UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
Hutton Construction, Inc.
v. Case No. 21-cv-706-PB Opinion No. 2022 DNH 076 Continental Western Insurance Company
MEMORANDUM AND ORDER
This insurance coverage case stems from a subcontractor’s defective
masonry work. The principal issue presented by the insurer’s motion for
partial summary judgment is whether the subcontractor’s comprehensive
general liability policy covers stipulated delay damages that the general
contractor incurred when the subcontractor’s faulty work caused a building
inspector to issue a stop-work order for the entire project.
I. BACKGROUND
In 2018, Hutton Construction Inc. entered into a build-to-suit lease
with O’Reilly’s Auto Enterprises, LLC to construct an auto parts store on
property Hutton owned in Ossipee, New Hampshire. The lease required
construction be completed within 125 days and imposed stipulated damages
of $1,000 for each additional day that the project remained unfinished. Hutton served as the general contractor for the project and
subcontracted with Frederick A. Meyer III & Sons, Inc. to construct the
building’s exterior masonry walls. The subcontract obligated Meyer to
complete the masonry work per the stipulated schedule and indemnify
Hutton against any claims, damages, or losses caused in whole or in part by
Meyer’s negligence. Construction began in July and was scheduled to be
finished in November. After Meyer completed a sufficient portion of the
exterior masonry work, Hutton began work on the roof and the interior of the
building.
While the work was ongoing, the Ossipee building inspector identified
defects in Meyer’s masonry work, including a lack of proper grouting of the
concrete blocks that formed the walls. After Meyer failed to address the
inspector’s concerns, he issued a “stop-work order” in October that required
all work on the project to cease immediately. In support of his order, the
inspector cited Meyer’s failures to properly grout concrete blocks and
correctly install steel anchors that connected the roof framing to the walls.
Both defects potentially threatened the building’s structural integrity.
The stop-work order remained in place for about thirteen months.
During that time, water seeped into the building through the defective
masonry walls and the unfinished roof, damaging Hutton’s work on the
interior. The water damage included moldy sheetrock, rusty metal studs, and
2 water-filled insulation. After the stop-work order was lifted, Hutton needed
two additional months to fix the water damage and complete the project.
Meanwhile, Meyer fixed the defective masonry at its own expense.
The construction delay left Hutton responsible to O’Reilly’s for
stipulated damages of close to half a million dollars. Hutton subsequently
demanded that Meyer reimburse it for both the stipulated damages and the
costs it incurred to repair the water damage. Meyer submitted a claim for
coverage under a commercial general liability (“CGL”) insurance policy it had
purchased from Continental Western Insurance Company. After Continental
denied coverage, Meyer assigned Hutton its rights under the policy. Hutton
then filed this declaratory judgment action in state court, and Continental
later removed the case to federal court. Continental now moves for partial
summary judgment, limited to Hutton’s claim for the stipulated delay
damages. Hutton objects.
II. STANDARD OF REVIEW
Summary judgment is appropriate when the record reveals “no genuine
dispute as to any material fact and the movant is entitled to judgment as a
matter of law.” Fed. R. Civ. P. 56(a). In this context, a “material fact” is one
that has the “potential to affect the outcome of the suit.” Cherkaoui v. City of
Quincy, 877 F.3d 14, 23 (1st Cir. 2017) (cleaned up). A “genuine dispute”
3 exists if a factfinder could resolve the disputed fact in the nonmovant’s favor.
Ellis v. Fid. Mgmt. Tr. Co., 883 F.3d 1, 7 (1st Cir. 2018).
The movant bears the initial burden of presenting evidence that “it
believes demonstrates the absence of a genuine issue of material fact.”
Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); accord Irobe v. U.S. Dep’t
of Agric., 890 F.3d 371, 377 (1st Cir. 2018). Once the movant has properly
presented such evidence, the burden shifts to the nonmovant to designate
“specific facts showing that there is a genuine issue for trial,” Celotex, 477
U.S. at 324, and to “demonstrate that a trier of fact could reasonably resolve
that issue in [its] favor.” Irobe, 890 F.3d at 377 (cleaned up). If the
nonmovant fails to adduce such evidence on which a reasonable factfinder
could base a favorable verdict, the motion must be granted. Celotex, 477 U.S.
at 324. In considering the evidence, the court must draw all reasonable
inferences in the nonmoving party’s favor. Theriault v. Genesis HealthCare
LLC, 890 F.3d 342, 348 (1st Cir. 2018).
