IN THE COURT OF APPEALS OF IOWA
No. 15-1677 Filed October 12, 2016
HUDSON HARDWARE PLUMBING & HEATING, INC., Plaintiff-Appellant,
vs.
AMCO INSURANCE COMPANY, Defendant-Appellee. ________________________________________________________________
Appeal from the Iowa District Court for Black Hawk County, George L.
Stigler, Judge.
Plaintiff-subcontractor appeals the district court’s grant of summary
judgment in favor of the defendant-insurer, finding the commercial general
liability policy issued by the insurer did not cover claims asserted against the
subcontractor or general contractor under its policy because the alleged
damages were not caused by an “occurrence” within the meaning of the policy.
REVERSED AND REMANDED WITH INSTRUCTIONS.
Brandon J. Gray of Redfern, Mason, Larsen & Moore, PLC, Cedar Rapids,
for appellant.
Stephen J. Powell and Dustin T. Zeschke of Swisher & Cohrt, P.L.C.,
Waterloo, for appellee.
Heard by Potterfield, P.J., and Doyle and Tabor, JJ. 2
DOYLE, Judge.
The underlying declaratory judgment action was precipitated by a
commercial construction dispute and resulting civil actions. In this appeal, we
are asked to review the district court’s grant of summary judgment finding the
commercial general liability policy issued by the insurer did not cover the claims
asserted against the subcontractor or general contractor under its policy because
the alleged damages were not caused by an “occurrence” within the meaning of
the policy. Because we agree the district court erred in its interpretation, we
reverse and remand the case back to the district court for further proceedings.
I. Undisputed Facts and Relevant Proceedings.
In December 2008, the Cedar Bend Humane Society (CBHS) contracted
with the Samuels Group, Inc. (SG) to design and build CBHS’s new animal
adoption facility. SG then subcontracted various parts of the project to others.
The production of the design plans for the project’s plumbing and heating,
ventilation, and air conditioning (HVAC) systems was subcontracted to Bracket
Engineering Consulting, LLC (Engineering). SG also subcontracted with Hudson
Hardware Plumbing & Heating, Inc. (Hudson) to “[p]rovide engineering, labor,
material and equipment to design and install” the HVAC and plumbing systems
for the project. The window materials and their installation was subcontracted to
Allen Glass Co., Inc. (Glass).
Hudson’s subcontract with SG obligated Hudson to procure commercial
general liability (CGL) insurance to cover Hudson’s indemnity obligations under
its subcontract, and SG was to be named as an insured. Hudson then obtained 3
the required policy from AMCO (Policy). That Policy and its standard CGL policy
language are the heart of this matter, which we will further discuss below.
“After the [construction] work was performed, [CBHS] noticed mold,
excess humidity, and excess odor in the building,” allegedly caused by faults
“with the design and installation of the HVAC system.” CBHS subsequently sued
SG, Engineering, Hudson, and Glass (collectively Defendants) for breach of
contract (Suit). CBHS’s petition specifically asserted Defendants:
a. Failed to design and install a [HVAC] system in the CBHS facility which provided adequate quantities of heat, cooling and ventilation to the CBHS facility, contrary to the Contract; b. Failed to or were unable to make repairs to the [HVAC] system in the CBHS facility, thereby depriving the CBHS of a functioning [HVAC] system which met the contract specifications set forth [in] the Contract; c. Failed to properly install windows in the CBHS facility which resulted in water damage, contrary to the Contract; and d. Failed to or were unable to make repairs to the windows in the CBHS facility, thereby depriving the CBHS of properly functioning windows which met the contract specifications set forth in the Contract[.]
CBHS alleged that, as a direct and proximate cause of the breach by
Defendants, it “incurred substantial expense to renovate, rework and repair the
[HVAC] system and the windows negligently installed by Defendants so as to
provide adequate amounts of heating, air conditioning and ventilation to the
CBHS facility and to provide properly installed windows in the CBHS facility.” In
its answer, SG asserted third-party claims against Engineering, Glass, and
Hudson.
