Baugh Const. Co. v. Mission Ins. Co.
| Decision Date | 23 February 1988 |
| Docket Number | Nos. 85-3763,85-3770,s. 85-3763 |
| Citation | 836 F.2d 1164 |
| Parties | BAUGH CONSTRUCTION CO., a Washington corporation, Plaintiff-Appellee, v. MISSION INSURANCE CO., a California corporation, et al., Defendants, and The Underwriters at Lloyd's A Great Britain corporation, Defendant-Appellant. BAUGH CONSTRUCTION CO., Plaintiff-Appellee, v. MISSION INSURANCE CO., Sayre & Toso, Inc., Harbor Insurance, American Reinsurance, C.V. Starr & Company, The Underwriters at Lloyd's, Granite State Insurance Co., and The Central National Insurance Company of Omaha, Defendants, and Holland America Insurance Corp., Defendant-Appellant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Mark Thorsrud, David A. Shaw, Tewell, Thorpe & Findlay, Inc., Seattle, Wash., for Holland America Insurance Corp.
Robert K. Waitt, Waitt, Johnson & Martens, Seattle, Wash., for Underwriters at Lloyd's.
John T. Petrie and Sarah Weaver, Diamond & Sylvester, Seattle, Wash., for plaintiff-appellee.
Before FLETCHER, BOOCHEVER and NORRIS, Circuit Judges.
Baugh Construction Company (Baugh) commenced a declaratory action against several third-party liability insurers seeking indemnity and reimbursement for its costs in defending claims asserted by Kilroy Industries, Inc. (Kilroy). Jurisdiction is based on diversity. 28 U.S.C. Sec. 1332 (1982). The claims arose out of Baugh's construction of an office building. Baugh sought damages from Holland America Insurance Corporation (Holland) for breach of Holland's duty to defend Baugh and for indemnification under the Holland policy. Baugh also sought to recover damages from the Underwriters at Lloyd's (Lloyd's) for the alleged breach of its duty to defend. The district court found that both insurance companies breached their duty to defend Baugh and that Holland also breached its duty to indemnify. With certain exceptions, we affirm as to Lloyd's but reverse the judgment against Holland.
In 1978, Baugh started construction on an eleven-story structure known as Sea Tac Tower II (Tower II) for Kilroy. Structural design plans for the tower were supplied by NAM Engineering. Between June 1978 and March 1979, Baugh poured the building's foundation, the lower and upper plazas, and floors two through seven. During that period, Holland insured Baugh under a broad form property damage policy covering Baugh's liability for damage to the "property of others."
Lloyd's insured Baugh from March 31, 1979, through March 31, 1983, under four property damage liability policies. During Lloyd's policy period, Baugh completed construction of the building, and Kilroy commenced construction and installation of tenant improvements.
Baugh commenced a lien foreclosure and breach of contract action against Kilroy in June 1980. Kilroy counterclaimed in July 1980, asserting a variety of claims against Baugh for breach of contract, including claims for delay in performance, nonefficient performance, overbilling, inadequate supervision, and wrongful billing for warranty repairs. The Kilroy counterclaim was amended in September 1980, and again generally alleged that "Contractor [had] failed ... to correct defective materials and workmanship," and that "there were numerous additional breaches by contractor with resultant damages to Owner, the details of which will be proved at time of trial."
Not until Kilroy again amended its counterclaim in December 1981 did it specifically allege the claims most critical to this litigation: negligent design and construction of Tower II, and failure to deliver a building meeting contract specifications. The amended counterclaim sought all damages resulting from the alleged negligent design and construction, including damages These allegations stemmed from recent discoveries that Baugh apparently had laid floor slabs that lacked adequate reinforcing steel, and that Tower II's seismic resistance system was defective. Upon investigation, the King County Building and Land Development Division determined that the floor slabs were not in compliance with the Uniform Building Code. Amid substantial local publicity, King County, on August 13, 1982, ordered that Tower II be vacated due to the inadequacy of its seismic resistance system. Eventually Baugh, pursuant to a settlement agreement with Kilroy, repaired Tower II's structural problems, a process that necessitated the destruction and replacement of Kilroy's tenant improvements.
for lost use of Tower II, reduced life of the building, reduced rental income, loss of tenants, reduced value of the building, and costs of remedying the defects.