Under New Hampshire law, the interpretation of an insurance policy is
a question of law. Town of Londonderry v. N.H. Mun. Ass’n Prop. Liab. Ins.
Tr., Inc., 140 N.H. 440, 441 (1995). “Where disputed terms are not defined in
a policy or by State judicial precedent, [courts] apply an objective standard,
construing the terms in context and as would a reasonable person in the
position of the insured, based upon more than a casual reading of the policy
4 as a whole.” Cath. Med. Ctr. v. Exec. Risk Indem., Inc., 151 N.H. 699, 701
(2005) (quoting Panciocco v. Lawyers Title Ins. Corp., 147 N.H. 610, 613
(2002)). Ambiguities in a policy must be resolved in favor of coverage.
Philbrick v. Liberty Mut. Fire Ins. Co., 156 N.H. 389, 391 (2007). The insurer
has the burden to prove that coverage is unavailable. Maville v. Peerless Ins.
Co., 141 N.H. 317, 320 (1996).
III. ANALYSIS
Continental cites three different policy provisions to support its refusal
to cover Hutton’s claims against Meyer. First, it argues that any property
damage Hutton suffered was not caused by an “occurrence.” Second, it argues
that the stipulated delay damages Hutton paid to O’Reilly’s are not a covered
form of “property damage.” Finally, it argues that Meyer’s right to coverage is
barred by the policy’s “your work” exclusion.
A. Occurrence
The Continental policy is a standard-form CGL policy. The insuring
agreement provides that Continental will “pay those sums that the insured
becomes legally obligated to pay as damages because of . . . ‘property damage’
to which this insurance applies.” Doc. No. 11–3 at 164. Coverage is available
under the policy, however, only if “‘property damage’ is caused by an
‘occurrence.’” Id. An “occurrence” is defined as “an accident, including
5 continuous or repeated exposure to substantially the same general harmful
conditions.” Id. at 178. The term “accident” is not defined in the policy.
Continental argues that the stipulated delay damages Hutton incurred,
both while the stop-work order was in effect and while Hutton was repairing
the water damage, were not caused by an occurrence because they resulted
from Meyer’s defective workmanship. In pressing this argument, Continental
relies on the general rule in New Hampshire that faulty workmanship is not
sufficiently fortuitous to qualify as an occurrence, at least when the claim
seeks coverage for the cost of repairing the defective work itself. See, e.g.,
McAllister v. Peerless Ins. Co., 124 N.H. 676, 680 (1984). Hutton responds
first by claiming that the existence of damage to property other than the
defective masonry — the physical damage to the building’s interior and the
loss of use of the entire building — satisfies the occurrence requirement. In
the alternative, to the extent damage to nondefective property is not
sufficient by itself, Hutton argues that the issuance of the stop-work order
and the water damage that occurred while the stop-work order was in effect
are each intervening fortuitous events that satisfy the occurrence
requirement. I take up these arguments in turn after providing a brief
summary of ways in which similar arguments have been addressed
elsewhere.
6 1. Defective workmanship and the occurrence requirement.
Courts across the country are divided on when faulty workmanship will
be deemed to be an occurrence under a standard-form CGL policy. See
Greystone Constr., Inc. v. Nat’l Fire & Marine Ins. Co., 661 F.3d 1272, 1282–
83 (10th Cir. 2011) (surveying caselaw and analyzing trends). At issue is
whether defective workmanship is an “accident,” which is a necessary
component of an occurrence. A growing number of states have held that
defective workmanship is an accident, regardless of whether the injury is
limited to the insured’s work product or extends to other property, as long as
it is unintended and unexpected from the standpoint of the insured. See, e.g.,
Am. Empire Surplus Line Ins. Co. v. Hathaway Dev. Co., 707 S.E.2d 369 (Ga.