Hudson filed a claim with AMCO, seeking coverage of Hudson and SG in
the Suit under the Policy. AMCO denied the claim because its “investigation
show[ed] that there was no occurrence as defined by [the Policy] and therefore 4
no grant of coverage exist[ed] for this loss.” AMCO also explained that its
“review showed that . . . the damages being claimed by [CBHS] d[id] not meet
the definition of an ‘occurrence’ or ‘property damage’ as defined in [the Policy].”
In a separate action, Hudson filed a petition for declaratory judgment
against AMCO, asking the court to declare that AMCO was “obligated to provide
coverage to Hudson and [SG] for defense and indemnification in the [Suit], and
any related causes of action, under the terms of the [Policy, and] to reimburse
Hudson for expenses” incurred in its defense. AMCO answered and denied the
Policy covered the claims asserted against Hudson or SG in the Suit, and it
argued it was therefore not required to defend Hudson or SG in the Suit.
Dueling motions for summary judgment were filed by the parties.
Following a hearing on the motions, the district court entered its ruling, granting
AMCO’s motion, denying Hudson’s motion, and dismissing Hudson’s declaratory
judgment action. Relying upon the case then most relevant, Pursell
Construction, Inc. v. Hawkeye-Security Insurance Co., 596 N.W.2d 67, 69 (Iowa
1999), the district court found AMCO had no duty to defend or indemnify Hudson
or SG.
Hudson now appeals.
II. Standard of Review.
We review a summary judgment ruling interpreting an insurance policy for
correction of errors at law. See Amish Connection, Inc. v. State Farm Fire &
Cas. Co., 861 N.W.2d 230, 235 (Iowa 2015). A grant of summary judgment is
only proper if no genuine issue of material fact exists and the moving party is
entitled to judgment as a matter of law. See Iowa R. Civ. P. 1.981(3); Villarreal v. 5
United Fire & Cas. Co., 873 N.W.2d 714, 719 (Iowa 2016). If the dispute
concerns only the legal consequences of undisputed facts, summary judgment is
appropriate. See Nelson v. Lindaman, 867 N.W.2d 1, 6 (Iowa 2015). But, if the
dispute involves facts that might affect the outcome of the suit, given the
applicable governing law, an issue of “material” fact exists. See id. “We view the
evidence in the light most favorable to the nonmoving party, who is entitled to
every legitimate inference that we may draw from the record.” Id. at 6-7.
III. Discussion.
With that standard in mind, we turn to the general principles concerning
insurance policies. “Insurance coverage is a contractual matter” governed by the
provisions set out in the policy. Talen v. Emp’rs Mut. Cas. Co., 703 N.W.2d 395,
402 (Iowa 2005). Under Iowa law, the intent of the parties, as determined by the
language of the insurance policy, controls the interpretation of the policy. See
Nationwide Agri-Bus. Ins. Co. v. Goodwin, 782 N.W.2d 465, 470 (Iowa 2010).
This requires determining “the meaning of the words that govern its legal effect.”
See Nat’l Sur. Corp. v. Westlake Inv., LLC, 880 N.W.2d 724, 733 (Iowa 2016)
(Westlake).
We note that the Policy’s provisions and language at issue here arise from
a contract that is now standard in the liability industry. See id.; Scott C. Turner,
Insurance Coverage of Construction Disputes § 1:5 (2d ed.) (Turner). Despite
the standardization, it has been said that determining whether there is coverage
of claims for the cost to repair or replace defective construction work or products
is “the most controversial and difficult of all.” Turner § 2.46. Because the CGL
policies generally have the same standardized language, the same issues have 6
been litigated in just about every jurisdiction, sometimes with contrary results.
