Lee Builders v. Farm Bureau Mut. Ins. Co.

• Decision Date: 09 June 2006
• Docket Number: No. 90,944.,90,944.
• Citation: 137 P.3d 486
• Parties: LEE BUILDERS, INC., Appellee/Cross-appellant, v. FARM BUREAU MUTUAL INSURANCE COMPANY, Appellant/Cross-appellee.
• Court: Kansas Supreme Court

Page 486

137 P.3d 486

LEE BUILDERS, INC., Appellee/Cross-appellant, v. FARM BUREAU MUTUAL INSURANCE COMPANY, Appellant/Cross-appellee.

No. 90,944.

Supreme Court of Kansas.

June 9, 2006.

COPYRIGHT MATERIAL OMITTED

Paul Hasty, Jr., of Wallace, Saunders, Austin, Brown & Enochs, Chartered, of Overland Park, argued the cause, and Patrick E. McGrath and Burke D. Robinson, of the same firm, were with him on the briefs, for appellant/cross-appellee.

Jacob S. Graybill, of Graybill & Hazlewood, L.L.C., of Wichita, argued the cause, and N. Russell Hazlewood, of the same firm, and John Terry Moore, of Moore Martin, L.C., of Wichita, were with him on the briefs, for appellee/cross-appellant.

Mark D. Hinderks, of Stinson Morrison Hecker LLP, of Overland Park, was on the brief, for amicus curiae National Association of Home Builders.

The opinion of the court was delivered by NUSS, J.:

This case concerns a dispute over insurance coverage between a general contractor, Lee Builders, Inc., (Lee) and its insurance carrier, Farm Bureau Mutual Insurance Company (Farm Bureau). Lee alleged that Farm Bureau breached a duty under the commercial general liability insurance (CGL) policy to defend or indemnify against a property damage claim brought by a homeowner. The district court granted judgment to Lee but denied certain attorney fees.

The Court of Appeals affirmed in part and reversed in part, holding that the CGL policy provided coverage for part of Lee's claims but remanding for further proceedings to determine the amount of the covered claim. It also vacated the award of prejudgment interest but affirmed the award of attorney fees. Lee Builders, Inc. v. Farm Bureau Mut. Ins. Co., 33 Kan.App.2d 504, 104 P.3d 997 (2005). Farm Bureau filed a petition for review on several issues; Lee filed no cross-petition for review. Our jurisdiction is pursuant to K.S.A. 60-2101(b).

Based upon Farm Bureau's petition, the issues on appeal and our accompanying holdings are as follows:

1. Did the district court and Court of Appeals err in determining that moisture leakage over time caused by defective materials or workmanship, which led to structural damage within a constructed home, was an "occurrence" under the CGL policy? No.

2. Did the district court err in awarding attorney fees pursuant to K.S.A. 40-908? No.

Accordingly, we affirm the Court of Appeals, including its remand to the district court to determine the amount of the covered claim.

FACTS

As a general contractor, Lee completed construction of a home for Dr. Richard Steinberger in Wichita, Kansas, pursuant to a written contract. Subcontractors performed the work on the home. Lee initially turned the house over to Steinberger in December 1991.

Between 1991 and 1996, Steinberger notified Lee that windows were leaking. Lee attempted to locate the cause of the leaks with the assistance of the window manufacturer, Norco. Eventually, Lee concluded that the windows were defective, but the exact defect was not pinpointed. Lee alleged that after repeated attempts to resolve the leakage issue failed, Steinberger threatened a lawsuit in 1996.

Lee was insured during this time under a CGL policy issued by Farm Bureau. In September 1996, Lee notified Farm Bureau of Steinberger's complaints that the windows were leaking and the stucco exterior was cracking and leaking. Lee indicated that the windows were a "factory defect."

On October 16, 1996, Jack Hollowell, regional claims manager for the Wichita claims office of Farm Bureau, sent a letter to Lee disclaiming liability coverage "for any alleged liability arising out of a situation concerning improper installation and/or defective windows which were installed by Lee Builders, Inc. or one of it's [sic] sub-contractors at the home owned by Dr. Richard Steinberger." In concluding that the CGL policy did not provide coverage for the claim, Hollowell stated: "It is our opinion that the situation giving rise to this claim does not meet the definition of `property damage' or `occurrence' as defined by the policy." Farm Bureau also disclaimed coverage based on several exclusions stated in the policy.

Following Farm Bureau's denial of coverage, Lee joined the window manufacturer, the window retailer, and the stucco installer in negotiating a settlement of Steinberger's claim at a total cost to Lee of $12,956.92. As part of the settlement, the Norco windows were removed and replaced with Andersen windows at the direction of Steinberger. The size of the Andersen windows differed from the Norco windows, requiring modification to Steinberger's house. While Lee paid for the cost of removing the Norco windows and installing the Andersen windows, Steinberger paid the difference between the cost of the windows.

