T.C. Bateson Const. Co. v. Lumbermens Mut. Cas. Co.

• Decision Date: 22 November 1989
• Docket Number: No. C14-88-387-CV,C14-88-387-CV
• Citation: 784 S.W.2d 692
• Parties: T.C. BATESON CONSTRUCTION COMPANY, Appellant, v. LUMBERMENS MUTUAL CASUALTY COMPANY, Appellee. (14th Dist.)
• Court: Texas Court of Appeals

Page 692

784 S.W.2d 692

T.C. BATESON CONSTRUCTION COMPANY, Appellant, v. LUMBERMENS MUTUAL CASUALTY COMPANY, Appellee.

No. C14-88-387-CV.

Court of Appeals of Texas,

Houston (14th Dist.).

Nov. 22, 1989.

Rehearing Denied Dec. 21, 1989.

Bob Roberts, Houston, for appellant.

Don Weitinger, Mike Johanson, Houston, for appellee.

Before PAUL PRESSLER, CANNON and ELLIS, JJ.

OPINION

CANNON, Justice.

Appellant T.C. Bateson Construction Company (Bateson) appeals the grant of a summary judgment in favor of appellee Lumbermens Mutual Casualty Company (Lumbermens) and the denial of its own motion for summary judgment. At issue is coverage under a comprehensive general liability policy purchased by Bateson from Lumbermens. We affirm the summary judgment.

The parties stipulated to certain facts, which we summarize as follows. In September 1967 Bateson entered into a contract with the University of Texas to construct the Lyndon Baines Johnson Library in Austin, Texas. The contract provided that the library was to be constructed in accordance with certain documents made part of the contract. The library's exterior was to be sheathed in a specific type of marble. The construction documents described how the marble was to be anchored to the building and included a formula for mortar to be used in the anchoring system.

Construction of the library began in September 1967, and the building was completed and turned over to the University in November 1971. Prior to that time, however, cracks appeared in the marble and continued to appear after occupancy by the University. Many of the cracks were in the immediate vicinity of the anchoring devices by which the marble sheets were attached to the building. The University requested that Bateson make repairs to the library, but Bateson did not do so. The University then contracted with another contractor to make the repairs and filed suit against Bateson.

During 1969, 1970 and 1971, Bateson had in effect a comprehensive general liability policy issued by Lumbermens. The policy provided insurance coverage, subject to the terms and conditions of the policy, against property damage liability up to $300,000 aggregate, plus "supplementary payments." After suit was filed, Bateson made a demand upon Lumbermens to defend the suit. Lumbermens denied a defense on the basis of no coverage.

No property of the University or others was damaged or destroyed except the cracked marble sheathing, the steel anchoring components and some related water damage. The damage to the sheathing was caused, in part, by grouting (mortar) that did not conform to contract specifications. It was determined by expert investigation that Bateson or its subcontractors added gypsum to the mortar, contrary to the formula contained in the construction documents. The presence of the gypsum caused excessive expansion, resulting in the cracking of the marble sheathing. Bateson or its subcontractors provided all of the materials, including the marble, anchoring components and mortar used to affix the marble sheathing to the structure. Don Ream was the masonry subcontractor, and he and his employees were independent contractors rather than employees of Bateson.

During 1969, 1970 and 1971, Bateson also had in effect a performance bond, which guaranteed the University that the work contracted for by Bateson would be performed pursuant to the contract. After Lumbermens refused to defend the suit, Bateson elected to defend at its own expense. Bateson ultimately settled the case for $1,550,000 plus costs and then sued Lumbermens.

Lumbermens filed a motion for summary judgment, asserting that Bateson sought "to recover the expenses incurred in the repair and replacement of their own work product, which due to their own deficiencies in product, workmanship, and materials was defectively constructed." Lumbermens argued that well-settled law disallows recovery for such repair and replacement costs when the insurance policy specifically excludes recovery. Lumbermens then relied on certain exclusions in the policy at issue to show that it specifically excluded such recovery. Bateson also moved for summary judgment, contending there was coverage under the policy because the exclusions relied upon by Lumbermens were ambiguous as a matter of law and should be strictly construed against the insurer. In a lengthy opinion, the trial court concluded that there was no genuine issue as to any material fact and that Lumbermens was entitled to judgment as a matter of law.

