Ohio Cas. Ins. Co. v. Terrace Enterprises, Inc.

• Decision Date: 26 August 1977
• Docket Number: No. 46790,46790
• Citation: 260 N.W.2d 450,8 A.L.R. 4th 553
• Parties: OHIO CASUALTY INSURANCE COMPANY, Appellant, v. TERRACE ENTERPRISES, INC., Respondent, Doerfler Construction Company, Inc., Respondent.
• Court: Minnesota Supreme Court

Page 450

260 N.W.2d 450

8 A.L.R.4th 553

OHIO CASUALTY INSURANCE COMPANY, Appellant, v. TERRACE ENTERPRISES, INC., Respondent Doerfler Construction Company, Inc., Respondent.

No. 46790.

Supreme Court of Minnesota.

Aug. 26, 1977.

Rehearing Denied Jan. 4, 1978.

Syllabus by the Court

1. The settling of a building resulting from faulty construction that was at most negligent was an "occurrence" within the terms of an insurance policy.

2. Coverage under the policy was not excluded by the "care, custody, or control," "products liability," or "sistership" clauses.

3. A reasonable attorneys fee for defending an unsuccessful appeal brought by an insurer in a declaratory judgment action to determine coverage is an expense incurred by the insured at the insurer's request and recoverable under the policy.

Jardine, Logan & O'Brien and Graham Heikes, St. Paul, for appellant.

John Daubney, St. Paul, for Terrace.

Johnson, Essling, Williams & Essling and David Essling, St. Paul, for Doerfler.

Heard before ROGOSHESKE, PETERSON, and KELLY, JJ., and considered and decided by the court en banc.

KELLY, Justice.

Plaintiff, Ohio Casualty Insurance Company, appeals from a declaratory judgment entered in district court determining that its insurance policy affords coverage to damages arising from faulty construction of an apartment building. We affirm.

Defendants, Terrace Enterprises, Inc., and Doerfler Construction Company, Inc., are Minnesota corporations under Virgil Doerfler's sole ownership and control. Doerfler Construction contracts for the construction of buildings. Terrace Enterprises was to take title to two parcels of real estate in St. Paul and secure a construction loan to finance the building of an apartment complex. Virgil Doerfler originally acquired title to the land in an individual capacity. Subsequently, he and another individual, Joseph Lombardo, entered into an agreement to invest in and to share the risk of the construction of the apartment buildings.

After securing a construction loan, Terrace Enterprises contracted with Doerfler Construction to construct two 69-unit apartment buildings. Doerfler Construction retained the excavation and carpentry work and hired more than 15 subcontractors to aid in the construction. Twin City Testing and Engineering Laboratory, Inc., was hired to test the soil at the site preparatory to construction. It recommended the project be stopped or slowed until the soil conditions improved for laying the footings and the foundation, and specifically warned of the need to protect the soil and concrete from freezing and of the danger of back filling over frozen soil. ¹ Doerfler Construction proceeded with the work. Although it made efforts to protect the soil and concrete from the climate, its efforts were inadequate. In March 1973, the building had settled and threatened collapse. Twin City Testing traced the problem's cause to Doerfler Construction's failure to protect the work from the elements and to back fill adequately. It recommended that the shell of the building be lifted on jacks and the foundation replaced. This remedial work was performed in June, July, and August of 1973 at a cost of $37,128.23, and caused a 3-month delay in opening the building for occupancy.

After the project was completed, Terrace Enterprises brought an action against Doerfler Construction to recover the expenses it incurred in rectifying the faulty construction and for the losses occasioned by delay. The defense of the action was tendered by Doerfler Construction to its general liability insurer, Ohio Casualty, pursuant to a policy in force during the construction of the apartment building. Ohio Casualty rejected the tender, asserting its policy provided no coverage for the damages alleged, and brought this declaratory judgment action to determine coverage. The district court, sitting without a jury, found that the insurance policy covered the claims raised in the main action and that Ohio Casualty was obligated to defend.

Three issues are presented on appeal:

(1) Did the faulty construction of the apartment building constitute an "occurrence" within the terms of the insurance policy?

(2) Do exclusionary clauses in the policy exclude coverage of the claims which Terrace Enterprises has made against Doerfler Construction?

(3) Is Doerfler Construction entitled to reasonable attorneys fees for responding to this appeal?

