Bor-Son Bldg. Corp. v. Employers Com'l Union

• Decision Date: 19 November 1982
• Docket Number: No. 81-704.,81-704.
• Citation: 323 NW 2d 58
• Parties: BOR-SON BUILDING CORPORATION, Respondent, v. EMPLOYERS COMMERCIAL UNION INSURANCE COMPANY OF AMERICA, et al., Appellants.
• Court: Minnesota Supreme Court

323 N.W.2d 58 (1982)

BOR-SON BUILDING CORPORATION, Respondent, v. EMPLOYERS COMMERCIAL UNION INSURANCE COMPANY OF AMERICA, et al., Appellants.

No. 81-704.

Supreme Court of Minnesota.

August 20, 1982.

Rehearing Denied November 19, 1982.

Gislason & Martin, and James T. Martin, Edina, for appellant.

Stolpestad, Brown & Smith, Russell C. Brown and Edward F. Fox, St. Paul, for respondent.

Heard, considered and decided by the court en banc.

KELLEY, Justice.

Employers Commercial Union Insurance Company of America and Employers Liability Assurance Corporation, Ltd. (Commercial Union) appeal from an order and judgment of the Ramsey County District Court holding that Commercial Union breached its duty to defend and afford coverage under a comprehensive general liability insurance policy to its insured, Bor-Son Building Corporation (Bor-Son), and that Commercial Union was required to reimburse Bor-Son for its contribution to a settlement of a lawsuit commenced against it and others by the Duluth Housing and Redevelopment Authority (HRA). The trial court also ordered Commercial Union to pay attorneys fees in that action as well as attorneys fees in this declaratory judgment action. We reverse.

In 1968, HRA decided to build two high-rise apartment complexes for the elderly in Duluth. One was known as the Midtowne project and the other was known as the Ramsey project. Bor-Son bid on and was awarded the contract on the Midtowne project. Thomas Shefchik, a registered architect, was awarded the contract on the Ramsey project. Shefchik immediately assigned the actual construction on the Ramsey project to Bor-Son. Each proposal called for "turnkey" construction, which requires a contractor to acquire a building site, design the building, provide interim financing and provide all the manpower and materials to construct the building.¹ When all the plans and specifications had been approved by HRA, HUD, and the City of Duluth, Bor-Son acquired the necessary parcels of land for the projects and eventually sold the land to the HRA by a contract for deed. The contract for deed also contained all the terms for the projects. Bor-Son was required to furnish a performance bond and comprehensive general liability insurance coverage for each project. It made arrangements with Commercial Union for both requirements.

Bor-Son did not do any of the actual work on the projects. Instead, it hired 15 different subcontractors to complete the construction. Bor-Son did supervise the work as it progressed through one of its employees, Eugene A. Wagner. Wagner generally maintained the work schedule by coordinating the subcontractors and focused on the major parts of the construction. Bor-Son also made arrangements with one of its larger subcontractors, United General Constructors, to furnish a job superintendent and foreman. In addition, HRA retained an inspecting architect to make sure the projects were proceeding according to the plans and specifications. This architect was on the job sites of these two projects on a daily basis.

Construction on both buildings began in late 1969. As the construction progressed, some problems with water leakage surfaced, but Bor-Son's supervisor Wagner attributed those problems to lack of waterproofing and caulking that, at the time, had not been applied to the buildings. The buildings were substantially completed and accepted by HRA in April 1971. A "memorandum of acceptance for occupancy" was executed on each project, and attached to each memorandum was a purchaser's architect statement. That statement was what is commonly known as the "punch list," which contained items that needed to be done to complete the building. The statement also contained a sentence: "Except as reported to the Housing and Redevelopment Authority, and noted in the punch list, the property is in good merchantable condition." The "punch list" contained nothing to indicate either that the buildings were experiencing water infiltration problems or that additional work was needed to assure prevention of water damage.

Shortly after the buildings were turned over to HRA, severe water leakage problems developed in both buildings. Bor-Son began to receive letters and calls from HRA that a number of the apartments were having water problems and were leaking. These problems would increase or decrease, depending upon the type of storm and the amount of rain. Bor-Son, through its employees, visited the sites and became involved in efforts to try to identify and correct the problems. Subcontractors and suppliers were involved in the process, but, over a period of some time, all attempts to cure the problems were generally unsuccessful.

