the builder-insured on a claim predicated on faulty workmanship by a subcontractor. See also Hathaway Dev. Co., Inc. v. Ill. Union Ins. Co., 274 Fed. Appx. 787, 2008, WL 1773307 (11th Cir. 2008) (subcontractor's installation of wrong-sized dishwasher supply line pipe in underslab plumbing at apartment complex projects did not constitute "occurrence" under contractor's policy when building pad was damaged by rain during period of delay caused before pipe could be replaced); Down Under Masonry, Inc. v. Peerless Ins. Co., 950 A.2d 1213 (Vt. 2008) (general contractor was not covered under commercial general liability policy for subcontractor's use of inferior quality shingles. Even assuming an "occurrence," the aesthetic impact on the home was not "property damage."); Paramount Parks, Inc. v. Admiral Ins. Co., 2008 WL 757533 (Ohio App. 12 Dist) ("a CGL policy such as the one at issue here does not insure against claims for defective or negligent workmanship or construction because defective workmanship does not constitute an ‘accident,' and therefore claims for defective or negligent workmanship do not constitute an occurrence under the policy."); Lloyd A. Twite Family Partnership v. Unitrin Multi Line Ins., 192 P.3d 1156 (Mont. 2008) (design and construction company's alleged failure to comply with federal and state requirements regarding equal use and access in housing projects did not constitute an "occurrence" under commercial general liability policy); Lyerla v. Amco Ins. Co., 536 F.3d 684 (7^th Cir. 2008) (failure by insured construction contractor to build home according to plans and specifications was not property damage caused by an "occurrence' as required for commercial general liability coverage); Integrity Mutual Insurance Co. v. Klampe, 2008 WL 5335690 (Minn. App.) (damages caused by defective work of contractor-insured was not property damage caused by an "occurrence" as required for coverage under standard commercial general liability coverage).

Why should insureds worry about late notice of a claim?

While providing timely notice of a claim would seem to be a relatively simple condition to coverage to comply with, notice is not always a simple matter and the late notice defense to coverage continues to generate disputes among insureds and insurers, especially in New York where late notice is a complete defense to liability whether or not the insurance company was prejudiced when a policy includes a notice-of-occurrence provision.

In Transportation Insurance Co. v. Aark Construction Group, Ltd., 526 F. Supp. 2d 350 (E.D.N.Y. 2007), an insured construction contractor failed to comply with the requirement that it report an "occurrence" as soon as practical and, thus, lost coverage for lawsuit related to collapse of a parking garage built by the contractor. The contractor failed to inform the insurer of an accident at the garage when a fuel truck fell through the first floor of the garage to the basement until two years after the accident when it received a claim letter from the garage owner for $1.4 million in damages. The insured's late notice was not excused by its belief that faulty construction was not the reason for the accident, which the court found to be an "unreasonable belief in its nonliability." The merits of the excuse of non-liability were belied by the contractor's letter just five days after the accident to its concrete system subcontractor asserting the possibility that the collapse may have been caused by the concrete system. Also, the contract with the garage owner placed responsibility for supervising subcontractors and for the quality of their work on the contractor. When the collapse occurred, "any question regarding the integrity of the work completed at the garage should have triggered a response from [the contractor] to contact its insurer." Id. at 359. See also York Speciality Food, Inc. v. Tower Ins. Co. of N.Y., 47 A.D.3d 589, 850 N.Y.S.2d 409 (N.Y., App. Div., 1^st Dep't 2008) (although a good faith belief in non-liability can excuse the failure to give timely notice, the insured's failure to notify an insurer until eight months after a claimant fell in front of the insured's building and was taken away in an ambulance was not excused. The insured made no investigation at all into the accident and so, having failed to take action to ascertain the possibility of liability, did not have a basis for a good-faith belief in non-liability).

However, a glimmer of hope for insureds in New York was offered in by North Country Ins. Co. v. Jandreau, 50 A.D.3d 1429, 856 N.Y.S.2d 294, 2008 N.Y.Slip Op. 03552 (N.Y., App. Div., 3^rd Dep't 2008), in which the question of whether the insured's 12-month delay in providing notice to his commercial general liability insurer was reasonable was found to be a question properly submitted to a jury, rather than determined on summary judgment. In North Country, the insured, a general contractor on a new home construction project, informed the supervisor of a roofing subcontractor that no one should go on the roof due to weather conditions. The subcontractor's employee nonetheless went on the roof and shortly thereafter fell off and was taken to the hospital for a leg operation. After the subcontractor told the contractor that he would inform his own insurance company of the accident, the contractor, who had owned an construction company for 12 years and never been sued for a construction site injury, believed there was no chance of liability being "unfamiliar with the nuances of liability." A year later when he received a summons and complaint, the contractor immediately provided his insurer with notice. Based on these facts, the court agreed that the question of whether this belief was reasonable was for the jury and that the trial court properly denied summary judgment in favor of the insurer based on the late notice defense.

How are pollution exclusions being enforced for present-day construction risks?

