The Group Builders decision continues to generate insurance coverage litigation and legal gymnastics through state courts applying often directly conflicting law on CGL coverage for construction defects. Another recent example is Axis Surplus Ins. Co. v. McCarthy/Kiewit, 2012 U.S. Dist. LEXIS 3612 (subscription required). Kaiser hired Kiewit to perform construction at the Kaiser Moanalua Medical Center, then alleged numerous construction defects. In connection with its work on the Project, IKiewit purchased primary and excess liability insurance from insurance companies Arch, RSUI, and Axis. Kiewit purchased its primary insurance from Arch, which issued a commercial general liability ("CGL") policy. The Arch insurance policy contained a limit of liability of one million dollars per occurrence. Kiewit purchased its first and second layers of excess insurance from RSUI Indemnity and Axis Surplus Ins. Co. (the "Axis Policy"). . The Axis Policy contains a Missouri-specific endorsement which expressly states that the Axis Policy was "procured and developed under the Missouri Surplus Lines Laws."
In the underlying Missouri case, Kaiser asserted a claim against Kiewit for damages resulting from allegedly deficient construction work on the Project. Kiewit tendered the claim to Arch, RSUI and Axis. Arch accepted the tender and agreed to defend Kiewit under a reservation of rights. RSUI and Axis refused to participate meaningfully in settlement discussions, investigate the underlying claim, or confirm or deny coverage under their respective policies.
On October 12, 2010, Defendants entered into a partial settlement agreement with Kaiser, resolving a portion of the claim for a payment of one million dollars. Arch has approved the settlement and agreed to fund the one million dollar payment, thereby exhausting the applicable limits of insurance under the Arch Policy.
Axis and RSUI filed a complaint for declaratory relief against Defendants and Arch in Hawai'i state court, which Defendants later removed to Hawaii's federal district court. On September 17, 2010, Defendants filed a complaint against Arch, Axis, and RSUI in the Circuit Court for the County of St. Louis, State of Missouri, for breach of contract, anticipatory breach of contract, breach of the implied covenant of good faith and fair dealing, insurance bad faith, and declaratory judgment ("Missouri Action").
On October 26, 2010, Plaintiffs filed a First Amended Complaint in Hawaii U.S. District Court, naming the exact same parties as the Missouri Action.
Defendants Kiewit and Arch moved to dismiss or stay the insurer's Hawaii action while the Missouri case was pending. At issue was what law should be applied to the dispute, where the dispute should be litigated, and whether one should be stayed while the other proceeded. Both sides accused each other of forum shopping — the insurers were trying to take advantage of the coverage cases coming out of Hawaii (namely Group Builders) while Defendants obviously viewed Missouri as a more favorable venue for the fight.
Hawaii U.S. district court judge Leslie Kobayashi stayed the case. She went through all of the grounds for staying vs. proceeding and determined that on balance the factors weighed in favor of staying the Hawaii case — the Missouri case was pending when the Hawaii case was filed, there was a potential for conflicting decisions, and the construction was over. Moreover, and this is the very interesting piece from the decision, Judge Kobayashi noted that after Judge Kay's decision in which he recited the legislature actions in response to Group Builders (('[T]he Group Builders decision creates a public policy crisis that only the State is in a position to remedy.'" Nat'l Union, 2011 U.S. Dist. LEXIS 128481, 2011 WL 5374355, at *1 (footnoted omitted)), the state of the law in light of recent legislation in Hawaii on this point appears to be "unsettled at this point," which was a factor in favor of a stay. The National Union case is discussed by my fellow blogger Tred Eyerly, here. This and Judge Kay's decision in National Union, above, is an interesting departure from the Hawaii district court's prior rubber stamping of the 9th Circuit's Burlington decision, which held, like Group Builders, that construction defects do not constitute a covered "occurrence" under CGL policies.
A copy of the case, which is well done and provides the added benefit of an interesting and useful discussion on declaratory judgments sought in federal court when parallel state actions are also pending, can be found here