Peerless Insurance Co. v. Wells

NOTICE:  This opinion is subject to motions for reargument under V.R.A.P. 40
as well as formal revision before publication in the Vermont Reports.
Readers are requested to notify the Reporter of Decisions, Vermont Supreme
Court, 111 State Street, Montpelier, Vermont 05602 of any errors in order
that corrections may be made before this opinion goes to press.


                                No. 89-349


Peerless Insurance Company                   Supreme Court

                                             On Appeal from
     v.                                      Washington Superior Court

Barbara J. Wells (Williams) and              May Term, 1990
Salvatore Alfano and Elaine Alfano


Matthew I. Katz, J.

Kiel & Boylan, Springfield, for plaintiff-appellee

Emily B. Tartter of Paterson & Walke, P.C., Montpelier, for defendants-
  appellants Alfanos


PRESENT:  Allen, C.J., Peck, Gibson, Dooley and Morse, JJ.


     ALLEN, C.J.   Defendants, the Alfanos, appeal from a declaratory
judgment determining that plaintiff is not obligated to pay damages to
defendant Wells under a general liability policy issued by plaintiff to the
Alfanos.  We affirm.
     The parties stipulated to the material facts, which disclose that in
July of 1984, defendant Wells entered into a contract with the Alfanos for
them to construct her home.  The home did not have a basement, but was to be
constructed on a concrete slab floor on grade.  The contract required the
contractors to provide for necessary fill and compaction, as well as the
construction of the slab.  The complaint by defendant Wells against the
Alfanos alleged that improper compaction of the fill caused the slab to
settle, resulting in extensive structural and cosmetic damage to the house.
     In its complaint for a declaratory judgment, plaintiff alleged that
the policy at issue did not afford protection for the damages claimed by
defendant Wells and sought a declaration that it had no obligation to defend
or pay any damages that might be awarded to her in the underlying action. (FN1)
The trial court concluded that the damages sought were not covered by the
policy issued by plaintiff because of certain exclusions from coverage con-
tained in the policy.  We agree.
     On appeal, the Alfanos contend that the exclusions, when read
together, create an ambiguity which must be construed in their favor and
which results in coverage for the damages sought from them.
     The policy provides that plaintiff "will pay on behalf of the insured
all sums which the insured shall become obligated to pay as damages because
. . . of property damage to which this insurance applies, caused by an
occurrence."  It further provides that:
         This insurance does not apply:

            (a)  to liability assumed by the insured under any
         contract or agreement except an incidental contract; but
         this exclusion does not apply to a warranty of fitness
         or quality of the named insured's products or warranty
         that work performed by or on behalf of the named insured
         will be done in a workmanlike manner;

         . . . .

            (n)  to property damage to the named insured's
         products arising out of such products or any part of
         such products;

            (o)  to property damage to work performed by or on
         behalf of the named insured arising out of work or any
         portion thereof, or out of materials, parts, or
         equipment furnished in connection therewith;

            (p)  to damages claimed for the withdrawal,
         inspection, repair, replacement, or loss of use of the
         named insured's products or work completed by or for the
         named insured or any property of which such products or
         work form a part, if such products, work or property are
         withdrawn from the market or from use because of any
         known or suspected defect or deficiency therein.

