Taja Investments LLC v. Peerless Insurance Company

• Court: Court of Appeals for the Fourth Circuit
• Decided: October 11, 2017
• Docket: 16-1854
• Status: Unpublished

Opinion

UNPUBLISHED

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

No. 16-1854

TAJA INVESTMENTS LLC; TAJA CONSTRUCTION & REHAB, INC., a/k/a Taja Construction LLC,

Plaintiffs - Appellants,

v.

PEERLESS INSURANCE COMPANY, a/k/a Liberty Mutual Insurance Company,

Defendant - Appellee.

Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. Gerald Bruce Lee, District Judge. (1:15-cv-01647-GBL-TCB)

Argued: September 13, 2017 Decided: October 11, 2017

Before AGEE, KEENAN, and HARRIS, Circuit Judges.

Affirmed by unpublished per curiam opinion.

ARGUED: C. Thomas Brown, SILVER & BROWN, Fairfax, Virginia, for Appellants. Roman Lifson, CHRISTIAN & BARTON, LLP, Richmond, Virginia, for Appellee. ON BRIEF: Erik B. Lawson, SILVER & BROWN, Fairfax, Virginia, for Appellants. E. Ford Stephens, CHRISTIAN & BARTON, LLP, Richmond, Virginia, for Appellee.

Unpublished opinions are not binding precedent in this circuit. PER CURIAM:

Taja Construction LLC was renovating a row house owned by affiliate Taja

Investments LLC (together, “Taja”) when the east wall of the property collapsed. Taja

sought to recover the cost of repairs under its insurance policy, issued by Peerless Insurance

Company. After an investigation, Peerless determined that the collapse was caused by

Taja’s failure to support the building’s foundation properly while excavating the basement,

and it denied Taja’s claim under a policy exclusion for defects in construction or

workmanship. Peerless also denied the claim under a separate exclusion, this one for

damages resulting from movement of the earth’s surface.

Taja filed suit against Peerless for breach of its insurance policy. The district court

granted summary judgment to Peerless, holding that both the cited exclusions apply and

that either would be a sufficient basis for denying coverage. For the reasons given below,

we affirm the judgment of the district court.

Taja is a real estate development company that purchases and renovates properties

for resale. As part of its renovation of 117 New York Avenue, a row house in Northwest

Washington, D.C., Taja planned to deepen the basement to create a larger living space.

The structural drawings required that the basement be excavated in sections, dug one at a

time, with concrete underpinning used to reinforce each section before proceeding to the

next. J.A. 1144–45. But contrary to the plans, Taja’s owner Michael Watson directed

subcontractors to fully excavate the basement without intermittent underpinning.

Several people warned Watson against proceeding without the contemplated

underpinning. In the weeks before the collapse, both the engineer responsible for the

2 structural drawings and a project subcontractor informed Watson of the need for structural

underpinning during excavation, with the subcontractor going so far as to insert into his

agreement with Taja a provision stating that he was “not responsible for any collapse due

to non[-]underpinning.” J.A. 1180. And roughly two days before the collapse, the owner

of a construction company that had renovated a neighboring property told Watson that he

was “concerned about the stability of [the] below grade soil,” and that if Taja failed to

underpin the property, it was “going to collapse.” J.A. 461–62.

By the third day of construction, the basement had been fully excavated without any

underpinning. J.A. 159, 165. A few hours after workers left the site, the property’s east

wall collapsed.

Taja’s property was insured under a builder’s risk policy issued by Peerless

Insurance Company. That policy – a broad “all risk” policy – covered all risks of direct

physical loss, except for those expressly excluded under the policy’s terms. Taja filed a

claim of $400,000 for repair costs, and Peerless hired an engineering firm to investigate

the cause of the collapse. Zachary Kates, lead engineer on the investigation, found that

Taja’s failure to periodically underpin during excavation left the soil beneath the load-

bearing walls in an unstable condition, which caused the collapse of the east wall. Watson,

Taja’s owner, confirmed that assessment, conceding at his deposition that Taja’s removal

of bricks and dirt beneath the wall directly caused the collapse.

