Blaine Const. Corp. v. Insurance Co. of North America

• Citation: 171 F.3d 343
• Decision Date: 12 April 1999
• Docket Number: 97-5636,Nos. 97-5579,s. 97-5579
• Parties: BLAINE CONSTRUCTION CORPORATION, Plaintiff-Appellant/Cross-Appellee, v. INSURANCE COMPANY OF NORTH AMERICA, Defendant-Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 343

171 F.3d 343

BLAINE CONSTRUCTION CORPORATION, Plaintiff-Appellant/Cross-Appellee, v. INSURANCE COMPANY OF NORTH AMERICA,

Defendant-Appellee/Cross-Appellant.

Nos. 97-5579, 97-5636.

United States Court of Appeals, Sixth Circuit.

Argued July 30, 1998.

Decided March 8, 1999.

Rehearing and Suggestion for Rehearing En Banc Denied April 12, 1999. ^*

Monty L. Walton (argued and briefed), Woolf, McClane, Bright, Allen & Carpenter, Knoxville, Tennessee, for Plaintiff-Appellant/Cross-Appellee.

Edward M. Kay (briefed), Sava A. Vojcanin, Imelda Terrazino (argued), Clausen, Miller, Gorman, Caffrey & Witous, Chicago, Illinois; David N. Wedekind (briefed), Hodges, Doughty & Carson, Knoxville, Tennessee, for Defendant-Appellee/Cross-Appellant.

Before: NELSON, BOGGS, and CLAY, Circuit Judges.

NELSON, J., delivered the opinion of the court, in which CLAY, J., joined. BOGGS, J. (pp. 354-360), delivered a separate dissenting opinion.

OPINION

DAVID A. NELSON, Circuit Judge.

This is a diversity case in which, on cross motions for summary judgment, the district court dismissed a claim asserted against an insurance company under a builder's all-risk property damage policy. The claimant, a construction contractor, sought to hold the insurance company liable for the cost of replacing ceiling insulation ruined by water that had condensed within the insulation cavity after a subcontractor failed to install a vapor barrier properly.

Two affirmative defenses were set forth in the pleadings. The first rested on a policy provision that excluded coverage for loss or damage caused by "faulty workmanship." The second rested on an exclusion for "[d]ampness or dryness of atmosphere; extremes or changes in temperature." The insurance company's summary judgment motion invoked both of these affirmative defenses.

The plaintiff conceded, for purposes of analysis, that the damage in question had been caused by faulty workmanship, but the plaintiff relied on an express exception to the faulty workmanship exclusion. The exception had the effect of reinstating coverage for loss or damage "ensuing" from an insured peril, notwithstanding that no coverage was provided for the cost of correcting the faulty workmanship itself.

Applying the decision of this court in Farmers Chem. Ass'n v. Maryland Casualty Co., 421 F.2d 319 (6th Cir.1970), the district court accepted the plaintiff's argument on the ensuing loss exception and held that the claim was not barred by the faulty workmanship exclusion. The court upheld the insurance company's second affirmative defense, however, and dismissed the lawsuit on the ground that the loss had been placed outside the coverage of the policy, unambiguously, by the dampness of atmosphere exclusion.

The plaintiff contractor has appealed, and the defendant insurance company has taken a protective cross-appeal. Upon de novo review we conclude that the insurance company was not entitled to judgment on either of its affirmative defenses. The order dismissing the lawsuit will therefore be reversed.

I

The plaintiff, Blaine Construction Corporation, was named as an additional insured under a $150,000,000 policy written by the defendant, Insurance Company of North America. The INA policy covered, among other things,

"The Insured Interest in:

(a) Real and Personal Property owned by the Insured and, improvements and betterments in buildings not owned by the Insured;

(b) Real and Personal Property of others in the Insured's Care, Custody or Control, and the Insured's liability imposed by law or assumed by written contract prior to loss."

Under the caption "PERILS INSURED AGAINST" the policy provided that

"This policy insures against ALL RISKS OF DIRECT PHYSICAL LOSS OR DAMAGE to property insured including general average, salvage and all other charges and shipments covered hereunder except as excluded."

Under the caption "PERILS EXCLUDED" the policy provided that

"This policy does not insure loss or damage caused directly or indirectly by any Peril excluded. Such loss or damage is excluded whether contributed to, in whole or in part, by any excluded Peril."

The policy then enumerated 20 excluded perils, including the two in question here:

"10. Errors in design, errors in processing, faulty workmanship or faulty materials, unless loss or damage from an insured Peril ensues and then only for such ensuing loss or damage.