The policy at issue reads in part:

The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of

A. bodily injury or B. property damage

to which this insurance applies, caused by an occurrence, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, ...

The pertinent exclusions are as follows:

This insurance does not apply:

(a) to liability assumed by the insured under any contract or agreement except an incidental contract; but this exclusion does not apply to a warranty of fitness or quality of the named insured's products or a warranty that work performed by or on behalf of the named insured will be done in a workmanlike manner;

. . . . .

(l ) to property damage to the named insured's products arising out of such products or any part of such products;

(m) to 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;

Before reviewing Bateson's points of error, we first address Lumbermens' contention that certain policy exclusions, specifically (m), preclude Bateson's recovery under the policy. The purpose of comprehensive liability insurance coverage is to provide protection to the insured for personal injury or for property damage caused by the completed product but not for the replacement and repair of that product. LaMarche v. Shelby Mut. Ins. Co., 390 So.2d 325, 326 (Fla.1980). The justification for treating these risks differently is that the insured can control the quality of the goods and services he supplies, while accidental injury to property or persons exposes him to almost limitless liability. Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A.2d 788, 791 (1979). Furthermore, "[t]o interpret the policy as providing coverage for construction deficiencies, as asserted by the petitioners and a minority of states, would enable a contractor to receive initial payment for the work from the homeowner, then receive subsequent payment from his insurance company to repair and correct deficiencies in his own work." LaMarche v. Shelby Mut. Ins. Co., 390 So.2d at 326.

Exclusions like those set out above reflect this concept and are commonly referred to as "business risk" exclusions. Vari Builders, Inc. v. United States Fidelity and Guar. Co., 523 A.2d 549, 551 (Del.Super.Ct.1986). They have been widely recognized as a valid limitation on coverage in general liability insurance policies.

In the context of this case the exclusions are designed to protect insurers from contractors' attempts to recover funds to correct deficiencies caused by the contractors' questionable performance. Their use demonstrates the insurers' belief that the cost of not performing well is a cost of doing business and not considered part of the risk sharing scheme for which general liability policies are written.

Id.

Lumbermens asserts that the facts of this case clearly fall within at least one of the "business risk" exclusions, exclusion (m), which is set out above. Lumbermens argues that as general contractor, Bateson contracted to build an entire library, not merely a component part; therefore, Bateson's "work" refers to the construction of the whole building. The property damage was limited to the grouting, marble sheathing and steel hangers, with some related water damage--all damage to the building itself. Furthermore, the damage arose out of the installation of the marble sheathing (work performed by Don Ream on behalf of Bateson) with grouting and steel hangers (materials furnished by Ream).

Texas courts have denied recovery under exclusions identical or very similar to (m) in similar fact situations. See, e.g., Eulich v. Home Indem. Co., 503 S.W.2d 846 (Tex.Civ.App.--Dallas 1973, writ ref'd n.r.e.); McCord, Condron and McDonald, Inc. v. Twin City Fire Ins. Co., 607 S.W.2d 956 (Tex.Civ.App.--Fort Worth 1980, writ ref'd n.r.e.). Both cases are discussed later in this opinion. Courts outside of the state have ruled similarly. See, e.g., Vari Builders, Inc. v. United States Fidelity and Guar. Co., 523 A.2d at 549; Indiana Ins. Co. v. DeZutti, 408 N.E.2d 1275 (Ind.1980) (citing Eulich ); Weedo v. Stone-E-Brick, Inc., 405 A.2d at 788; B.A. Green Constr. Co. v. Liberty Mut. Ins. Co., 213 Kan. 393, 517 P.2d 563 (1973).

With this discussion in mind, we now review Bateson's arguments contesting the summary judgment. Regarding exclusion (m), Bateson maintains that it is ambiguous in several respects and thus should be strictly construed against the insurer. Bateson first argues that the phrase "on behalf of the named insured" is ambiguous in that it could mean either work done by the employees, agents and servants of the insured or any work done pursuant to or in furtherance of the insured's contract. Bateson suggests that since both meanings are equally plausible, the exclusion should be given the more restrictive interpretation. Accordingly, "on behalf of the named insured" would not refer to independent contractors hired by Bateson and thus would not exclude Ream's actions from coverage.

This same argument was made in Insurance Co. of North America v. Bosworth Constr. Co., where the appellant argued that "by or on behalf of" referred to the insured's employees and not to independent...