2011); Sheehan Constr. Co. v. Continental Cas. Co., 935 N.E.2d 160 (Ind.
2010); Architex Ass’n, Inc. v. Scottsdale Ins. Co., 27 So.3d 1148 (Miss. 2010);
Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007).
These courts generally reason that “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.” Lamar, 242 S.W.3d at 8. This approach rejects the notion that an
occurrence should be interpreted more narrowly on public policy grounds,
namely, that damages caused by faulty workmanship represent a business
risk that performance bonds, not CGL policies, are meant to cover. See id. at
7 10. Instead, courts that follow this reasoning have explained that any
limitations on coverage for the general business risks presented by faulty
workmanship are best addressed by policy exclusions, such as the “your
work” exclusion, that typically bar coverage for the cost of repairing damage
to the insured’s own work. See id. This line of cases also rejects the argument
that the term “accident” necessarily requires truly fortuitous circumstances
that faulty workmanship alone cannot satisfy. Some have reasoned that
fortuity is not a prerequisite to finding an accident, while others have
explained that the insured’s faulty work satisfies the fortuity requirement as
long as it is unintended and unexpected. Compare id. at 16, with Greystone,
661 F.3d at 1285.
New Hampshire is aligned with other jurisdictions that refuse to treat
faulty workmanship as an occurrence when it results in damage only to the
insured’s defective work product. See, e.g., Cincinnati Ins. Co. v. Motorists
Mut. Ins. Co., 306 S.W.3d 69 (Ky. 2010); Essex Ins. Co. v. Holder, 261 S.W.3d
456 (Ark. 2007); Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial
Union Ins. Co., 908 A.2d 888 (Pa. 2006); Auto–Owners Ins. Co. v. Home Pride
Cos., 684 N.W.2d 571 (Neb. 2004); McAllister, 124 N.H. at 680. Although
some courts have reached this result based on the business risk rule, the
more prevalent rationale focuses on the concept of fortuity. See Home Pride,
684 N.W.2d at 577. Fortuity is inherent in the plain meaning of “accident,”
8 these courts reason, and damage to defective work, standing alone, ordinarily
is not fortuitous. Id. (citing McAllister, 124 N.H. at 680).
Courts in this second group diverge when the insured’s faulty work also
results in damage to nondefective property. Some courts have held that
defective workmanship will be deemed to be accidental to the extent that it
results in damage to nondefective property, even when the sole cause of the
damage is the insured’s defective workmanship. See, e.g., Home Pride, 684
N.W.2d at 578–79; Wardcraft Homes, Inc. v. Emp’rs Mut. Cas. Co., 70 F.
Supp. 3d 1198, 1204–07 (D. Colo. 2014). Others have concluded that damage
to nondefective property caused by faulty workmanship will be treated as
accidental only when it is followed by a fortuitous event or exposure that
results in damage to the nondefective property. See, e.g., Pa. Nat. Mut. Cas.
Ins. Co. v. St. Catherine of Siena Par., 790 F.3d 1173, 1180 (11th Cir. 2015)
(holding, under Alabama law, that repeated exposure to water that came
through improperly installed shingles and damaged ceilings constituted an
occurrence); French v. Assurance Co. of Am., 448 F.3d 693, 704 (4th Cir.
2006) (applying Maryland law and holding that “moisture intrusion into the
nondefective structure and walls of the [plaintiffs’] home was an accident”
that resulted from subcontractor’s defective installation of exterior stucco);
Burlington Ins. Co. v. Shelter Structures, Inc., 484 F. Supp. 3d 237, 243–45
(E.D. Pa. 2020) (rejecting insured’s argument that existence of damage to
9 nondefective property from faulty workmanship constitutes an occurrence
under Pennsylvania law absent some “unexpected and undesirable event”);
Auto Owners Ins. Co. v. Newman, 684 S.E.2d 541, 544 (S.C. 2009)
(“[A]lthough the subcontractor’s negligent application of the stucco does not
on its own constitute an ‘occurrence,’ we find that the continuous moisture
intrusion resulting from the subcontractor’s negligence is an ‘occurrence’ as
defined by the CGL policy.”). Am. Fam. Mut. Ins. Co. v. Am. Girl, Inc., 673
N.W.2d 65, 76 (Wis. 2004) (finding settlement of soil underneath building to
constitute an occurrence that resulted from subcontractor’s faulty site-
preparation advice).
