July 1st, 2013

MOST STATES NOW HOLD THAT DEFECTIVE CONSTRUCTION CAN BE AN OCCURRENCE IN A CGL POLICY

By Mark A. Boyle, Esquire

Boyle & Leonard P.A.

Over the last ten years, one of the biggest issues in insurance litigation across the country has been the question of whether construction defects constitute an occurrence.  A spate of recent opinions finding that defective construction can constitute an occurrence continues a trend favoring coverage on behalf of builders under their Commercial General Liability (CGL) policies.  Most businesses, including businesses involved in the construction trades such as general contractors and subcontractors, procure a standard form of insurance known as the CGL policy.  Most CGL policies are issued on a standard form promulgated by the Insurance Services Office (ISO).  Given that this CGL ISO form is in use throughout the country, one might think that the interpretation of this policy would be uniform throughout most jurisdictions.  This is definitely not the case.

 

The term “occurrence” is defined under the standard form CGL policy as follows:

 

[A]n accident, including continuous or repeated exposure to substantially the same general harmful conditions.

 

Crucially, the term “accident” is not defined.  The gist of the dispute between contracting insureds and their insurance carriers is whether defective construction is sufficiently “accidental” to constitute a covered loss.  Boiled to its essence, insurance carriers argue that defective construction events are merely faulty workmanship, the foreseeable result of which is eventual damage and other problems.  This argument holds that such foreseeability of damage makes construction defect losses non-accidental and therefore uninsurable under the CGL policy.

 

Thankfully, while this argument has maintained some traction (see Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 589 Pa. 317 (Pa. 2006)), the vast majority of jurisdictions which have considered the issue over the last ten years have correctly found coverage.  The most recent state Supreme Court to address the issue is the Supreme Court of Appeals of West Virginia.  See Cherrington, et al. v. Erie Ins. Property & Casualty Co., No. 12-0036, — S.E..2d — (W.V. June 18, 2013).   The Supreme Court of West Virginia explicitly held that the defective workmanship resulting in property damage constituted an occurrence and accident under a commercial general liability policy.  The court also noted that its decision in this regard was following the new “majority rule” based on decisions across the country.  Finally, the West Virginia Supreme Court noted that its decision in Cherrington overruled its prior decisions holding defective construction could not be covered under CGL policies.

 

Another very recent Supreme Court ruling on this issue comes from the Supreme Court of Connecticut.  In Capstone Bldg. Corp. v. American Motorist Ins. Co. 308 Conn. 760, — A.3d — (Conn. June 11, 2013), the insured general contractor, Capstone, was sued for defective construction.  The contractor submitted a claim for defective construction to its CGL insurance carrier, who denied the claim outright.  The Connecticut Supreme court specifically held:

 

Because negligent work is unintentional from the point of view of the insured, we find that it may constitute the basis for an “accident” or “occurrence” under the plain terms of the commercial general liability policy.

 

A similar result was reached in K & L Homes, Inc. v. American Family Mut. Ins. Co., 829 N.W. 2d 724 (N.D. April 5, 2013).  In K & L Homes, the builder, K & L, was sued by the owners of a newly-constructed house which had been purchased from K & L.  Not long after the purchase of the house from K & L, the owners claimed that they noticed cracks, unevenness and shifting in their home.  K & L submitted these claims to its insurance carrier, who denied them outright.  The North Dakota Supreme Court began its analysis of the issue by noting, “[c]urrently, the majority of state supreme courts who have decided the issue of whether inadvertent faulty workmanship is an accidental ‘occurrence’ potentially covered under the CGL policy have decided that it can be an ‘occurrence’.”  The court concluded that faulty workmanship may constitute an “occurrence” if the faulty work was “unexpected” and not intended by the insured, and the property damage was not anticipated or intentional, so that neither the harm was anticipated, intended, or expected.

 

Both the K & L and Capstone courts recognized that their decision was consistent with the Florida Supreme Court’s pronouncements on the same issue in U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007).  In J.S.U.B., the Florida Supreme Court held:

 

We conclude that defective work performed by a subcontractor that causes damage to the contractor’s completed project and is neither expected nor intended from the standpoint of the contractor can constitute “property damage” caused by an “occurrence” as those terms are defined in a standard form commercial general liability policy.

