French v. Assurance Co. of America

• Decision Date: 27 April 2006
• Docket Number: No. 05-1356.,05-1356.
• Citation: 448 F.3d 693
• Parties: James H. FRENCH, assignee of the claims of Jeffco Development Corporation; Kathleen B. French, assignee of the claims of Jeffco Development Corporation, Plaintiffs-Appellants, v. ASSURANCE COMPANY OF AMERICA; United States Fire Insurance Company, Defendants-Appellees, and The Aetna Casualty and Surety Company, now known as Travelers Casualty and Surety Company, Defendant. National Association of Home Builders, Amicus Supporting Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 693

448 F.3d 693

James H. FRENCH, assignee of the claims of Jeffco Development Corporation; Kathleen B. French, assignee of the claims of Jeffco Development Corporation, Plaintiffs-Appellants, v. ASSURANCE COMPANY OF AMERICA; United States Fire Insurance Company, Defendants-Appellees, and The Aetna Casualty and Surety Company, now known as Travelers Casualty and Surety Company, Defendant.

National Association of Home Builders, Amicus Supporting Appellants.

No. 05-1356.

United States Court of Appeals, Fourth Circuit.

Argued: March 14, 2006.

Decided: April 27, 2006.

ARGUED:

David Hilton Wise, Waters & Wise, P.L.L.C., Fairfax, Virginia, for

Appellants. Thomas Sykes Schaufelberger, Wright, Robinson, Osthimer & Tatum, Washington, D.C., for Appellees.

ON BRIEF:

Paul V. Waters, Waters & Wise, P.L.L.C., Fairfax, Virginia, for Appellants. Edward E. Nicholas, Wright, Robinson, Osthimer & Tatum, Washington, D.C., for Appellee United States Fire Insurance Company; Robert Edward Worst, Kalbaugh, Pfund & Messersmith, Fairfax, Virginia, for Appellee Assurance Company of America. David S. Jaffe, National Association of Home Builders, Washington, D.C., for Amicus Supporting Appellants.

Before WILKINSON and MICHAEL, Circuit Judges, and HAMILTON, Senior Circuit Judge.

Affirmed in part, vacated in part, and remanded by published opinion. Senior Judge HAMILTON wrote the opinion, in which Judge WILKINSON and Judge MICHAEL joined.

OPINION

HAMILTON, Senior Circuit Judge:

This appeal presents two separate, but related, insurance coverage questions in the construction context: (1) Whether, under Maryland law, a standard 1986 commercial general liability policy form published by the Insurance Services Office, Incorporated (ISO) provides liability coverage to a general contractor to correct defective workmanship performed by a subcontractor; and (2) Whether, under Maryland law, the same policy form provides liability coverage for the costs to remedy unexpected and unintended property damage to the contractor's otherwise nondefective work-product caused by the subcontractor's defective workmanship. We answer the first question in the negative and the second question in the affirmative. Accordingly, we affirm in part and vacate in part the judgment below in favor of the insurance company defendants and remand for further proceedings.

I.

The following relevant facts are undisputed. In 1993, James and Kathleen French (the Frenches) contracted with Jeffco Development Corporation (Jeffco) for the construction of a single-family home in Fairfax County, Virginia. Pursuant to the construction contract, and via a subcontractor, the exterior of the home was clad with a synthetic stucco system known as Exterior Insulating Finishing System (EIFS). Following the completion of construction, building officials issued a Certificate of Occupancy for the Frenches' home in December 1994. Nearly five years later, in late 1999, the Frenches discovered extensive moisture and water damage to the otherwise nondefective structure and walls of their home resulting from the defective cladding of the exterior of their home with EIFS. The Frenches have since spent in excess of $500,000 to correct the defects in the EIFS exterior of their home and to remedy the resulting damage to the otherwise nondefective structure and walls of their home.

On November 29, 1999, the Frenches filed suit (the Underlying Suit) against Jeffco in Virginia state court alleging multiple claims, including breach of contract, and seeking damages to cover the costs to correct the construction defects with respect to the EIFS exterior of their home and to remedy the resulting damage to the otherwise nondefective structure and walls of their home.

