Nat'l Sur. Corp. v. Westlake Invs., LLC, 14–1274.

• Court: United States State Supreme Court of Iowa
• Writing for the Court: WIGGINS, Justice.
• Citation: 880 N.W.2d 724
• Parties: NATIONAL SURETY CORPORATION, an Illinois Corporation, Appellant, v. WESTLAKE INVESTMENTS, LLC, an Iowa Limited Liability Company, Appellee.
• Docket Number: No. 14–1274.,14–1274.
• Decision Date: 10 June 2016

880 N.W.2d 724

NATIONAL SURETY CORPORATION, an Illinois Corporation, Appellant,
v.
WESTLAKE INVESTMENTS, LLC, an Iowa Limited Liability Company, Appellee.

No. 14–1274.

Supreme Court of Iowa.

June 10, 2016.

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Todd S. Schenk and Amber Coisman of Tressler LLP, Chicago, Illinois, and Mollie Pawlosky of Dickinson, Mackaman, Tyler & Hagen, P.C., Des Moines, for appellant.

Todd M. Lantz of Weinhardt & Logan, P.C., and Stephen R. Eckley of Belin McCormick, P.C., Des Moines, for appellee.

Jeffrey A. Stone of Simmons Perrine Moyer Bergman PLC, Cedar Rapids, for amici curiae Hubbell Realty Company, Home Builders Association of Iowa, and Associated Builders & Contractors of Iowa.

Brenda K. Wallrichs of Lederer Weston Craig PLC, Cedar Rapids, for amici curiae American Insurance Association and Property Casualty Insurers Association of America.

WIGGINS, Justice.

An insurer sought a declaratory judgment stating it was not liable to the assignee of an excess commercial general liability (CGL) insurance policy for damages

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awarded to the assignee in federal district court. The assignee brought a counterclaim against the insurer for breach of contract. A jury concluded the insurer was liable to the assignee for the damages under the excess CGL policy. On appeal, the court of appeals affirmed the verdict against the insurer but reversed the district court award of prejudgment interest and remanded the case to the district court with instructions. The insurer sought further review, which we granted. On further review, we affirm the court of appeals decision affirming the district court judgment. We conclude the district court did not err in instructing the jury to determine whether the claimed damages arose due to an “accident” constituting an “occurrence” under the policy by considering “the viewpoint of the insureds and what they intended or should reasonably have expected.” Additionally, we conclude the district court did not err in ruling defective work performed by an insured's subcontractor may constitute an occurrence under the policy. The court of appeals decision will stand as the final decision of this court with respect to all other issues raised on appeal.

I. Background Facts and Proceedings.

In 2002, developers and a general contractor began construction on an apartment complex in West Des Moines. In the spring of 2003, while the complex was still under construction, Westlake Investments, LLC, (Westlake) entered into negotiations to purchase it. In June, Westlake executed a purchase agreement.

That summer, the developers and general contractor (the insureds) purchased a primary CGL insurance policy with a $1,000,000 policy limit from Arch Insurance Group (Arch) and an excess CGL insurance policy with a $20,000,000 policy limit from National Surety Corporation (NSC). The terms of the Arch policy defined the scope of coverage under the NSC policy, as the NSC policy followed the form of and incorporated by reference the terms, conditions, and exclusions of the Arch policy. Both policies became effective on July 1, 2003, and expired on July 1, 2004.

During construction, numerous problems surfaced within the complex, including visible water penetration issues in several buildings. These problems did not hamper the sale to Westlake because the parties believed them to be aesthetic. However, that turned out not to be true. After the sale closed in November 2003, the construction defects throughout the complex continued to cause widespread water penetration issues.

In February 2008, Westlake sued the insureds in federal district court, seeking to recover lost profits, repair costs, and other damages under tort and contract theories. The insureds in turn sued numerous third-party defendants, including the architect who designed the complex and the subcontractors who helped to construct it.

