Corner Construction Co. vs. United States Fidelity et al
Annotate this CaseCorner Construction Company, a Corporation
Plaintiff and Appellant
v.
United States Fidelity and Guaranty Company,
a Corporation; and Cummings & Roll, LTD., a Corporation
Regent Insurance Company, a Corporation;
and Continental Insurance Company, a Corporation
Defendants and Appellees
[2002 SD 5]
South Dakota Supreme Court
Appeal from the Circuit Court of
The Seventh Judicial Circuit
Pennington County, South Dakota
Hon. Thomas L. Trimble, Judge
Veronica L. Duffy
Joseph M. Butler of
Bangs, McCullen, Butler, Foye and Simmons, LLP
Rapid City, South Dakota
Attorneys for plaintiff and appellant.
Scott Sumner
Jerry D. Johnson of
Banks, Johnson, Colbath, Keerr & Sumner, LLC
Rapid City, South Dakota
Attorneys for defendants and appellees United States Fidelity & Guaranty Co.
William A. May of
Costello, Porter, Hill, Heisterkamp, Bushnell & Carpenter
Rapid City, South Daktoa
Attorneys for defendant and appellees Cummings & Roll, Ltd.
Considered on Briefs November 16, 2001
Opinion Filed 1/9/2002
#21880, #21888, #21897
SABERS, Justice
[¶1.] Corner Construction Company (Corner) filed an action seeking a declaratory judgment against United States Fidelity and Guaranty Company (USF&G) alleging that there was coverage for the faulty work of Corner’s subcontractors under its existing insurance policies. Corner also filed an action against Cummings and Roll (C&R) alleging that C&R had negligently advised Corner that there was no insurance coverage under its insurance policies. USF&G and C&R moved for summary judgment. The trial court granted summary judgment for USF&G holding that there was coverage under the insurance policies, but Corner was not covered because it failed to give proper notice. The trial court denied C&R’s motions. USF&G and C&R appeal on: (1) the issue of coverage. C&R also appeals: (2) the trial court’s decision that Corner’s claim was not barred by the applicable statute of limitation. Corner appeals on: (3) the issue of notice. We affirm Issue 1 in part and remand for factual determinations on Issues 1, 2 and 3.
FACTS[¶12.] “When interpreting insurance contracts, we have uniformly held them reviewable as a matter of law under the de novo standard.” Nation Sun Indus., Inc. v. S.D. Farm Bureau Ins. Co., 1999 SD 63, ¶7, 596 NW2d 45, 46 (citing Opperman v. Heritage Mut. Ins. Co., 1997 SD 85, ¶3, 566 NW2d 487, 489 (additional citations omitted)).
[¶13.] 1. WHETHER CORNER IS AFFORDED COVERAGE UNDER THE BROAD FORM PROPERTY DAMAGE ENDORSEMENT OF ITS CGL POLICY FOR THE FAULTY WORKMANSHIP OF ITS SUBCONTRACTORS.
The company will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of:
A. bodily injury, or
B. property damage
to which this insurance applies, caused by an occurrence, and the Company shall have the right and duty to defend any suit against the Insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient, but the Company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the Company’s liability has been exhausted by payment of judgments or settlements.
Under the exclusion provisions of the policies, the insurance does not apply to:
property damage to work performed by or on behalf of the Named Insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith.
(Exclusion (o) (emphasis added)). The BFPDE, specifically section VI(A)(3), purchased by Corner modifies the above exclusion of the basic policy as follows:
VI. Broad Form Property Damage Liability Coverage (Including Completed Operations)
(A) Exclusions (k) and (o) are replaced by the following:
(3) with respect to the completed operations hazard and with respect to any classification stated in the policy or in the company’s manual as “including completed operations” to property damage to work performed by the named insured arising out of such work or any portion thereof, or out of such materials, parts or equipment furnished in connection therewith.
(emphasis added).
[¶15.] The 1973 version of the BFPDE eliminated the phrase “on behalf of”
when discussing whose work is covered by the policies. In 1986, this CGL policy was amended, essentially incorporating the 1973 BFPDE endorsement section VI(A)(3) into the basic policy as exclusion L. This new provision is as follows:
1. “Property damage” to “your work” arising out of it or any
part of it and included in the “products-completed
operations hazard.”
This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.
[¶18.] The primary issue is whether a completed operations hazard exclusion in an endorsement to a CGL policy excludes coverage for damage to the final product, caused by the faulty work of subcontractors. Of key importance is whether the elimination of the phrase “on behalf of,” from the completed operations hazard provision, provides coverage for a named insured’s subcontractors. The question becomes whether a subcontractor’s work is a separate insurable risk.
