Construction Defects - Duty to Defend

Neither Designated Work Exclusion nor Pre-Existing Damage Exclusion Defeat Duty to Defend

Tred R. Eyerly | Insurance Law Hawaii
March 9, 2015

   A duty to defend existed for alleged construction defects despite the designated work exclusion and the pre-existing damage exclusion. Gemini Ins. Co. v. N. Am Capacity Ins. Co., 2015 U.S. Dist. LEXIS 14836 (D. Nev. Feb. 6, 2015).

   Olsen Construction Company held three separate policies issued by Gemini from September 2002 to February 2005. North American issued a CGL policy to Olsen for the period February 2005 to February 2006. Olsen conducted repair work on decks at the location between 2002 and 2003. 

   Olsen was sued for construction defects by the Homeowners' Association (HOA). Gemini defended and also tendered to North American. When North American refused the tender, Gemini sued for declaratory and equitable relief related to North American's duty to defend Olsen in the underlying case. North American moved for summary judgment.

   The court first found there was an occurrence and property damage during the policy period. Under Nevada law, Olsen's alleged faulty workmanship could constitute an occurrence and thereby create a possibility of coverage if the faulty workmanship occurred when Olsen conducted its repairs.  Nevada law held that even though faulty workmanship did not constitute an occurrence, an unexpected happening caused by faulty workmanship could be an occurrence. 

   The underlying case also alleged property damage occurred following Olsen's improper deck repair and window repair,  causing leaking, water damage and mold to the structures. The policy clearly created the potential for coverage for the damage described in the underlying complaint.

   The court next considered the two exclusions relied upon by North American. Under the designated work exclusion, North American had no duty to defend Olsen for its own work. The underlying case alleged that Olsen performed operations for the HOA, indicating that Olsen's conduct fell squarely within the designated work exclusion. The court found the exclusion was ambiguous, however, because the dates for which the exclusion applied were unclear. For example, if the exclusion only applied to Olsen's work performed during North American's policy period, then it would not exclude coverage for Olsen's work between 2002 and 2003, which could have resulted in property damage during the policy period.

   The pre-existing damage exclusion stated that the policy did not apply to property damage that (1) first occurred prior to the date the policy began, or (2) was in the process of occurring. The underlying case did not identify any date on which the property damage occurred, nor did it state a date before which the property damage was alleged to have occurred. Even if the water intrusion began prior to the policy, this would not establish that there was no potential for coverage because North American still failed to produce evidence that the consequential property damage did not occur during the policy period.

   Therefore, the court refused to grant North American's motion for summary judgment. 

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