As the primary insurer, Arch defended the suit on behalf of the insureds. After extensive pretrial litigation and discovery, Westlake and the insureds entered into settlement negotiations. Those negotiations culminated in a settlement agreement between Westlake, the insureds, and all but one of the subcontractors in September 2011. See Westlake Invs., LLC v. MLP Mgmt., LLC, 842 F.Supp.2d 1119, 1121–25 (S.D.Iowa 2012).

In February 2012, the federal district court entered a consent judgment for $15,600,000 in favor of Westlake. Arch contributed $1,000,000 (the policy limit on the primary CGL policy) toward satisfaction of the judgment, and the third-party defendants contributed $1,737,500. Following

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these contributions, $12,762,500 awarded in the judgment remained unsatisfied. Pursuant to the settlement agreement, the insureds assigned their claims against NSC on the excess CGL policy to Westlake.

In October 2011, shortly after the parties agreed to settle but before the federal district court entered the consent judgment against the insureds, NSC initiated this declaratory judgment action in state district court. Specifically, NSC sought entry of a declaration stating it had no obligation under the NSC policy to pay any portion of the judgment awarded to Westlake. Westlake counterclaimed for breach of contract and sought entry of a declaration stating the NSC policy obligated NSC to pay Westlake the unsatisfied portion of any judgment awarded to Westlake.

Following discovery, Westlake and NSC filed competing motions for summary judgment on various grounds, one of which is relevant to this appeal. Westlake argued property damage resulting from defective work performed by an insured's subcontractor may constitute an accident that qualifies as an occurrence covered by the Arch policy (and therefore the NSC policy). In response, NSC argued property damage caused by defective workmanship does not constitute an accident or an occurrence under a CGL insurance policy.

Following a hearing, the district court granted Westlake's motion for partial summary judgment and denied NSC's motion for summary judgment. The district court concluded property damage resulting from defective work performed by an insured's subcontractor may constitute an accident and an occurrence under a post–1986 CGL insurance policy written to a general contractor.

The case proceeded to a jury trial in March 2014. Over the course of three weeks, the jury heard testimony from numerous witnesses, and the district court admitted hundreds of exhibits. At the close of the evidence, both parties moved for a directed verdict. The court denied both motions and declined to disturb its summary judgment ruling that property damage resulting from defective work performed by an insured's subcontractor may constitute an accident and an occurrence under the Arch policy.

Before the district court submitted the case to the jury, both parties objected to several jury instructions. Of particular relevance to this appeal, NSC objected to the jury instruction defining the terms “accident” and “occurrence” on the ground that the meaning of the term “accident” is objective rather than subjective. Accordingly, NSC proposed an instruction on the meaning of the term “occurrence” that defined the term “accident” as “an undesigned, sudden and unexpected event.”

The district court overruled all the objections to the jury instructions, noting its instruction on the meaning of the term “occurrence” relied on cases cited by both parties and concluding the instruction represented an accurate statement of Iowa law. Thus, the following jury instructions were among those the court submitted to the jury:

Instruction No. 19

[T]o prove the National Surety policy covers the consent judgment damages, Westlake must show that:

1. Some or all of the consent judgment damages resulted from “property damage” that was caused by an “occurrence,” and

2. Some or all of the consent judgment damages resulted from “property damage” that happened between July 1, 2003 and July 1, 2004.

Instruction No. 20

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As used in Instruction No. 19, “property damage” means 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.

You are instructed that property damage happened at the Westlake apartment complex at some point in time due to water intrusion. You must determine whether property damage happened during the policy period of July 1, 2003 to July 1, 2004.

Instruction No. 21

As used in Instruction No. 19, an “occurrence” is an accident, including continuous or repeated exposure to substantially the same general harmful conditions. Defective construction work performed by an insured is not covered by the policy; however, defective construction work performed by subcontractors may be an “occurrence” under the policy.

“Accident” means an unplanned, sudden, and unexpected event.

Whether something is an “accident” must be determined from the viewpoint of the insureds and what they intended or should reasonably have expected. An accident is unexpected so long as the insured does not expect both it and some damage.

The jury deliberated for just over an hour before...