In October 2001, Lee filed suit against Farm Bureau seeking to recover the full amount Lee paid to settle Steinberger's claim, $12,956.92, plus interest and attorney fees under K.S.A. 40-256, 40-908, or both. Lee alleged Farm Bureau breached its duty under the CGL policy to defend or indemnify Lee against Steinberger's property damage claim and that Farm Bureau's wrongful refusal caused Lee to mitigate its damages to prevent Steinberger from suing Lee.

Lee and Farm Bureau filed competing motions for summary judgment. Although the district court denied both motions, at the conclusion of the hearing it impliedly found that the damage was an "accident" because the damage was not anticipated or intended and expressly found the existence of an "occurrence":

"[T]here is no dispute that the windows leaked, even though the exact mechanism by which the windows leaked appears to be undetermined. The fact that the windows leaked was not anticipated nor intended by the insured in this case, Mr. Lee, I seriously doubt that was the case. I doubt Mr. Lee would put in a window that he expected or intended to leak. I find that the work [that] was completed at the time in the house certainly qualifies as real estate or real property. Also going to find this constitutes an occurrence."

Although a jury trial was scheduled for April 15, 2003, Farm Bureau conceded that the amount Lee spent to resolve Steinberger's complaints ($12,956.92) was fair, reasonable, and in good faith. After argument, the district court determined that no material issues of fact remained and granted Lee's oral motion for judgment on the merits based on its previous determination that an occurrence resulted in damage. The court entered judgment in favor of Lee in the amount of $12,956.92, plus prejudgment interest and costs, and awarded Lee attorney fees and expenses of $77,101.15 pursuant to K.S.A. 40-908.

Farm Bureau appealed, and Lee cross-appealed the district court's refusal to award attorney fees under K.S.A. 40-256. The Court of Appeals affirmed the district court on all issues regarding Lee's coverage under the CGL policy; however, it reversed judgment for the entire amount of Steinberger's claim. The court remanded for a factual determination of the amount resulting from the occurrence, noting that prejudgment interest would not apply to the determination. The court also affirmed the district court's award of attorney fees; therefore, the cross-appeal was moot. Lee Builders, Inc. v. Farm Bureau Mut. Ins. Co., 33 Kan.App.2d at 518, 104 P.3d 997.

Farm Bureau petitioned this court for review. Lee did not file a cross-petition for review of any of the issues decided by the Court of Appeals. Accordingly, the issues of prejudgment interest and failure to award attorney fees under K.S.A. 40-256 are not before this court. See Supreme Court Rule 8.03(a)(5)(c) and (b)(1) (2005 Kan. Ct. R. Annot. 61); Shirley v. Smith, 261 Kan. 685, 696-97, 933 P.2d 651 (1997) (discussing party's failure to file a cross-petition for review).

ANALYSIS

Issue 1: Did the district court and Court of Appeals err in determining that moisture leakage over time caused by defective materials or workmanship, which led to structural damage within a constructed home, was an "occurrence" under the CGL policy?

Standard of Review

In assessing whether Steinberger's underlying claims against Lee fall within the scope of coverage, this court must interpret the language contained in the CGL policy. The interpretation of an insurance contract is a question of law over which this court exercises unlimited review. Exploration Place, Inc. v. Midwest Drywall Co., 277 Kan. 898, 901, 89 P.3d 536 (2004).

Analysis

The CGL policy in the instant case, like most CGL's, contains several basic parts relating to insurance coverage. The first basic part concerns the initial grant of general coverage. The second basic part concerns various "exclusions" from the initial grant of coverage. The third basic part concerns "exceptions" to the exclusions, i.e., under certain circumstances this part reinstates insurance coverage that had been excluded from the general grant. In the analogous case of Am. Fam. Mut. Ins. Co. v. American Girl, Inc., 268 Wis.2d 16, 32-33, 673 N.W.2d 65 (2004), the Wisconsin Supreme Court explained that its review of a CGL policy therefore could potentially follow three steps:

"[1] we examine the facts of the insured's claim to determine whether the policy's insuring agreement makes an initial grant of coverage. If it is clear that the policy was not intended to cover the claim asserted, the analysis ends there. If the claim triggers the initial grant of coverage in the insuring agreement, [2] we next examine the various exclusions to see whether any of them preclude coverage of the present claim. . . . We analyze each exclusion separately; the inapplicability of one exclusion will not reinstate coverage where another exclusion has precluded it. Exclusions sometimes have exceptions; if a particular exclusion applies, [3] we then look to see whether any exception to that exclusion reinstates coverage. An exception pertains only to the exclusion clause within which it appears; the applicability of an exception...