See Christopher C. French, Construction Defects: Are They “Occurrences”?, 47
Gonz. L. Rev. 1, 3 (2012); see also Philip L. Bruner and Patrick J. O’Connor, Jr.,
Bruner & O’Connor Construction Law § 11:200 (2016); James Duffy O’Connor,
Construction Defects: “Property Damage” and the Commercial General Liability
Policy, 24 Constr. L. 11 (Spring 2004).
Generally speaking, CGL policies, like the one here, contain an insuring
agreement, which “is the core provision of the entire policy, setting forth both the
insurer’s obligation to pay liabilities and its obligation to defend claims made
against the insured.” See Turner § 1:13; see also Pursell, 596 N.W.2d at 69
(discussing parts of CGL policies). “After the insuring agreement ‘giveth,’ the
exclusions ‘taketh away.’” Turner § 1:14. That is, CGL policies also have
“exclusions that take away some of this coverage.” Pursell, 596 N.W.2d at 69.
On top of that, there are generally exceptions to the exclusions. See Westlake,
880 N.W.2d at 739. Consequently, “[t]o determine if an insurance policy affords
coverage under a particular set of circumstances, we generally look first to the
insuring agreement, then to the exclusions and the exceptions to the exclusions.”
Id.; see also Amish Connection, 861 N.W.2d at 240. If a term is not defined in
the policy, we use its ordinary meaning—one a reasonable, ordinary person
would use. See Westlake, 880 N.W.2d at 734. However, an “undefined term in
an insurance policy must be construed in light of the entire policy, including any
exclusions.” Id. at 735. 7
A. Insuring Agreement.
As noted above, most insuring agreements set forth an insurer’s two main
obligations: the duty to defend and the duty to indemnify. See Turner § 1:13.
While “[t]he two duties are clearly coextensive,” see Yegge v. Integrity Mut. Ins.
Co., 534 N.W.2d 100, 102 (Iowa 1995),
the duty to defend is said to be a separate, distinct and independent obligation of the insurer. Whereas the duty to indemnify is dependent on the findings in the underlying case and therefore is usually not determined until the conclusion of that action, the duty to defend is determined at the very outset.
Turner § 7:1. However, because of the complexity of claims concerning
defective construction work, the pleadings in the underlying case are generally,
“of necessity, [pled] very broadly,” making the duty-to-defend determination
complicated. See id. § 1:2. “As such, when faced with a general pleading,
defense coverage should be triggered in most cases as indemnity coverage
cannot be ruled out.” Id. § 2.46. Thus, the duty to defend is said to be broader
than the duty to indemnify. See United Fire & Cas. Co. v. Shelly Funeral Home,
Inc., 642 N.W.2d 648, 656 (Iowa 2002). Ultimately,
the duty to defend rests solely on whether the petition contains any allegations that arguably or potentially bring the action within the policy coverage. If any claim alleged against the insured can rationally be said to fall within such coverage, the insurer must defend the entire action. In case of doubt as to whether the petition alleges a claim that is covered by the policy, the doubt is resolved in favor of the insured.
Id. at 656-57 (citation omitted). “[I]t is permissible for a liability insurer, in
determining whether to accept a tendered defense to consider facts beyond the
allegations of the petition.” Talen, 703 N.W.2d at 405. But the “insurer has no
duty to defend ‘if after construing both the policy in question, the pleadings of the 8
injured party and any other admissible and relevant facts in the record, it appears
the claim made is not covered by the indemnity insurance contract.’” Id. at 406
(citation omitted); see also Turner § 2:1 (noting “breach of contract claim against
the insured triggers the insurer’s duty to defend unless both the face of the claim
or complaint and a thorough investigation of the facts reveal that the claim cannot
possibly include a claim for any item of covered damages”).
The Policy’s insuring agreement, which includes both the duty-to-
indemnify and duty-to-defend language, stated:
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of . . . “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for . . . “property damage” to which this insurance does not apply. We may, at our discretion, investigate any “occurrence” and settle any claim or “suit” that may result. .... b. This insurance applies to . . . “property damage” only if . . . “property damage” is caused by an “occurrence” . . . .