Baugh first notified Holland of Kilroy's allegations on November 19, 1981. The notice included Kilroy's September 1980 counterclaim and a letter from Baugh's attorneys, notifying the carrier of its duty to defend Baugh and its potential liability for defense costs should it fail to defend. Holland denied coverage and refused to defend Baugh, both then and again after receiving Kilroy's December 1981 amended counterclaim, which for the first time specifically alleged negligent design and construction, and made claims for the resulting damages.
Baugh first notified Lloyd's of Kilroy's allegations on June 29, 1982. The notice included Kilroy's December 1981 amended counterclaim and a letter, dated June 22, 1982, from Baugh's attorneys, Diamond & Sylvester, detailing the more recent allegations of defective floors, diminution in value of the building, and damage to tenant improvements. Lloyd's did not accept Baugh's tender of defense until February 14, 1983, when Lloyd's appointed Barokas & Martin to defend Baugh. Diamond & Sylvester continued to handle Baugh's defense until May 1983, when the firm formally associated with Barokas & Martin for purposes of the Baugh-Kilroy litigation. Thereafter, the two law firms jointly represented Baugh.
Several settlement meetings took place during October and November of 1983. Lloyd's was represented at most of these meetings. In the course of the negotiations, the assignment of Baugh's professional negligence claim against NAM Engineering to Kilroy was discussed as a potential term of the settlement. Lloyd's did not object to such an assignment prior to the execution of the settlement agreement, which included the assignment among its terms. The Baugh-Kilroy litigation settled on November 14, 1983.
In September 1982, Baugh commenced this declaratory action against its insurers, including Holland and Lloyd's, for reimbursement of the costs of defending Kilroy's claims and for indemnification. The other insurers settled with Baugh. Lloyd's eventually paid its share of the settlement, leaving for trial a claim for indemnification against Holland under Holland's policy and the duty-to-defend claims against each carrier.
The district court, in order to decide which allegations of property damage could trigger Holland and Lloyd's duties to defend Baugh, separated Kilroy's allegations into four types of damage:
(3) permanent diminution in value of the building from the "taint" of having been a defective building and the reduced utility and changed orientation of space in the building after repair, and
(4) damage to tenant improvements and the cost of demolishing and replacing tenant improvements installed by Kilroy.
The court held that Holland's and Lloyd's policies excluded damage to the building itself, the cost of repair, and loss of use of The district court found that both Lloyd's and Holland breached their duty to defend Baugh. Further, the court held that Holland must indemnify Baugh to the full extent of its $250,000 policy limit. The court also concluded that Lloyd's failure to object during settlement negotiations to Baugh's assignment of its claim against NAM Engineering estopped Lloyd's from asserting subrogation rights to the claim and found as a matter of law that Baugh had not breached the insurance agreement by its late tender. Lloyd's and Holland appeal.
the building, items (1) and (2) above. The court ruled, however, that the diminution in value and the damage to tenant improvements claims, items (3) and (4), were covered as consequential damages under the Holland and Lloyd's policies, even though they occurred after the expiration of Holland's policy. These damages were not excluded by the faulty work, defective product, or design exclusions. The court held that once it was determined that property damage had been sustained during the relevant policy period, consequential damages resulting from the damaged property were covered no matter when they were sustained.
The main issue on appeal is whether Kilroy's allegations of damage to tenant improvements and diminution in the building's value arguably fall within the parameters of Lloyd's and Holland's policies, thereby triggering a duty to defend Baugh. Additionally, we must decide whether Holland must indemnify Baugh under the Holland policy. Lloyd's and Holland both contend that Kilroy's allegations did not create a duty to defend Baugh.
An indemnity policy insurer's duty to defend arises when a complaint alleges facts which, if proven, would render the insurer liable to indemnify the insured under the policy. Waite v. Aetna Casualty & Sur. Co., 77 Wash.2d 850, 855, 467 P.2d 847, 851 (1970) (en banc); Harrison Plumbing & Heating, Inc. v. New Hampshire Ins. Group, 37 Wash.App. 621, 623, 681 P.2d 875, 877 (1984). The general rule is that the insurer need not look beyond the pleadings to determine its liability. Harrison Plumbing, 37 Wash.App. at 623, 681 P.2d at 877; R.A. Hanson Co. v. Aetna Ins. Co., 26 Wash.App. 290, 293, 612 P.2d 456, 458 (1980).
Several exceptions, however, require the insurer to look...
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