February 2007
Table of Contents
Mahoney, Dougherty and Mahoney, P.A. distributes this newsletter to its clients and others to keep them informed about developments in the area of tort and insurance law. The articles are not intended to be legal advice and should not be relied on without counsel.
CONSTRUCTION COVERAGE DECISIONS FROM 2006
By Victor Lund
2006 saw a number of decisions from the appellate courts on the question of coverage for builders whose homes later developed mold resulting from faulty construction and water intrusion. Unfortunately, the decisions produce little clarity and leave more questions than they answer.
The year began with the case of Kootenia Homes, Inc. v. Federated Mutual , (unpublished, Minnesota Court of Appeals, A05-278). Kootenia was a builder. It had CGL coverage with Federated through April 1, 2002, which provided coverage for property damage caused by occurrences. Kootenia built and sold a number of single-family homes with stucco siding. Complaints of water intrusion began to show up after Federated canceled the policy. Because the houses were built during Federated's policy period, Kootenia tendered defense to Federated. The company's structural engineer concluded that each of the homes was damaged because of water intrusion, the cause of the water intrusion was improper stucco application, the property damage began shortly after Kootenia completed construction of each home, and would continue until remediation. Federated paid damages for those homes, but informed Kootenia that as to future claims involving long-term, continuous damage, it would only provide coverage proportionate to its time on the risk ending on April 1, 2002. Federated suggested that Kootenia contact its subsequent insurers for additional coverage.
Thereafter, more claims came in from homes built during Federated's time on the risk. The company investigated and again concluded that the damages began shortly after completion of construction and would continue until remediation. Meanwhile, Kootenia's subsequent insurers refused to provide any coverage whatsoever for claims arising out of homes built before their policies began based on mold exclusions and other provisions.
Kootenia sued Federated and a subsequent insurer. The district court found that Federated owed coverage for all damages without allocation.
The court of appeals, based primarily on the conclusion of Federated's expert, held that actual damages to each house began shortly after construction was completed. The evidence was that the moisture intrusion began shortly after construction even if it was not possible to pin that down to a specific day. The court then rejected Federated's argument to allocate coverage by time on the risk. The moisture intrusion and resulting damage were more or less continuous, but the court was of the view that this was not a proper case for applying allocation by time on the risk. That rule developed in the context of environmental claims for cleanup of polluted sites where polluting activities at the sites had ended decades in the past and no one knew who the insurers were when activities were going on. Under those circumstances, where it is impossible to assign a specific insurer to discrete injurious acts, allocation by time on the risk is appropriate.
In moisture intrusion cases, however, there is a discrete and identifiable event from which all damage flows, even if gradually, i.e., defective construction. This makes the case more analogous to silicone implant cases, In re Silicone Implant Insurance Coverage Litigation , 667 N.W.2d 405 (Minn. 2003), where the court rejected allocation by time on the risk and held that the insurer on the risk at the time of the surgery is the insurer on the risk for all subsequent damages. The surgery is a discrete and identifiable event to which all damages flow. Similarly, in construction cases, poor construction is a discrete and identifiable event. All moisture intrusion and all subsequent damages are attributable to the faulty construction. There is no basis to allocate.
The year ended with the Minnesota Supreme Court's decision in Wooddale Builders, Inc. v. Maryland Casualty Co. , 722 N.W.2d 283 (Minn. 2006). Like Kootenia , Wooddale addressed the coverage for a home builder facing many claims for moldy houses, but there the resemblance ends. Wooddale built single family stucco homes in the 1990s. In 2000, it began receiving claims of poor workmanship. It had five separate CGL insurers from 1990 through 2002. All of the insurers defended the underlying claims to some extent. In the declaratory action, all parties agreed that faulty construction was not the cause of the damages; instead, repeated and ongoing water intrusions caused continuous, gradual and indivisible damages. Given that agreement, the supreme court found that apportionment by time on the risk was the appropriate rule. All insurers that provided coverage from construction through date of notice of claim are triggered. However, those precise dates are not important in determining the period of allocation because all triggered insurers are deemed to be triggered for entire policy periods. No insurer whose policy commences after date of notice of claim has any coverage for that particular claim since it is known loss once the notice comes in.
