Vill. At Deer Creek Homeowners Ass'n, Inc. v. Mid-Continent Cas. Co.

• Decision Date: 24 June 2014
• Docket Number: WD76192.,Nos. WD76191,s. WD76191
• Court: Missouri Court of Appeals
• Parties: The VILLAGE AT DEER CREEK HOMEOWNERS ASSOCIATION, INC., Respondent, v. MID–CONTINENT CASUALTY COMPANY, Appellant.

432 S.W.3d 231

The VILLAGE AT DEER CREEK HOMEOWNERS ASSOCIATION, INC., Respondent,

v.MID–CONTINENT CASUALTY COMPANY, Appellant.

Nos. WD76191, WD76192.

Missouri Court of Appeals, Western District.

April 1, 2014.

Motion for Rehearing and/or Transfer to Supreme Court Denied April 29, 2014.

Application for Transfer Denied June 24, 2014.

Scott C. Long and John R. Weist, Overland Park, KS, for respondent.

Vincent F. O'Flaherty and Levon G. Hovnatanian, Kansas City, MO, for appellant.

Before Division One: CYNTHIA L. MARTIN, Presiding Judge, MARK D. PFEIFFER, Judge and KAREN KING MITCHELL, Judge.

CYNTHIA L. MARTIN, Judge.

Mid–Continent Casualty Company (“Mid–Continent”) appeals a multi-million dollar judgment entered in favor of The Village at Deer Creek Homeowners Association, Inc. (“Association”) in an equitable garnishment proceeding tried to the court. Because we conclude that a judgment awarded to the Association against Mid–Continent's insured, Greater Midwest Builders, Ltd. (“GMB”), was for “property damage” caused by an “occurrence” as defined in Mid–Continent's policies, and because we conclude that the trial court did not abuse its discretion in denying Mid–Continent leave to file an amended answer, we affirm the trial court's judgment in its entirety except for paragraphs 53 and 54 which calculate the damages awarded to the Association. We exercise our discretion in accordance with Rule 84.14 to vacate and modify paragraphs 53 and 54 of the judgment to recalculate the damages awarded to the Association.

Factual and Procedural History ¹

GMB is a real estate development company. In 1999, it began development of a subdivision in Overland Park, Kansas known as the Village at Deer Creek (“Subdivision”). The development plan envisioned the construction of 137 townhomes. GMB was both the developer of the Subdivision, and the builder/general contractor that oversaw construction of each townhome.

In its role as developer, GMB established the Association and filed a Declaration of Covenants, Restrictions, Assessments and Easements (“Declarations”) for the Subdivision. The Declarations required the Association to “maintain, repair, and replace ... the exterior portion of all Units” subject to exceptions not applicable to this case. The Declarations permitted GMB as the developer to control the Association until such time as the Declarations required the Association to be turned over to the control of homeowners. GMB controlled the Association from 1999 until January 1, 2005.

In its role as the builder/general contractor, GMB oversaw the construction of townhomes, and then sold the townhomes to individual homeowners. Homeowners acquired their townhomes subject to the Declarations, and were required to pay dues to the Association. GMB closed its first sales of townhomes in October 2001.

Sometime in 2004, several homeowners began complaining to GMB about water leaks in their townhomes. The nature of the complaints varied. GMB tried to fix each reported leak. GMB did not suspect that the leaks were symptomatic of pervasive construction defects, and did not investigate the leaks to determine whether they were related to a common cause.

Homeowners became concerned that GMB was using the Association's funds (and thus homeowner's dues) to fix the water leaks when the homeowners believed repairs should be paid for by GMB. This and other concerns led GMB to agree to turn over control of the Association to the homeowners on January 1, 2005. As a part of the turnover of control, GMB acknowledged in writing that it would address “development related deficiencies” that were its responsibility, and that it would do so before the Subdivision was completely built out. At the time of the turnover, 41 townhomes remained to be constructed. GMB oversaw construction of the remaining townhomes, and completed the build out of the Subdivision by September 2007. During this time, the Association continued efforts to resolve “development related deficiencies” with GMB.

The Kansas Lawsuit Filed Against GMB

On December 31, 2007, the Association and 47 homeowners filed suit against GMB in Kansas state court (“Underlying Lawsuit”). The homeowners sued GMB as the builder/general contractor of their respective townhomes, and sought damages caused by water leaks to the interior portions of their townhomes. The Association sued GMB in its capacity as the developer of the Subdivision and sought damages relating to the exterior of the townhomes.

