New Hawaii Law Seeks to Restore Coverage for Construction Defect Claims

Hawaii Gov. Neil Abercrombie has signed legislation its supporters hope will restore coverage for construction defect claims under a commercial general liability (CGL) policy that was called into question by a 2010 court ruling.

However, an attorney specializing in insurance coverage and commercial litigation warns that the new law (H.B. 924) could create new legal issues for insurers because state law on construction defects is still not clear.

The new law was written to address the uncertainty for the construction industry caused by the 2010 decision in the Group Builders v. Admiral Insurance Co. case by the Hawaii Intermediate Court of Appeal (ICA). Though not required to follow federal court decisions, the ICA reviewed past federal cases interpreting Hawaii law on the issue and cited the same conclusion – that construction defects did not arise from an occurrence and therefore allegations arising from either a breach of contract or tort were not covered under a CGL policy.

The new law states that “occurrence” in a liability policy “shall be construed in accordance with the law as it existed at the time that the insurance policy was issued.”

The law applies to all liability policies in effect at the time the bill was signed into law.

But, according to attorney Tred Eyerly, an associate with the law firm of Damon Key Leong Kupchak Hastert, the new law creates its own uncertainty. The problem is that it’s not clear what the state’s prevailing law on construction defects has been or is.

He said insurers are likely to rely upon a 2004 federal court decision in the case of The Burlington Insurance Company v. Oceanic Design & Construction, Inc. that concluded that “CGL policies are not designed to provide contractors and developers with coverage against claims their work is inferior or defective.” That’s the same conclusion arrived at by the court six years later in the Group Builders case.

On the other hand, Eyerly said, insureds will likely argue that a decision in a 1994 case, Sentinel Insurance Company v. First Insurance Company, applies and an allegation of construction defect should trigger coverage.

Eyerly said that because the issue remains murky, it will be expensive to litigate and difficult to establish what the state of the law was at the time. In addition, he said, courts will have to address the retroactivity of the bill.

“There are very few opinions from the high courts in Hawaii addressing construction defect,” he said.

In response to the new legislation, Mark Sektnan, vice president of the Property Casualty Insurers Association of America (PCI), doesn’t expect it will cause a problem with member insurers. “The law was the result of a series of court cases in Hawaii that upheld the long held standard that construction defects are not covered under a general liability policy,” Sektnan said.

Initially, PCI opposed the bill because it retroactively imposed an obligation that was not there. “The law, as passed…no longer has a retroactive application and the insurance market in Hawaii has changed since 2001, when this issue began where there are, as there are in most states, specific policies for construction disputes,” the PCI lobbyist said.