2. Defective workmanship and damage to nondefective property.
The parties agree that an insured’s defective workmanship does not
give rise to an occurrence under New Hampshire law if the only resulting
damage is to the defective work itself. See, e.g., Concord Gen. Mut. Ins. Co. v.
Green & Co. Bldg. & Dev. Corp., 160 N.H. 690, 693 (2010); McAllister, 124
N.H. at 680; Hull v. Berkshire Mut. Ins. Co., 121 N.H. 230, 231 (1981). They
disagree, however, as to which approach New Hampshire courts will follow
when defective workmanship also results in damage to nondefective property.
Hutton contends that such damage always satisfies the occurrence
requirement. Continental argues that damage to nondefective property is not
10 sufficient absent some intervening event that is truly fortuitous. Although
the New Hampshire Supreme Court has not squarely answered this question,
a close reading of its precedent suggests that an intervening fortuitous event
or exposure is required.
The New Hampshire Supreme Court has interpreted the term
“accident” in a CGL policy to mean “an undesigned contingency, a happening
by chance, something out of the usual course of things, unusual, fortuitous,
not anticipated, and not naturally to be expected.” EnergyNorth Nat. Gas v.
Cont’l Ins. Co., 146 N.H. 156, 160 (2001) (quoting Vermont Mut. Ins. Co. v.
Malcolm, 128 N.H. 521, 523 (1986)). An accident can refer to “circumstances,
not necessarily a sudden and identifiable event, that were unexpected or
unintended from the standpoint of the insured.” High Country Assocs. v. N.H.
Ins. Co., 139 N.H. 39, 44 (1994). The focus is on whether the event causing
the injury was accidental from the perspective of the insured. Vermont Mut.,
128 N.H. at 523.
Applying these principles, the New Hampshire Supreme Court has
found the occurrence requirement satisfied in several cases that involved
faulty work that caused injury to nondefective property. See Webster v.
Acadia Ins. Co., 156 N.H. 317, 322 (2007); High Country, 139 N.H. at 44; M.
Mooney Corp. v. U.S. Fid. & Guar. Co., 136 N.H. 463, 469–70 (1992). A close
examination of the facts of these cases, however, reveals that in each such
11 case, a fortuitous intervening event was critical to the court’s finding that the
damage claimed was caused by accident.
In Webster, a contractor negligently constructed a replacement roof on
a school gymnasium. As a result of the faulty workmanship, snow that had
accumulated on the roof following a heavy snowstorm caused buckling and
separation of the purlins that provided structural support to the roof. The
contractor’s insurer refused to provide a defense after the school sued the
contractor for the physical injury to the purlins. See 156 N.H. at 318, 322–23.
The insurer argued that the CGL policy did not cover damage to the purlins
because there was no occurrence under the policy. The New Hampshire
Supreme Court disagreed. The court first distinguished its prior decision in
McAllister because the school sought damages for the nondefective purlins
rather than the defective roof itself. Id. at 322. The court then found that the
damage to the purlins was an accident because it was “first caused or
aggravated by the snowstorm,” an event that “was unexpected from the
standpoint of the [insured], especially given that its work did not include the
purlins.” Id. at 323. Accordingly, the court held that the unexpected damage
to the purlins from the snow accumulation was caused by an occurrence.
The court relied in Webster on its prior decision in High Country,
where it had found an occurrence based on analogous facts. See id. at 322–23.