See also Westlake, 880 N.W.2d at 732-33 (discussing substantively similar CGL
policy language). The Policy contained definitions of the words contained in
quotation marks, which were also substantively similar to the standard CGL
policy definitions. See also id. The Policy defined “property damage” as
a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.
See also id. at 733. An “occurrence” was defined as “an accident, including
continuous or repeated exposure to substantially the same general harmful 9
conditions.” See also id. at 732. The term “accident” is generally not defined in
standard CGL policies, and it was not defined in this Policy. See id. at 735.
However, our supreme court has addressed this issue and concluded “that in the
context of a modern standard-form CGL policy containing an exclusion
precluding coverage for property damage ‘expected or intended from the
standpoint of the insured,’”—which is the case here—“the term ‘accident’ means
‘an unexpected and unintended event.’” Id. Substituting the relevant definitions
into the insuring agreement, AMCO agreed to defend Hudson and SG against
any suit seeking damages for physical injuries to, or loss of use of, tangible
property that were caused by an unexpected and unintended event. See, e.g.,
id. at 732-36.
In its motion for summary judgment, AMCO’s initial argument was two-
fold. AMCO first asserted that the Suit was not seeking damages for injuries to
tangible property. Additionally, AMCO argued that there was no “occurrence” as
a matter of law, citing Pursell; our own unpublished case, W.C. Stewart
Construction, Inc. v. Cincinnati Insurance Co, No. 08-0824, 2009 WL 928871, at
*3-4 (Iowa Ct. App. Apr. 8, 2009), which relied upon Pursell to reach the
conclusion there was no “occurrence”; and an Eighth Circuit case that interpreted
Iowa law and relied upon Pursell and W.C. Stewart to determine there was not
an “occurrence.” See Pursell, 596 N.W.2d 70-73 (discussing CGL policies and
the term “occurrence”); see also Liberty Mut. Ins. Co. v. Pella Corp., 650 F.3d
1161, 1176 (8th Cir. 2011) (discussing Pursell and W.C. Stewart, 2009 WL
928871, at *2-3). Like the Eighth Circuit in Liberty Mutual, the district court here
relied upon Pursell and W.C. Stewart in reaching its conclusion that, “[b]y 10
definition, the alleged defective workmanship performed by [Hudson] was not the
result of a sudden event and thus not the result of an ‘accident’ covered by [the
Policy].” Having reached that conclusion, it was not necessary for the court to
address AMCO’s “property damage” argument, but AMCO reasserts that
argument here in the alternative. See Duck Creek Tire Serv., Inc. v. Goodyear
Corners, L.C., 796 N.W.2d 886, 893 (Iowa 2011) (“It is well-settled law that a
prevailing party can raise an alternative ground for affirmance on appeal without
filing a notice of cross-appeal, as long as the prevailing party raised the
alternative ground in the district court.”). Consequently, we begin our discussion
with the “occurrence” argument.
1. Was There an Occurrence?
Until recently, the leading Iowa case on the matter was Pursell. See
Westlake, 880 N.W.2d at 736 (discussing Pursell, 596 N.W.2d at 67). In Pursell,
the Iowa Supreme Court
considered whether a CGL policy covered damages arising from breach-of-contract and negligence claims brought against an insured who failed to construct two houses in a floodplain at the elevation required by city ordinance, thereby causing the houses to be uninhabitable. We treated the claim against the insurer as one for the cost of repairing the insured’s own defective workmanship, as the claimed damages were the cost of raising the elevation of the houses by approximately two feet. We concluded the policy did not cover the cost of repairing an insured’s own defective work product because “defective workmanship standing alone, that is, resulting in damages only to the work product itself, is not an occurrence under a CGL policy.” In arriving at this conclusion, we reasoned that interpreting the policy to cover repairs to the insured’s own defective workmanship would convert the insurer into “a guarantor of the insured’s performance” on a contract, causing the policy to take on “the attributes of a performance bond.”
