City of Oak Harbor v. St. Paul Mercury Ins.

• Decision Date: 16 April 2007
• Docket Number: No. 57959-2-I.,57959-2-I.
• Citation: 159 P.3d 422,139 Wn. App. 68
• Court: Washington Court of Appeals
• Parties: CITY OF OAK HARBOR, Appellant, v. ST. PAUL MERCURY INSURANCE, Respondent.

159 P.3d 422

139 Wn. App. 68

CITY OF OAK HARBOR, Appellant, v. ST. PAUL MERCURY INSURANCE, Respondent.

No. 57959-2-I.

Court of Appeals of Washington, Division 1.

April 16, 2007.

Publication Ordered June 11, 2007.

Lawrence Gottlieb, Betts Patterson Mines, P.S., Seattle, Counsel for Appellants.

Thomas Daniel Heffernan, Heffernan Law Firm PLLC, Redmond, Counsel for Respondents.

COX, J.

¶ 1 At issue is whether St. Paul Mercury Insurance Company met its burden to show there was no genuine issue of material fact regarding the application of its faulty work exclusion to the City of Oak Harbor's claim under its all-risks policy. Because this record shows there was no genuine issue of material fact and St. Paul was entitled to judgment as a matter of law, we affirm.

¶ 2 In 2002, the City of Oak Harbor hired R & R Environmental, Inc. to dredge biosolids from lagoons located in the City's wastewater treatment plant. The City and R & R signed a contract for this service. The contract, among other things, required R & R to leave no more than approximately one foot of biosolids in the bottom of the lagoon.¹ The contract also prohibited R & R from causing any damage to the liner and required R & R to repair any damage to the liner that may have resulted.²

¶ 3 R & R performed the dredging project. About a year later, the City discovered many tears in one of the lagoon liners. An engineering firm determined that R & R more likely than not caused the liner damage, most probably from defectively operating the auger that was used to break up the biosolids. Shortly before trial, the City, in a separate action from this, settled with R & R in exchange for its primary insurance limits of $1,000,000.

¶ 4 The City had an "all-risks" insurance policy with St. Paul. The City sued St. Paul in this action to recover under that policy. The trial court granted St. Paul's motion for summary judgment based on the defense that the faulty workmanship exclusion applied.

¶ 5 The City appeals.

SCOPE OF THE POLICY EXCLUSION

¶ 6 The City argues that there is a material factual dispute regarding the cause of the liner damage. It also claims that the policy exclusion for faulty workmanship does not apply to the damage in this case. Because the cause of the liner damage is not in dispute and it is covered by the plain meaning of "faulty workmanship," the trial court correctly ruled that the exclusion applies to bar coverage.

¶ 7 We review a trial court's summary judgment determination de novo.³ Summary judgment is appropriate if, viewing all facts in the light most favorable to the non-moving party, there is no genuine issue of fact and the moving party is entitled to judgment as a matter of law.⁴ A factual dispute is material if the outcome of the case depends upon it.⁵

¶ 8 Interpretation of an insurance contract is an issue of law we review de novo.⁶ A court should construe an insurance contract as a whole, giving words their plain, ordinary meaning.⁷ Courts should read an insurance contract the way an average consumer of insurance would.⁸ Insurance contracts should not be given a strained or forced interpretation, but a practical and reasonable one.⁹

¶ 9 If an insurance contract is ambiguous in that it is subject to more than one reasonable interpretation, the language should be interpreted against the insurer.¹⁰ Thus, if a policy exclusion drafted by the insurance company is ambiguous, the exclusion is rendered ineffective.¹¹

¶ 10 First, the City argues that there is a genuine issue of material fact regarding the cause of the liner damage. But the City conceded in its trial court brief that R & R's negligence caused the property damage in this case:

During its dredging operations in August and September 2002, R & R negligently caused the auger of its hydraulic dredge to repeatedly cut, rip and tear the heavy plastic liner on the bottom of the City's sewer lagoon.¹²

¶ 11 We will not review a claim that was not raised in the trial court.¹³ The City cannot now claim that something else caused the liner damage.

¶ 12 The City also argues on appeal that there is a factual dispute about whether the loss was "inherent" in the dredging process or "fortuitous." As we will discuss more fully later in this opinion, this alleged dispute is not a genuine issue of material fact. Interpreting the faulty workmanship exclusion does not require us to consider whether the loss was inherent or fortuitous. Coverage under this contract can be decided as a matter of law.