In High Country, condominium owners sued their builder for the defective
12 installation of siding. The defective siding allowed moisture to seep into the
buildings, causing widespread decay of the interior and exterior walls and
loss of structural integrity. High Country, 139 N.H. at 41. The builder’s
insurer denied coverage asserting that the builder’s defective workmanship
did not constitute an occurrence under the applicable CGL policy. The court
rejected the insurer’s argument that the complaint asserted only an
uncovered claim for faulty workmanship because the condominium owners
“alleged actual damage to the buildings caused by exposure to water seeping
into the walls that resulted from the negligent construction methods” of the
builder. Id. at 43. The court thus emphasized that the defective siding did
not, by itself, erode the interior and exterior walls. Rather, the defective
siding enabled an intervening event — water infiltration — to damage the
nondefective walls. For this reason, the plaintiffs had properly “alleged
negligent construction that resulted in an occurrence, rather than an
occurrence of alleged negligent construction.” Id. at 45.
The court reached a similar outcome in Mooney. In that case, the
general contractor for a condominium project was sued for negligent
construction after one of the units was damaged by a chimney fire and the
State fire marshal prohibited further use of fireplaces in the remaining units.
Mooney, 136 N.H. at 465. The court held that the fire in one unit was an
occurrence that caused the loss of use of fireplaces in all units. Id. at 468–70.
13 Again, faulty workmanship had allowed an intervening event (the fire) to
cause loss of use of property that was not physically injured.
Hutton has failed to identify a single New Hampshire Supreme Court
case that directly supports it contention that faulty workmanship will always
constitute an occurrence if it results in damage to nondefective property, and
I have found none. Although Hutton invokes Green to support its argument,
its reliance on that case is misplaced. In Green, the court held that the
insured was not entitled to coverage for defective workmanship because it did
not cause any damage to nondefective property. 160 N.H. at 693. Thus, any
suggestion in Green that faulty workmanship will always be deemed to be
accidental if it results in damage to nondefective property is nothing more
than dictum.
Hutton’s reading of Green is also problematic because it requires a
logical leap that is not explained in either the decision itself or in any of the
other cases where the court expressly dealt with claims for coverage of
damage to nondefective property. As one court in another jurisdiction has
described this problem, “[t]he logical basis for the distinction between
damage to the work itself (not caused by an occurrence) and damage to
collateral property (caused by an occurrence) is less than clear. Both types of
property damage are caused by the same thing — negligent or defective work.
One type of damage is no more accidental than the other.” Erie Ins. Exch. v.
14 Colony Dev. Corp., 736 N.E. 2d 950, 952 n.1 (Ohio App. 2000). Because
Hutton has failed to fill this gap in its reasoning, I am disinclined to adopt its
expansive reading of Green.
Finally, Hutton’s reliance on Green for the proposition that an
intervening fortuitous event or exposure is not required when faulty
workmanship causes damage to nondefective property is especially
problematic because that case involved an intervening fortuitous event — the
infusion of carbon monoxide into claimants’ houses through defective
chimneys — but no resulting damage to nondefective property. See 160 N.H.
at 694. Thus, there is no reasonable way in which Green can be read to
support Hutton’s argument.
In sum, based on my analysis of New Hampshire cases, I agree with
Continental that damage to nondefective property caused by defective
workmanship will not give rise to an occurrence under the policy without an
intervening event or exposure that occurs fortuitously and, together with the
defective work, harms nondefective property.
3. The stop-work order and resulting water damage.
Hutton next argues that the building inspector’s stop-work order and
the water infiltration are each intervening fortuitous events that satisfy the
occurrence requirement. Although I agree that the water infiltration that
damaged the property while the stop-work order was in effect was a
15 fortuitous event that satisfies the occurrence requirement, I am unpersuaded
by Hutton’s claim that the stop-work order itself was fortuitous.
In this case, as in High Country, a subcontractor’s defective work
allowed water to penetrate a building and damage nondefective property,
causing moldy sheetrock, rusty metal studs, and water-filled insulation. See
139 N.H. at 43. The intervening water exposure led to a two-month delay in
the completion of the project, during which Hutton had to repair the damage
to the interior of the building. Accordingly, the stipulated damages incurred
during the two-month delay were caused by an occurrence.