Questions about how pollution exclusions, a standard feature in most commercial general liability policies, apply to situations falling outside of traditional environmental pollution abound and the answers vary widely depending upon the jurisdiction.

For example, the uncertainty amongst jurisdictions was recognized in Apana v. TIG Ins. Co., 504 F. Supp. 2d 998 (D. Haw. 2007), on the issue of application of a total pollution exclusion. In Apana, an insured-plumbing company's commercial general liability insurer refused to defend it against a personal injury suit brought by a store employee who inhaled noxious fumes released when the plumber used chemicals to treat a clogged store drain. Although the court predicted that the Hawaii Supreme Court would likely find that the language of the total pollution exclusion was plain and unambiguous in excluding bodily injury resulting from relatively isolated inhalation or exposure to discharged "pollutants"—defined to include "any solid, liquid, gaseous or thermal irritant or contaminant including smoke, vapor, soot, fumes, acid, alkalis, chemicals and waste"—because the question was an open one under Hawaii law and "a heavily debated question nationally," the possibility existed that the insured would be entitled to indemnification and so the insurer had a duty to defend the underlying case. Ultimately, then, having predicted that the total pollution exclusion would apply to preclude indemnification, the insured was only entitled to recover its defense costs, not indemnity for the bodily injury damages sustained. On the issue of bad faith, the court determined that fact questions existed that precluded summary judgment for the insurer as to whether it acted in bad faith in refusing to defend the underlying action in light of Hawaii's standard that an insurer must defend when there is a mere possibility or potential for coverage.

In Ocean Partners, LLC v. North River Insurance Co., 546 F. Supp. 2d 101 (S.D.N.Y. 2008), the court determined a standard pollution exclusion in a property policy was ambiguous as to whether damages to a building located near the World Trade Center site from particulate disbursed in the collapse was property damage excluded by the pollution exclusion. The particulate was made up of 1.2 million tons of building materials, including asbestos, lead and mercury, which the insurer argued was a "contaminant" within the definition of "pollutant" in the pollution exclusion. The policy defined "pollutants" as "any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot[,] fume, acids alkalis, chemicals and waste." "Perhaps because it could not seriously contend that the cloud of WTC particulate was a ‘pollutant' as that term is normally understood," the court noted the insurer's focus on the word "contaminant" in the definition and its heavy reliance on the fact that the insured's own expert used the words "contaminate" and "contaminant" to describe damage done to the building. Id. at 112. The court, however, disagreed, citing with favor the determination by the 2nd Circuit in Parks Real Estate Purchasing Group v. St. Paul Fire & Marine Insurance Co., 472 F.3d 33 (2d Cir. 2006), where the meaning of a pollution exclusion under similar facts of airborne particulate damage was focused on "contamination." Just as in Parks, where the court found that the term as used within the pollution exclusion was ambiguous and that the meaning of the term in the context of the particular airborne particulate incident was for the trier of fact, the court in Ocean Partners similarly found that:

Because of the boundless array of possible applications of these terms ["contamination" and "contaminant"], it is not clear that the Policy was intended to exclude them. Thus, [the insurer] has not met its burden of showing that the pollutant exclusion "is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applied in the particular case and that its interpretation is the only construction that [could] fairly be placed thereon." Parks Real Estate, 472 F.3d at 42 (citation and internal quotation marks omitted). Accordingly, the resolution of the exclusion's meaning must be made by the trier of fact.

546 F. Supp. 2d at 114-15.

In James River Insurance Co. v. Ground Down Engineering, Inc., 540 F.3d 1270 (11^th Cir. 2008), a case involving an engineer's professional liability policy, the 11^th Circuit Court of Appeals determined that a pollution exclusion precluded coverage for a suit by a developer against the engineering firm for negligently failing to detect underground fuel tanks and construction debris. The engineering firm had been retained to perform an environmental assessment of the site before the developer purchased the land and found no hazardous environmental conditions. When the development began, however, several 55-gallon drums, half of an underground storage tank and construction debris were found, all of which required removal and disposal, as well as environmental remediation. The "pollution exclusion" in the policy was applicable to "[a]ll liability and expense arising out of or related to any form of pollution, whether intentional or otherwise" and further stated that the exclusion applied "regardless of whether . . . an alleged cause for the injury or damage is the Insured's negligent hiring, placement, training, supervision or wrongful act." Id. at 1273. Because the claim against the engineering firm depended on the presence of the environmental contamination, such that there was a direct relationship between the developer's damages and the contamination of the property, the exclusion applied. Also, the allegations of negligent performance of a site assessment were consistent with application of the exclusion to the "negligent hiring, placement, training, supervision, retention, or wrongful act" portion of the exclusion indicating application even if the insured was not itself the polluter.