(Emphasis added.)
     It is argued that exclusion (a) is in conflict with the other
exclusions and presents an ambiguity which must be resolved in favor of the
insureds. (FN2)
     Our rules for construction of insurance contracts are well settled, and
on the facts presented the following rules are applicable:  (1) "[i]nsurance
contracts must be interpreted according to their terms and the evident
intent of the parties, as gathered from the contract language," Sanders v.
St. Paul Mercury Ins. Co., 148 Vt. 496, 500, 536 A.2d 914, 916 (1987); (2)
any ambiguity in policy language should be resolved in favor of the insured
since the insurer is in a better position to avoid the ambiguity, id.; and
(3) while insurance policies are to be strictly construed against the
insurer, it is not to be deprived of unambiguous provisions placed in a
policy for its benefit, Clark v. Cooperative Ins. Ass'n of Vermont, 141 Vt.
321, 323, 448 A.2d 155, 156 (1982).  With these rules in mind, we examine
the claim of ambiguity.
     The argument for ambiguity is that the exception to the exclusion found
in (a) grants coverage for the occurrence, whereas exclusion (o) takes away
the coverage and is in conflict with (a).  The exception to the exclusion in
(a) retains the coverage for liability for breach of warranty of fitness
afforded by the insuring clause unless it is narrowed or eliminated by some
other exclusion.  However, the exception in (a) is not a grant of coverage,
it simply provides that the exclusion for liability assumed by the insured
under any contract or agreement does not apply to a warranty of fitness or a
warranty that work performed by the insured will be done in a workmanlike
manner.  Exclusion (o) unequivocally excludes coverage for property damage
to the work performed by or on behalf of the insured.  The exclusions read
together, as they must be, limit the coverage afforded by the policy to
damage to property other than the insured's work.  We are mindful of the
fact that other courts have reached an opposite conclusion. (FN3) The majority,
and in our view the better reasoned decisions, have found no coverage under
similar or nearly identical facts.  See Biebel Bros., Inc. v. United States
Fidelity & Guar. Co., 522 F.2d 1207 (8th Cir. 1975) (construing Missouri
law); U.S. Fire Ins. Co. v. Colver, 600 P.2d 1 (Alaska 1979); St. Paul Fire
& Marine Ins. Co. v. Coss, 80 Cal. App. 3d 888, 145 Cal. Rptr. 836 (Cal.
App. 1978); Indiana Ins. Co. v. DeZutti, 408 N.E.2d 1275 (Ind. 1980); Weedo
v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A.2d 788 (1979).
     The Alfanos further argue that because other jurisdictions have reached
different conclusions on the question before us, an ambiguity is
established. (FN4) We agree that in some instances such might be the case.  On
the issue before us, however, ambiguity results only from a forced reading
of the policy language.  Stillwater Condominium Ass'n v. American Home
Assurance Co., 508 F. Supp. 1075, 1080 (D. Mont. 1981) (aff'd, 688 F.2d 848
(1982).
     The Alfanos also contend that exclusion (o) should not be enforced
because it eliminates the warranty coverage reserved in exclusion (n),
relying upon Val Preda Leasing, Inc. v. Rodriguez, 149 Vt. 129, 540 A.2d 648 (1987).  In that case we concluded that a collision damage waiver in an
automobile rental agreement was misleading and unenforceable because the
exceptions swallowed the protection.  Id. at 135-36, 540 A.2d  at 652.  Such
is not the case here.  The exception to (a) eliminates breach of warranty
from the exclusion relating to contractual liability.  Breach of warranty
coverage is limited by exclusion (o), which eliminates coverage for property
damage to work performed by or on behalf of the insured.  The result is that
coverage exists for warranty claims arising from damage to property other
than to property which is the insured's own work.  The policy is neither
         misleading nor unenforceable.
     Affirmed.

                                        FOR THE COURT:



                                        Chief Justice



FN1.    Plaintiff has acknowledged in the stipulated facts that it is
obligated under its policy to afford coverage for a portion of the damage
claimed and is, therefore, obligated to defend the suit by defendant Wells
against the Alfanos.


FN2.    While plaintiff contended that (n), (o) and (p) were all applicable
and the trial court concluded that (n) barred recovery because the house was
a product, we question whether (n) is the applicable exclusion because the
policy defines products to mean goods or products manufactured, sold,
handled or distributed.  Since on the complaint by defendant Wells against
the Alfanos it is alleged that improper compaction resulted in damage to the
work performed by the insureds, we conclude that (o) is the applicable
exclusion.  See Indiana Ins. Co. v. DeZutti, 408 N.E.2d 1275, 1280 (Ind.
1980).


FN3.    See, e.g., Federal Ins. Co. v. P.A.T. Homes, Inc., 113 Ariz. 136,
547 P.2d 1050 (1976) (en banc); Worsham Construction Co., Inc. v. Reliance
Ins. Co., 687 P.2d 988 (Colo. App. 1984).


FN4.    Federal Ins. Co. v. P.A.T. Homes, Inc., 113 Ariz. at 139, 547 P.2d 
at 1052, is cited for this proposition.  That opinion cites only
Fontainebleau Hotel Corp. v. United Filigree Corp., 298 So. 2d 455 (Fla.
App. 1974) in support of its holding that an insurance policy covered the
insured's liability for construction work done in an unprofessional manner.
However, LaMarche v. Shelby Mut. Ins. Co., 390 So. 2d 325 (Fla. 1980)
expressly overruled Fontainebleau.  We also note that State Farm Mutual
Auto. Ins. Co. v. Wilson, ___ Ariz. ___, ___, 782 P.2d 727, 732-34 (1989)
overruled Federal Ins. to the extent that it automatically required the
construction of a policy against the drafter once an ambiguity was
established.  Under the rule announced in State Farm, language subject to
conflicting interpretations will be construed against the insurer only after
considering the language of the clause, public policy considerations, and
the purpose of the transaction as a whole.  Id. at ___, 782 P.2d  at 733-34.