In Hay v.  American Safety Indem. Co., — F. Supp. 3d —- (W.D. Wash. Sep. 19, 2017), the court held a “tract housing” exclusion applied to claims for construction defect and related damages arising out of the construction of a residential housing development.  The court’s holding and analysis may be instructive as to how courts will approach policyholder’s arguments that “tract housing” exclusions are ambiguous.

Hay arises out of the construction of a housing development in Fife, Washington.  The plaintiffs, purchasers of the houses, sued the developer, Highmark, alleging it “constructed 29 homes located within the Valley Haven project development.”  The plaintiffs alleged siding and window defects, and water intrusion.  Highmark’s insurer, ASIC, disclaimed based on a “Condominium, Apartment, Townhouse, or Tract Housing Coverage Limitation Endorsement,” which excluded property damage “however caused, arising directly or indirectly, out of, or related to” an insured’s or subcontractor’s work that is “incorporated into a tract housing project or development.”  The endorsement defined “tract housing” to mean “any housing project or development that includes the construction, repair or remodel of twenty-five (25) or more residential buildings by our insured in any or all phases of the project or development.”  The plaintiffs settled with Highmark for $4,250,000 in exchange for an assignment of rights, and sued ASIC thereafter, alleging breach of contract and bad faith.

Highmark contested the disclaimer, noting it was not the original developer.  Rather, Highmark bought lots from the developer in foreclosure, built homes, and then evaluated whether to purchase more lots.  Because it did not contemplate a unified community, it argued “the houses weren’t built and arranged according to a single plan,” and argued the exclusion was ambiguous.  In litigation, the plaintiffs argued the term “phases” rendered the policy ambiguous, i.e., the exclusion should only apply where 25 houses are constructed in “a distinct stage of development.”  The plaintiffs also argued the exclusion should only apply if 25 houses were completed during a single policy limit.  The court held the exclusion was unambiguous, and applied because “Highmark constructed 29 homes in the Valley Haven development, over the 25 house limit.”  Noting the complaint explicitly alleged that Highmark constructed 29 houses in one development, the court further held ASIC owed no duty to defend.

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