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In MW Builders, Inc. v. Safeco Ins. Co. of Am. 2010 U.S. App. LEXIS 13960 (9th Cir. Or. July 8, 2010), the Ninth Circuit held that “[t]he district court erred in granting MW Builders the entire arbitration award because that award included uncovered repair costs.”  The plaintiff argued that the entire amount of the underlying arbitration award should be covered because the award amount was less than the total, actual cost to repair damage caused by the insured subcontractor’s defective work.  The Ninth Circuit rejected this argument, explaining:

That the actual repair costs, excluding uncovered repairs, ended up exceeding the $620,000 arbitration award does not justify awarding MW Builders the entire award.  MW Builders was never entitled to recover all the repair costs from Safeco.  It was only entitled to recover a portion of the damage to the hotel caused by Safeco’s insured.

Although the Ninth Circuit’s opinion is unpublished, it can be cited pursuant to FRAP 32.1.  Unless and until Oregon’s Supreme Court or Court of Appeals issues a contrary decision, the Ninth Circuit’s opinion in MW Builders should provide a sound basis for apportionment arguments in Oregon.

Based on the “selective tender” rule, which states that “where an insured has not tendered a claim to an insurer, that insurer is excused from its duty to perform under the policy or to contribute to a settlement of the claim,” the Court ruled that “if the insured has not tendered a claim to an insurer prior to settlement or the end of trial, other insurers cannot recover in equitable contribution against that insurer.” The Court further reasoned that because equitable contribution is a claim an insurer has of its own right to recover from another insurer that is independently obligated to cover the same loss, “the insurer who seeks contribution does not sit in the place of the insured and cannot tender a claim to the other insurer.”

Unlike the equitable contribution claim, the Court held that the “selective tender” rule did not apply to bar the conventional subrogation claim, which MOE and CUIC took by reason of assignment from the insured.  (The Court distinguishes “conventional subrogation” from “equitable subrogation” and expressly states that its analysis does not apply to equitable subrogation.)  By taking the assignment, the insurers were able to stand in the shoes of the insured and exercise the insured’s rights to tender the claim to the additional insurer. MOE and CUIC were then also able to assert the “late tender” rule to raise an issue of fact as to USF’s late notice defense. That rule provides that “even where an insured fails to give an insurer timely notice of a claim, the insurer is not relieved of its obligation to perform on the policy unless it can show that the late notice actually and substantially prejudiced it.” Significantly, the Court found that “While we need not decide whether conventional subrogation and assignment are equivalent in all respects, this court recognizes that an insurer who receives full contractual assignment of an insured’s rights may bring a conventional subrogation claim to enforce those rights.” This leaves open the question of whether an insurer’s subrogation claim against other insurers would be safe from the “selective tender” rule without a full assignment of the insured’s rights against those insurers.

The Court also provides insight as to what it will take to prove that an insurer was prejudiced by late notice under the “late tender” rule. The Court held that “in order to show prejudice, the insurer must prove that an insured’s breach of a notice provision had an identifiable and material detrimental effect on its ability to defend its interests.” The Court also provides a nonexhaustive list of factors to be considered. It also found that, contrary to a prior Washington Court of Appeals decision, a lost opportunity to conduct a meaningful investigation alone will not be enough.

Back in December, the Florida Supreme Court had answered a certified question from the Eleventh Circuit in Auto-Owners Ins. Co. v. Pozzi Window Co., No. SC06-779 (Fla. December 20, 2007) that a lawsuit brought against a contractor for water damage caused by the defective installation of windows at a multi-million dollar house in Coconut Grove was not covered since CGL policies do not cover the cost of repair and replacement of defective work.

In Pozzi Window Co. v. Auto-Owners Ins. Co., 446 F.3d 1178 (11th Cir. 2006), the Eleventh Circuit certified to the Supreme Court the issue of whether the defective windows were completed works such that the cost of repairing or replacing the defective windows fell within the scope of the policy’s coverage for claims within the “products/completed operations hazard.” In light of recent Florida appellate decisions that have split on the issue of whether repair or replacement costs are covered under a CGL policy, the Eleventh Circuit asked the Florida Supreme Court to answer whether a standard CGL policy that included coverage for claims within the products/completed operations hazard would cover a general contractor’s liability to a third party for the cost of repairing or replacing defective work by its subcontractor. Unlike its opinion J.S.U.B., the Florida Supreme Court observed that in this case, while the defective installation of the windows was an “occurrence,” the cost of repairing and removing defective work was not a claim for “property damage.”

