martin/elias Properties, LLC v. Acuity, a Mutual Insurance Company

• Court: Kentucky Supreme Court
• Decided: April 26, 2018
• Docket: 2016-SC-0195
• Status: Published

Opinion

RENDERED: APRIL 26, 2018 TO BE PUBLISHED

2016-SC-0000195-DG

MARTIN/ELIAS PROPERTIES, LLC APPELLANT

ON REVIEW FROM CE>URT OF APPEALS v. CASE NO. 2013-CA-001428 KENTON CIRCUIT COURT NO. 09-CI-01276

ACUITY, A MUTUAL INSURANCE COMPANY APPELLEE

OPINION OF THE COURT BY CHIEF JUSTICE MINTON

AFFIRMING

In Cincinnati Ins. Co. v. Motorist Mut. Ins. Co.1, this Court held that

damage because of a contractor's faulty workmanship does not constitute an

occurrence covered under the contractor's commercial general liability (CGL) · ' )

insurance policy. The Court of Appeals applied the principles of Cincinnati in

the present case to hold that a contractor's faulty workmanship on the

basement and foundation of an existing structure, resulting in extensive

damage to the entire building, was not an accident triggering coverage as an I

occurrence under.the contractor's CGL policy. On discretionacy review, we

agree that the Court of Appeals correctly applied the law and affirm.

i Cincinnati Ins. Co. v. Motorists Mut. Ins. Co., 306 S.W.3d 69 (Ky. 2010).

( I. FACTUAL AND PROCEDURAL HISTORY. Martin Elias/Properties, LLC ("MEP") purchased an old home in a

historic urban neighborhood to renovate and resell for a profit. After completing

renovations on the first, second, and third floors, MEP hired Tony Gosney to

renovate and expand the basement. l Gosney agreed that he would dig the existing basement deeper, pour new \ footers to stabilize the building, and pour a new concrete floor. While

performing his. work on the townhouse, Gosney failed to support the existing

foundation adequately before digging around it. Within days,. the old

foundation began to crack and· eventually the entire structure began to sag.

Interior doors began sticking and brick walls began cracking. At this point,

Gosney stopped work and notified his CGL insurer, Acuity. Acuity .

recommended that MEP hire a structural engineer to evaluate the conditiori of

the structure. -:.

MEP's structural engineer reported that the entire structure wa~ at risk

of imminent collapse. To repair the damage caused by Gosney's work would

require substantial work. After learning this·, MEP made a demand for payment

upon both Gosney and Acuity, but they· rejected the demand. So MEP sued

Gosney and Acuity in circuit court. Against Gosney, MEP claimed negligence,

breach of contract, and breach of warranties. Against Acuity, MEP asserted

bad faith by failing to provide coverage under its CGL policy. Meanwhile[ · -

Gosney sought bankruptcy protection and disappeared. Later, efforts by private

2 investigators to locate Gosney failed, and he neither testified at trial nor

participated in any way.

MEP and Acuity each filed motions for summary judgment citing the

same language in Acuity's CGL policy. The policy provided that Acuity would

pay for property damage if it resulted from an "occurrence." The policy defined

occurrence as "an accident, including continuous or repeated exposure to

substantially the same general harmful.conditions." The policy did not define

the term accident.

MEP argued that the damage to the property from Gosney's work should

be considered an accident triggering coverage under the CGL policy issued by

Acuity,. Acuity argued that the structural damage was caused· by Gosney's

faulty workmanship, a circumstance that failed to qualify as an occurrence

under the CGL policy, and therefore, the loss was not covered _by Gosney's

policy.

The trial court granted partial summary judgment to both parties. The

court ruled that MEP could not recover from Acuity for the damage to the

basement because that damage directly resulted from the faulty work Gosney

performed, hence not satisfying the requirement of an occurrence under the

CGL policy. But the trial court also ruled that MEP could recover from Acuity

under the policy for the damage to the structure above the basement level.