Id. at 736-37 (discussing Pursell, 596 N.W.2d at 67-71). 11
Recently, the court revisited the “occurrence” definition discussion in
Westlake, 880 N.W.2d at 724, which was decided after the district court’s
summary judgment ruling at issue here. In Westlake, an insurer appealed the
district court’s rulings in a declaratory judgment action that found “defective work
performed by an insured’s subcontractor may constitute an occurrence under the
policy” and instructed “the jury to determine whether the claimed damages arose
due to an ‘accident’ constituting an ‘occurrence’ under the policy by considering
‘the viewpoint of the insureds and what they intended or should reasonably have
expected.’” Id. at 727. Finding no error, the court1 revisited the definition of
“accident” in the context of CGL policies, stating:
An intentional act resulting in property damage the insured did not expect or intend qualifies as an accident amounting to an occurrence as defined in a modern standard-form CGL policy so long as the insured did not expect and intend both the act itself and the resulting property damage. Considered from the standpoint of the insured, “a deliberate act, performed negligently, is an accident if the effect is not the intended or expected result; that is, the result would have been different had the deliberate act been performed correctly.” Accordingly, an intentional act does not constitute an accident that qualifies as an occurrence covered by a modern standard-form CGL policy when the resulting harm “was the natural and expected result of the insured’s actions, that is, was highly probable whether the insured was negligent or not.”
Id. at 736 (citations omitted). The court went on to reject the insurer’s argument
that Pursell stood for the proposition that “defective workmanship never
constitutes an accident or an occurrence under Iowa law.” Id. at 736-37
(emphasis added). Noting Pursell only concerned damages to an insured
contractor’s own defective work product, the court found its holding in Pursell
1 We note there was a strong dissent in Westlake by three of the seven Justices of the Iowa Supreme Court. See Westlake, 880 N.W.2d at 744-51. 12
“was limited by its plain language to situations in which the insured performed
defective work and sought coverage for the cost of repairing the defective work
product.” Id. at 737-38. The court “interpret[ed] the insuring agreement in the
modern standard-form CGL policy as providing coverage for property damage
arising out of defective work performed by an insured’s subcontractor unless the
resulting property damage is specifically precluded from coverage by an
exclusion or endorsement.” Id. at 740. Under the facts and policy in that case,
the court concluded “the defective work performed by the insureds’
subcontractors [fell] within the definition of ‘occurrence’ in the insuring agreement
appearing in the . . . policy.” Id.
Though the court did not overrule Pursell, the majority’s holding in
Westlake was a bit of a game changer. See Westlake, 880 N.W.2d at 744
(Waterman, J., dissenting) (“The majority disregards [the Eighth Circuit’s
persuasive decision in Liberty Mutual that is] directly on point and instead relies
on inapposite Iowa authority finding liability coverage for a landlord’s negligent
supervision of an employee who flashed tenants.” (citing Shelly Funeral Home,
642 N.W.2d at 651)). Comparing the facts in Pursell—as distinguished by the
majority in Westlake—with those here, it is clear that the claims in the Suit are
not solely claims for damages by Hudson based upon Hudson’s alleged defective
work product. In discovery in the Suit, CBHS’s president elaborated upon
CBHS’s claims in her affidavit:
After the work was performed, [CBHS] noticed mold, excess humidity, and excess odor in the building. [CBHS] alleges that the negligence and/or breach of contract of the [SG] and/or the named subcontractors caused ventilation problems in the animal care and adoption building. 13
[CBHS] later hired [an expert] to review the construction and documentation associated with the completion. [The expert’s] report [found] fault with the design and installation of the HVAC system and stat[ed] that the mold, excess humidity, and excess odor were the result. As a result of the mold, excess humidity and excess odor [CBHS] alleges was caused by the negligence of the [SG] and/or the named subcontractors, [CBHS] has incurred expenses to remediate the mold, excess humidity and excess odor and to perform certain other repairs and/or improvements to the animal care and adoption building.
