SHEEHAN Constr. Co. INC. v. Cont'l Cas. Co., 49S02-1001-CV-32.

• Citation: 935 N.E.2d 160
• Decision Date: 17 December 2010
• Docket Number: No. 49S02-1001-CV-32.,49S02-1001-CV-32.
• Parties: SHEEHAN CONSTRUCTION COMPANY, INC., Vincent B. Alig, M.D. and Mary Jean Alig Individually, Co-Trustees of the Mary Jean Alig Revocable Trust, and as Representatives of a class of all Others Similarly Situated, Appellants (Petitioners below), v. CONTINENTAL CASUALTY COMPANY, Indiana Insurance Company, and MJ Insurance, Inc., Appellees (Respondents below).
• Court: Supreme Court of Indiana

935 N.E.2d 160

SHEEHAN CONSTRUCTION COMPANY, INC., Vincent B. Alig, M.D. and Mary Jean Alig Individually, Co-Trustees of the Mary Jean Alig Revocable Trust, and as Representatives of a class of all Others Similarly Situated, Appellants (Petitioners below),

v.CONTINENTAL CASUALTY COMPANY, Indiana Insurance Company, and MJ Insurance, Inc., Appellees (Respondents below).

No. 49S02-1001-CV-32.

Supreme Court of Indiana.

Sept. 30, 2010.

Rehearing Granted Dec. 17, 2010.

David F. McNamar, McNamar & Associates, P.C., Indianapolis, IN, Attorneys for Appellant.

Mary K. Reeder, Riley Bennett & Egloff, LLP, Indianapolis, IN, Joseph Borders and Peter G. Daniels, of counsel, Walker Wilcox Matousek LLP, Chicago, IL, Attorneys for Appellee Continental Casualty Company.

Joseph Dietz, Meils Thompson Dietz & Berish, Indianapolis, IN, Attorneys for Appellee Indiana Insurance Company.

Philip E. Kalamaros, Hunt Suedhoff Kalamaros LLP, St. Joseph, MI, Attorneys for Appellee MJ Insurance, Inc.

On Petition To Transfer from the Indiana Court of Appeals, No. 49A02-0805-CV-420

RUCKER, Justice.

Continental Casualty Company filed a declaratory judgment action to determine its obligation to its insured, Sheehan Construction Company. The trial court determined that the policy issued by Continental to Sheehan did not cover Sheehan's claim and granted summary judgment in favor of Continental. The main issue in this case is whether a standard commercial general liability (“CGL”) insurance policy covers an insured contractor for the faulty workmanship of its subcontractor.

Background

Before discussing the issues at stake in this case, we provide some background information. CGL insurance policies are designed to protect an insured against certain losses arising out of business operations. Most CGL policies are written on standardized forms developed by an association of domestic property insurers known as the Insurance Services Office (“ISO”). ¹ Hartford Fire Ins. Co. v. California, 509 U.S. 764, 772, 113 S.Ct. 2891, 125 L.Ed.2d 612 (1993). “[These] policies begin with a broad grant of coverage, which is then limited in scope by exclusions. Exceptions to exclusions narrow the scope of the exclusion and, as a consequence, add back coverage. However, it is the initial broad grant of coverage, not the exception to the exclusion, that ultimately creates (or does not create) the coverage sought.” David Dekker, Douglas Green & Stephen Palley, The Expansion of Insurance Coverage for Defective Construction, 28 Constr. Law, Fall 2008, at 19, 20.

The precursor of today's standard commercial liability insurance contracts was promulgated in 1940 and has since undergone five principal revisions, the most recent of which came into use in 1986. Prior to 1986, the ISO had not significantly revised its standard commercial general liability form since 1973. Ernest Martin, Jr., Daniel T. Mabery, Erika L. Blomquist & Jeffrey S. Lowenstein, Insurance Coverage for the New Breed of Internet-Related Trademark Infringement Claims, 54 S.M.U.L.Rev.1973, 1987-88 (2001) (“ISO frequently makes minor revisions to its CGL form, but rarely undertakes a major, substantive overhaul.... The standard ISO form in existence before the 1986 revision was promulgated in 1973....”). “In the 1973 version of the [ISO's CGL policy form], the work performed exclusion precluded coverage for property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith.” French v. Assurance Co. of Am., 448 F.3d 693, 700 (4th Cir.2006) (internal citations and quotations omitted) (emphasis added); see also 9A Eric Mills Holmes, Holmes' Appleman on Insurance 2d § 132.9 at 152 (2002). The “on behalf of” language was interpreted to mean that no coverage existed for damage to a subcontractor's work or for damage to the insured's own work resulting from a subcontractor's work. See 9A Lee R. Russ, et al., Couch on Insurance 3d § 129:18 (2005); Holmes, supra, at 153.

