Dodson v. St. Paul Ins. Co.

• Decision Date: 05 March 1991
• Docket Number: No. 68832,68832
• Citation: 812 P.2d 372,1991 OK 24
• Parties: Ralph F. DODSON, d/b/a, Dodson Construction Company, Appellee, v. ST. PAUL INSURANCE COMPANY, Appellant.
• Court: Oklahoma Supreme Court

Page 372

812 P.2d 372

1991 OK 24

Ralph F. DODSON, d/b/a, Dodson Construction Company, Appellee, v. ST. PAUL INSURANCE COMPANY, Appellant.

No. 68832.

Supreme Court of Oklahoma.

March 5, 1991.

Rehearing Denied July 2, 1991.

Appeal From the District Court of Murray County; Gary L. Lumpkin, District Judge.

In construing a comprehensive general liability insurance policy provided by insurer to a general building contractor, the district court denied insurer's motion for summary judgment, finding the policy exclusions were misleading and that the policy provided coverage to the contractor for damages resulting from a subcontractor's use of defective materials and faulty workmanship in building a school house roof. Insurer appeals.

Roberts, Burns & Delashaw, Inc., Darryl F. Roberts, Ardmore, for appellee.

Deaton & Davison, Inc., Austin R. Deaton, Jr., Ada, for appellant.

DOOLIN, Justice.

Appellant, St. Paul Insurance Company, (Insurer), appeals from summary judgment of liability under a Comprehensive General Liability Insurance Coverage Form-Board Policy (CGLI), issued to appellee Dodson Construction Company, and the resultant jury award of actual and punitive damages. The district court also ordered Insurer to pay Dodson's attorneys fees and cost of this action. We reverse.

Dodson Construction, a general building contractor, constructed a school building for the Board of Education of Independent School District No. 1 in Sulphur, Oklahoma. Upon completion of the building, the Board of Education discovered the roof of the school was poorly constructed, causing leaks and interior damage to the school building. The roofing subcontractor, employed by Dodson, had used defective and/or nonspecified materials, improperly installed the roof, and upon demand was unable to repair or replace the roof. Dodson forwarded a loss notice to insurer concerning the leaky roof. Insurer denied coverage for the subcontractor's defective workmanship and the materials used to construct the roof.

The school district instituted action against Dodson and Mid-Continent Casualty Company, as surety on the performance bond. Dodson's attorney and the School District agreed to submit the case to arbitration before the American Arbitration Association. The Construction Industry Arbitration Tribunal granted judgment against Dodson for the sum of $44,997.00, representing the cost to replace the roof, and $1,000.00 for interior damage caused by the leaky roof. Dodson did not request Insurer to defend against, or even notify Insurer of the school board's action.

Dodson then instituted this action against Insurer for failure to defend and the insurer's alleged bad faith refusal to comply with the terms of the CGLI policy. Insurer subsequently admitted liability for the school building's interior property damage caused by the roofing defect, but insisted that the policy did not cover the subcontractor's defective workmanship or materials. Firm in its belief, insurer requested the district court to determine, as a matter of law, that the CGLI policy provided no coverage for the roofing subcontractor's defective material and faulty workmanship.

The CGLI policy, submitted to the district court, is a standardized contractual form developed, revised and generally used in the insurance industry. Dodson paid liability coverage premiums for bodily injury and property damage in two broad areas: Contractors' Liability Insurance Coverage and Products and Completed Operations Liability Coverage. The insurance contract in question has two interrelated provisions; first, the general declaration of coverage, followed by the second part, the exclusions. The pertinent language of the standardized contract provides:

The Company will pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of:

Coverage A. bodily injury or

Coverage B. property damage

to which this insurance applies, caused by an occurrence, and the Company shall have the right and duty to defend any suit against the Insured seeking damages on account of such bodily injury or property damage, ....

Exclusions

This insurance does not apply:

(a) to liability assumed by the Insured under contract or agreement except an incidental contract; but this exclusion does not apply to a warranty of fitness or quality of the Named Insured's products or warranty that work performed by or on behalf of the Named Insured will be done in a workmanlike manner;

* * * * * *

(m) to property damage to the Named Insured's products arising out of such products or any part of such products;

(n) to property damage to work performed by or on behalf of the Named Insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith;.... [Emphasis in original].