The report “found five principle areas where [CBHS] incurred both tangible and
intangible costs as a result of design or construction failures,” and it listed the
following damages and related costs:
• HVAC System Design & Installation Deficiencies HVAC repairs, controls, & Reznor replacement $ 232,002 Temporary HVAC $ 8,417 Engineering costs $ 30,807 Related roofing & curb installations $ 8,987 Related construction costs $ 13,976
• Site Drainage & Building Moisture Migration Window repair $ 4,500 Window replacement $ 70,902
• Ceilings & Building Material Choices Ceilings $ 7,429 Walls & floors $ 60,482
• Plumbing Fixtures valued at $ 40,000
• Loss of Value LEED certification. valued at $ 17,000 Construction delays
Given the broad pleadings in the Suit and CBHS’s claimed damages to the
ceilings, walls, floors, windows, and the roof, among other things, viewing the
evidence in the light most favorable to Hudson, it is possible—if not definite—that
CBHS claims defective workmanship by Hudson caused damages beyond its 14
own work that Hudson did not expect or intend, potentially constituting an
“accident” that is an “occurrence” within the meaning of the Policy. Stated
another way, there is the potential, given the facts alleged in the Suit, that the
events were “unexpected.” The district court erred in concluding otherwise.
2. Was There Property Damage?
Because we find the court erred in finding there could be no “occurrence”
under the Policy, we must address AMCO’s argument the damages alleged in
the Suit do not fall within the definition of “property damage” in the Policy. Citing
Yegge, 534 N.W.2d at 101, AMCO claims the only damages asserted are
intangible economic losses that are not covered under the Policy’s definition.
However, viewing the record in the light most favorable to Hudson, CBHS’s
claims are not merely claims for “faulty workmanship” or for the cost to finish
unfinished work. Rather, the damages alleged, as set out in the expert’s report,
include damages to tangible property beyond the work product itself, such as the
walls. We think, at this stage and given our standard of review, Hudson has
shown the claims in the Suit include claims of “property damage” within the
meaning of the Policy.
Because the claims against Hudson in the Suit include claims against
Hudson for “property damage” caused by an “occurrence” within the meaning of
the Policy, we conclude the claims in the Suit are covered under the Policy’s
insuring agreement.
B. Exclusions.
Having determined that the claims in the Suit are covered under the
Policy’s insuring agreement, we next turn to the final two steps in our analysis in 15
which we examine the Policy’s pertinent exclusions and then, if applicable, any
exceptions to those exclusions. “Insurers relying on exclusions from coverage
have the burden to prove their applicability,” and, if “an insurer has ‘affirmatively
expressed coverage through broad promises, [it] assumes a duty to define any
limitations or exclusionary clause in clear and explicit terms.’” Farm Bureau Life
Ins. Co. v. Chubb Custom Ins. Co., 780 N.W.2d 735, 742 (Iowa 2010) (alteration
in original) (citation omitted). “We construe exclusions strictly against the
insurer.” Amish Connection, 861 N.W.2d at 236.