Peerless denied Taja’s claim. First, relying on Kates’s report, Peerless cited the

policy’s exclusion of losses resulting from defects in workmanship and construction (the

“Workmanship Exclusion”). And second, as an independent and alternative ground for

3 denying coverage, Peerless relied on the policy’s “Earth Movement Exclusion,” which

excludes coverage for losses caused by “movement or vibration of the earth’s surface.”

J.A. 127, 133. Taja disputed Peerless’s denial of its claim, and filed suit for breach of

insurance policy in Virginia state court. Peerless removed the claim to federal district

court, invoking diversity jurisdiction, and both parties moved for summary judgment.

In a thorough and thoughtful opinion, the district court granted summary judgment

to Peerless, holding that both exclusions apply and that each separately supports the denial

of Taja’s claim. Taja Invs. LLC v. Peerless Ins. Co., 196 F. Supp. 3d 587 (E.D. Va. 2016).

We summarize the court’s detailed opinion briefly here.

The court began with the Workmanship Exclusion, which provides that Peerless

will “not pay for loss caused by an act, defect, error, or omission (negligent or not) relating

to . . . construction, workmanship . . . [or] renovation.” J.A. 135–36. Undisputed witness

testimony attributed the collapse of the row house’s east wall to Taja’s failure to underpin

the property while excavating. And Taja itself accepted and relied upon Kates’s report

concluding that Taja’s faulty work sequence caused the collapse. The court thus found it

beyond dispute that the Workmanship Exclusion applies – as Taja ultimately conceded

before this court at oral argument.

Taja argued, however, that even assuming application of the Workmanship

Exclusion, coverage is restored by the provision’s “ensuing loss” clause. Ensuing loss

clauses preserve coverage when a loss excluded under a policy – here, a loss caused by a

defect in workmanship – results in a subsequent or “ensuing” loss that otherwise would be

covered. See TRAVCO Ins. Co. v. Ward, 715 F. Supp. 2d 699, 718 (E.D. Va. 2010), aff’d,

4 504 F. App’x 251, 253 (4th Cir. 2013). Specifically, the ensuing loss clause in Taja’s

policy provides that while Peerless will not pay for loss or damage caused by a

workmanship defect, “if loss by a covered peril results,” then Peerless will pay for “the

resulting loss.” J.A. 135. And according to Taja, that entitles it to recover for losses that

“result[ed]” from the collapse caused by its defective workmanship.

The district court rejected that argument, finding that damages associated with the

collapse were the direct result of Taja’s failure of workmanship rather than a separate

“resulting loss,” and thus remained excluded under the Workmanship Exclusion. Taja

Invs., 196 F. Supp. 3d at 594. Although the Supreme Court of Virginia has not directly

addressed the scope of ensuing loss clauses, 1 courts generally agree, as the district court

explained, that when a workmanship exclusion is triggered, an ensuing loss clause applies

only when there is significant attenuation between the direct result of a workmanship defect

and the ultimate loss for which coverage is sought, usually due to an independent or

fortuitous intervening cause. In other words, an ensuing loss provision “excludes from

coverage the normal results of defective construction, and applies only to distinct,

1 The district court properly applied Virginia law to this dispute. A federal court sitting in diversity applies the forum state’s choice-of-law rules. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 494 (1941). Virginia choice-of-law rules provide that “the law of the place where an insurance contract is written and delivered controls.” Buchanan v. Doe, 431 S.E.2d 289, 291 (Va. 1993). Before the district court, the parties agreed that the policy was delivered in Virginia and that Virginia law applied. On appeal, Taja now suggests that Washington D.C. law should apply. Appellants’ Br. at 26–27. Taja concedes, however, that “there is no difference” between D.C. and Virginia law as applied here. Appellants’ Br. at 23 n.26. Because the parties agree there is no substantive difference between the applicable laws, we need not perform a choice of law analysis. Millennium Inorganic Chems. Ltd. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 744 F.3d 279, 284 n.5 (4th Cir. 2014).