[¶21.] The courts that have found coverage for the faulty work of subcontractors have done so on the basis that the language of the completed operations hazard exclusion in the BFPDE does not preclude such coverage. Fireguard Sprinkler Sys., 864 F2d at 651. These courts have interpreted the deletion of the phrase “on behalf of” as significant. The deliberate omission of the phrase lends credence to the position that the coverage exclusion in the completed operations hazard provision was only to apply to work performed by the named insured and not to subcontractors.
[¶22.] Furthermore, Fireguard Sprinkler Systems and its progeny have stated that the purpose of insurance is to insure against risks. Because a “general contractor’s liability policy insures against risks outside his or her control, such a risk surely can arise from a subcontractor’s work.” Id. at 653. Specifically,
[u]nder the usual coverage [ ] the insured has no insurance whatsoever for damage to a subcontractor’s work or for damage to his own work resulting from a subcontractor’s work. Therein lie the advantages of Broad Form Property Damage coverage including Completed Operations. Consequently, if an insured does not anticipate using subcontractors, the value of purchasing Broad Form Property Damage coverage with Completed Operations is questionable, in view of the additional premium required for it.
Id. at 652 (emphasis in original).
[¶23.] These courts have also looked at extrinsic evidence, particularly from the insurance industry, to determine the meaning of the completed operations hazard provision. According to one industry publication:
[t]he broad form property damage endorsement “eliminates coverage for property damage to work performed by the named insured if the property damage arises out of the named insured’s work or any portion of it. Thus, an insured has coverage for his completed work when the damage arises out of work performed by someone other than the named insured, such as a subcontractor . . . . The usual Completed Operations coverage (no Broad Form Property Damage endorsement attached) flatly excludes property damage to work performed by or on behalf of the named insured arising out of the work.”
Maryland Casualty Co., 221 CalApp3d at 972 (citing August, 1982, Fire Casualty & Surety Bulletin, published by the National Underwriters Association). Another frequently cited publication dismisses the idea that because a subcontractor’s work becomes part of the final product, it cannot be viewed as a separate insurance risk. Id. at 976.
The editors have heard of instances in which insurers have denied coverage . . . on the ground that the policy exclusion of injury to the named insured’s products (which is not amended by the Broad Form endorsement) eliminates coverage for any damage to the completed building, the completed building being a “product” of the named insured. In the opinion of the editors, that reasoning ignores the distinction between the “completed operations hazard” and the “named insured’s products” in the policy definitions. Moreover, that reasoning precludes any possibility of recovery under the Completed Operations feature of the Broad Form Endorsement, a feature for which the insured has presumably paid an additional premium.
Id.
[¶24.] The courts that have declined to find coverage for the faulty work of subcontractors have held that, when a general contractor enters into a contract, it assumes certain risks. Bor-Son Bldg. Corp., 323 NW2d at 61; Blaylock, 796 SW2d at 154. The Bor-Son court stated that “[i]ncluded in those risks was the obligation to construct buildings free from defects and to remedy, on demand, any defects discovered within a year of completion.” Bor-Son Bldg. Corp., 323 NW2d at 61. The court ultimately concluded that “[s]ince the alleged building damages were the result of alleged breach of contract, there was no duty on [the insurer], the comprehensive general liability insurer, to defend the [ ] actions not to indemnify [the general contractor] for its contribution toward the settlement of those actions.”[1] Id. at 62.
[¶26.] In order to qualify for such coverage, Corner must show that the insuring clause under its policies is satisfied. The insuring clause states:
The Company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of
A. bodily injury or
B. property damage
to which this insurance applies, caused by an occurrence[.]
[¶27.] Generally, the CGL policy, together with the BFPDE exclusion, will not provide coverage for the subcontractor’s faulty workmanship, unless it results in an accident or occurrence which results in property damage to the work. See generally, Haugen v. Home Indem. Co., 86 SD 406, 414, 197 NW2d 18, 22 (1972) (holding that “there is no liability coverage afforded by the policies for damages caused by and confined to the insured’s own work or product”). If, however, the subcontractor’s faulty workmanship results in damage to other property, the damage will be covered. See id. (holding that “when the insured’s work or product actively malfunctions and causes damages to other property coverage is afforded.”).
[¶28.] Furthermore, the property damage must be caused by an occurrence. An “occurrence” is defined as an “accident” which is an event that is “undesigned, sudden, and unexpected.” Taylor v. Imperial Casualty, 144 NW2d 856, 858 (SD 1966) (citing Neale Const. Co. v. U.S. Fidelity and Guar. Co. 199 F2d 591 (10Cir 1952)) (additional citations omitted).