The Policy’s exclusions are set forth in several pages and are substantially
the same as the standard CGL policy contract. The exclusions at issue here are
almost identical to those in Westlake, so we need not set them out here. See
880 N.W.2d at 732-33.
In Westlake, the CGL policy in question was issued by the insurer to the
general contractor, and the claims for which the general contractor sought
indemnification was based upon the defective work of the general contractor’s
subcontractor. See id. at 739. Considering the same exceptions, the court
concluded the policy in its case “plainly contemplate[d] coverage for some
property damage caused by defective work performed by an insured’s
subcontractor.” Id. The court reasoned that interpreting the CGL policy “so
narrowly as to preclude coverage for all property damage arising from negligent
work performed by an insured’s subcontractor would be unreasonable in light of
the exceptions and exclusions the [the CGL policy] contains.” Id. The court
explained: 16
[T]he policy’s “your work” exclusion generally excludes from coverage property damage arising out of completed work performed by or on behalf of the insured. However, the exclusion contains an exception indicating property damage to work performed on behalf of the insured remains compensable assuming no other coverage exclusion applies if it was performed by the insured’s subcontractor. Specifically, it states the “your work” exclusion does not apply if “the damaged work or the work out of which the damage arises was performed . . . by a subcontractor” on behalf of the insured. The effect of this subcontractor exception to the “your work” exclusion is to preserve coverage the “your work” exclusion would otherwise negate. .... We think a reasonable ordinary person who read the modern standard-form CGL policy containing the subcontractor exception to the “your work” exclusion in its entirety would believe it covered defective work performed by the insured’s subcontractor unless the resulting property damage was specifically precluded from coverage by an exclusion or endorsement. Accordingly, we interpret the insuring agreement in the modern standard-form CGL policy as providing coverage for property damage arising out of defective work performed by an insured’s subcontractor unless the resulting property damage is specifically precluded from coverage by an exclusion or endorsement. In addition, we conclude the defective work performed by the insureds’ subcontractors falls within the definition of “occurrence” in the insuring agreement appearing in the [policy at issue here].
Id. at 739-40 (alteration in quoted text in original) (internal citations and footnotes
omitted).
Here, the Policy insures Hudson and then SG as an additional insured.
Though the insureds’ positions here are different from Westlake, we do not think
the differences distinguish this case from the conclusion reached by the court in
Westlake. As one text explains, the “your work” exclusions in standard CGL
policies “are intended to eliminate coverage for the cost of repairing or replacing
the insured’s faulty work or product, but they do not eliminate coverage for the
damage caused by the insured’s faulty work or product.” Turner § 11:10. In 17
Weedo v. Stone-E-Brick, Inc., 405 A.2d 788, 791 (N.J. 1979), a case regularly
cited across jurisdictions, liability policies were explained to work as follows:
The consequence of not performing well is part of every business venture; the replacement or repair of faulty goods and works is a business expense, to be borne by the insured-contractor in order to satisfy customers. There exists another form of risk in the insured-contractor’s line of work, that is, injury to people and damage to property caused by faulty workmanship. Unlike business risks of the sort described above, where the tradesman commonly absorbs the cost attendant upon the repair of his faulty work, the accidental injury to property or persons substantially caused by his unworkmanlike performance exposes the contractor to almost limitless liabilities. While it may be true that the same neglectful craftsmanship can be the cause of both a business expense of repair and a loss represented by damage to persons and property, the two consequences are vastly different in relation to sharing the cost of such risks as a matter of insurance underwriting. .... An illustration of this fundamental point may serve to mark the boundaries between “business risks” and occurrences giving rise to insurable liability. When a craftsman applies stucco to an exterior wall of a home in a faulty manner and discoloration, peeling and chipping result, the poorly-performed work will perforce have to be replaced or repaired by the tradesman or by a surety. On the other hand, should the stucco peel and fall from the wall, and thereby cause injury to the homeowner or his neighbor standing below or to a passing automobile, an occurrence of harm arises which is the proper subject of risk-sharing as provided by the type of policy before us in this case. The happenstance and extent of the latter liability is entirely unpredictable the neighbor could suffer a scratched arm or a fatal blow to the skull from the peeling stonework. . . . [I]njury to persons and damage to other property constitute the risks intended to be covered under the CGL [policy].
Weedo, 405 A.2d at 791-92 (citations omitted).
Because the Suit is still pending, no conclusions have been reached as to
who, if anyone, caused damages as alleged in the Suit. Viewing the record in
the light most favorable to Hudson, the damages alleged are not simply for “the
work” of Hudson or SG such that exclusion is absolute. Rather, the pleadings in 18
the Suit clearly contemplate damages caused by Hudson to other property and
may fall outside the exclusion or within the exception to the exclusion such that
coverage exists.