GMB notified its insurers, Mid–Continent and State Automobile Insurance Co. (“State Auto”) of the Underlying Lawsuit. State Auto had written commercial general liability (“CGL”) coverage for GMB for the period from November 1, 2000 to November 1, 2003.² Mid–Continent had written CGL coverage for GMB for the period from February 13, 2004 to February 13, 2008. There was a gap in coverage for GMB from November 2, 2003 through February 12, 2004. Both Mid–Continent and State Auto accepted defense of the claims asserted in the Underlying Lawsuit under a reservation of rights.

Prior to trial, the Association and the homeowner plaintiffs indicated their willingness to settle all claims asserted against GMB within the limits of Mid–Continent and State Auto's policies. The insurers would not agree to a settlement, and would not agree to GMB's subsequent demand to withdraw their reservations of rights. GMB terminated its insurers' defense. GMB reached an agreement with the Association and the homeowners that any recovery obtained would be collected solely from GMB's insurance coverage. In exchange, GMB agreed not to offer evidence at trial or to cross examine witnesses. The Underlying Lawsuit proceeded to a trial to the court.

The Association's expert, Laurence Fehner (“Fehner”) testified about several reports he prepared between January 2008 and September 2010. He testified that the exterior of each of the townhomes had been constructed using a cladding system. The cladding system, which included windows, stucco, brick, siding, flashing, and other components, was supposed to keep water from entering the townhomes. The cladding system involved the application of exterior sheeting (OSB or oriented strand board) to wood studs to which metal lathe and paper were applied and on which stucco was applied. The Association's expert identified 28 separate defects in the manner in which the exterior cladding systems of the townhomes had been constructed.³ He prepared a spreadsheet that listed each townhome and the defects present in each townhome. He testified at length about how each defect resulted in water intrusion into the townhomes, and about the water damage caused to the townhomes as a result. The damage included damage to the exterior cladding system itself, and to other components considered to be a part of the exterior of the townhomes. For example, Fehner testified that upon inspection of one townhome that was being repaired, (the Mossinghoff home), he observed first-hand “behind the walls” damage of the nature he expected would exist in light of the construction defects he had identified. He observed rotted subfloor, rotted floor joists, rotted studs, and that brick and OSB—components of the exterior cladding system—had crumbled and disintegrated. Fehner opined that this “behind the walls” damage was a result of water intrusion caused by the construction defects. Fehner also testified that the same type of damage was almost certainly present, albeit in varying degrees, in each of the 137 townhomes in the Subdivision.

Fehner's spreadsheet was used by the Association to generate bids to repair the exteriors of the townhomes. The total cost of repair exceeded $7,000,000.00.

The Kansas court in the Underlying Lawsuit concluded that the construction defects “combined with repeated and continuous exposure to weather conditions [to] create[ ] serious leak problem[s] and resulting damage to all of the townhomes.” The court found “the defective conditions ... may not have caused immediate damage at the time of construction or at the time of completion of each unit, but exposure of the conditions to various weather events over time after completion resulted in water intrusion that caused damage to the building components.” The court found that “[t]he longer these conditions remain unrepaired the worse the damage will get.” The court found that as of the date of its judgment, 72 townhomes had known water leaks and that as to “those townhomes where a leak has not yet been observed in the interior, it is highly likely ... that water has already intruded within the building envelope of those townhomes and caused damage.”

The court found that GMB breached common law negligence duties it owed to the Association in its capacity as the developer of the Subdivision as specified in the RESTATEMENT (THIRD) OF PROPERTY section 6.20, which expressly addresses a developer's duties to a homeowner's association and its members up until the developer relinquishes control of an association. Specifically, and without limitation, the court concluded that GMB, as developer, failed to use reasonable care and prudence to (i) “ascertain that [the reported] water leaks and signs of water intrusion were indicative of pervasive construction defects with the building envelopes of the units;” (ii) “properly investigate the[ ] issues with water leaks and water intrusion;” and (iii) “inspect, maintain or repair or replace defects with the building envelope on the townhomes to prevent water intrusion or avoid further water intrusion with the townhomes.” The court found that property damage sustained to the exterior envelopes of each townhome:

[O]ccurred very soon after each townhome was complete as the defective conditions in the townhome exterior were met with moisture-related weather events. This began a process whereby damage was essentially continuing and worsening over time with additional repeated moisture-related events. Visible damage...