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Insurance Law News - March 2017

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No "Occurrence" Where Insured Contractor Knew About and Intended to Perform Defective Work in Hope or Mistaken Belief That Defective Work Would Not Cause Property Damage

For purposes of liability coverage, there was no "occurrence" or "accident" where the insured, a general contractor, knew about and intended to perform defective work in the hope or mistaken belief that the defective work would not actually cause any property damage. (Navigators Specialty Ins. Co. v. Moorefield Construction, Inc. (2016) 6 Cal.App.5th 1258)

Facts

DBO Development No. 28 (DBO) hired Moorefield Construction, Inc. (Moorefield) to be the general contractor for construction of a 30,000 square foot retail building. The construction contract provided that if Moorefield failed to complete the building on time, Moorefield would have to pay significant liquidated damages to DBO. The contract also contained an attorney's fees clause.

The construction plans called for vinyl composition tiles and carpet tiles to be installed on the surface of the building's interior concrete slab. Both the vinyl composition tiles and the carpet tiles were to be glued onto the concrete slab using a flooring adhesive.

Before the vinyl composition tiles and carpet tiles were installed, Moorefield hired Krazan & Associates (K & A) to conduct "moisture vapor emission" tests on the concrete slab. K & A conducted tests which showed that the moisture vapor emissions from the slab were at seven to nine pounds per 1,000 square feet, which was higher than the five pounds per 1,000 square feet specified by the plans. K & A concluded that several additional months of drying time would be necessary for the concrete slab to cure sufficiently so that the moisture vapor emission rate would be at allowable levels. K & A presented its findings to Moorefield.

Despite receiving K & A's findings, Moorefield personnel concluded, based on their own past experience, that there was "low risk to no risk" that installing the flooring tiles on the existing slab would actually cause the flooring tiles to fail. Moorefield personnel used a "cost - benefit" analysis to decide that it would be cheaper to install the flooring immediately so that the building could be completed on time, and to deal with any resulting flooring problems later. Moorefield thus instructed its flooring subcontractor, Solo Flooring, Inc. (Solo) to install the flooring tiles. Solo agreed to install the flooring tiles, but Solo required Moorefield to sign a letter acknowledging that "due to the high moisture of the above-mentioned job … [Solo] will not be held responsible for any moisture related problems." Moorefield signed the letter and Solo proceeded to install the flooring tiles.

After the flooring tiles were installed, the tiles slowly began to fail allegedly due to excessive moisture vapors in the concrete slab. The vinyl composite tiles cracked, the carpet tiles curled, and flooring adhesive oozed up through the edges. The tenant in the building became aware of the problems, but apparently did not immediately notify either DBO (the original developer) or Moorefield (the general contractor) of the problems.

Eventually, DBO sold the building to JSL Properties, LLC (JSL). After JSL purchased the building, JSL discovered the floor tile problems, and JSL ultimately paid $377,404 to make repairs.

JSL subsequently sued DBO and Moorefield for breach of contract and negligence. DBO cross-complained against Moorefield for indemnity.

Moorefield tendered defense of the litigation to its general liability insurer, Navigators Specialty Insurance Company (Navigators). The Navigators policy contained an insuring agreement which provided that Navigators would indemnify and defend Moorefield against suits for damages because of property damage caused by an "occurrence," or "accident." The policy also contained a supplementary payments provision which required Navigators to pay "all costs taxed against" Moorefield in any lawsuit Navigators defended on behalf of Moorefield. In response to the tender, Navigators agreed to defend Moorefield under reservation of rights.

Navigators filed a coverage action against Moorefield seeking a ruling that the flooring failure was not an "occurrence," and that Navigators thus had no duty to defend or indemnify Moorefield in the underlying litigation. Navigators moved for summary adjudication that it had no duty to defend Moorefield, but the trial court denied the motion on the ground that there were triable issues of fact about the causes of the flooring failure (including the possibility that design defects in the slab and / or a leaking roof had contributed to the flooring failure).

Eventually, JSL and DBO settled the underlying litigation against Moorefield. Navigators contributed $1 million on behalf of Moorefield toward the settlement, subject to a reservation of rights to seek reimbursement.

The coverage action then proceeded to a bench trial. After hearing the evidence, the trial court concluded that excessive moisture vapors in the concrete slab had indeed caused the flooring failure. The trial court further concluded that the flooring failure was not an "occurrence," or "accident," as required by the Navigators policy. The trial court thus ruled that Navigators had no duty to indemnify Moorefield, and ordered Moorefield to reimburse Navigators the entire $1 million that Navigators had contributed to the underlying settlement. Moorefield appealed.

Holding

The Court of Appeal affirmed in part and reversed in part.

The appellate court agreed that during trial of the coverage case, the evidence established that the flooring failure was not an "occurrence," or "accident," as required by the Navigators policy. Moorefield's decision to install the flooring "was not an accident because it was a deliberate decision made with knowledge that the moisture vapor emission rate from the concrete slab exceeded specifications." Thus, the flooring damage that ultimately resulted "was not produced by an additional, unexpected, independent, and unforeseen happening." The court emphasized that Moorefield knew about and intended to perform defective work in the hope or mistaken belief that the defective work would not cause property damage. Under such circumstances, there was no "occurrence" and Navigators had no duty to indemnify Moorefield. Thus, Navigators was entitled to reimbursement of that portion of the $1 million settlement contribution that was attributable to the damages Moorefield owed to JSL and DBO in the underlying case.

However, the appellate court held that Navigators did have a duty to defend Moorefield in the underlying case. Because Navigators had a duty to defend Moorefield, Navigators had an obligation under the policy's separate supplementary payments provision to pay costs of suit – including attorney fees – that Moorefield owed to JSL and DBO in the underlying case. The appellate court noted that at least some portion of the $1 million that Navigators had contributed to the underlying settlement was for attorney fees and costs of suit falling within the supplementary payments provision, and to that extent Navigators was not entitled to reimbursement from Moorefield.

In light of the above, the appellate court remanded the case to the trial court to determine what portion of Navigators' $1 million settlement contribution was allocable to damages that were not the result of an "occurrence" within the meaning of the insuring agreement, and what portion of Navigators' $1 million settlement contribution was allocable to attorney fees and costs of suit that fell within the supplementary payments provision. Navigators would be entitled to reimbursement from Moorefield for damages not covered by the insuring agreement, but would not be entitled to reimbursement from Moorefield for attorney fees and costs of suit covered by the supplementary payments provision.

Comment

With regard to the "occurrence" issue, the appellate court took a rather dim view of the insured's conscious decision to proceed with installation of the floor tiles knowing that the concrete slab had a moisture vapor emission rate that exceeded specifications. Certainly the court was not impressed with the insured's admitted "cost-benefit" analysis (i.e., that it would be cheaper to install the flooring immediately so that the building could be completed on time, and to deal with any resulting flooring problems later). The court seemed to suggest that while the eventual failure of the flooring was not an absolute "certainty," it was enough of a risk that it could not be deemed "accidental."

 

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