1. Plaintiff argues that the faulty construction of the apartment building is not an "occurrence" for which it provides insurance coverage. An "occurrence" is defined in the policy as "an accident, including injurious exposure to conditions, which results, during the policy period, in bodily injury or property damage neither expected nor intended from the standpoint of the insured." We recently had occasion to interpret this language in Bituminous Casualty Corp. v. Bartlett, 307 Minn. 72, 240 N.W.2d 310 (1976). There, we held that intentional failure to conform to building specifications was not an "occurrence" covered by a comprehensive general liability insurance policy and stated:

" * * * A construction contractor's liability policy is designed to protect him from fortuitous losses occurring in connection with his work. If property damage occurs because of mistake or carelessness on the part of the contractor or his employees, he reasonably expects that damage to be covered. On the other hand, the insurer is in the business of distributing losses due to such property damage among a large number of policyholders. It is able to properly set premiums and supply coverage only if those losses are uncertain from the standpoint of any single policyholder. If the single insured is allowed through intentional or reckless acts to consciously control the risks covered by the policy, a central concept of insurance is violated." 307 Minn. 78, 240 N.W.2d 313 (Italics supplied).

Doerfler Construction was aware, from its own knowledge and the soil report, of the dangers of freezing conditions. The company took precautions that failed to adequately protect the soil and concrete. Such conduct was perhaps negligent, but not reckless or intentional. Hence, the settling of the building was an "occurrence" within the terms of the policy.

2. Plaintiff argues that any of three exclusionary clauses in the policy eliminated coverage for the damages in question. The first clause excludes "property damage to * * * property in the care, custody or control of the insured or as to which the insured is for any purpose exercising physical control." ²

We have not interpreted this language, but other courts have construed this standard clause and have reached various results. A vast majority agree that the clause envisions possessory, not proprietary control. Annotation,62 A.L.R.2d 1242, §§ 4, 5. But they disagree as to whether the clause is ambiguous or not. Annotation, 62 A.L.R.2d 1242, § 3(b). The clause does not itself seem vague, apparently its clarity differs in the circumstances in which it is viewed. Compare, e. g., Monari v. Surfside Boat Club, Inc., 469 F.2d 9 (2 Cir. 1972) (personal property; unambiguous), with Harris, Jolliff & Michel, Inc. v. Motorists Mut. Ins. Co., 21 Ohio App.2d 81, 255 N.E.2d 302 (1970) (real property, ambiguous). The courts have fashioned a general rule that property is in the care, custody, or control of the insured when it is under his supervision and is a necessary element of the work involved. Hence, if the property damaged is incidental to the property upon which the work is performed by the insured, it is not within his care, custody, or control. E. g., Meiser v. Aetna Casualty & Surety Co., 8 Wis.2d 233, 98 N.W.2d 919 (1959) (windows scratched while removing plaster which had inadvertently been splashed on them during plastering; windows were merely incidental to plasterer's work, policy exclusion held inapplicable). Annotation, 62 A.L.R.2d 1242, §§ 6 to 8. Arguably, this distinction is a post hoc justification for a decision that turns on the facts of a specific case. Elcar Mobile Homes, Inc. v. D. K. Baxter, Inc., 66 N.J.Super. 478, 491, 169 A.2d 509, 516 (1961). Some courts have reached similar results by endeavoring to employ the purpose of the clause i. e., elimination of the insurer as a guarantor of workmanship to determine if the risk in question is contemplated therein. Royal Indemnity Co. v. Smith, 121 Ga.App. 272, 173 S.E.2d 738 (1970); Hendrix Elec. Co. v. Casualty Reciprocal Exch., 297 So.2d 470 (La.App.1974); Stewart Warner Corp. v. Burns Intl. Sec. Servs., Inc., 527 F.2d 1025, 1030 (7 Cir. 1975).

In construing an analogous exclusionary clause, we have noted "that * * * whether * * * a party (has) dominion or control over the property of another * * is primarily a question of fact." Knott v. Soltau, 283 Minn. 25, 30, 166 N.W.2d 91, 94 (1969). Rather than adopt a rigid test for determining "care, custody or control," we will examine the circumstances in this case in light of the following factors: (1) Whether the property is realty or personalty; (2) the location, size, shape, and other characteristics of the property; and (3) the insured's duties with respect to the property as a whole, the property damaged, and other workers. ³ See, Elcar Mobile Homes, Inc. v. D. K. Baxter, Inc., supra; Mustachio, Manufacturers' and Contractors' Liability Insurance Policy: The Care, Custody, or Control Exclusion Clause, 6 Houston L.Rev. 359, 364 (1968). This examination yields no ready answers but perhaps it makes explicit the factors salient to a determination of coverage under the exclusionary clause.

In this case, the property is realty, a factor favoring coverage. As the court stated in Goswick v. Employers' Casualty Co., 440 S.W.2d 287, 290 (Tex.1969) "Only rarely has the exclusion been applied to realty * * *. * * * The courts have refused to extend the insured's work on a specific item of property into care, custody or control of the building...