We also think this interpretation is supported by the language in the
subcontract between SG and Hudson. While that contract is not binding here, it
is informative of Hudson and SG’s intent. Hudson was required to obtain
“contractual liability insurance covering [Hudson’s] indemnity obligations under
[the subcontract].” The indemnity obligations required Hudson to
defend, indemnify and hold harmless [CBHS, the owner, SG Design, the architect, SG, the contractor] (including its affiliates, parents and subsidiaries) and other contractors and subcontractors and all their agents and employees from and against all claims, damages, loss and expenses . . . arising out of or resulting from the performance of Subcontractor’s Work including, but not limited to: (a) any such claim, damage, loss, or expense [that] is attributable to bodily injury, . . . or to injury to or destruction of tangible property (other than Subcontractor’s Work itself) including the loss of use resulting therefrom, to the extent caused in whole or in any part by any negligent act or omission of Subcontractor or anyone directly or indirectly employed by Subcontractor or anyone for whose acts Subcontractor may be liable; and (b) such obligation shall not be construed to negate, or abridge, or otherwise reduce any other right or obligation of indemnity which would otherwise exist as to any party or person described [here]. Loss or damage due to acts of Subcontractor will be deducted from the amounts otherwise due Subcontractor.
Hudson was also required “to obtain, maintain and pay for such [CGL] insurance
coverage and endorsements as will insure the provisions of this subcontract.”
Additionally, the subcontract mandated that Hudson obtain an additional insured
endorsement adding SG as an insured to the policy, with SG receiving “all the
same rights and insurance coverage under the [policy] including coverage for
completed operations as given [to Hudson].” These terms indicate that SG 19
wanted to lessen its risk from claims for damages based upon its subcontractor’s
negligence, and it clearly contemplates that its subcontractor’s own work would
not be insured. The terms of the subcontract support the conclusion that the
“your work” exclusion was not intended to exclude damages to other property
caused by the subcontractor’s own “work.”
Viewing the record in the light most favorable to Hudson, we conclude the
claims alleged in the Suit against Hudson and SG may not fall within an
exclusion or may fall within an exception to an exclusion such that the claims are
covered under the Policy, requiring AMCO to defend Hudson and SG in the Suit.
C. Duty to Indemnify.
Briefly, we note Hudson requested in its petition for declaratory judgment
and its summary judgment motion that it also be declared that AMCO has a duty
to indemnify Hudson and SG. At this time, we conclude genuine issues of
material fact exist precluding such a declaration. It is conceivable that the fact-
finder will determine the damages were caused by Hudson’s defective
workmanship but the damages were only to its own work, such that there was no
“accident” or “occurrence.” Similarly, it is also possible that, once facts and
damages are determined, the damages fall under one of the Policy’s exclusions
precluding coverage. We are not commenting on the validity of CBHS’s claims
or the quality of Hudson’s workmanship. Simply, it is impossible to determine the
basis, if any, upon which CBHS will recover until that action is completed. See
Emp’rs Mut. Cas. Co. v. Cedar Rapids Television Co., 552 N.W.2d 639, 642
(Iowa 1996). Consequently, whether AMCO has an indemnification duty cannot
be determined at this time. 20
IV. Conclusion.
In sum, Hudson has shown, as a matter of law, AMCO owed it and SG a
defense duty in the underlying action for claims asserted by CBHS. However,
neither AMCO nor Hudson have established whether AMCO has a duty to
indemnify Hudson or SG at this time. Accordingly, we reverse the district court’s
summary judgment ruling finding AMCO had no duty to defend or indemnify
Hudson or SG. We remand the case for the district court to enter summary
judgment in favor of Hudson on its claim AMCO had a duty to defend but deny
both parties’ motions concerning AMCO’s alleged duty to indemnify.