 

The Florida Supreme Court’s ruling in this regard was a significant change.  (The change was, of course, made at the urging of our firm.  Boyle, Gentile, Leonard & Crockett, P.A. represented the contractor in J.S.U.B. at the claims presentation stage, before the trial court, before the intermediate appeals court, all the way through to our victory at the Florida Supreme Court.)  Reduced to its essence, insurance carriers argue that a contractor’s failure to perform its contract is always intentional – – essentially arguing that a contractor’s failure to perform its work in accordance with its contract necessarily makes the resulting problems arising from that work foreseeable.  While this argument may have some initial intuitive appeal, the argument fails upon closer analysis:

 

Yet, on even a moment’s reflection, we all understand that contracts are broken, many times, for reasons that we would call “accidental.”  The wrong number of boxes was shipped because someone made a mistake in the counting.  The lawsuit was filed in the wrong venue because someone made a mistake when reading the venue statute.  As one court explained, “at bottom, an occurrence is simply an unexpected consequence of an insured’s act, even if due to negligence or faulty work”.

 

See Ellen S. Pryor, The Economic Loss Rule and Liability Insurance, 48 Ariz. L. Rev 905, 917 (2006) (quoting Anthem Elecs., Inc. v. Pac. Employers Ins. Co., 302 F.3d 1049, 1056 (9th Cir. 2002)).

 

Certainly, if foreseeability of injury were the test for whether or not something was insurable, nothing would be insured, as all forms of liability that give rise to actionable damages are premised on the foreseeability of damages.  If this argument were to be accepted, it would make CGL policies a Seinfeld-esque insurance policy about nothing.

 

            In future blog entries, I will explore (1) how the “property damage” definition in the CGL policy interacts with the “occurrence” definition in defective construction cases, (2) how changes to the CGL policy, beginning with the broad form property damage endorsement in the 1970s, expanded the availability of coverage for defective construction, and (3) how the CGL product differs from performance bonds.

January 15th, 2013

Removal by a Forum Defendant Prior to Service

By Amanda K. Anderson, Esquire

Boyle & Leonard P.A.

Can a “forum defendant” escape the confines of 28 U.S.C. §1441(b)(2) by removing prior to being served with a pleading?All of the cases addressing removal prior to service involve a non-forum defendant; most courts have held that removal is proper in that instance. But is it the same when a forum defendant seeks to remove prior to being served? I would suggest that it is, however improper or unfair it may seem.

A defendant may remove an action from state court to federal court only when a federal court would have had original jurisdiction over the action. 28 U.S.C. § 1441; Caterpillar, Inc. v. Williams, 482 U.S. 386 (1987).  However, §1441(b)(2) states “a civil action otherwise removable solely on the basis of jurisdiction under section 1332(a) of this title may not be removed if any of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought.”  28 U.S.C. §1441(b)(2) (emphasis added).  This restriction on the removal of diversity cases is known as the “forum defendant rule.” See Allen v. GlaxoSmithKline PLC, 2008 WL 2247067, at * 2 (E.D. Pa. May 30, 2008).

Even where there is complete diversity between the parties, then a defendant may not remove a case brought in a state court sitting in the same state in which any properly joined and served defendant is a citizen.  North v. Precision Airmotive Corp., 600 F.Supp.2d 1263, 1267 (M.D. Fla. 2009).  Removal is “intended to protect out-of-state defendants from possible prejudices in state court,” and the purpose of the forum state defendant rule is to allow plaintiffs to choose a forum because a forum state defendant does not need the protection of removal rights.  Valerio ex rel. Valerio v. SmithKline Beecham Corp., 2008 WL 3286976, at *2 (S.D. Fla. Aug. 7, 2008)(citingLively v. Wild Oats MarketsInc., 456 F.3d 933, 940 (9th Cir.2006)).

It is well established that for removal to be proper under 28 U.S.C. § 1441, “no defendant can be a citizen of the state in which the action was brought.”  Tillman v. R.J. Reynolds Tobacco, 253 F.3d 1302, 1305 (11th Cir. 2001); see also Armstrong v. JLG Industries, Inc., 2008 WL 4665556 at *2 (M.D. Fla. Oct. 21, 2008);McMahon v. Presidential Airways, Inc., 410 F.Supp.2d 1189, 1194-95 (M.D. Fla. 2006) (recognizing that removal from Florida state court was not proper on the basis of diversity jurisdiction because the defendants were Florida residents).  Only an out-of-state defendant can remove an action to federal court and not, as here, a Florida citizen.  See Bank of New York Mellon Trust Co., N.A. v. Johnson, 2010 WL 5426783, at *3 (N.D. Fla. Nov. 24, 2010). Therefore, “a defendant who is a citizen of the State of Florida cannot remove an action to federal court based upon diversity between the parties.”   Id. (citing Tillman, 253 F.3d at 1305; and McMahon, 410 F.Supp.2d at 1194-95). The court inJohnson held that “[b]ecause Defendants are Florida residents, sued in a Florida state court, they cannot remove this action based upon diversity of citizenship.”

Thus, it would seem as though even a forum defendant can remove as long as they do so prior to the joining of any other forum defendants and prior to service.

 

 

 

 

 

 

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