Last week, however, the Florida Supreme Court withdrew its December 20, 2007 opinion and declared in Auto Owners Ins. Co. v. Pozzi Window Co., No. SCO6-779 (Fla. June 12, 2008) that it was unable to answer the Eleventh Circuit’s certified question owing to the fact that the court had failed to clarify whether the water damage resulted from defective installation, for which there would not be coverage, or defects in the installed windows themselves. In keeping with its  opinion  in U.S. Fire Ins. Co. v. JSUB, the Supreme Curt noted that if the windows were not defective prior to their installation, coverage would exist for the cost of repair or replacement of the windows because there was physical injury to tangible property (the windows) caused by their defective installation by a subcontractor. However, a different result would follow if the windows were in a defective condition before being installed and the damage to the completed project was therefore caused by defective windows rather than faulty installation alone.

In this case, MOE defended its insured, Dan Paulson Construction, Inc. (“DPCI”) under a reservation of rights against construction defect claims brought by the Martinellis related to damages to their personal residence that DPCI constructed. DPCI and the Martinellis proceeded to arbitration on the claims. Shortly before the arbitration hearing, MOE filed a declaratory judgment action in the state court against both DPCI and the Martinellis seeking a declaration that it had no duty to defend or indemnify on the basis of the “Your Work” exclusion. MOE did not serve this action on either DPCI or the Martinellis. 

On December 30, 2003, MOE issued a subpoena duces tecum in the un-served state court declaratory judgment action on the arbitrator seeking documents and the arbitrator’s thoughts regarding the arbitration. With the subpoena, MOE sent the arbitrator an ex parte cover letter explaining its coverage issues with DPCI.  Both DPCI and the Martinellis received the subpoena two business days prior to the arbitration hearing. MOE did not serve the cover letter to the arbitrator on either DPCI or the Martinellis. MOE then sent a second letter to the arbitrator slightly narrowing its original requests and further explaining its coverage dispute with DPCI. Subsequently MOE struck the subpoena and dismissed its first declaratory judgment action. The parties thereafter negotiated a settlement and entered into a stipulated settlement agreement which provided in part that DPCI would assign its coverage and bad faith claims against MOE to the Martinellis. 

MOE subsequently filed the subject coverage action against DPCI and the Martinellis.  On several motions for summary judgment, the trial court found that MOE acted in bad faith but that MOE had successfully rebutted the presumption of harm. The Court of Appeals reversed holding that MOE did not act in bad faith. The Washington Supreme Court reinstated the trial court’s decision that MOE acted in bad faith and further found that MOE failed in rebutting the presumption of harm.  As to bad faith, the court found that through its subpoena and two ex parte letters to the arbitrator, MOE “clearly showed great concern for its monetary interest in establishing which of the Martinellis’ claims were excluded from coverage under DPCI’s policy [while displaying] little to no concern for how its conduct might affect DPCI’s financial risk, which was then being litigated in the arbitration hearing.” The court found that MOE’s actions therefore “conclusively” demonstrated that it had a greater concern for its monetary interest than for DPCI’s financial risk.

The court then determined that MOE did not rebut the presumption of harm arising from its bad faith conduct as it failed to show that its subpoena and ex parte communications did not harm or prejudice DPCI. To the contrary, the court found that the record supported a finding that MOE’s conduct caused significant uncertainly and increased risk for DPCI’s defense. The court rejected the trial court’s initial conclusion that DPCI’s decision to proceed with the arbitration coupled with a subsequent settlement within policy limits effectively rebutted the presumption that MOE’s bad faith harmed DPCI. The court stated that “loss of control of the case is in itself prejudicial to the insured.” 

The court specifically stated that it was not expanding its prior rulings on the presumption of harm to conduct that occurs in connection with an insurer’s coverage duties. Rather, the finding of harm in this case was directly related to conduct during the defense case as, despite the fact that the bad faith conduct was perpetrated by coverage counsel, MOE’s conduct was associated with its underlying defense of DPCI and could not be “reasonably segregated from that defense [as it] interfered directly in that defense.”