Hutton Constr. v. Cont'l W. Ins. Co.
| Docket Number | 21-cv-706-PB,2022 DNH 076 |
| Decision Date | 05 July 2022 |
| Parties | Hutton Construction, Inc. v. Continental Western Insurance Company |
| Court | U.S. District Court — District of New Hampshire |
This insurance coverage case stems from a subcontractor's defective masonry work. The principal issue presented by the insurer's motion for partial summary judgment is whether the subcontractor's comprehensive general liability policy covers stipulated delay damages that the general contractor incurred when the subcontractor's faulty work caused a building inspector to issue a stop-work order for the entire project.
In 2018, Hutton Construction Inc. entered into a build-to-suit lease with O'Reilly's Auto Enterprises, LLC to construct an auto parts store on property Hutton owned in Ossipee, New Hampshire. The lease required construction be completed within 125 days and imposed stipulated damages of $1,000 for each additional day that the project remained unfinished.
Hutton served as the general contractor for the project and subcontracted with Frederick A. Meyer III & Sons, Inc. to construct the building's exterior masonry walls. The subcontract obligated Meyer to complete the masonry work per the stipulated schedule and indemnify Hutton against any claims, damages, or losses caused in whole or in part by Meyer's negligence. Construction began in July and was scheduled to be finished in November. After Meyer completed a sufficient portion of the exterior masonry work, Hutton began work on the roof and the interior of the building.
While the work was ongoing, the Ossipee building inspector identified defects in Meyer's masonry work, including a lack of proper grouting of the concrete blocks that formed the walls. After Meyer failed to address the inspector's concerns, he issued a “stop-work order” in October that required all work on the project to cease immediately. In support of his order, the inspector cited Meyer's failures to properly grout concrete blocks and correctly install steel anchors that connected the roof framing to the walls. Both defects potentially threatened the building's structural integrity.
The stop-work order remained in place for about thirteen months. During that time, water seeped into the building through the defective masonry walls and the unfinished roof, damaging Hutton's work on the interior. The water damage included moldy sheetrock, rusty metal studs, and water-filled insulation. After the stop-work order was lifted, Hutton needed two additional months to fix the water damage and complete the project. Meanwhile, Meyer fixed the defective masonry at its own expense.
The construction delay left Hutton responsible to O'Reilly's for stipulated damages of close to half a million dollars. Hutton subsequently demanded that Meyer reimburse it for both the stipulated damages and the costs it incurred to repair the water damage. Meyer submitted a claim for coverage under a commercial general liability (“CGL”) insurance policy it had purchased from Continental Western Insurance Company. After Continental denied coverage, Meyer assigned Hutton its rights under the policy. Hutton then filed this declaratory judgment action in state court, and Continental later removed the case to federal court. Continental now moves for partial summary judgment, limited to Hutton's claim for the stipulated delay damages. Hutton objects.
Summary judgment is appropriate when the record reveals “no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). In this context, a “material fact” is one that has the “potential to affect the outcome of the suit.” Cherkaoui v. City of Quincy, 877 F.3d 14, 23 (1st Cir. 2017) (cleaned up). A “genuine dispute” exists if a factfinder could resolve the disputed fact in the nonmovant's favor. Ellis v. Fid. Mgmt. Tr. Co., 883 F.3d 1, 7 (1st Cir. 2018).
The movant bears the initial burden of presenting evidence that “it believes demonstrates the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); accord Irobe v. U.S. Dep't of Agric., 890 F.3d 371, 377 (1st Cir. 2018). Once the movant has properly presented such evidence, the burden shifts to the nonmovant to designate “specific facts showing that there is a genuine issue for trial,” Celotex, 477 U.S. at 324, and to “demonstrate that a trier of fact could reasonably resolve that issue in [its] favor.” Irobe, 890 F.3d at 377 (cleaned up). If the nonmovant fails to adduce such evidence on which a reasonable factfinder could base a favorable verdict, the motion must be granted. Celotex, 477 U.S. at 324. In considering the evidence, the court must draw all reasonable inferences in the nonmoving party's favor. Theriault v. Genesis HealthCare LLC, 890 F.3d 342, 348 (1st Cir. 2018).