5 separable, and ensuing losses.” Friedberg v. Chubb & Son, Inc., 691 F.3d 948, 953 (8th

Cir. 2012) (internal quotation marks and alteration omitted) (applying Minnesota law); see

Taja Invs., 196 F. Supp. 3d. at 593 (citing, inter alia, Alton Ochsner Med. Found. v.

Allendale Mut. Ins. Co., 219 F.3d 501, 507 (5th Cir. 2000) (ensuing loss clause generally

applies only to damage that “result[s] fortuitously from events extraneous to the

construction process”) (emphasis in original) (internal quotation marks omitted); In Re

Chinese Manufactured Drywall Prods. Liab. Litig., 759 F. Supp. 2d 822, 850 (E.D. La.

2010) (ensuing loss clause not applicable to damages that are a direct and continuous result

of workmanship defect)). 2

Applying the consensus approach, the district court rejected Taja’s effort to

“separate cause and effect” by distinguishing between a wall collapse caused by defective

workmanship and losses resulting directly from that collapse. Taja Invs., 196 F. Supp. 3d

at 594. “If a defectively-designed building collapses, one does not characterize the effect

of gravitational forces as a distinct and separate event, and the cost of replacing the

collapsed building is not an ensuing loss.” Id. at 593 (quoting Performing Arts Cmty.

Improvement Dist. v. Ace Am. Ins. Co., No. 13-0945-CV-W-ODS, 2015 WL 3491292, at

*6 (W.D. Mo. June 3, 2015)). Endorsing Taja’s approach, the court explained, would

violate basic principles of Virginia contract interpretation by “essentially . . . writ[ing] the

Workmanship [E]xclusion out of the [p]olicy”: Virtually any damage caused by a defect

2 As the district court recognized, the case law on ensuing loss clauses is not entirely uniform. See Taja Invs., 196 F. Supp. 3d. at 593 (citing Vision One, LLC v. Philadelphia Indem. Ins. Co., 276 P.3d 300, 307 (Wash. 2012) (“[T]he dispositive question in analyzing ensuing loss clauses” is not causal attenuation, but “whether the loss that ensues from the excluded event is covered or excluded.”)). 6 in workmanship could be re-characterized as a “resulting loss” for which coverage was

restored. Id. at 594. The district court thus concluded that Taja could not invoke the

ensuing loss clause and that its claim remains subject to the Workmanship Exclusion.

The district court also ruled for Peerless on the alternative ground that Taja’s claim

is barred under the policy’s Earth Movement Exclusion, which applies to damages caused

by “any movement or vibration of the earth’s surface.” J.A. 127. Before the district court,

Taja argued that the Earth Movement Exclusion does not apply because the “movement”

in this case occurred below the earth’s surface, at the basement level of the row house being

renovated. The court disagreed, explaining that Taja’s position conflated movement below

grade – that is, below street- or ground-level – with movement below the earth’s surface.

The court found no ambiguity in the terms of the exclusion: “Using the plain meaning of

[the] words, it is evident that while the movement that caused the east wall’s collapse

occurred below grade (in the basement, below the ground level of the structure), it still

involved movement of the earth surface (the uppermost layer of the soil and clay).” Taja

Invs., 196 F. Supp. 3d at 597–98. Accordingly, the district court ruled, the Earth Movement

Exclusion provided an independent basis for denial of Taja’s claim.

On appeal, the parties now raise substantially the same arguments as they did before

the district court. Having carefully considered the controlling law and the parties’ briefs

and oral arguments, we affirm on the reasoning of the opinion of the district court.

AFFIRMED