Hutton’s broader claim that the stop-work order itself is a fortuitous
event suffers from two fatal defects. First, the stop-work order was not an
intervening chance event but an expected consequence of the defective
masonry work. Pursuant to his duties under state and local law, the building
inspector monitored the project to ensure compliance with the building code.
See N.H. Rev. Stat. Ann. § 674:51, III(c). The inspector could issue a cease-
and-desist order against any violations of the building code or the applicable
regulations. See id. § 676:17–a. Because Meyer had failed to construct the
masonry walls according to the code standards, the building inspector merely
enforced the law by ordering all work on the project to cease. Thus, unlike the
water infiltration, the stop-work order was not “a happening by chance” but
16 was “naturally to be expected” when Meyer violated the building code. See
Vermont Mut., 128 N.H. at 523 (cleaned up).
The New Hampshire Supreme Court’s decision in Mooney supports the
view that the stop-work order was not an occurrence. Although the court did
not expressly consider in Mooney whether a fire marshal’s order prohibiting
the use of fireplaces was an occurrence, its reasoning suggests that the order
was instead an expected consequence of faulty workmanship. See Mooney,
136 N.H. at 468. The court noted that the fire marshal used his statutory
authority to enforce fire safety standards after his investigation of the
chimney fire in one of the units identified defective work that caused all
fireplaces to be unsafe. Id. Despite concluding that “the fire marshal’s order
. . . resulted in the loss of use of tangible property in all units,” id., the court
did not consider the order to be an occurrence and instead concluded that it
was the fire that was the fortuitous event that led to the fire marshal’s order.
See id. at 468–70. Like the building inspector, the fire marshal detected
defective work while performing his duties and used his authority to address
violations of the law. Neither enforcement order constituted a chance event;
each was a “natural and ordinary consequence” of failing to build according to
standards set by law. Cf. 9A Couch on Insurance § 126:26.
As Hutton points out, the building inspector’s order was not within
Meyer’s control in that the inspector independently determined that the
17 building code was violated and how the violation needed to be remedied. But
that alone does not transform the stop-work order into a fortuitous event.
Meyer had control over the construction of the masonry walls and the
resulting violation of the building code. Because the stop-work order resulted
from Meyer’s defective work, not some chance triggering event or exposure,
the stop-work order was not an accident under the policy.
Even if a stop-work order could be deemed to be fortuitous if the
insured does not expect it, however, the undisputed facts in this case show
that Meyer was aware of the building inspector’s concerns before the issuance
of the stop-work order. The building inspector identified a violation of the
building code — the lack of proper grouting of the concrete blocks — and
Meyer failed to correct the defective work before the inspector issued the
stop-work order. Especially when defects are identified prior to an
enforcement order and the insured does not remedy them, the order is not
accidental because, from the perspective of the insured, it was expected.
The Arizona Court of Appeals faced analogous circumstances in
Western Casualty and Surety Company v. Hays, 781 P.2d 38 (Ariz. Ct. App.
1989). In that case, the Hays sold land to the Mollets, who intended to plant
jojoba. A state agency later designated the surrounding basin as an
“irrigation non-expansion area,” thereby precluding the Mollets from
watering their crops. Id. at 39. The Mollets sued the Hays, who in turn looked
18 to their insurer to defend the action. In upholding the insurer’s decision not
to defend, the court rejected the Hays’s argument that the state agency’s
order resulting in the cessation of irrigation was unexpected and unintended
merely because the Hays neither expected nor intended its issuance. Id. at
40. Labeling that argument “too simplistic to be realistic,” the court held that
no occurrence had transpired. Id. The court reasoned that the state agency
had begun the process that led to the non-irrigation order, including holding
a public hearing, well before the Hays sold the land to the Mollets. Id. Thus,
it could not “seriously be contended” that the actions of the state agency, done
within the purview of its authority, “were unintended and unexpected.” Id. So
too here. Given that the building inspector had voiced his concerns about
Meyer’s defective work before issuing the stop-work order, it cannot be
claimed that his order was unexpected from the insured’s standpoint.
Because Hutton cannot point to an intervening event that fortuitously
caused the delay while the stop-work order was in effect, its claim for
coverage of the stipulated damages incurred during that period must fail.
