Auto-Owners Ins. v. Home Pride Companies

• Citation: 268 Neb. 528,684 N.W.2d 571
• Decision Date: 06 August 2004
• Docket Number: No. S-03-352.,S-03-352.
• Parties: AUTO-OWNERS INSURANCE COMPANY, appellee, v. HOME PRIDE COMPANIES, INC., appellant, and Appletree Apartments, Inc., et al., appellees.
• Court: Supreme Court of Nebraska

684 N.W.2d 571

268 Neb. 528

AUTO-OWNERS INSURANCE COMPANY, appellee, v. HOME PRIDE COMPANIES, INC., appellant, and Appletree Apartments, Inc., et al., appellees.

No. S-03-352.

Supreme Court of Nebraska.

August 6, 2004.

Andrew J. Wilson, Omaha, of Walentine, O'Toole, McQuillan & Gordon, for appellant.

Curtis D. Ruwe, Lake Elmo, MN, and C.J. Gatz, of Gatz, Fitzgerald, Vetter & Temple, Norfolk, for appellee Auto-Owners Insurance Company.

Thomas M. Locher, Omaha and Douglas W. Krenzer, Council Bluffs, of Locher, Cellilli, Pavelka & Dostal, L.L.C., and Roger W. Warren and Jeffrey C. Baker, of Sanders, Conkright & Warren, L.L.P., Overland Park, KS, for appellees Certain Teed Corporation and G.S. Roofing Products Co.

HENDRY, C.J., WRIGHT, CONNOLLY, GERRARD, STEPHAN, McCORMACK, and MILLER-LERMAN, JJ.

GERRARD, J.

NATURE OF CASE

Auto-Owners Insurance Company (Auto-Owners) instituted this declaratory judgment action to determine its obligations to its insured, Home Pride Companies, Inc. (Home Pride). The district court determined that the policy issued by Auto-Owners to Home Pride did not cover Home Pride's claim and granted summary judgment in favor of Auto-Owners. The main issue on appeal is whether a standard commercial general liability (CGL) insurance policy covers an insured contractor for the faulty workmanship of a subcontractor that it hired.

FACTUAL AND PROCEDURAL BACKGROUND

Because this action is based upon an underlying action filed in April 2002, we digress to trace the history of the original action. Appletree Apartments, Inc. (Appletree), is a wholly owned subsidiary of J.A. Peterson Enterprises, Inc. (Peterson). Appletree and Peterson entered into a contract with JT Builders, Inc., to install new shingles on a number of Appletree's apartment buildings. Thereafter, JT Builders subcontracted with Craig Industries, Inc., to do the work. After becoming dissatisfied with Craig Industries' work, JT Builders terminated its contract with Craig Industries and subcontracted the work to Home Pride. Home Pride then entered into a subcontract with Ron Hansen, doing business as Ron Hansen Construction, to install the shingles.

Sometime in 1996, Ron Hansen Construction completed the project. Soon thereafter, Appletree began to notice problems with the roof. Appletree notified Home Pride of the problems, and after receiving what it believed to be an unsatisfactory response, Appletree and Peterson filed suit against Home Pride, JT Builders, and Craig Industries. In their petition, Appletree and Peterson claimed that the aforementioned parties failed to install the shingles in a workmanlike manner and that such faulty workmanship caused substantial and material damage to the roof structures and buildings. Appletree and Peterson also alleged that the shingles were defective and included in the action the manufacturer of the shingles, Certain Teed Corporation, and G.S. Roofing Products Co., a company that merged with Certain Teed Corporation after Appletree purchased the shingles.

After the suit was filed, Home Pride made a claim to its insurer, Auto-Owners, for coverage under its CGL policy. Pursuant to a reservation of rights, Auto-Owners assumed the defense of Home Pride. Thereafter, Auto-Owners instituted this declaratory judgment action against Home Pride, Appletree, Peterson, JT Builders, Craig Industries, Certain Teed Corporation, G.S. Roofing Products Co., and Ron Hansen, doing business as Ron Hansen Construction. Essentially, Auto-Owners claimed that the insurance policy did not provide coverage because the faulty workmanship of a subcontractor is not an "occurrence" under a CGL policy.

Both Auto-Owners and Home Pride moved for summary judgment. The district court determined that any alleged property damage was not caused by an "occurrence" and granted summary judgment in favor of Auto-Owners. Home Pride filed a timely notice of appeal.

ASSIGNMENT OF ERROR

Home Pride assigns that the district court erred in determining that its CGL policy did not provide coverage.