Finally, in 1975 HRA brought two suits (one for each project) against Bor-Son, as contractor, and Commercial Union, as surety on the performance bond. These suits alleged that the water leakage was due to defects caused by faulty materials and workmanship resulting in $500,000 damage to each building and its contents.²

Bor-Son was the principal named in the performance bond and Commercial Union was the surety. Thus, Bor-Son had the obligation to defend the suits, insofar as they alleged claims against the surety on the performance bonds, and to indemnify the surety, Commercial Union, for any amounts it might have to pay because of those suits. On the other hand, by the terms of the comprehensive general liability insurance policy, Commercial Union had the obligation to provide Bor-Son with a defense of any claims asserted against Bor-Son within the coverage of the policy and to pay any claims ultimately determined to be within the policy coverage.

On May 2, 1975, an attorney for Bor-Son wrote a letter to Commercial Union informing Commercial Union that that firm would interpose an answer on behalf of Commercial Union in the two pending HRA actions and agreed that Bor-Son would hold Commercial Union "harmless" insofar as the HRA had any claim against the surety on the bonds furnished by Bor-Son. In that letter, the attorney indicated that the "hold harmless" agreement did not apply insofar as any of the damages alleged or proved by the HRA turned out to be within the coverage of the comprehensive general liability insurance policies issued to Bor-Son by Commercial Union.

The underlying HRA lawsuits lay dormant for several years during which the various parties were trying to correct the water infiltration problem. During that period of dormancy, the attorney for Bor-Son and the claim department of Commercial Union kept in periodic contact with status inquiries and status reports. Also during this period of time, Commercial Union and, apparently, the then attorney for Bor-Son considered that Commercial Union's only responsibility under the comprehensive general liability insurance policy arose out of only one allegation in each complaint suggesting that HRA claimed damage to contents of the buildings.³ Though Commercial Union requested the nature and extent of any such property contents damage, it never received any response from Bor-Son or its attorneys.

In late 1979, the two HRA lawsuits became "active" again and depositions were taken. Following the depositions, HRA demanded in settlement more than $2 million in damages. After a series of negotiations, HRA agreed to accept $450,000 in settlement of the two cases from the various defendants and third-party defendants. Bor-Son contributed $100,750 to the settlement. In connection with the settlement negotiations, in the late summer of 1980 HRA submitted a long list of claimed damages. This list contained no claim for "damage to contents." It did, however, for the first time, assert a claim for loss of rents and relocation costs HRA claimed to have sustained as the result of the water infiltration problem and the attempts to correct it.⁴ The settlement of the HRA lawsuits made no allocation of amounts of money toward the various damage claims which had been asserted by HRA during the negotiations.

After contributing to the settlement, Bor-Son commenced this declaratory judgment action seeking indemnification from Commercial Union for its contribution to HRA's case settlement and its attorneys fees in that action, as well as in this action, claiming that Commercial Union, as insurer on the comprehensive general liability insurance policy, had the duty to defend and to indemnify it in the HRA actions. The trial court held that under the comprehensive general liability insurance policy, (1) Commercial Union had the duty to defend Bor-Son in the HRA action because the allegations in the complaints in that action alleged water penetration due to faulty construction; (2) that the faulty construction and resulting water penetration constituted an "occurrence" as that word is used in the comprehensive general liability insurance policy; (3) that none of the exclusionary clauses in the policy were applicable to relieve Commercial Union of its policy duties to defend and indemnify Bor-Son; and (4) that Bor-Son's coverage under the comprehensive general liability insurance policy was not "abrogated or limited" because Commercial Union had furnished a performance bond. The trial court then ordered judgment be entered awarding Bor-Son indemnity for the entire $100,750 it had paid toward the HRA settlement plus attorneys fees in the HRA actions as well as in this declaratory judgment action.

Appellant Commercial Union claimed in the trial court, and here, that the HRA suits against Bor-Son were based upon the contract documents and, with the possible exception of the allegation in the complaint of damage to contents which all parties concede was subsequently abandoned by HRA, alleged damages to the two apartment buildings as a result of Bor-Son's breach of contract in furnishing defective workmanship and materials. Commercial Union asserts that damages to the buildings themselves flow from faulty construction — a breach of the contract — and, therefore, are...