The district court, overruling insurer's motion for summary judgment, held that Dodson's CGLI policy did cover the loss resulting from the roofing subcontractor's faulty craftmanship. The trial court's decision also implicitly imposed a prior duty upon insurer to provide Dodson with a defense against the school board's previous arbitration action. Subsequently, the jury returned verdicts for $62,749.00 in actual damages and $100,000.00 in punitive damages against insurer. Thereafter, the district court awarded Dodson attorneys fees and cost of $56,000.00. Insurer appeals.

We have not previously addressed the question of whether a CGLI policy's exclusions preclude recovery for property damage to either the insured's completed work product or to work performed by or on behalf of the insured. In reaching its decision in this case of first impression, the district court specifically recognized a split of authority concerning the mutual relationship between exclusion (a) with policy exclusions (m) and (n). The majority view, as expressed in Weedo v. Stone-E-Brick, Inc., ¹ holds that exclusions (a), (m), and (n) are clear, unambiguous, and effectively deny coverage for the "business risk" ² at issue. The minority view, as stated in Fresard v. Michigan Millers Mut. Ins. Co., ³ holds that exclusion (a) is ambiguous when read in conjunction with exclusions (m) and (n), and such courts construe exclusion (a) most favorably to the insured as providing business risk coverage.

In the instant case our district court opined that "an ambiguity exists as between exclusion (a) and exclusions (m) and (n)." In so holding, the district court, (1) emphasized the reasonable expections of the "average policyholder," (2) recognized that exclusions are read with the general declaration of coverage and independently of every other exclusions, and (3) specifically admitted "an exclusion cannot confer coverage, but only limit it." Relying on Fresard, the district court seems to have reasoned that because the exception to exclusion (a) exempts coverage for the occurrence sustained by Dodson, exclusions (m) and (n) cannot defeat the reasonable construction and expection of coverage for damage to the insured's work product, because then the exception provision of exclusion (a) would be a nullity. The district court concluded that "the only purpose served by the exception to exclusion (a) is to mislead an average policyholder to believing that he/she would have coverage for damage to his/her work product or for damage resulting from a breach of the warranties prescribed in the exception." In other words, the district court held that the exception to exclusion (a) provides coverage to the insured for claims based on products liability, and on the contractor's, or in the instant case, subcontractor's breach of warranty that work performed will be done in a workmanlike manner.

As noted at the outset, this Court has not previously construed exclusion (a) alone, or together with exclusions (m) and (n). The district court recognized established rules of Oklahoma jurisprudence in adopting the underlying premise of the minority position. Nevertheless, the court's interpretation, under the guise of strict construction against the insurer, (1) finds liability coverage where none otherwise existed, (2) ignores the reasonable effect of two contractual provisions, and (3) rewrites the parties' contract to fasten a liability upon the insurer that was not originally contemplated by the parties. We cannot agree with a construction which isolates and stretches one contractual provision, creating an ambiguity, and then entirely neutralizes two provisions, instead of giving effect to every part of the contract, if possible, as our law requires. See n. 11 infra.

Our examination of the law in the State of Oklahoma indicates an analogous course following the majority position that the CGLI policy provisions are without ambiguity or uncertainty, and are enforceable as issued by the insurer; notwithstanding the "reasonable expections of the average policyholder." The contractual provision relied upon by the district court as creating an ambiguity is at best a strained and unnatural construction we do not deem permissible. Because an insurance policy is a contract, we think it proper to reiterate some rules governing the interpretation of contracts, since the same principles generally apply to the construction of a policy of insurance. ⁴

An insurance policy, like any other contract of adhesion, is liberally construed, consistent with the object sought to be accomplished, so as to give a reasonable effect to all of its provisions, if possible. ⁵ In Wiley v. Travelers Ins. Co., 534 P.2d 1293, 1295 (Okla.1974), we observed that:

Parties to insurance contract are at liberty to contract for insurance to cover such risks as they see fit and are bound by the terms of contract and courts will not undertake to rewrite terms thereof. The construction of an insurance policy should be a natural and reasonable one, fairly constructed to effectuate its purpose, and viewed in the light of common sense so as not...