Damage to the structure above the basement, the trial court reasoned, was an

· unexpected and unintended consequence of Gosney's faulty work on the

3 basement, making this portion of the total loss an occurrence covered by the

The case was then tried to a jury on the issue of damages. The jury

found the cost to repair the entire structure to b~ $700,000. It found the cost

to repair the basement alone to be $227,000. Applying it's ruling on liability

from its summary judgment, the trial court $227,000 from the total cost of

repair to arrive at a final judgment that required Acuity to payMEP $473,000.

Acuity appealed the judgment, and a unanimous panel of the Court of

Appeals reversed the trial court judgment. Applying the rule established in

Cincinnati, the appellate panel emphasized Gosney's intent and control over the

work to reverse the trial court's summary judgment and hold that none of the

structural damage qualified as an accident triggering coverage as an

occurrence under Acuity's CGL policy. We agree.

II. ANALYSIS.

A. Standard of Review. Interpretation of a contract is ordinarily a question of law for a court's

determination.2 So with questions of contractual interpretation, an appellate

court reviews the lower court's findings de nova, with no deference to the ruling

of the lower court. 3

2 Jd. at 73.

3 Id.

4 B. Bituminous Casualty Corporation v. Kenway Contracting and Cincinnati Insurance Company v. M~torists·Mutual Insurance Company. As they did in the courts below, the parties cite to two different cases

from this Court to support their arguments. MEP cites to Bituminous Casualty

Corporation v. Kenway Contractingt- to support its argument, while Acuity cites

Cincinnati for support.

The old~r of the cas~s, Bituminous addressed the definition of accident in

a CGL. In Bituminous, the owners of a house contracted for the removal of the

attached carport, so they could convert the house into a commercial unit. On

the morning the work was to begin, an employee of the contractor arrived at

the property and began the process of removing the carport. But because of a

miscommunication between the contractor·and its employee, the employee

proceeded to demolish the entire house. By the time the contractor arrived on

the scene, the employee had done a significant amount of work-half the house

had been demolished.

The owners made a claim against the contractor's CGL policy. The

insurer denied coverage, arguing that the destruction of the residence was not

an accident covered by the policy. This Court held that the damage was covered j .

under the CGL policy. The Court stat~d that CGL coverage applied ~ecause the

demolition of the structure was not the "plan, design or intent o:(the insured." 5

4 Bituminous Cas. Corp v. Kenway Contracting, Inc., 240 S.W.3d 633 (Ky. 2007). s Id. at 637.

/ Three years after Bituminous, we unanimously decided Cincinnati.. Once

again, we were asked to address the term accident in a CGL policy. Cincinnati.

involved the faulty workmanship of a newly constructed house. The

homeowners purchased it from Elite Homes, but after only·five years, the . .I

house had to be completely razed because it was so poorly built. The

homeowners made a claim against Elite Homes' CGL policy, claiming that the

resulting damage was an occurrence under the policy.

In deciding Cincinnati, we established a test different from the one

articulated in Bituminous. Rather than asking, .as we did in Bituminous, if the

damage was outside of the "plan, design or intent of the insured," we instead

focused on a concept widely accepted .in insurance law, the doctrine of the

"fortuity" of the event. 6 In doing so, we recognized that there are two aspects of

fortuity: intent and control. We held that the faulty-workmanship claim

brought by the homeowners was not covered by the builder's CGL policy \,

because the builder was in control of the construction of the residence and that

the builder fully intended to take the action that he took on the project such

that finding liability under the CGL policy would be tantamount to converting

the builder's CGL policy into a performance bond or unconditional guarantee.