Many contractors were dissatisfied with this state of affairs because more and more projects were being completed with the help of subcontractors. See Russ, et al., supra, § 129:18 (“Due to the increasing use of subcontractors on construction projects, many general contractors were not satisfied with the lack of coverage provided under [the 1973 ISO CGL] commercial general liability policies where the general contractor was not directly responsible for the defective work.”). In response to this dissatisfaction, beginning in 1976 an insured under the 1973 ISO CGL policy form could pay a higher premium to obtain a broad form property damage endorsement (the BFPD Endorsement) which effectively eliminated the “on behalf of” language and excluded coverage only for property damage to work performed by the named insured. Id. Thus, liability coverage was extended to the insured's completed work when the damage arose out of work performed by a subcontractor. Id.

In 1986, as part of a major revision, the subcontractor exception aspect of the BFPD Endorsement was added directly to the body of the ISO's CGL policy in the form of an express exception to the “Your Work” exclusion. Id.; Limbach Co. LLC v. Zurich Am. Ins. Co., 396 F.3d 358, 362-63 (4th Cir.2005) (internal citations omitted). Thus, under the 1986 ISO CGL Policies, the “Your Work” exclusion specifically provides that it “does not apply if the damaged work or the work out of which the damage arises was performed on [the insured contractor's] behalf by a subcontractor.” Appellants' App. at 245. Copyrighted in 1994 and 1997, see supra n. 1, the CGL Polices at issue in this case post date the 1986 revisions and include a subcontractor exception to the “Your Work” exclusion. With this background in mind we proceed to the merits of the case before us.

Facts and Procedural History

Because this action is based upon an underlying claim filed in November 2004, we begin by tracing the history of the original action. In April 2000 Vincent B. Alig and his wife Mary Jean Alig purchased a home in the Crystal Lake residential subdivision located in Marion County. Sheehan Construction Company was the general contractor on the project and was responsible for hiring subcontractors who actually built the houses. After experiencing water leaks in their home, the Aligs notified their homeowner's insurance carrier which in turn hired an engineering company to investigate. Among other things the investigation revealed leaking windows, fungus growth on the siding, decayed OSB sheathing, deteriorating and decaying floor joists, and water damage to the interior of the home including water stained carpeting. Appellee Continental's App. at 37, 38, 40. These problems were caused by the faulty workmanship of Sheehan's subcontractors which included lack of adequate flashing and quality caulking around the windows, lack of a weather resistant barrier behind the brick veneer to protect the wood components of the wall, improperly installed roofing shingles, improperly flashed or sealed openings for the chimney and vents, and inadequate ventilation in the crawl space. Id. at 74-76.

In November 2004, the Aligs filed a complaint in the Marion Circuit Court against Sheehan pursuant to Indiana Code sections 32-27-3-1 to 14 (concerning cause of action for construction defects). During the period in which the home was built Sheehan was insured under a CGL policy issued by Continental Insurance Company. Sheehan was also included as an additional named insured in a CGL policy issued by Indiana Insurance Company to Somerville Construction-one of Sheehan's subcontractors. The policies provided coverage for the “sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’.... caused by an ‘occurrence’ that takes place in the ‘coverage territory’ ” during the policy period. Appellee Continental's App. at 102; Appellee Indiana's App. at 125, 139. As defined in the policies, an “occurrence” is “an accident, including continuous or repeated exposure to substantially the same general harmful conditions,” and “property damage” includes “[p]hysical injury to tangible property, including all resulting loss of use of that property.” Appellee Continental's App. at 112, 113; Appellee Indiana's App. at 133-34, 146, 147. The coverage provisions were limited by numerous exclusions. Of particular relevance in this case is the exclusion, with its exception, that excludes coverage for damage to the insured's property and work:

2. Exclusions.

This insurance does not apply to:

....

1. Damage To Your Work

“Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard”.

This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.

Appellee Continental's App. at 102, 105; Appellee Indiana's App. at 125, 128; 139, 142.

After the Aligs filed suit, Sheehan contacted Continental which agreed to represent Sheehan under a reservation of rights. When other homeowners in the subdivision began experiencing problems with their homes similar to those experienced by the Aligs, they sought to be joined as plaintiffs. Consequently counsel filed, and the trial court granted, a motion to convert the Aligs' complaint into a Class Action lawsuit. After the Class was certified the trial court ordered the parties into mediation. Continental participated therein and the mediation resulted in a settlement of approximately $2.8 million. Among other things the settlement provided that the Class would not pursue its claims against Sheehan. Instead, Sheehan assigned to the Class any rights it might have against Continental in addition to certain non-settling subcontractors and MJ Insurance-Sheehan's insurance broker.

Continental filed this...