Insurance – Duty to Defend – Property Damage Coverage – Exclusions – Material Fact – Summary Judgment

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Builders Mutual Insurance Co. v. Mitchell. (Lawyers Weekly No. 11-07-0331, 18 pp.) (John C. Martin, Ch.J.) Appealed from New Hanover County Superior Court. (W. Allen Cobb, J.) N.C. App. Click here for the full text of the opinion.

Holding: The fact that an accident may have arisen from the insured’s negligence does not prohibit coverage where a policy provided coverage for “property damage” caused by an “occurrence.”

The extent and nature of the damage to previously undamaged property is a genuine issue of material fact that is properly decided by a jury, and the trial court erred by granting summary judgment on the issue of coverage.

“Your work” as defined by the policy would exclude defendant Umstead Construction Group’s faulty workmanship from coverage but not damage to the completed, undamaged work of the builder that was not the subject of Umstead’s repairs.

Defendant Maryland Casualty Co.’s definition of “your work” that would include even damage to property other than the work product itself is too broad.

Maryland Casualty has not met its burden of showing the applicability of an exclusion. Whether this damage occurred and the extent of such damage are genuine issues of material fact to be decided at trial.

Because the complaint alleged damages that may be covered by the policy, we hold that Maryland Casualty did have a duty to defend Umstead in the defendant’s case

Facts

Henry Mitchell (defendant) owned a home on Figure Eight Island. It was constructed by Clancy & Theys Construction Company and completed in 1992. The home experienced water drainage and rot, resulting in damages to its interior, marble terraces and decks.

Umstead, the insured, contracted with defendant and began repair work in February 2000. The work continued until December 2005. Defendant fired Umstead after discovering the work was not being performed in a workmanlike manner and defendant was being overbilled. Umstead had been paid more than $4.3 million at the time it was dismissed.

Defendant hired Nick Garret Development, Inc., which discovered that the defects had not been corrected and the attempted repairs had caused additional damage.

Defendant filed a complaint against Umstead and its subcontractors, alleging breach of contract, breach of express and implied warranties, negligence, willful/negligent misrepresentation, unfair and deceptive trade practices and fraud. Plaintiff defended Umstead under a reservation of rights, retaining its right to deny coverage depending on information discovered in the case.

Prior to the resolution of the case, plaintiff filed a complaint for declaratory judgment against interested parties, including Maryland Casualty. Maryland Casualty’s commercial general liability policy covered Umstead from March 2000 to March 2003. Plaintiff’s policy then covered Umstead from March 2003 to March 2006. Following mediation of the defendant’s case, plaintiff paid a settlement.

Maryland Casualty did not contribute to the settlement or to the defense of Umstead.

Maryland Casualty moved for summary judgment in the declaratory judgment action against plaintiff. Plaintiff responded with its own motion for summary judgment, seeking contribution of one-half of the defense costs and one-half of the settlement of the defendant’s case.

The trial court granted summary judgment in favor of Maryland Casualty and dismissed the case with prejudice. The trial court found that Maryland Casualty did not have a duty to defend Umstead and was not liable in the underlying case.

Plaintiff appealed.

Analysis

The insured has the burden of bringing itself within the insuring language of the policy.

If it is determined that the insuring language embraces the particular claim or injury, the burden then shifts to the insurer to prove that a policy exclusion excepts the particular injury from coverage.

The Maryland Casualty policy covering Umstead provided coverage for “property damage” caused by an “occurrence.” An “occurrence” is defined by the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” “Accident” is not defined in the policy.

Our Supreme Court has defined accident as “an unforeseen event, occurring without the will or design of the person whose mere act causes it; an unexpected, unusual, or undersigned occurrence.”

A claim for faulty workmanship, in and of itself, is not an occurrence under a commercial general liability policy. Faulty workmanship is not included in the standard definition of “property damage” because a failure of workmanship does not involve the fortuity required to constitute an accident.

For any damages regarding the cost of repairing the faulty workmanship itself, the Maryland Casualty policy would not apply, because the damages for such repair costs would not constitute “property damage” as defined by the policy. But an “occurrence” as defined by a CGL policy can be an accident caused by or resulting from faulty workmanship including damage to any property other than the work product. Prod. Sys., Inc., v. Amerisure Ins. Co., 167 N.C. App. 601 (2004), allows for coverage where the property damaged was not part of the work product itself.

Our courts have interpreted “property damage” to mean “damage to property that was previously undamaged and not the expense of repairing property or completing a project that was not done correctly or according to contract in the first instance.” Whether damage to previously undamaged property is covered depends on whether the damage was an “accident” under the ordinary meaning of the word.

A witness testified that in at least two instances, the property damaged was previously undamaged and was not a part of the work product of Umstead. The credibility, expertise and knowledge of that witness, which was questioned by Maryland Casualty, cannot be settled by summary judgment. For purposes of summary judgment, we must assume the facts in his affidavit are true.

The affidavit alleges that Umstead’s work on the roof and gutter system caused damage to previously undamaged portions of the home. It also alleges that Umstead’s failure to protect previously undamaged portions of the home resulted in damages to interior property. Either of these may indicate an “accident” happened and thus there was an “occurrence” covered by the policy.

The fact that the accident may have arisen from Umstead’s negligence does not prohibit coverage. There is no indication that Umstead intended or expected this damage.

The extent and nature of the damage to previously undamaged property is a genuine issue of material fact that is properly decided by a jury.

Having alleged sufficient facts to put some of the damages within the coverage of the policy, the burden shifts to the insurance company to prove an exclusion applies.

Exclusions

Maryland Casualty claims the “your work” exclusion would apply to all of the damage alleged, as the damage was a result of Umstead’s work.

“Your work” as defined by the policy would exclude Umstead’s faulty workmanship itself from coverage. It would not exclude damage to the completed, undamaged work of Clancy & Theys that was not the subject of Umstead’s repairs.It is unclear which exclusion Maryland Casualty is claiming applies in this case.

Maryland Casualty seeks a definition of “your work” that would include all damage arising out of Umstead’s work, even damage to property other than the work product itself. This reading would be too broad.

Maryland Casualty has not met its burden of showing the applicability of an exclusion. Whether this damage occurred and the extent of such damage are genuine issues of material fact to be decided at trial.

Period of Coverage

The trial court found Maryland Casualty was not liable under the holding in Gaston County Dyeing Machine Co. v. Northfield Ins. Co., 351 N.C. 293 (2000).

“Where the date of the injury-in-fact can be known with certainty, the insurance policy or policies on the risk on that date are triggered.”

Maryland Casualty argues that the date of the injury-in-fact in this case cannot be known with certainty, and thus the injury-in-fact test is not the appropriate standard. Whether the date can be known with certainty is a genuine issue of material fact and should not have been resolved by summary judgment.

Duty to Defend

 The trial court found that Maryland Casualty had no duty to defend. Because the complaint alleged damages that may be covered by the policy, we hold that Maryland Casualty did have a duty to defend Umstead in the defendant’s case.

Reversed and remanded.