B. Property Damage
Continental next argues that Hutton’s stipulated delay damages cannot
qualify as “property damage” because they are not a measure of injury to the
property but are contractual damages meant to compensate for economic loss.
19 Hutton asserts that the damages were incurred “because of” covered property
damage and that its claim against Meyer sounds in tort, not contract.
The policy provides that Continental must pay any “sums that the
insured becomes legally obligated to pay as damages because of . . . ‘property
damage’ to which this insurance applies.” Doc. No. 11–3 at 164. “Property
damage,” in turn, includes “[p]hysical injury to tangible property, including
all resulting loss of use of that property,” as well as “[l]oss of use of tangible
property that is not physically injured.” Id. at 178.
Continental argues that the delay damages do not constitute “property
damage” because they did not arise from the property owner’s lost use of the
building but instead seek to compensate for economic loss. I need not
determine, however, whether the delay damages themselves constitute loss-
of-use “property damage.” As Hutton points out, the policy language is
broader than “property damage” and expressly covers damages incurred
“because of . . . ‘property damage.’” Doc. No. 11–3 at 164 (emphasis added).
Many courts and treatises have taken an expansive view of damages incurred
“because of” property damage to include “a broad array of consequential
damages, not simply those that constitute a measure of the injury to the
property itself.” Berry Plastics Corp. v. Ill. Nat’l Ins. Co., 903 F.3d 630, 639
(7th Cir. 2018); see id. at 640–41 (collecting authorities). In this context,
consequential damages “are those that naturally flow from the property
20 damage without direct human intervention.” 4 Philip L. Bruner & Patrick J.
O’Connor, Jr., Bruner & O’Connor on Construction Law § 11:232 (2021).
Following this reasoning, several courts have found that construction delay
damages that directly result from covered property damage are entitled to
coverage as consequential damages incurred “because of” property damage.
See, e.g., Edward E. Gillen Co. v. Ins. Co. of Pa., 874 F. Supp. 2d 755, 758
(E.D. Wis. 2012); Clark Constr. Grp., Inc. v. Eagle Amalgamated Serv., Inc.,
2005 WL 2092998, at *3–4 (W.D. Tenn. Aug. 24, 2005); Mattiola Constr.
Corp. v. Com. Union Ins. Co., 2002 WL 434296, at *2–4 (Pa. Ct. Comm. Pl.
2002); Dimambro–Northend Assoc. v. United Constr., Inc., 397 N.W.2d 547,
550–51 (Mich. App. 1986). I agree with those courts. The policy language is,
at the very least, ambiguous and susceptible to a reasonable interpretation
that delay damages arising from “property damage” are covered.
Applying that interpretation to the facts here leads me to conclude that
the policy covers the delay damages incurred while Hutton was repairing the
water damage. The water damage plainly falls within the scope of “property
damage” because it constituted “[p]hysical injury to tangible property” that
resulted in “loss of use of that property.” Doc. No. 11–3 at 178. The two-
month delay while Hutton worked to repair the water-damaged property
directly resulted from that property damage. The associated delay damages,
therefore, naturally flowed from covered property damage. If, as a result of
21 the underlying action, Meyer must pay the delay damages, then those
damages would be sums that Meyer is “legally obligated to pay as damages
because of . . . ‘property damage’” to which the CGL policy applies. See Doc.
No. 11–3 at 164.
Continental’s alternative argument that the stipulated delay damages
are not covered because they are based on contractual liability also fails to
persuade. The First Circuit has agreed with “established, well-grounded law”
that the phrase “legally obligated to pay as damages” in a CGL policy applies
only to tort liability and not contractual liability. See Lopez & Medina Corp.
v. Marsh USA, Inc., 667 F.3d 58, 67–68 (1st Cir. 2012). But the court has also
explained that this phrase “refers exclusively ‘to the liability of the insured
arising from the breach of a duty that exists independent of any contractual
relationship between the insured and the injured party.’” Id. at 67 (quoting
1 Barry R. Ostrager & Thomas R. Newman, Handbook on Insurance
Coverage Disputes § 7.01, at 469 (15th ed. 2010)).