* * *

12. Dampness or dryness of atmosphere; extremes or changes in temperature."

Although water seeping up from the ground and precipitation falling on personal property in the open were listed as excluded perils, there was no general exclusion for water damage.

Blaine Construction Corporation had become an additional insured under the policy after entering into a contract to construct a metal warehouse building for a utility company in Huron, South Dakota. The construction contract called for installation of a total of 12 inches of insulation at the roof of the building, and Blaine subcontracted the insulation and insulation support system work to Crown Metal Buildings, Inc., d/b/a High Rider Systems. We must assume, for present purposes, that the manner in which High Rider installed the insulation and insulation support system was not in conformity with the contract.

The contract called for the use of insulation batts with vapor barriers laminated on one side. These batts were to underlie thicker, unfaced, insulation batts. Both courses of insulation were to go between structural steel framing members, called "purlins," below the roof line.

The vapor barriers protruded beyond the batts to which they were laminated, forming "edge tabs" two inches in width. Designed to overlap one another, the edge tabs were supposed to be taped or sealed to form a continuous vapor barrier capable of preventing moisture migration.

Instead of sealing the edge tabs to form a continuous vapor barrier, High Rider simply tucked the tabs up against the sides of the purlins. Moisture could thus migrate above the vapor barrier, and any condensation would be trapped in the cavities between the purlins.

That seems to be precisely what happened in the winter of 1994-95, at a time when construction activities were still going on within the building. Consulting engineers hired by INA in May of 1995, after the loss had been reported, found that "[w]hen the vapor barrier was cut a copious amount of water flowed from the opening...." It appeared, according to the engineers, that copious amounts of water had been trapped in the ceiling cavities across the entire structure.

The owner of the building told INA's engineers that the roof system was substantially completed before the winter began. The building's concrete floor was poured in January and February of 1995, and heaters fired with natural gas were used to keep the building warm during those months. Interior venting of the exhaust from the heaters increased the relative humidity within the building. Thawing of the ground and construction materials and the curing of the concrete also contributed to the humidity.

Although the humidity and the resulting condensation were greater than they would have been otherwise, INA's engineers viewed this factor as a secondary one. Their report to INA concluded with an opinion couched in these terms:

"[M]ost if not all of the condensation within the insulation cavity area could have been prevented with the proper installation of the vapor barriers edge tabs and sealing of the insulation ends over the beams and at cross-bracing positions. * * * If proper insulation procedures had been carried out, condensation, if it did occur, would have formed on the underside of the vapor barrier in the interior of the building. Thus, no damage to the insulation would have resulted.

In conclusion, if the vapor barrier on the insulation had been sealed in a manner as specified and [as] is customary to the trade, the condensation and subsequent accumulation of water in the insulation blankets would not have occurred. The construction activities provided a high relative humidity level which only became a factor due to the lack of a continuous vapor barrier."

II

The building owner directed Blaine to remove and replace all of the water-soaked insulation. Blaine did so--allegedly at a cost of about $315,000--and then brought the present lawsuit against INA in federal district court after a claim submitted under the policy had been denied.

Blaine is a Tennessee corporation with its principal place of business in Knoxville, Tennessee. INA is a citizen of Pennsylvania. The parties are in agreement that the district court's diversity jurisdiction was properly invoked and that the governing substantive law is Tennessee's.

Some months after INA filed its answer asserting the affirmative defenses described above, Blaine moved for partial summary judgment thereon. With respect to the faulty workmanship exclusion, Blaine's motion contended, among other things, that "[e]ven if the failure to seal the vapor barrier constituted defective work, the introduction of moisture into the insulation was an 'ensuing loss' outside the scope of the first exclusion relied upon by INA." With respect to the dampness or dryness of atmosphere exclusion, the motion contended, inter al., that "[a]ir within a building space is not 'atmosphere' as that term is reasonably understood, and therefore, the second exclusion relied upon by INA is not applicable in this case."

INA filed a response and cross-motion for summary judgment in which it argued that the policy exclusions barred coverage unambiguously and had to be applied according to their ordinary meaning. Blaine then filed a reply brief arguing, among other things, that INA was advancing "a strained and uncommon use of the term 'atmosphere;' " that "[a]t the very least," caselaw cited in the brief validated "the reasonableness of Blaine's interpretation of the 'dampness of atmosphere' exclusion;" and that "[i]f the...