We make clear today that th~ legal analysis used to determine whether

something constitutes an accident for issues of CGL coverage is the doctrine of

fortuity, which encompasses both intent and control. Although Bituminous did

6 Cincinnati, 306 S.W.3d at 74.

6 not include as part of its analysis a discussion of the doctrine of fortuity,

Bituminous provides well-reasoned instruction on a particular set of faets. That \ being said, in determining whether an.event constitutes an accident so as to

afford the insured CGL policy coverage, courts must analyze this issue

according to the doctrine of fortuity: 1) whether the insured intended the event

to occur; and 2) whether the event was a "'chance event' beyond the control of

the insured. "7 If the insured did not intend the ev<:;nt or result to occur, and the

event or result that occurred was a chance event beyond the control of the

insured, then cq.L coverage covering accidents will apply to the benefit of the

insured.

C. Gosney's Work did not qualify as an Occurrence under the CGL. In the performance of his contractual obligation in the present case,

Gosney's actions undermined the structural integrity of MEP's historic

residential property. His failure to support the existing structure before di~ging

around the old foundation resulted in cracking of the ori~al foundation that

led inexorably to near destruction of the entp-~ structu:r;-e. We review this case

having fully adopted our holding in Cincinnati.

· As recognized by the partial summary judgment granted by the trial __, court, MEP argues,. that at the ver:y least, the damage done to the property

above the basement should trigger coverage as an accident. We agree :with the

Court of Appeals that this cannot be the case.

7 Cincinnati, 306 S.W.3d at.76 (internal citations omitted).

7 MEP points to/ the final footnote of Cincinnati where we stated, "a general

rule exists whereby a CGL policy would apply if the faulty workmanship caused ' bodily injury or property damage to something other than the insured's

allegedly faulty work product."8 That same footnote goes on to state, "Thus, as ,/

' we construe it ... the general rule could lead to coverage if ... the Mintmans' j .

·allegedly improperly constructed home damaged another's propertjr. However, \ we need not definitively decide in this case whether we should adopt this

general rule ... "9 As in Cincinnati, the facts today do not provide us with an

opportunity to adopt this rule because the assertion of damages before us is to

MEP's property alone. -

Our facts today are not significantly different from those in Cincinnati. Of

importance, the contract language we construe today in the CGL policy is

exactly the same language we saw in Cincinnati. As discussed above, in

Cincinnati we decided faulty workmanship performed by the insured

homebuilder did not qualify as an occurrence under their CGL policy~ The

damages alleged by the plaintiffs in -Cincinnati consisted of crac;:ks in the

drywall and exterior brick walls, defective Windows and doors, sagging floors,

separation of brick veneer from exterior walls, and leaning walls. Like Gosney, · I •

the homebuilders in Cincinnati had full control over their work and executed

their work according to their own plan. We held the resulting damage to the

s Cincinnati, 306 S.W.3d at fn. 45. 9 Id.

8 home was not of an accidental nature creating a fortuitous event, but rather an

unintended consequence of poor workmanship.

A factual distinction be~een Cincinnati and the case before us today is

that the damage alleged to have been done by the homebuilders in Cincinnati

was the reslJlt of poor workmanship on parts of the home on which they had

directly worked or of which they had qirect control. As for Gosney, he was

contracted to work on the bas~rnent and foundation exclusively, while work

above the basement was done by others. Although his work was to be done in

the basement, Gosney's poor workmanship resulted iii damage throughout the

entire. property, making it structurally unsound.

We note with approval the application ,of our holding in Cincinnati by the

federal district court in McBride v. Acuity. 10 In McBride, the trial court faced

strikingly similar facts to those before us and identical CGL policy language. In

fact, the case involved an Acuity CGL policy.

In McBride, a contractor subcontracted the construction of the footer and

basement for th,e property. The plaintiffs experienced several problems related

to the differential settlement of the house. These damages, caused by the

failure of the· foundation system to provide stable support for the house,

_included cracking to the exterior brick and mortar, the interior dry wall, and

the basement floor. Relying on our holding in Cincinnati, the trial court ruled . I

10McBride v. Acuity, 8:10-CV-173, 2011WL6130922 (W.D. Ky. Dec 8, 2011), aff'd 510 Fed. Appx. 451 (6th Cir. 2013)

9 that there was no accident because the contractor fully complied with its

planned work and therefore did not trigger an occurrence under the CGL.