STANDARD OF REVIEW

Summary judgment is proper when the pleadings and evidence admitted at the hearing disclose that there is no genuine issue as to any material fact or as to the ultimate inferences that may be drawn from those facts and that the moving party is entitled to judgment as a matter of law. Keys v. Guthmann, 267 Neb. 649, 676 N.W.2d 354 (2004). In reviewing a summary judgment, an appellate court views the evidence in a light most favorable to the party against whom the judgment is granted and gives such party the benefit of all reasonable inferences deducible from the evidence. Id.

ANALYSIS

Broadly speaking, this appeal requires us to determine whether damage caused by faulty workmanship is covered under a standard CGL insurance policy. Although this issue has been frequently examined by a number of courts, it is a matter of first impression in Nebraska.

The meaning of an insurance policy is a question of law, in connection with which an appellate court has an obligation to reach its own conclusions independently of the determination made by the lower court. Poulton v. State Farm Fire & Cas. Cos., 267 Neb. 569, 675 N.W.2d 665 (2004). In construing insurance policy provisions, a court must determine from the clear language of the policy whether the insurer in fact insured against the risk involved. Id. In an appellate review of an insurance policy, the court construes the policy as any other contract to give effect to the parties' intentions at the time the writing was made. Where the terms of a contract are clear, they are to be accorded their plain and ordinary meaning. Id.

As relevant here, Home Pride's policy states:

SECTIONI — 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 "bodily injury" or "property damage" to which this insurance applies....

....

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

(1) The "bodily injury" or "property damage" is caused by an "occurrence" that takes place in the "coverage territory"....

....

2. Exclusions.

This insurance does not apply to:

....

1. "Property damage" to "your work" arising out of it or any part of it and including 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.

As an initial matter, we note that Home Pride appears to argue that coverage exists because the policy contains a subcontractor exception to the "your work," or "1," exclusion found in section 2. We disagree. The provision Home Pride relies on is merely an exception to an exclusion and, therefore, incapable of providing coverage. See, Auto Owners Ins. Co. v. Travelers Cas. & Surety, 227 F.Supp.2d 1248 (M.D.Fla.2002); Hawkeye-Security Ins. Co. v. Davis, 6 S.W.3d 419 (Mo.App.1999); Lassiter Const. v. American States Ins., 699 So.2d 768 (Fla.App.1997). Stated otherwise, the exception contained within exclusion "l" is irrelevant until two conditions precedent are met: (1) There is an initial grant of coverage and (2) exclusion "l" operates to preclude coverage. See, L-J, Inc. v. Bituminous Fire and Marine, 350 S.C. 549, 567 S.E.2d 489 (S.C.App.2002); Kalchthaler v. Keller Const. Co., 224 Wis.2d 387, 591 N.W.2d 169 (Wis.App.1999). If, and only if, these two conditions are met may the subcontractor exception to the exclusion be applicable.

In order to determine if coverage exists, we must first determine if there was "property damage" caused by an "occurrence." On both accounts, Auto-Owners contends that there is not. As to the former, the policy states that "property damage" is "[p]hysical injury to tangible property, including all resulting loss of use of that property" as well as "[l]oss of use of tangible property that is not physically injured." In their amended petition, Appletree and Peterson alleged that shingles were breaking apart and falling off the roofs at Appletree's apartments, resulting in substantial and material damage to the roof structures and buildings. Such allegations state a cause for physical injury to tangible property and, therefore, "property damage" under the policy. See, American Family Mut. v. American Girl, Inc., 268 Wis.2d 16, 673 N.W.2d 65 (2004); Kalchthaler v. Keller Const. Co., supra; Maryland Cas. Co. v. Reeder,

221 Cal.App.3d 961, 270 Cal.Rptr. 719 (1990).

At the core of Auto-Owners' appellate argument is its contention that faulty workmanship does not constitute an "occurrence" under the policy. The policy defines "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." While the term "accident" is not defined in the policy, we have previously stated that "an accident within the meaning of liability insurance contracts includes any event which takes place without the foresight or expectation of the person acted upon or affected thereby." Farr v. Designer Phosphate & Premix Internat., 253 Neb. 201, 206, 570 N.W.2d 320, 325 (1997). See, also, Sullivan v. Great Plains Ins. Co., 210 Neb. 846, 851, 317 N.W.2d 375, 379 (1982) (accident is "`an unexpected happening without intention or design,'" quoting 45 C.J.S. Insurance § 829 (1946)); City of Kimball v. St. Paul Fire & Marine Ins. Co., 190 Neb. 152, 154, 206 N.W.2d 632, 634 (1973) ("[t]he word `accident' as used in liability insurance is a more comprehensive term than `negligence' and in its common signification the word means an unexpected happening without intention").

Whether faulty workmanship fits within the aforementioned definition of accident is a difficult question, and courts have answered it in a variety of ways. For example, a relatively small number of courts have determined that the damage that occurs as a result of faulty or negligent...