Remodeling Dimensions, Inc. v. Integrity Mut. Ins. Co., A10–1992.

Citation819 N.W.2d 602
Decision Date22 August 2012
Docket NumberNo. A10–1992.,A10–1992.
PartiesREMODELING DIMENSIONS, INC., Appellant, v. INTEGRITY MUTUAL INSURANCE COMPANY, Respondent.
CourtSupreme Court of Minnesota (US)

OPINION TEXT STARTS HERE

Syllabus by the Court

1. Homeowners' claim for moisture damage caused by the contractor to preexisting walls and structure located adjacent to work performed by the contractor satisfies the definition of an “occurrence,” and is not excluded under the business-risk exclusion of the applicable commercial general liability insurance policy.

2. When an insurer notifies its insured that it accepts defense of an arbitration claim under a reservation of rights that includes covered and noncovered claims, the insurer not only has a duty to defend the claim, but also to disclose to its insured the insured's interest in obtaining a written explanation of the award that identifies the claims or theories of recovery actually proved and the portions of the award attributable to each.

D. Clay Taylor, Josiah R. Fricton, D. Clay Taylor, P.A., Minneapolis, MN, for appellant.

George C. Hottinger, Nicholas H. Jakobe, Erstad & Riemer, P.A., Minneapolis, MN, for respondent.

OPINION

DIETZEN, Justice.

The issue before us is whether an insurer is vicariously liable for the failure of the attorney it appointed to represent the insured to request a written explanation of an arbitration award. Appellant Remodeling Dimensions, Inc. (RDI), a home remodeling contractor, received a demand for arbitration regarding allegedly defective work it performed on a remodeling project. RDI tendered the demand to its insurer, respondent Integrity Mutual Insurance Company (Integrity), and Integrity accepted defense of the claim under a reservation of rights. The arbitrator issued a general arbitration award in favor of the homeowners. When Integrity refused to pay the award, RDI paid the homeowners and sued Integrity for indemnification under the policy. On cross-motions for summary judgment, the district court granted RDI's motion, concluding that Integrity was vicariously liable for the failure of the attorney it appointed to represent RDI to request a written explanation of the arbitration award. The court of appeals reversed, concluding that Integrity had the right to challenge coverage of the claim even though no detailed award was obtained, and that the claim was not covered under the insurance policy. We granted review and now reverse the court of appeals.

The events surrounding the damage to the homeowners' home are largely undisputed. In January 2003, RDI entered into a construction agreement to build an addition on the east side of a house and install trim on windows in the original part of the house. Additionally, after RDI began work on the project, the homeowners asked and RDI agreed to remove and reinstall the master bedroom window in the original part of the house. The agreement between RDI and the homeowners provided that disputes arising out of the construction work would be resolved by binding arbitration through the construction industry rules of the American Arbitration Association (AAA).

RDI completed the project in June 2003. In May 2004, the house sustained storm damage. In the course of repairing the storm damage, the homeowners noticed damage to the siding of the house and hired a consultant to conduct an inspection to evaluate the problem. The consultant reported significant moisture and related damage in several areas. In the spring of 2006, the homeowners hired a second consultant, who found moisture in the structural parts of the house and recommended repair work to the house. The cause of the moisture intrusion and damage was a matter of considerable dispute between RDI and the homeowners.

In July 2006, the homeowners served an arbitration demand upon RDI and filed it with the AAA. The homeowners claimed that defects in RDI's construction work caused water damage to the house and that RDI was negligent in failing to warn them of defects in the original construction of the house, which prevented the homeowners from bringing claims against the original builder within the statutory warranty period. SeeMinn.Stat. § 327A.02, subd. 1(c) (2010). The homeowners sought damages totaling $264,100.

The facts regarding the tender of the arbitration demand to Integrity and its response to RDI are neither complete nor well developed in the record. At some point, pursuant to its liability insurance policy, RDI tendered the homeowners' arbitration demand to Integrity. By September 7, 2006, Integrity had appointed an attorney to represent RDI in the arbitration proceedings. On September 21, 2006, the AAA appointed an arbitrator to decide the case. The next day, Integrity sent RDI a reservation-of-rights letter, stating that it questioned whether the homeowners' claims were covered under the insurance policy and reserving its right to deny coverage notwithstanding the outcome of the arbitration.