Under New Hampshire law, the interpretation of an insurance policy is a question of law. Town of Londonderry v. N.H. Mun. Ass'n Prop. Liab. Ins. Tr., Inc., 140 N.H. 440, 441 (1995). “Where disputed terms are not defined in a policy or by State judicial precedent, [courts] apply an objective standard, construing the terms in context and as would a reasonable person in the position of the insured, based upon more than a casual reading of the policy as a whole.” Cath. Med. Ctr. v. Exec. Risk Indem., Inc., 151 N.H. 699, 701 (2005) (quoting Panciocco v. Lawyers Title Ins. Corp., 147 N.H. 610, 613 (2002)). Ambiguities in a policy must be resolved in favor of coverage. Philbrick v. Liberty Mut. Fire Ins. Co., 156 N.H. 389, 391 (2007). The insurer has the burden to prove that coverage is unavailable. Maville v. Peerless Ins. Co., 141 N.H. 317, 320 (1996).
Continental cites three different policy provisions to support its refusal to cover Hutton's claims against Meyer. First, it argues that any property damage Hutton suffered was not caused by an “occurrence.” Second, it argues that the stipulated delay damages Hutton paid to O'Reilly's are not a covered form of “property damage.” Finally, it argues that Meyer's right to coverage is barred by the policy's “your work” exclusion.
The Continental policy is a standard-form CGL policy. The insuring agreement provides that Continental will “pay those sums that the insured becomes legally obligated to pay as damages because of . . . ‘property damage' to which this insurance applies.” Doc. No. 11-3 at 164. Coverage is available under the policy, however, only if “‘property damage' is caused by an ‘occurrence.'” Id. An “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Id. at 178. The term “accident” is not defined in the policy.
Continental argues that the stipulated delay damages Hutton incurred, both while the stop-work order was in effect and while Hutton was repairing the water damage, were not caused by an occurrence because they resulted from Meyer's defective workmanship. In pressing this argument, Continental relies on the general rule in New Hampshire that faulty workmanship is not sufficiently fortuitous to qualify as an occurrence, at least when the claim seeks coverage for the cost of repairing the defective work itself. See, e.g., McAllister v. Peerless Ins. Co., 124 N.H. 676, 680 (1984). Hutton responds first by claiming that the existence of damage to property other than the defective masonry - the physical damage to the building's interior and the loss of use of the entire building - satisfies the occurrence requirement. In the alternative, to the extent damage to nondefective property is not sufficient by itself, Hutton argues that the issuance of the stop-work order and the water damage that occurred while the stop-work order was in effect are each intervening fortuitous events that satisfy the occurrence requirement. I take up these arguments in turn after providing a brief summary of ways in which similar arguments have been addressed elsewhere.
Courts across the country are divided on when faulty workmanship will be deemed to be an occurrence under a standard-form CGL policy. See Greystone Constr., Inc. v. Nat'l Fire & Marine Ins. Co., 661 F.3d 1272, 128283 (10th Cir. 2011) (). At issue is whether defective workmanship is an “accident,” which is a necessary component of an occurrence. A growing number of states have held that defective workmanship is an accident, regardless of whether the injury is limited to the insured's work product or extends to other property, as long as it is unintended and unexpected from the standpoint of the insured. See, e.g., Am. Empire Surplus Line Ins. Co. v. Hathaway Dev. Co., 707 S.E.2d 369 (Ga. 2011); Sheehan Constr. Co. v. Continental Cas. Co., 935 N.E.2d 160 (Ind. 2010); Architex Ass'n, Inc. v. Scottsdale Ins. Co., 27 So.3d 1148 (Miss. 2010); Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007). These courts generally reason that “a deliberate act, performed negligently, is an accident if the effect is not the intended or expected result; that is, the result would have been different had the deliberate act been performed correctly.” Lamar, 242 S.W.3d at 8. This approach rejects the notion that an occurrence should be interpreted more narrowly on public policy grounds, namely, that damages caused by faulty workmanship represent a business risk that performance bonds, not CGL policies, are meant to cover. See id. At 10.
Instead, courts that follow this reasoning have explained that any limitations on coverage for the general business risks presented by...
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