Hampton's a-1 Signs v. American States Ins.

• Decision Date: 28 December 2006
• Docket Number: No. M2005-01720-COA-R3-CV.,M2005-01720-COA-R3-CV.
• Citation: 225 S.W.3d 482
• Parties: CHARLES HAMPTON'S A-1 SIGNS, INC. v. AMERICAN STATES INSURANCE COMPANY.
• Court: Tennessee Court of Appeals

225 S.W.3d 482

CHARLES HAMPTON'S A-1 SIGNS, INC. v. AMERICAN STATES INSURANCE COMPANY.

No. M2005-01720-COA-R3-CV.

Court of Appeals of Tennessee, Western Section, at Nashville.

July 12, 2006 Session.

December 28, 2006.

Application for Permission to Appeal Denied by Supreme Court April 16, 2007.

Motion to Reconsider Denied May 4, 2007.

William M. Jeter and Michael D. Herrin, Memphis, Tennessee, for Defendant/Appellant American States Insurance Company.

Christopher J. Pittman, Clarksville, Tennessee, for Plaintiff/Appellee Charles Hampton's A-1 Signs, Inc.

HOLLY M. KIRBY, J., delivered the opinion of the Court, in which W. FRANK CRAWFORD, P.J., W.S., and ALAN E. HIGHERS, J., joined.

OPINION

This is an insurance case. The plaintiff installs steel structures that hold billboard signs. On one of the sign structures, the sign fell from its sign pole after installation. An investigation revealed a defective weld between the sign pole and the mounting plate. A subsequent investigation indicated that all sign poles fabricated by a particular sub-contractor had similar defective welds. The plaintiff sued the sub-contractor for breach of contract on 78 structures and obtained a default judgment. The plaintiff then filed the instant lawsuit against the sub-contractor's liability insurer, alleging that it was liable under the sub-contractor's commercial general liability policy and umbrella policy. The defendant insurer filed a motion for summary judgment. The trial court granted it in part, narrowing the plaintiff's claim to the sign structures which showed physical damage. After a bench trial, the trial court found there was coverage and entered a judgment in favor of the plaintiff. We reverse, holding that physical damage arising out of and confined to the defective welds performed by the insured is not covered under either the commercial general liability policy or the umbrella policy.

The material facts in this case are not in dispute. Plaintiff/Appellee Charles Hampton's A-1 Signs, Inc. ("A-1 Signs"), contracted with Cracker Barrel Old Country Stores, Inc. ("Cracker Barrel"), to install sign structures to hold billboard signs advertising Cracker Barrel restaurants. In general, a sign structure consists of the footings, a sign pole, a mounting plate on which a sign is attached, and electrical work. In 1990, A-1 Signs subcontracted the fabrication of the sign poles to Fabri-Struct, Inc. ("Fabri-Struct"), a Missouri corporation. Fabri-Struct produced the steel structure—a sign pole with a mounting plate welded to its top—and delivered it to A-1 Signs. A-1 Signs then laid a concrete foundation, erected the steel structure, ran the electrical wiring, and affixed a Cracker Barrel sign to the mounting plate. From November 8, 1990 to August 25, 2000, A-1 Signs installed 113 sign structures at various locations throughout the United States using steel structures provided by Fabri-Struct.

On May 8, 2000, at a Cracker Barrel restaurant in Bradley, Illinois, a Cracker Barrel sign fell from its sign pole approximately one hundred feet to the ground. This caused A-1 Signs to investigate what caused the Cracker Barrel sign to fall. A-1 Signs found that Fabri-Struct had failed to weld the mounting plate to the sign pole according to contract specifications. Consequently, a crack formed in the weld that eventually traveled the circumference of the pole. The sign then detached from the top of the pole and fell. This occurred under the force of approximately 70-mile-an-hour winds; had the weld been done according to the contract specifications, the sign structure should have been able to withstand winds of up to 110 miles an hour or more.

After the incident in Bradley, Illinois, A-1 Signs inspected a number of the sign structures welded by Fabri-Struct. A-1 Signs found that, of the 113 sign structures erected with poles fabricated by Fabri-Struct, 78 structures were dangerous and in need of repairs due to defective welds. Of these sign structures, 39 were defectively welded but showed no signs of physical damage. The remaining 39 structures, however, had cracks and stress fractures in the weld between the top of the sign pole and the mounting plate. A-1 Signs repaired all 78 structures using a machine that "gouged the [defective] weld[s] out . . . one-fourth at a time," thereby re-welding the mounting plates to the sign poles without having to remove the Cracker Barrel signs.