¶ 13 Determining coverage under an insurance policy is a two-step process.¹⁴ First, we must decide whether the policy in question applies to the type of loss, and second, we decide whether an exclusion to coverage applies.¹⁵ The only issue on appeal in this case is whether the faulty workmanship exclusion applies to the loss.

¶ 14 The City argues that the faulty workmanship exclusion does not apply because the property damage was "fortuitous." This argument misapplies the legal doctrines at issue in this case.

¶ 15 Under an all-risks insurance policy, recovery is allowed "for all fortuitous losses" unless a specific exclusion applies.¹⁶ St. Paul concedes that the loss in this case was "fortuitous" and that the all-risks policy insuring provision applies. Thus, the issue here is whether the faulty workmanship exclusion applies to bar coverage.

¶ 16 We start with the plain meaning of the faulty workmanship exclusion contained in the policy:

We won't cover loss caused by faulty, inadequate or defective: ... design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction ....

. . . . .

All of the above apply to part or all of any property on or off the location described in the Coverage Summary.¹⁷

According to the dictionary, "faulty" means "marked by a fault."¹⁸ "Workmanship" has two definitions: (1) "the art or skill of a workman: the execution or manner of making or doing something: craftsmanship"; and (2) "something that is effected, made, or produced."¹⁹ In short, "workmanship" means both (1) using skill to make or do something, and (2) the end product of that work.²⁰

¶ 17 Washington law requires us to give effect to the plain meaning of each contract exclusion.²¹ Unlike in many of the cases cited by the City in its brief, "workmanship" here appears in a list along with the words "design, specifications, . . . repair, construction, renovation, remodeling, grading, [and] compaction." These words all refer to processes, not aspects of a final product.²² Also, "workmanship" must mean something distinct from "construction" and "design," or else it would be superfluous.²³ Accordingly, "workmanship" here includes: using skill or craft to make or do something that is not limited to the construction of property. Likewise, it includes the resulting product.²⁴

¶ 18 In interpreting exclusions similar to the one in this case, many courts have debated whether the term "workmanship" means a process or a product.²⁵ Other courts have inquired whether "faulty workmanship" encompasses a contract standard or a tort standard.²⁶ The tort standard asks whether the actor's negligence caused the property damage (similar to a "process"), and the contract standard asks whether the actor fulfilled its obligations under the contract, or whether instead it breached the contract (similar to a "product").²⁷

¶ 19 It is not necessary for us to resolve these debates in this case. Under any of these definitions, the exclusion applies to the facts of this case.

¶ 20 The City conceded below that R & R was negligent in dredging the pit. This violates the "negligence" definition of "faulty workmanship." It also means that R & R was faulty in making or doing something—a process.

¶ 21 It is equally clear that R & R breached its contract, which specifically required R & R to dredge within one foot of the liner without causing any tears in or damage to the liner. Therefore, R & R likewise violated the "contract" definition of "faulty workmanship." And R & R produced a faulty product—a dredged pit that had a liner torn in several places.²⁸

¶ 22 The City argues that the faulty workmanship exclusion cannot apply because something "external" to construction of the lagoon liner caused the damage to the liner. This argument contravenes Washington case law, and we reject it.

¶ 23 In Capelouto v. Valley Forge Insurance Co.,²⁹ this court held that a faulty workmanship exclusion applied when the city's sewage bypass system (used while sewer pipes were being replaced) failed and caused sewage to back up and damage a nearby home. There, the insurance policy excluded "faulty ... design, specifications, workmanship, repair, construction, renovation, remodeling, grading, [and] compaction . . . on or off the described premises."³⁰ Capelouto argued that inadequate equipment used offsite for the bypass system was distinct from the inadequate design and specifications for the system or the workmanship at the construction site. This court disagreed.³¹ Because the sewage pump was inadequate to handle the job, it was a faulty "design" or "specification" under the exclusion.³² It did not make a difference that the bypass project was "external" to the covered property (the nearby home), or the construction of that property.

¶ 24 The City's similar argument in this case, where workmanship is involved, is unpersuasive. The City admits in its brief that Capelouto involved "damage to a house from extraneous operations." It attempts to distinguish that case on the basis that the cause of the damage was inadequate design or specifications "within the plain meaning of that policy's exclusion." This distinction misses the point. The "design" and "specifications" terms are not at issue in this case. Capelouto does not help us define the term "workmanship," which is a separate term in the exclusion. Capelouto simply illustrates that something "external" from the covered property can qualify as faulty...