On January 10, 2007, Integrity sent RDI a second letter that stated:

The purpose of this correspondence is also to alert you of your duties in this matter. It will be up to you and your counsel to fashion an arbitration award form that addresses the coverage issues and your respective burden. If, for example, the arbitration award ultimately rendered makes it impossible to determine whether any of the damages awarded involve “property damage” that occurred during the Integrity policy period, Integrity will not be responsible to indemnify an ambiguous award.

Following the arbitration hearing, the arbitrator awarded the homeowners $45,000 for “basic house repairs,” $2,000 for “flat roof repair,” $1,000 for “final cleaning,” and $3,000 for “construction management fees.” The arbitrator awarded nothing for replacement window costs, inspection costs, and design costs.

RDI's attorney then requested further written explanation of the award. The arbitrator denied the request as untimely on the basis that “the parties did not request an explanation of the Award in writing prior to the appointment of the arbitrator as required by R–43(b).” AAA Construction Industry Arbitration Rule 43(b) (amended and effective September 15, 2005) 1 states:

The arbitrator shall provide a concise, written breakdown of the award. If requested in writing by all parties prior to the appointment of the arbitrator, or if the arbitrator believes it is appropriate to do so, the arbitrator shall provide a written explanation of the award.

Subsequently, Integrity denied coverage of the award. RDI paid the homeowners the award amount and then commenced a declaratory judgment action against Integrity, alleging breach of contract for Integrity's refusal to pay the arbitration award, excluding $2,000 for flat roof repair, which RDI conceded was not covered by the insurance policy. Both parties moved for summary judgment, and the district court granted RDI's motion, concluding that the vague arbitration award made it impossible to determine whether the insurance policy covered any of the homeowners' successful claims and was directly attributable to the attorney's inaction. Therefore, the district court concluded that Integrity was legally responsible for the attorney's conduct. The court reasoned that Integrity should pay the entire award because an attorney hired by an insurer to defend an insured is an agent of the insurer, and the insurer is therefore vicariously liable for the attorney's failure to request a written explanation of the award.

The court of appeals reversed and ordered the district court to enter summary judgment in favor of Integrity. Remodeling Dimensions, Inc. v. Integrity Mut. Ins. Co., 806 N.W.2d 82 (Minn.App.2011). The court determined that the attorney hired by Integrity to represent RDI did not have an attorney-client relationship with Integrity, and therefore Integrity is not responsible for the attorney's failure to make a timely request for a written explanation of the award. Id. at 89–90. Additionally, the court concluded as a matter of law that the homeowners' claims against RDI are not covered losses under the insurance policy. Id. at 91–93.

I.

On appeal, RDI argues that the court of appeals erred in concluding that its claim is not covered under the insurance policy. Additionally, RDI asserts that Integrity is either vicariously or directly liable for the failure of the attorney Integrity appointed to represent RDI to request a written explanation of the arbitration award that would have resolved the coverage dispute.

We review a decision of the district court regarding motions for summary judgment to determine whether there are any genuine issues of material fact that would preclude summary judgment and whether the district court erred in its application of the law. Dykes v. Sukup Mfg. Co., 781 N.W.2d 578, 581 (Minn.2010). In doing so, we view the evidence in the light most favorable to the nonmoving party. Valspar Refinish, Inc. v. Gaylord's, Inc., 764 N.W.2d 359, 364 (Minn.2009). When the parties file cross-motions for summary judgment, however, they “tacitly agree[ ] that there exist no genuine issues of material fact....” Am. Family Mut. Ins. Co. v. Thiem, 503 N.W.2d 789, 790 (Minn.1993). We review the district court's application of the law de novo. Dykes, 781 N.W.2d at 581.

A.

We first address whether the homeowners presented a claim for damage that, if proven, would be covered under the insurance policy. Integrity argues that it is entitled to summary judgment because the only claims presented by the homeowners in the arbitration proceeding were not covered or were excluded from coverage under the policy. Specifically, Integrity argues that the homeowners' claims did not satisfy the definition of an “occurrence” under the policy, and were excluded under the business-risk exclusion in the policy.

The interpretation of an insurance policy and application of the policy to the facts of a case are questions of law that we review de novo. W. Nat'l Ins. Co. v. Thompson, 797...

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