"No State shall pass any ex post facto Law, or Law impairing the Obligation of Contracts." — United States Constitution, Article I, Section 10

In 2000-01, the Kalia Tower was built at the Hilton Hawaiian Village. It was shuttered in 2002 when mold was found throughout the building. It was reconstructed and reopened about one year later. Hilton sued and settled with the contractors and others for its losses. In that process, an insurance dispute arose between one of the contractors and an insurer. The insurer declined to cover the loss paid by the contractor to Hilton.

I was the attorney who represented that insurer.

The contractor sued the insurer and after nearly three years of litigation, the trial judge ruled in favor of the insurer. The contractor appealed.

Three judges of the appeals court then considered the case, and last year they issued a unanimous decision holding that "under Hawaii law, construction defect claims do not constitute an ‘occurrence’ under a CGL (commercial general liability) policy. Accordingly, breach of contract claims based on allegations of shoddy performance are not covered."

The translation from "insurance speak" is that sloppy work by the contractor is not an accident that should be paid for by the insurance company.

There is now a larger issue that challenges principles protected by the Constitution: the separation of powers and the private right of contract. Legislation has been introduced (House Bill 924), aggressively supported by contractors and their lobbyists, that would change the definition of an "occurrence" in an insurance contract.

The proposed legislation would require that the courts ignore the definitions contained in the insurance contract, a private contract between two parties, if the definitions would exclude coverage arising from a contractor’s poor workmanship.

Insurance policies are intended to cover accidents — true and bona fide unforeseeable events that cause injury or harm to others. Insurance companies are not in the business of guaranteeing the quality of a contractor’s work. They do not have the ability to assess the risk that a contractor will put poorly trained people on the job or inadequately supervise them. The risk that workers will cut corners or perform shoddy work is a risk that must remain with the party best able to manage and control that risk, the contractor.

The insurance company takes on the risk of truly unforeseen accidents occurring. The likelihood and expense associated with such risks can be statistically predicted in ways that make it possible for an insurance company to price the risk and charge a premium in exchange for it. If such risk, by legislation, is expanded to include shoddy workmanship, then the insurance company could be turned into a guarantor of the quality of the contractor’s work.

HB 924 would enact the law retroactively, making it apply to insurance policies that have already been issued. The effect of doing so would be to rewrite insurance contracts after the parties have entered into them, despite the fact that the courts in Hawaii have already ruled on the interpretation of those contracts. Retroactive changes in the law not only offend our sense fairness, they are unconstitutional.

If this legislation becomes law, insurance companies will have to make adjustments. Their exposure to risk will be expanded and so they can be expected to respond in one of two ways: Either no longer issue such insurance in Hawaii or charge more for it.

In the first scenario, fewer insurance companies will mean less competition and higher prices for insurance.

In the second scenario, greater risk to the insurance companies will mean higher prices for insurance.

In either scenario, the higher price will be passed along from contractors to their customers. In the end, building costs will rise and the Hawaii consumer will pay for this legislation.