For certain time periods (some overlapping) during the entire time period relevant to the Underlying Suit, Jeffco had commercial general liability coverage through four different commercial general liability insurance carriers: Assurance Company of America (Assurance), United States Fire Insurance Company (U.S.Fire), Ohio Casualty Insurance Company (Ohio Casualty), and Aetna Casualty and Surety Company n/k/a Travelers Casualty and Surety Company (Travelers). All parties agree that for purposes of resolving the issues presented in the present appeal, the commercial general liability policies issued to Jeffco by appellees Assurance and U.S. Fire consisted of the 1986 version of the standard commercial general liability policy form drafted by the ISO¹ and widely used in the insurance industry. See Hartford Fire Ins. Co. v. California, 509 U.S. 764, 772, 113 S.Ct. 2891, 125 L.Ed.2d 612 (1993) ("ISO develops standard policy forms and files or lodges them with each State's insurance regulators; most CGL insurance written in the United States is written on these forms."). From henceforth, we will refer to these policies as the 1986 ISO CGL Policies. Of relevance in the present appeal, the 1986 ISO CGL Policies provided:

SECTION I — COVERAGES

COVERAGE A. BODILY INJURY AND PROPERTY DAMAGE LIABILITY

1. Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of ... "property damage" to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages for ... "property damage" to which this insurance does not apply. We may, at our discretion, investigate any "occurrence" and settle any claim or "suit" that may result....

* * *

b. This insurance applies to ... "property damage" only if:

(1) The ... "property damage" is caused by an "occurrence" ....

(J.A. 157). The 1986 ISO CGL Policies applied to completed operations, as defined in said policies under "Products-completed operations hazard." (J.A. 168). This term is defined, in relevant part, as follows:

14. "Products-completed operations hazard":

a. Includes all "bodily injury" and "property damage" occurring away from premises you own or rent and arising out of "your product" or "your work" except:

(1) Products that are still in your physical possession; or

(2) Work that has not yet been completed or abandoned. However, "your work" will be deemed completed at the earliest of the following times:

(a) When all of the work called for in your contract has been completed.

(b) When all of the work to be done at the job site has been completed if your contract calls for work at more than one job site.

(c) When that part of the work done at a job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project.

Work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed.

Id.

The 1986 ISO CGL Policies contained several exclusions that limit the insurance carriers' duty to provide coverage to Jeffco. The following two of those exclusions are relevant to the issues on appeal:

2. Exclusions

This insurance does not apply to:

a. Expected or Intended Injury

"... [P]roperty damage" expected or intended from the standpoint of the insured.

* * *

(J.A. 157).

1. Damage to Your Work

"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.

(J.A. 160).

The 1986 ISO CGL Policies define the term "[o]ccurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." (J.A. 168). While the 1986 ISO CGL Policies do not define the term "accident," controlling Maryland case law provides that an act of negligence constitutes an "accident" under a liability insurance policy when the resulting damage takes place without the insured's actual foresight or expectation. Sheets v. Brethren Mut. Ins. Co., 342 Md. 634, 679 A.2d 540, 548 (1996) (adopting subjective test from standpoint of the insured regarding whether act of negligence constitutes an "accident" under liability insurance policy); see also Cole v. State Farm Mut. Ins. Co., 359 Md. 298, 753 A.2d 533, 541 (2000). The test is a subjective one, because, according to Maryland's highest court, "[i]f we were to adopt an objective standard and hold that the term `accident' as used in liability insurance policies excludes coverage for damage that should have been foreseen or expected by the insured, such insurance policies would be rendered all but meaningless." Sheets, 679 A.2d at 549. Also of relevance here, the 1986 ISO CGL Policies define "[p]roperty damage" as "Physical injury to tangible property, including all resulting loss of use of that property." (J.A. 169).

Jeffco notified Assurance, U.S. Fire, Ohio Casualty, and Travelers of the Underlying Suit and requested to be defended. Assurance and U.S. Fire undertook to defend Jeffco pursuant to a reservation of rights letter. Ohio Casualty also undertook to defend Jeffco, but Travelers refused to provide any defense. Assurance, U.S. Fire, and Ohio Casualty jointly retained the law firm of Sinnott, Nuckols, and Logan to represent Jeffco in the Underlying Suit.

On July 28, 2003, the date of trial in the Underlying Suit, the only count remaining alleged breach of contract. However, that same day, Jeffco and the Frenches reached a settlement agreement (the Settlement Agreement). Although Ohio Casualty consented to the Settlement Agreement, Assurance and U.S. Fire did not.

Pursuant to the Settlement Agreement: (1) Jeffco agreed to confess judgment to the Frenches for $450,000; (2) Jeffco and Ohio Casualty would only be responsible to collectively pay the Frenches $45,000 of the $450,000 confessed judgment; (3) the judgment would be marked "paid and satisfied" upon the...