We agree with the well-reasoned opinion of from the federal district

court. In the case before us, Gosney had both intent and full control when

conducting his work, which ultimately failed to support the exis~g structure.

So it cannot be said that the resulting damage from Gosney's poor

workmanship was a fortuitous event. For an event to be fortuitous, and

therefore .an accident, it must be "beyond the power of any human being to

bring ... to pass, [or is] ... within the control of third persons .... "11

Like Gosney, the subcontractor in McBride had full control of how to

) conduct the work on the basement. Damage that results from poor

workmanship would be considered an accident in laymen's terms. One would

not purposefully perform substandard work for the purpose of damaging

property. So the emphasis should not be whether the damage, done is the type

of damage that would be expected by the contractor, but rather whether the

damage resulted from the actions purposefully taken by the contractor or those

working under·the contractor's control.

The above reasoning helps emphasize the control and intent principles -~-

we found so compelling in Cincinnati. For instance, in our case, had the

damage to the property resulted from fire caused by Gosney's knocking over a

kerosene lamp, it would clearly be .an accident. Gosney would not intend to

11 Cincinnati, 306 S.W.3d at 76.

10 knock the lamp over and knocking it over by accident wo?ld~be outside of his

control.

While the trial court was Solomonic in its partial summary judgment

splitting the liability for this unfortunate loss, it failed to focus on the proper

elements from Cincinnati. Instead of focusing on the fact that Gosney fully

intended to Clo what he did and had complete control over the work to e~cavate - the basement and stabilize the foundation, it focused instead on the fact that / Gosney never intended to bring down the entire house.

Because the actions taken by Gosney, which led to the property damage,

were entirely under his control, and he fully intended to execute the plan as he

did, we cannot.say that the resulting damage throughout the property was· an

accident.

III. CONCLUSION.

For the foregoing reasons we affirm the opinion of the Court of Appeals.

All sitting.· Minton, C.J.; Cunningham, Hughes, Keller, and VanMeter, ,

JJ., concur. Wright, J., concurs in result only by separate opinion in which

Venters, J., joins.

WRIGHT, J., CONCURRING IN RESULT ONLY: ·While I agree with the

result of the majority's opinion, I disagree as to its reasoning. Here, the policy

language specifically excludes:

tl1at particular part of real property .on which you or any contractor

or sub-contractor working directly or indirectly on your behalf is

performing operations if the property damage arises out of those r

11 (

operations; or ... [t]hat particular part of any property that must

be restored, repaired or.replaced because your work was

incorrectly performed on it.

Therefore, even if we were to determine Gosney's actions amounted to an

accident, the policy exclusions would cover neither the ·basement in which the

work was performed nor the restoration and repair of the upper floors of the

house.

The majority focuses on the issue of control in making the determination

that Gosney's actions was not an occurrence. Under this analysis it is hard.to

see how an accident could ever occur. I agree that the Majority's example of

knocking over the kerosene lamp would be an accident, but under the control

analysis it puts forth, knocking over the lamp and burning the house down

would not be an accident. In the lamp ~xample, the contrac~or would have had

control over choosing a flammable light source, the placement of the lamp, the

manner in which he worked, and the movements which ultimately led to the

lamp being knocked over. ln my opinion, the majority goes too far today in

making it significantly harder for injured parties to recover.

However, due to the terms of the policy as outlined above, I agree that

Gosney's actions in this case were not covered under the policy. Therefore, I

concur in result only.

12 COUNSEL FOR APPELLANT:

Paul R. Boggs, III Jonathan Douglas Gray Wallace Boggs, PLLC

COUNSEL FOR APPELLEE:

Katherine Kennedy Laura Salzman Judd Uhl Lewis, Brisbois, Bisgaard & Smith, LLP

/