[¶29.] As required by the insuring clause, there was an accident or unintended event, resulting in property damage that was neither expected nor intended by the insured, at least in respect to the following: Cub, which was hired to do the insulation work, left voids in the insulation between the studs and failed to securely attach the vapor barrier. The vapor barrier fell, causing temperature fluctuations and other ventilation problems. As a result, Corner’s own work was damaged by the faulty work of its subcontractor. Corner was forced to remove the drywall, fix the vapor barrier, replace the drywall, and then retape, retexture and repaint the portions of the building that had been damaged. Such damage is covered by the insuring clause in connection with the BFPDE. Accordingly, we affirm the trial court’s finding of coverage for Corner to this extent under the policy. When viewed in a light most favorable to Corner, we conclude that some of the facts giving rise to this lawsuit are within the coverage of the USF&G policy and BFPDE completed operations hazard exclusion. Since the trial court made no determination as to the extent of damages under this theory, we remand for that purpose.
[¶30.] 2. WHETHER THE TRIAL COURT ERRED WHEN IT HELD THAT CORNER WAS NOT ENTITLED TO COVERAGE UNDER ITS CGL POLICY BECAUSE IT FAILED TO PROVIDE USF&G WRITTEN NOTICE.
[¶31.] The trial court held that the policies issued by USF&G required written notice and that Corner failed to substantially comply with the policies’ written notice provision until after the arbitration proceedings had been completed, resulting in prejudice to USF&G. Corner argues that it immediately informed Ross Roll, an owner of C&R, of the pending arbitration proceeding and inquired as to whether there was coverage for the faulty workmanship of its subcontractors. C&R denies such statements were ever made. The trial court did not address the existence or nonexistence of such statements. Therefore, there is an issue of material fact which should be addressed.
[¶32.] If Corner did inform C&R of the arbitration proceeding pending against it, SDCL 59-6-5 is applicable. SDCL 59-6-5 provides:
As against a principal both principal and agent are deemed to have notice of whatever either has notice of, and ought, in good faith and the exercise of ordinary care and diligence, to communicate to the other.
[¶33.] 3. WHETHER THE STATUTE OF LIMITATION HAS RUN ON CORNER’S CLAIM AGAINST C&R.
[¶34.] C&R claims that Corner’s action is barred by the three-year statute of limitation contained in SDCL 15-2-14(3). C&R contends that Corner’s negligent misrepresentation claim sounds in negligence and, therefore, falls under SDCL 15-2-14(3). C&R further argues that Corner failed to bring this action within three years of when it alleges C&R negligently informed it that there was no coverage under its insurance policies. C&R argues that the deposition testimony of Corner’s president establishes that the alleged advisement from C&R on the issue of coverage was given in September 1992. Corner commenced this action in September 1997. Accordingly, C&R asserts that Corner brought its action two years after the three-year limitation period expired. SDCL 15-2-14(3) provides:
Except where, in special cases, a different limitation is prescribed by statute, the following civil actions other than for the recovery of real property can be commenced only within three years after the cause of action shall have accrued:
. . .
(3) An action for personal injury.
Except where, in special cases, a different limitation is prescribed by statute, the following civil actions other than for the recovery of real property can be commenced only within six years after the cause of action shall have accrued.
(1) An action upon a contract, obligation, or liability, express or implied, excepting those mentioned in §§15-2-6 to 15-2-8, inclusive, and subdivisions 15-2-15(3) and (4);
. . .
(5) An action for criminal conversation or for any other injury to the rights of another not arising on contract and not otherwise specifically enumerated in §§ 15-2-6 to 15-2-17[.]
[1]. The courts that have followed this line of reasoning have adopted the
following premise regarding CGL policies:
[t]he risk intended to be insured is the possibility that the goods, products or work of the insured, once relinquished or completed, will cause bodily injury or damage to property other than to the product or completed work itself, and for which the insured may be found liable. The insured, as a source of goods or services, may be liable as a matter of contract law to make good on products or work which is defective or otherwise unsuitable because it is lacking in some capacity. This may even extend to an obligation to completely replace or rebuild the deficient product or work. This liability, however, is not what the coverages in question are designed to protect against. The coverage is for tort liability for physical damage to others and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained.
Bor-son Bldg. Corp., 323 NW2d at 63. Ultimately, the work performed by the subcontractors becomes the work of the general contractor and is therefore not a separate insurable risk.
2. This Court has stated that “[e]stoppel may be applied to prevent a fraudulent or inequitable resort to a statute of limitations.” L.R. Foy Constr. Co., Inc. v. South Dakota State Cement Plant Comm’n, 399 NW2d 340, 345 (SD 1987) (holding that it was unjust to allow the defendant to benefit from its misrepresentations and use a shorter statute of limitations to bar the action against it). “[A]n estoppel arises, where, by conduct or acts, a party has been induced to alter his position or do that which he would not otherwise have done to his prejudice.” Id. (citing Willadsen v. Crawford, 60 NW2d 692 (SD 1953)). If a party can prove the essential elements of estoppel the applicable statute of limitation may be tolled. L.R. Foy Constr. Co., Inc., 399 NW2d at 344-45. Whether the plaintiff can demonstrate that the defendant’s misrepresentations tolled the statute of limitation is a question of fact for the trier of fact. Id. at 346.
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