In McGregor v. Allamerica Insurance Co., 449 Mass. 400, 868 N.E.2d 1225 (2007), the Massachusetts Supreme Judicial Court determined that a contractor hired to install a furnace in a new home did not have coverage under his commercial general liability policy when it was discovered six years later that a leak in the supply line had allowed oil to drain from the tank into the ground below the home. According to the court, the costs of a state-ordered clean up and for lost rental income from the home during the cleanup period were damages excluded by the policy's pollution exclusion. The exclusion applied to loss, cost or expense arising out of a request to clean up the effects of "pollutants," which was defined to include "any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste." In a case of first impression in Massachusetts, the court determined that the costs associated with discharge of home heating oil were excluded from coverage because an insured "could reasonably expect that oil leaking into the ground constitutes a pollutant within the meaning of the policy." Id. at 403, 1227.

Another case to broadly apply the pollution exclusion is American Casualty Co. of Reading, Pa. v. Miller, 159 Cal. App. 4th 501, 71 Cal. Rptr. 3d 571 (Cal. App. 2d Dist. 2008), in which a contractor who was repairing a sewer line was injured when the owner of a furniture stripping business discharged methylene chloride into the city sewer system. The business owner's commercial general liability policy included a pollution exclusion and, according to the court, the exclusion applied for this release of a "chemical," which was a term included in the definition of "pollutant." Moreover, as a business dealing with chemicals regularly, the insured "knew or should have known that the chemicals must be properly stored and that release of the chemicals into the environment could cause serious bodily injury or property damage. An ordinary insured standing in [the owner's] shoes would reasonably expect that such a release would constitute environmental pollution." Id. at 516.

What circumstances rise to the level of bad faith/estoppel?

Failures in the handling of construction defect claims can also be dangerous territory for insurers, who risk bad faith liability in many jurisdictions for such failures. In Aecon Buildings, Inc. v. Zurich North America, 572 F. Supp. 2d 1227 (W.D. Wash. 2008), for example, a general contractor alleged that two subcontractors' commercial general liability insurers acted in bad faith in failing to defend the general contractor against an owner's defective construction claims. Because the insurers failed to conduct a reasonable investigation before denying a defense to the general contractor, both insurers were found to have acted in bad faith and were estopped to deny coverage. The claims adjuster for one subcontractor's insurer conducted no investigation at all, assuming with no factual support that the claim involved completed operations and was thereby excluded. Similarly, the claims adjuster for the second subcontractor assumed without doing any investigation that the work was complete, could point to no document in support of that assumption and could not articulate why, if the assumption were correct, that the policy did not provide coverage. Other assumptions made were directly contradicted in the tender information received and would not have supported a denial, even if true. "Because he speculated without conducting a reasonable investigation, and because that speculation resulted in a denial without a basis in the policy or in fact, [the adjuster's] handling of the claim constitutes bad faith." Id. at 1237.

In another bad faith case from Washington, Mutual of Enumclaw Insurance Co. v. Dan Paulson Construction, Inc., 161 Wn.2d 903, 169 P.3d 1 (2007), the Washington Supreme Court, en banc, determined that the insurer of an insured home builder acted in bad faith and was estopped to deny coverage. Five days before the arbitration was scheduled to begin, the insurer, who was defending the insured under a reservation of rights in the arbitration against a homeowner's construction defect claim, sent a subpoena duces tecum to the arbitrator asking for documents and the arbitrator's thoughts about the arbitration. The insurer also sent the arbitrator an ex parte letter summarizing its coverage issues with the insured. Thereafter, another letter was sent to the arbitrator with the same coverage issue summary, although the second letter was copied to the parties. By showing greater concern for its monetary interests than for the risks of its insured, the insurer acted in bad faith. Instead of filing a declaratory judgment action while the underlying action was ongoing and simultaneously seeking to discover facts about the underlying action, as this insurer did, the insurer had the option of defending under a reservation of rights and, following a judgment, the insured would have the burden of proving coverage and damages, so long as it hadn't acted in bad faith.

Finally, in Pueblo Santa Fe Townhomes Owners' Association, Inc. v. Transcontinental Ins. Co., 178 P.3d 485 (Ariz. Ct. App. 2008), review denied 2008 Ariz. LEXIS 173 (Ariz. Sept. 23, 2008), a stucco subcontractor's commercial general liability insurer failed to reserve rights for 18 months with respect to a homeowners' association's construction defect action involving multiple defendants. According to the court, the insurer was estopped to deny coverage for the $1.1 million stipulated judgment against the stucco subcontractor based on the "your work" exclusion because of the 18 month delay in reserving rights, which prejudiced the insured. Prior to the reservation of rights, the court had ordered destructive testing on the homes but the insurer-retained counsel did not attend that testing on behalf of the stucco subcontractor. Nor did the insurer-retained counsel inform the insured that the testing had taken place until nearly 19 months after the testing had taken place. Because the destructive testing provided the best source of information as to the reason for the stucco cracking on the homes, limiting the stucco subcontractor in its ability to pursue defenses – such as the possibility that the stucco failed because of building movement, design flaws or framing subcontractor negligence – the court found that the insurer was estopped to deny coverage.