Charles M. Somers ("Somers"), individually, and Charles M. Somers as Trustee of the Charles M. Somers Living Trust, and West Sunset 32 Phase 1, LLC (collectively, "Intervenors") have an ownership interest in Kilauea Falls Ranch (the "Property") located on the island of Kaua‘i, Hawai'i. ECF No. 36-2 ¶ 6. Intervenors entered into a contract with Defendant on January 28, 2011 for the development and construction of the Property, which includes residential structures and a pond. Id. ¶ 8. The pond walls enclose residential spaces and "are steel-reinforced, cast-in-place (C.I.P) concrete walls that also serve as structural foundations for walls enclosing the Main Foyer, Foyer Stairway, Kitchen, Dining Room, Living Room, Theatre, Master Bedroom Foyer, Master Bedroom Closet, and Bedroom 4." ECF No. 48-1 ¶ 4. Defendant built the Property from 2011 to 2013.1 ECF No. 36-2 ¶ 17.
In February 2017, the pond leaked into its pump room and Defendant performed remedial work by injecting epoxy into cracks. Id. ¶ 19; ECF No. 48-1 ¶ 10. On June 3, 2017, water from the pond leaked into the interior of the residence near a staircase. ECF No. 36-2 ¶ 20. Water also leaked into the master bedroom area causing musty odor, mold growth, and increased humidity. Id. ¶ 21. Intervenors have incurred substantial expenses investigating the sources of the leaks and discovered water proofing issues and the use of untreated lumber in violation of the building code. Id. ¶¶ 22–25. Additional leaks appeared in December 2017 in the pump room and at the base of an exterior wall between the main residence and the pump room. Id. ¶¶ 26–27.
Intervenors filed the underlying action on November 14, 2018, asserting breach of contract, breach of warranty, misrepresentation, and negligence claims. Id. ¶¶ 29–45. They pray for compensatory, special, and/or general damages, pre- and post-judgment interest, and reasonable attorneys’ fees and costs. Id. at 10.
Following the commencement of the underlying action, Plaintiff issued a reservation of rights letter to Defendant, reserving the right to disclaim coverage and to file a declaratory action regarding its rights and obligations.2 ECF No. 36-12 at 2, 16. To date, Plaintiff has defended Defendant in the underlying action pursuant to its reservation of rights and duty to defend under the applicable Commercial General Liability ("CGL") insurance policies (the "Policies"). Compl. ¶ 21.
Plaintiff issued consecutive CGL policies to Defendant for the period March 25, 2010 to March 25, 2011, and extending through the period March 25, 2017 to March 25, 2018. Id. ¶ 22. Section I of the Policies contains coverage and exclusion provisions:
1. Insuring Agreement
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages for "bodily injury" or "property damage" to which this insurance does not apply. We may, at our discretion investigate any "occurrence" and settle any claim or "suit" that may result. But:
(1) The amount we will pay for damages is limited as described in Section III – Limits Of Insurance; and
(2) Our right and duty to defend ends when we have used up the applicable limit of insurance in the payment of judgments or settlements under Coverages A or B or medical expenses under Coverage C .
No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for under Supplementary Payments – Coverages A and B .
b. This insurance applies to "bodily injury" and "property damage" only if:
(1) The "bodily injury" or "property damage" is caused by an "occurrence" that takes place in the "coverage territory";
(2) The "bodily injury" or "property damage" occurs during the policy period; and
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2. Exclusions
This insurance does not apply to:
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b. Contractual Liability
"Bodily injury" or "property damage" for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages:
(1) That the insured would have in the absence of the contract or agreement; or
(2) Assumed in a contract that is an "insured contract", provided the "bodily injury" or "property damage" occurs subsequent to the execution of the contract or agreement. Solely for the purposes of liability assumed in an "insured contract", reasonable attorney fees and necessary litigation expenses incurred by or for a party other than an insured are deemed to be damages because of "bodily injury" or "property damage", provided:
(a) Liability to such party for, or for the cost of, that party's defense has also been assumed in the same "insured contract"; and
(b) Such attorney fees and litigation expenses are for defense of that party against a civil or alternative dispute resolution proceeding in which damages to which this insurance applies are alleged.
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l. Damage To Your Work
"Property damage" to "your work" arising out of it or any part of it and included in the "products-completed operations hazard".
This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.
m. Damage To Impaired Property Or Property Not Physically Injured
"Property damage" to "impaired property" or property that has not been physically injured, arising out of:
(1) A defect, deficiency, inadequacy or dangerous condition in "your product" or "your work"; or
(2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.
This exclusion does not apply to the loss of use of other property arising out of the sudden and accidental physical injury to "your product" or "your work" after it has been put to its intended use.
ECF No. 36-15 at 12–13, 16. Section V contains the relevant definitions:
3. "Bodily injury" means bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.
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8. "Impaired property" means tangible property, other than "your product" or "your work", that cannot be used or is less useful because:
a. It incorporates "your product" or "your work" that is known or thought to be defective, deficient, inadequate or dangerous; or
b. You have failed to fulfill the terms of a contract or agreement;
if such property can be restored to use by:
a. The repair, replacement, adjustment or removal of "your product" or "your work"; or
b. Your fulfilling the terms of the contract or agreement.
9. "Insured contract" means any written:
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f. Part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume tort liability of another party to pay for "bodily injury" or "property damage" to a third person or organization, provided that the "bodily injury" or "property damage" is caused, in whole or in part, by you or those acting on your behalf. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.[3]
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16. "Products-completed operations hazard":
a. Includes all "bodily injury" and "property damage" occurring away from premises you own or rent and arising out of "your product" or "your work" except:
(1) Products that are still in your physical possession; or
(2) Work that has not yet been completed or abandoned. However, "your work" will be deemed completed at the earliest of the following times:
(a) When all of the work called for in your contract has been completed.
(b) When all of the work to be done at the job site has been completed if your contract calls for work at more than one job site.
(c) When that part of the work done at a job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project.
Work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed.
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17. "Property damage" means:
a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the "occurrence" that caused it.
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