Although Hutton’s contract with Meyer required Meyer to indemnify
Hutton for any damages caused by Meyer’s negligence, Meyer had an
independent duty of reasonable care that it allegedly breached when
constructing the masonry walls. Thus, Hutton could sue Meyer for negligence
irrespective of the indemnification provision. If Hutton succeeds on that
claim, the basis for Meyer’s liability would be in tort, not contract, satisfying
22 the insuring agreement’s requirement that coverage be limited to amounts
the insured is “legally obligated to pay as damages.” Cf. Restatement (Third)
of Torts § 3, cmt. (2020) (“An actor whose negligence causes personal injury or
physical harm to the property of another can be held liable in tort regardless
of whether the negligence occurs in the performance of a contract between the
parties.”); Ewing Constr. Co. v. Amerisure Ins. Co., 420 S.W.3d 30, 37–38
(Tex. 2014) (contractual liability exclusion in CGL policy does not apply when
breach of contract would be actionable in tort even absent a contract).
The two cases that Continental cites for the proposition that the
insuring agreement does not cover stipulated damages are distinguishable.
Those courts held that an insured’s contractual liability for economic loss
does not constitute “property damage.” See Lyerla v. AMCO Ins. Co., 536
F.3d 684, 692 (7th Cir. 2008); Kvaerner N. Am. Constr. Inc. v. Certain
Underwriters at Lloyd’s London Subscribing to Pol’y No. 509/DL486507, 2017
WL 2821691, at *11 (N.D.W. Va. June 28, 2017). Unlike in those cases, where
the insured had contracted to pay stipulated damages and later sought
coverage for breach of contract claims, Meyer was not a party to the lease
agreement and the claim against it sounds in tort, not contract. In addition,
those courts considered whether stipulated damages constitute property
damage in and of themselves, rather than evaluating whether they are
covered as consequential damages incurred “because of” covered property
23 damage. Cf. 1 Barry R. Ostrager & Thomas R. Newman, Handbook on
Insurance Coverage Disputes § 7.06, at 598–601 (18th ed. 2017)
(distinguishing cases holding that economic damages are not recoverable
“property damage” from cases holding that consequential economic damages
are covered when incurred “because of” actual property damage). Their
persuasive authority is, therefore, limited.
Given the principle that a reasonable construction that affords coverage
should be adopted, I conclude that the insuring language of the Continental
policy covers any delay damages that Meyer must pay to Hutton because of
the water damage to Hutton’s property.
C. “Your Work” Exclusion
Continental’s final pitch is that the “your work” exclusion bars coverage
for Hutton’s delay damages. Those damages, Continental claims, “arose solely
out of the time and resources spent to repair Meyer’s alleged defective
construction of the walls.” Doc. No. 11–1 at 12. Hutton, naturally, disagrees.
The New Hampshire Supreme Court has rejected the notion that the
“your work” exclusion operates to “preclude coverage for all damage resulting
from [an insured’s] defective work, including damage to the non-defectively
constructed” property. Cogswell Farm Condo. Ass’n v. Tower Grp., Inc., 167
N.H. 245, 251 (2015). Instead, the court has narrowly construed the exclusion
to bar coverage “only for those parts of the property on which the allegedly
24 defective work was done.” Id. Here, nondefective property — Hutton’s work-
product on the interior of the building — was damaged as a result of Meyer’s
defective work on the exterior masonry walls. Because the repairs that
necessitated the construction delay were done on property that was not
defectively built by the insured, damages flowing from the delay fall outside
the scope of the “your work” exclusion.
IV. CONCLUSION
For the foregoing reasons, Continental’s motion for partial summary
judgment (Doc. No. 11) is granted with respect to the claim for stipulated
damages imposed throughout the stop-work order and denied with respect to
the claim for stipulated damages for the two-month period during which
Hutton had to repair the water damage occasioned by Meyer’s defective work.
SO ORDERED.
/s/ Paul J. Barbadoro Paul J. Barbadoro United States District Judge
July 5, 2022
cc: Counsel of record