Significant Changes to Construction Insurance

Posted by Brant Kahler on Tuesday, September 13, 2016

On June 10, 2016, the Iowa Supreme Court issued a landmark decision in National Surety Corporation v. Westlake Investments, LLC.  Prior to that decision, and based primarily on the Iowa Supreme Court’s previous decision in Pursell Construction v. Hawkeye-Security Insurance, 596 N.W.2d 67 (Iowa 1999), Iowa law held that a contractor’s Commercial General Liability (CGL) insurance policy did not provide coverage for defective construction.  As explained below, in Westlake the Iowa Supreme Court partially reversed course, holding that there is coverage for defective construction under a contractor’s CGL policy, but only if the defective construction is performed by a subcontractor.

The Westlake saga started in 2002 when developers and a general contractor began constructing an apartment complex in West Des Moines.  Westlake purchased the apartment complex in 2003, after which substantial water infiltration issues were discovered.  As a result, in February of 2008, Westlake filed suit against the developers and general contractor who, in turn, asserted third party claims against the architect that designed the building and numerous subcontractors.  After years of litigation, settlement was reached and a consent judgment was entered in favor of Westlake for $15,600,000.  After the primary insurer tendered its policy limits of $1,000,000 and the various third-party defendants contributed $1,737,500, $12,762,500 of the judgment remained unsatisfied.  As part of the settlement, the developers and general contractor assigned their claims against National Surety Corporation (NSC), the excess CGL insurer, to Westlake. 

In October of 2011, NSC filed a declaratory judgment action against Westlake in state court seeking a declaration that there was no coverage under the excess CGL policy for the defective construction of the apartment complex that led to the widespread water infiltration issues.  Westlake counterclaimed for breach of contract and a declaration that NSC was liable under the excess CGL policy for the $12,762,500 unsatisfied portion of Westlake’s judgment.  Following dispositive motions and a three week jury trial, Westlake obtained a verdict against NSC for the unsatisfied portion of its judgment (at that time $12,439,500).

NSC filed an appeal.  Based on a strict interpretation and construction of the modern form CGL policy language (the language contained in the NSC excess CGL policy at issue), the Iowa Supreme Court affirmed the decisions from the district court and the Iowa Court of Appeals, holding that coverage was available to Westlake under the contractor’s CGL policy for defective construction performed by the insured’s subcontractors.  Please note, however, under Iowa law, insurance coverage is still not available for defective construction performed by the insured.

We have a number of cases pending at this time involving these issues.  If we could be of any assistance or you would like to discuss these matters further, please call Brant Kahler (515-242-2430), Mike Dee (515-242-2475) or Brian Rickert (515-242-2457).