A-1 Signs then sued Fabri-Struct for breach of contract and breach of warranty, seeking expenses incurred in testing and repairing the 78 sign structures. Initially, Fabri-Struct's commercial insurance provider, Defendant/Appellant American States Insurance Company ("American States"), retained counsel and provided a defense to Fabri-Struct. However, American States later decided to deny coverage to Fabri-Struct for the claims asserted by A-1 Signs; consequently, on September 28, 2001, American States withdrew its defense of Fabri-Struct. Fabri-Struct did not thereafter appear, and on July 25, 2002, the trial court entered a default judgment in favor of A-1 Signs for $300,117.50, the costs A-1 Signs incurred in testing and repairing all 78 defective signs.

On September 25, 2002, A-1 Signs filed the instant lawsuit against American States. In its complaint, A-1 Signs sought a declaratory judgment that American States was legally responsible for satisfaction of the judgment previously entered against its insured, Fabri-Struct. A-1 Signs based its claim on two insurance policies provided to Fabri-Struct by American States: a Commercial General Liability policy ("commercial liability policy") and an accompanying Umbrella policy. The insuring agreement of the commercial liability policy reads, in pertinent part:

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies.

* * *

b. This insurance applies to "bodily injury" and "property damage" only if:

(1) The "bodily injury" or "property damage" is caused by an occurrence" . . .; [and]

(2) The "bodily injury" or "property damage" occurs during the policy period.

Similarly, the Umbrella policy states:

[W]e will pay those sums that the insured becomes legally obligated to pay as "ultimate net loss" . . . because of:

A. "Bodily Injury" or "property damage," . . .

* * *

which takes place during the policy period and in the policy territory and is caused by an "occurrence."

Generally, these policies provide coverage for "property damage" caused by an "occurrence." In both policies, "property damage" is defined as:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the "occurrence" that caused it.

Although each policy defines "occurrence" slightly differently, under both policies the term generally means an "accident, including continuous or repeated exposure to substantially the same general harmful conditions."

On January 4, 2004, American States filed a motion for summary judgment. Both parties agreed that the issues were governed by Missouri law.¹ In its motion, American States asserted that the claims were governed by exclusions from coverage in both policies, relying primarily on section I.2.m(1) of the commercial liability policy and section III.J.1 of the Umbrella policy. These exclusions are identical in each policy. Both sections state that the following is excluded from coverage:

"Property damage" to "impaired property" or property that has not been physically injured, arising out of:

(1) A defect, deficiency, inadequacy or dangerous condition in "your product" or "your work;" or

(2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.

This exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to "your product" or "your work" after it has been put to its intended use.

In short, the policies do not cover "property that has not been physically injured" where the loss arises out of a defect or deficiency in the insured's product or work. Based on these exclusions, American States asserted in its motion for summary judgment that the policies did not cover the costs of repairs arising out of Fabri-Struct's failure to follow specifications in welding the mounting plates to the sign poles where the sign structures—the pole, mounting plate, sign, and electrical work—were not physically injured.

In its response to the motion for summary judgment, A-1 Signs conceded that there was no coverage under the insurance policies for the 39 sign structures that, although defectively welded, did not show cracks or stress fractures at the time A-1 Signs repaired them. It asserted, however, that the remaining 39 sign structures that showed cracks and stress fractures in the weld at the time of repair were "physically injured," triggering coverage.

On April 28, 2004, American States filed a reply asserting that, even if the cracks and stress fractures in the welds of the 39 sign structures at issue constituted "physical injury" to the unit as a whole, the policies still excluded coverage. American States argued that the "physical injury" occurred to "impaired property," that is, property other than the insured's made "less useful" because of the insured's product or work, or the insured's "failure to fulfill the terms of [the] contract." As with "property that has not been physically injured," it contended, coverage is excluded for damage to "impaired property" arising out of a "defect, deficiency, inadequacy or dangerous condition" in the insured's product or work. Therefore, American States...