Insurer Must Defend Homebuilder for Defective Construction Regardless of Whether Complaint Alleges Water Damage During Policy Period

In Westfield Insurance Company v. Kroiss, 694 N.W.2d 102 (Minn. App. 2005), the Minnesota Court of Appeals held that an insurer had a duty to defend its homebuilder policyholder against lawsuits for water damage allegedly caused by defective construction during the insurer's policy period. The court further found that the policyholder was entitled to both fees and costs for its successful coverage action and relating to the underlying claims that were defended by other insurers.

There, Westfield Insurance Company ('Westfield') sold S. Kroiss Homes ('Kroiss') a commercial general liability insurance policy covering the period from Oct. 8, 1993 through May 15, 1995. The policy was an occurrence-based policy, requiring Westfield to defend and indemnify the policyholder against property damage occurring during it. When the policyholder was sued by homeowners alleging that its defective construction during the policy period caused continuing water intrusion damage, Kroiss tendered the claim to Westfield. Westfield denied its coverage obligations, claiming that the homeowners' suits gave no indication that water damage occurred during its policy period. Indeed, the homeowners neither stated when the damage occurred, nor alleged damage during the policy period.

Other insurers, whose policies incepted after Westfield's policy, accepted their defense obligations subject to certain reservations of rights. When Westfield filed suit seeking to confirm its non-coverage position, Kroiss filed a counterclaim for coverage and attorneys' fees. Kroiss then moved for summary judgment. The trial court granted the motion, finding that Westfield breached its defense obligations. The trial court, however, denied the policyholder's request for fees. The court concluded that Kroiss had 'suffered no damages as a direct loss incident to the breach of contract' because other insurers assumed its defense.

The Minnesota Court of Appeals affirmed in part, and reversed in part, the trial court's decision. Like the trial court, the Court of Appeals rejected Westfield's claim that it had no defense obligation because there was no evidence that damage occurred during its policy period. The court reminded that the duty to defend is broad and insurers bear the burden of showing that there is no damage at the time a policy is in force. All of the homeowners here asserted that defective construction during the policy period caused water damage. The damage from water seepage, therefore, could have started while Westfield's policies were in force. Where questions of fact such as these remain, an insurer has a duty to defend. Although a policy is triggered by evidence of actual injury during the policy period, the injury need not be diagnosable, compensable or manifest when the policy is in force. Moreover, damages occurring continuously or repeatedly over time trigger all policies in force during that time frame.

The Minnesota Court of Appeals also held that Kroiss was entitled to attorneys' fees and costs because Westfield breached its defense obligations. The court ruled that coverage counsel's fees were recoverable as damages arising directly from the insurer's breach of its contract, as were certain fees associated with the underlying claim. The court observed that the policyholder had been required to manage a portion of the underlying case's defense by communicating with the other insurers about settlement offers. It likewise spent time dealing with other insurers regarding the treatment of, and liability for, the Westfield policy period. The court therefore remanded the matter to the trial court for further action consistent with its rulings.

Sherilyn Pastor is a partner at McCarter & English, LLP.

In Westfield Insurance Company v. Kroiss , 694 N.W.2d 102 (Minn. App. 2005), the Minnesota Court of Appeals held that an insurer had a duty to defend its homebuilder policyholder against lawsuits for water damage allegedly caused by defective construction during the insurer's policy period. The court further found that the policyholder was entitled to both fees and costs for its successful coverage action and relating to the underlying claims that were defended by other insurers.

There, Westfield Insurance Company ('Westfield') sold S. Kroiss Homes ('Kroiss') a commercial general liability insurance policy covering the period from Oct. 8, 1993 through May 15, 1995. The policy was an occurrence-based policy, requiring Westfield to defend and indemnify the policyholder against property damage occurring during it. When the policyholder was sued by homeowners alleging that its defective construction during the policy period caused continuing water intrusion damage, Kroiss tendered the claim to Westfield. Westfield denied its coverage obligations, claiming that the homeowners' suits gave no indication that water damage occurred during its policy period. Indeed, the homeowners neither stated when the damage occurred, nor alleged damage during the policy period.

Other insurers, whose policies incepted after Westfield's policy, accepted their defense obligations subject to certain reservations of rights. When Westfield filed suit seeking to confirm its non-coverage position, Kroiss filed a counterclaim for coverage and attorneys' fees. Kroiss then moved for summary judgment. The trial court granted the motion, finding that Westfield breached its defense obligations. The trial court, however, denied the policyholder's request for fees. The court concluded that Kroiss had 'suffered no damages as a direct loss incident to the breach of contract' because other insurers assumed its defense.

The Minnesota Court of Appeals affirmed in part, and reversed in part, the trial court's decision. Like the trial court, the Court of Appeals rejected Westfield's claim that it had no defense obligation because there was no evidence that damage occurred during its policy period. The court reminded that the duty to defend is broad and insurers bear the burden of showing that there is no damage at the time a policy is in force. All of the homeowners here asserted that defective construction during the policy period caused water damage. The damage from water seepage, therefore, could have started while Westfield's policies were in force. Where questions of fact such as these remain, an insurer has a duty to defend. Although a policy is triggered by evidence of actual injury during the policy period, the injury need not be diagnosable, compensable or manifest when the policy is in force. Moreover, damages occurring continuously or repeatedly over time trigger all policies in force during that time frame.

The Minnesota Court of Appeals also held that Kroiss was entitled to attorneys' fees and costs because Westfield breached its defense obligations. The court ruled that coverage counsel's fees were recoverable as damages arising directly from the insurer's breach of its contract, as were certain fees associated with the underlying claim. The court observed that the policyholder had been required to manage a portion of the underlying case's defense by communicating with the other insurers about settlement offers. It likewise spent time dealing with other insurers regarding the treatment of, and liability for, the Westfield policy period. The court therefore remanded the matter to the trial court for further action consistent with its rulings.

Sherilyn Pastor is a partner at McCarter & English, LLP.