Breach of Warranty Claims and Contractual Exclusion
December 5, 2016
The insurer filed a declaratory action against the insured to determine whether the policy covered the homeowners' losses resulting from the insured's faulty installation of heating, ventilation, and air conditioning (HVAC) system. This case is North Star Mutual Insurance Company v. Rose, 27 F.Supp.3d 1250 (2014).
The Quigleys hired Rose to install an HVAC unit at their home in Oklahoma. The work was performed from January, 2008 until October, 2008. While the work was being performed, Rose attained insurance from North Star Mutual with effective dates of July, 2008 through July, 2009. In late 2009, the Quigleys began experiencing heating and cooling problems along with other deficiencies with the unit. Ultimately, the Quigleys sued Rose for breach of warranty and breach of contract. Rose forwarded the lawsuit to its insurance company.
North Star did not dispute that the facts in the underlying lawsuit satisfy the definition of an occurrence. The insurer did contend that certain exclusions in the policy preclude coverage and filed this lawsuit seeking a declaratory judgment as to coverage.
The United States District Court for the Eastern District, Oklahoma, noted the North Star argument that contractual liability exclusions operate to deny liability for property damage resulting from a breach of contract. Rose countered that a claim such as here for breach of warranty does not implicate duties under the contract but rather duties implied by law. The court said that the reasoning of the exclusion urged by North Star is not a natural one. The court said that reading the phrase to apply to all liabilities sounding in contract renders the phrase superfluous. The court referred to an Oklahoma state ruling that the contractual liability phrasing in the general liability policy refers only to tort claims and not contract claims.
The court then addressed the North Star argument that the impaired property exclusion applied. Such an exclusion precludes coverage for property damage to property, other than the insured's work or product, that is not physically damaged and which damage is caused by the insured's faulty work or product. Here, North Star conceded that there is potential for damage to property surrounding the HVAC installation due to removing the sub-flooring to reach the ducts in order to rectify the situation. The court then ruled that a reading of the entire impaired property exclusion meant that the exclusion does not apply.
North Star also claimed that the recall exclusion applied but the court said that replacing a single HVAC unit is not a recall and so, the exclusion is not applicable.
The insurer also brought up the damage to property exclusion stating that coverage is not provided for property damage to that particular part of any property that must be restored, repaired or replaced because the named insured's work was incorrectly performed on it.; the exclusion does not apply to property damage included in the products-completed operations hazard. Rose alleged that this wording was ambiguous. The court noted that the incident involved in the underlying lawsuit would not fit within the products-completed operations hazard definition and so, even if the provision is ambiguous. It is not pertinent to this decision.
After mostly rejecting the applicability of the exclusions cited by the insurer, the court still ruled in favor of North Star. The court cited the contractual liability exclusion as applying in this instance.
Editor's Note: In a rather complex and bizarre decision, the U.S. District Court, E.D. Oklahoma, rules that the contractual liability exclusion applied to the claim made against the insured. After calling the insurer's interpretation of the contractual liability exclusion not “necessarily a natural one,” the court found that the exclusion applied because the breach of warranty claim brought against the insured was excluded. The court said that, because the policy stated in a pertinent part that it did not apply to property damage for which the insured was obligated to pay damages by reason of the assumption of liability in a contract or agreement, the contractual exclusion applied.