Broad EIFS Exclusion Enforced

Many liability insurers writing coverage for construction contractors now include in their policies some form of exclusion for construction defect claims involving siding that is an exterior insulation finish system (“EIFS”). These exclusions often state that there is no coverage for property damage arising out of, or caused by, EIFS. But some insurers are now using a broader exclusion under which there is no coverage for exterior work if EIFS is used on any part of the building at issue. On February, 22, 2013, in First Mercury Ins. Co. v. Miller Roofing Enter. 2013 U.S. Dist. Lexis. 23728 (.pdf), the federal district court in Seattle enforced this broader exclusion to eliminate coverage for a claim against a roofer. The insured roofer argued that the EIFS exclusion should not apply because the alleged leak damage related to the insured’s roofing work and the insured performed no work involving the building’s EIFS siding. Judge Coughenour characterized this point as “irrelevant” because the exclusion applies so long as there is EIFS siding on any part of the building.

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Discovery Alone Does Not Trigger Duty to Defend

On December 24, 2012, the Court of Appeals (Div. I) affirmed summary judgment in Western National Assurance Co. v. Maxcare of Wa. (pdf.), finding that a total pollution exclusion eliminated coverage for a lawsuit premised on the use of cleaning chemicals to remediate fire damage in the plaintiffs’ home.  While the allegations in the underlying complaint clearly implicated the total pollution exclusion, the insured argued that discovery in the underlying lawsuit had revealed other potential theories of liability beyond the scope of the total pollution exclusion. But the Court of Appeals rejected this argument and reasoned that the duty to defend arises at the time a complaint is filed such that information later uncovered during discovery is not the type of extrinsic evidence that an insurer must consider when evaluating an unambiguous complaint. 

No Coverage For Known Construction Defects Ignored By Developer

Far Northwest Dev. Co., LLC v. Cmty. Ass’n of Underwriters of Am., Inc. et al., 2009 WL 1099158 (W.D. Wash. April 22, 2009)

Faramarz Ghoddoussi, the sole member of Far Northwest Development, LLC (“LLC”) which built and sold the Somerset Village Townhome Condominiums, admitted that he was aware of construction defects in several condominium units during the construction process. However, Ghoddoussi did not share that information with unit owners or the homeowners’ association (“HOA”), and he did not undertake a full scale investigation of the complex to determine whether the same problems existed in other units. The HOA brought action against the LLC, and Ghoddoussi individually, alleging in part that Ghoddoussi breached his fiduciary duties to the HOA by failing to fully investigate the defects during development, and as a result the condominiums suffered physical damage.

Ghoddoussi and the LLC tendered to their insurers for defense and indemnity. After the insurers denied coverage and indemnity, Ghoddoussi and the LLC initiated a declaratory judgment action. The insurers filed a motion for summary judgment, contending that there could be no coverage or indemnity because the harms alleged in the underlying lawsuit were “expected or intended” by Ghoddoussi.

The insurance policy specifically excluded “‘property damage’ expected or intended from the standpoint of the insured.” Furthermore, in granting the insurers’ motions for summary judgment, the court acknowledged that, even apart from the policy language, as a matter of insurance law “[t]here is never coverage where the harm is expected or intended.”

Ghoddoussi attempted to evade the exclusion by claiming that the damage was not “expected or intended” because he was unaware of any fiduciary duties and he lacked significant experience in construction. The court decisively rejected Ghoddoussi’s “self-serving testimony,” finding that the “expected or intended” exclusion negated any duty to defend or indemnify because Ghoddoussi was aware of the construction defects during the construction of the complex and, out of his own self-interest, failed to take action, thereby causing the damage.