The fact that Wooddale was uninsured after 2002 further complicated the picture. The court held that Wooddale must bear allocated responsibility for any periods when it voluntarily chose not to purchase available insurance, but if there was no coverage available to it, any such uninsured periods should be ignored. This is in keeping with the rule that the insured should be held responsible only for those risks which it voluntarily chose to assume.
It is important to note that Wooddale did not hold that the law of Minnesota is that apportionment of time on the risk is the proper rule in cases of houses developing mold over a number of years. The court applied that rule because parties agreed that apportionment was proper. The parties in future cases might not agree to that.
Kootenia and Wooddale reached dramatically different answers to the same question. Kootenia treats faulty construction as a discrete and identifiable event from which all subsequent damage flows; the insurer on the risk as of construction is stuck with coverage for all damages. Wooddale reaches the opposite conclusion. The subsequent water infiltration and development of mold is the injurious process, not the faulty construction. The builder may have coverage from any number of companies over the years allocated by time on the risk. Unfortunately, no one knows what the law of Minnesota really is because the unpublished Kootenia decision is not precedential, and the Wooddale court based its result on agreement of the parties. Additionally, the decision in Kootenia is largely based upon admissions by the insurer's own expert. We may expect the insurers in the future will find experts who reach different conclusions.
The duty to defend is equally uncertain. In Wooddale , all triggered policies shared the defense obligation equally, but only because the parties agreed to dispense with loan receipts and not to dispute apportionment by time on the risk. If in some future case the parties do not agree that apportionment by time on the risk applies, Wooddale will provide little guidance on who must defend. In Kootenia , the insurer on the risk during construction has the sole duty to defend.
These opinions leave many questions unanswered. The biggest one is, what is the damage? Faulty construction or resulting water intrusion and mold? The second question which depends on the first is whether allocation is appropriate at all or whether the insurer on the risk during construction is solely responsible. Another issue that is sure to be litigated extensively is whether insurance for moldy houses is truly unavailable or whether the builder voluntarily chooses to be uninsured. How expensive does the insurance have to be before it becomes unavailable?
Kootenia and Wooddale involve third-party liability claims. In the middle of the year, the court of appeals also addressed a first-party claim for a moldy house. The case is Bloom v. Western National Mutual Insurance Co. (A05-2093.) The Blooms had homeowners coverage with Western National. They found significant rot, mold and deterioration in the walls of their house. The opinion does not say when the house was built or whether there was a viable claim against a contractor. The cause of the rot was water infiltration through poor construction, absent or inadequate flashing, poorly installed windows, and the like. Western National denied the claim based on exclusions for errors, omissions, defects, and wear and tear. A district court judge in Hennepin County found coverage. As to the errors and omissions exclusion, the district court concluded that it extended to the cost of going back and redoing the job right the second time, but not to rot and mold resulting from the failure to do it right the first time. The court of appeals disagreed with this reasoning. The evidence showed that the damages were rot and mold caused directly by water which got into the house because of poor workmanship. This was exactly the sort of claim that the exclusion was intended to address. The district court judge further found that the wear and tear exclusion did not apply because the Blooms were seeking coverage for the rot and mold itself and not anything resulting from rot and mold. The court of appeals concluded that this was splitting hairs and found that the exclusion applied both to the actual mold and rot and any construction materials that needed to be replaced because of mold and rot. The ensuing loss provision did not create coverage where none existed otherwise. Wear/tear and mold/rot were not separate and distinct perils. Water intrusion and resulting mold and rot were a single phenomenon. There was no additional or intervening cause other than time. Faulty construction is the immediate cause, but the resulting damages, mold and rot, are excluded under the wear and tear exclusion.
Litigation over faulty construction of homes and who if anyone provides coverage for the builders is not going to go away. We can expect more decisions in 2007 which may provide clarification of these issues.