December 04, 2013 Articles

Mediation of Coverage Disputes: Best Practices and Trends

Like any other weapon in the litigator’s arsenal, mediation can be an effective tool for obtaining the best possible result for a client if used properly and at the right time. Thus, counsel should consider when and whether to mediate throughout a dispute

by Tred R. Eyerly

A commercial general liability (CGL) policy covers potential liability for property damage caused by an “occurrence,” typically defined as an “accident,” including gradual, accidental harm.[1] For years, a debate has raged over whether a CGL policy provides coverage for construction defects. Some courts have determined that a construction defect is not an “occurrence” and therefore not covered under a CGL policy. Instead, these courts hold that property damage caused by faulty workmanship arises from an expected or intended act or from breach of contract, which are non-fortuitous events and not covered by the policy.

Other courts, however, have found that the policy’s insuring agreement broadly grants coverage for “property damage” caused by accident, i.e., faulty workmanship. The scope of such coverage may be narrowed or even eliminated, not because of the absence of an “occurrence,” but because exclusions in the policy negate coverage.[2] As a result, a policy’s “business risk” exclusions may ultimately limit or remove all coverage for construction defects.

Hawaii courts are currently immersed in a microcosm of the nationwide debate. In 2010, the Hawaii Intermediate Court of Appeals found that construction defect claims were not an occurrence under a CGL policy.[3] The court held: “Breach of contract claims based on allegations of shoddy performance are not covered under CGL policies. Additionally, tort-based claims, derivative of these breach of contract claims, are also not covered under CGL policies.”[4] In 2011, the Hawaii state legislature attempted to “correct” the appellate court’s decision.[5] Subsequently, the meaning and intent of the legislative efforts have been called into question.

This article surveys cases across the country on both sides of the debate. We then focus on Hawaii, where federal district court judges predicting Hawaii law feel compelled to follow a 2004 Ninth Circuit decision[6] predicting that Hawaii courts would find no coverage for claims arising from construction defects. The Hawaii supreme court has yet to weigh in on the issue definitively, but some state trial court judges have disagreed with their federal counterparts.

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