SURPRISE! - MY BUILDING SANK
YOU'VE GOT COVERAGE (MAYBE)
Everyone knows the bromide about the difference between news and no-news. Dog Bites Man. That's Not News. Man Bites Dog. Now That's News. An analog in the casualty insurance world might sound like this. Contractor Jones accidentally damages home when, instead of removing his customer's roof at 2008 Queen, he removes the neighbor's at 2018 Queen. But not to worry for him, because this was an accident - and he has liability insurance to cover the cost of repair and replacement. Nothing new about that.
But fast forward to the 21st Century and the world of construction defect lawsuits. What is an "an accident" in the world of thousands of contractors building and selling homes and commercial structures at a rapid pace? What does a policy mean when one insures against an "occurrence" under a standard general liability policy? Is there news?
Take, for example, a contemporary construction project gone awry. General Contractor Renschler agreed under a sophisticated contract to build a high-end distribution center for the Pleasant Company, complete with significant warranties guaranteeing that the design and structural components will be free from defects. Moreover, Renschler promised to repair and replace defective components and pay for consequential damages they cause.
Pleasant took occupancy in 1994. Then came the bad news. Within one year, the warehouse began to sink. By the spring of 1995, the settlement at one end of the structure had reached eight inches. In the fall of 1995, Renschler re-hung approximately 30 exterior panels and windows that were leaking as a result of the settlement. The building continued to sink throughout 1996. By early 1997, the settlement approached one foot, the building was buckling, steel supports were deformed, the floor was cracking, and sewer lines had shifted. In January or February 1997, the parties met to discuss the settlement damage and the options for remediation. In August 1997, Renschler notified its liability insurance carrier, American Family, of the loss.
Renschler hired engineers. They advised that the structural steel was so over-stressed that the building was no longer safe for occupancy. In late 1999, the building was dismantled. By that time, the settlement was approximately 18 inches. During this time, Renshcler determined that its soil engineering sub-contractor (Lawson) had provided faulty soil preparation advice and that it caused the foundation to sink.
Pleasant demanded compensation from Renchsler which, in turn, tendered the claim to its insurers. American Family was the primary liability insurer (there were excess insurers, but their role is beyond the scope of this article). After some equivocation, American Family denies coverage. After all, this was a very sophisticated contract with contractual promises (warranties) and agreed upon remedies running from the builder to the owner. Since when would a contractual undertaking like this be covered by liability insurance (as opposed to a performance bond) ? American Family's view: This is a no brainer. There is no coverage.
Wrong, says the Wisconsin Supreme Court in a hotly debated, three to two decision on a broad range of coverage and underlying liability issues, presented in an all too familiar 21st Century construction defect quarrel. American Family Mutual Insurance Company v. American Girl, Inc., f/k/a Pleasant Company, Inc., 673 N.W.2d 65) (Wis. 2004)
The opinion is long, well-written, and very instructive. The dissents are sharp. The case is a must-read for any legal or insurance professional who walks in the valley of construction defect debris. Here, in abbreviated format, are the Court's conclusions.
1. PROPERTY DAMAGE CAUSED BY AN OCCURRENCE. The threshold question is whether the claim is for "property damage" caused by an "occurrence" within the meaning of the AmFam policies' general grant of coverage. It is. The CGL policies define "property damage" as "physical injury to tangible property." The sinking, buckling, and cracking of the warehouse was plainly "physical injury to tangible property." An "occurrence" is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful condition." The damage to the warehouse was caused by substantial soil settlement underneath the completed building, which occurred because of faulty site-preparation advice of the soil engineering subcontractor. It was accidental, not intentional or anticipated, and it involved the "continuous or repeated exposure" to the "same general harmful condition." Accordingly, there was "property damage" caused by an "occurrence" within the meaning of the CGL policies.
2. THE ECONOMIC LOSS DOCTRINE. The economic loss doctrine does not preclude coverage. The economic loss doctrine generally operates to confine contracting parties to contract rather than tort remedies for recovery of purely economic losses associated with the contract relationship. The doctrine does not determine insurance coverage, which turns on the policy language. That the property damage at issue in this case is actionable in contract, but not in tort, does not make it "non-accidental" or otherwise remove it from the CGL's definition of "occurrence."
3. EXPECTED OR INTENDED INJURY. Because the property damage in dispute was neither expected nor intended, the "expected or intended" exclusion did not apply.
4. CONTRACTUALLY ASSUMED LIABILITY. The "contractually-assumed liability" exclusion (upon which the inferior court rested its no-coverage conclusion) eliminates coverage for damages the insured is obligated to pay "by reason of the assumption of liability in a contract or agreement." This language does not exclude coverage for all breach of contract liability. Rather, it excludes coverage for liability that arises because the insured has contractually assumed the liability of another, as in an indemnification or hold harmless agreement. There is no indemnification or hold harmless agreement in dispute in this case, so this exclusion does not apply.
5. THE "YOUR WORK" EXCLUSION AND ITS EXCEPTION. The "business risk" or "your work" exclusions ordinarily would operate to exclude coverage under these circumstances. But the "subcontractor" exception to the "your work" exclusion applies in this case (because the damage to the general's work arose out of the work of the soil engineer subcontractor". The subcontractor exception to the business risk exclusion restores coverage if "the work out of which the damage arises" was performed by a subcontractor.
6. THE PROFESSIONAL LIABILITY SERVICES EXCLUSION. The "professional services liability exclusion" in the excess policies applies under the circumstances of this case.
7. THE KNOWN LOSS DOCTRINE. Coverage under the policies issued after the property damage loss was substantially known to the parties is barred by the "known loss" doctrine. Here, because the fact that settlement was occurring was known in March 1995, and the extent of damage was substantially known by January 1997, insurance policies issued after January 1997 were not invoked.
About the Author: Bob's areas of practice are professional and products liability, casualty and commercial litigation, insurance coverage and bad faith disputes. He has extensive experience at the appellate level. Bob has served as trial counsel in a wide range of jury and court cases, including defense jury verdicts in eight consecutive defective ladder and scaffolding cases, bad faith failure to settle and inadequate defense claims against a liability insurer, sexual misconduct/repressed memory claims by a minor against a municipality's police officer, and wrongful death construction site claims. He has also defended suits over the alleged negligent destruction of computerized architectural drawings with controversial lost profit claims, defamation suits by disgruntled former employees, defamation and advertising claims by corporations against their critics and competitors, a host of insurance coverage disputes, life and disability insurance suits, and performance bond cases. Bob has served as mediator and as neutral arbitrator in over 100 cases removed from the court system, as well as UM/UIM cases.
© 2004 Arthur, Chapman, Kettering, Smetak & Pikala, P.A.
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