French v. Assurance Company , 448 F.3d 693 ( 2006 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
JAMES H. FRENCH, assignee of the 
claims of Jeffco Development
Corporation; KATHLEEN B. FRENCH,
assignee of the claims of Jeffco
Development Corporation,
Plaintiffs-Appellants,
v.
ASSURANCE COMPANY OF AMERICA;
UNITED STATES FIRE INSURANCE
COMPANY,
Defendants-Appellees,  No. 05-1356
and
THE AETNA CASUALTY AND SURETY
COMPANY, now known as Travelers
Casualty and Surety Company,
Defendant.
NATIONAL ASSOCIATION OF HOME
BUILDERS,
Amicus Supporting Appellants.

Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
James C. Cacheris, Senior District Judge.
(CA-04-550-1-JCC)
Argued: March 14, 2006
Decided: April 27, 2006
Before WILKINSON and MICHAEL, Circuit Judges, and
HAMILTON, Senior Circuit Judge.
2 FRENCH v. ASSURANCE CO. OF AMERICA
Affirmed in part, vacated in part, and remanded by published opinion.
Senior Judge Hamilton wrote the opinion, in which Judge Wilkinson
and Judge Michael joined.
COUNSEL
ARGUED: David Hilton Wise, WATERS & WISE, P.L.L.C., Fair-
fax, Virginia, for Appellants. Thomas Sykes Schaufelberger,
WRIGHT, ROBINSON, OSTHIMER & TATUM, Washington, D.C.,
for Appellees. ON BRIEF: Paul V. Waters, WATERS & WISE,
P.L.L.C., Fairfax, Virginia, for Appellants. Edward E. Nicholas,
WRIGHT, ROBINSON, OSTHIMER & TATUM, Washington, D.C.,
for Appellee United States Fire Insurance Company; Robert Edward
Worst, KALBAUGH, PFUND & MESSERSMITH, Fairfax, Virginia,
for Appellee Assurance Company of America. David S. Jaffe,
NATIONAL ASSOCIATION OF HOME BUILDERS, Washington,
D.C., for Amicus Supporting Appellants.
OPINION
HAMILTON, Senior Circuit Judge:
This appeal presents two separate, but related, insurance coverage
questions in the construction context: (1) Whether, under Maryland
law, a standard 1986 commercial general liability policy form pub-
lished by the Insurance Services Office, Incorporated (ISO) provides
liability coverage to a general contractor to correct defective work-
manship performed by a subcontractor; and (2) Whether, under Mary-
land law, the same policy form provides liability coverage for the
costs to remedy unexpected and unintended property damage to the
contractor’s otherwise nondefective work-product caused by the sub-
contractor’s defective workmanship. We answer the first question in
the negative and the second question in the affirmative. Accordingly,
we affirm in part and vacate in part the judgment below in favor of
the insurance company defendants and remand for further proceed-
ings.
FRENCH v. ASSURANCE CO. OF AMERICA 3
I.
The following relevant facts are undisputed. In 1993, James and
Kathleen French (the Frenches) contracted with Jeffco Development
Corporation (Jeffco) for the construction of a single-family home in
Fairfax County, Virginia. Pursuant to the construction contract, and
via a subcontractor, the exterior of the home was clad with a synthetic
stucco system known as Exterior Insulating Finishing System (EIFS).
Following the completion of construction, building officials issued a
Certificate of Occupancy for the Frenches’ home in December 1994.
Nearly five years later, in late 1999, the Frenches discovered exten-
sive moisture and water damage to the otherwise nondefective struc-
ture and walls of their home resulting from the defective cladding of
the exterior of their home with EIFS. The Frenches have since spent
in excess of $500,000 to correct the defects in the EIFS exterior of
their home and to remedy the resulting damage to the otherwise non-
defective structure and walls of their home.
On November 29, 1999, the Frenches filed suit (the Underlying
Suit) against Jeffco in Virginia state court alleging multiple claims,
including breach of contract, and seeking damages to cover the costs
to correct the construction defects with respect to the EIFS exterior
of their home and to remedy the resulting damage to the otherwise
nondefective structure and walls of their home.
For certain time periods (some overlapping) during the entire time
period relevant to the Underlying Suit, Jeffco had commercial general
liability coverage through four different commercial general liability
insurance carriers: Assurance Company of America (Assurance),
United States Fire Insurance Company (U.S. Fire), Ohio Casualty
Insurance Company (Ohio Casualty), and Aetna Casualty and Surety
Company n/k/a Travelers Casualty and Surety Company (Travelers).
All parties agree that for purposes of resolving the issues presented
in the present appeal, the commercial general liability policies issued
to Jeffco by appellees Assurance and U.S. Fire consisted of the 1986
version of the standard commercial general liability policy form
drafted by the ISO1 and widely used in the insurance industry. See
1
The ISO is "a national insurance policy drafting organization." State
Auto Prop. and Cas. Ins. Co. v. Travelers Indem. Co. of Am., 343 F.3d
249, 255 n.9 (4th Cir. 2003).
4 FRENCH v. ASSURANCE CO. OF AMERICA
Hartford Fire Ins. Co. v. California, 509 U.S. 764, 772 (1993) ("ISO
develops standard policy forms and files or lodges them with each
State’s insurance regulators; most CGL insurance written in the
United States is written on these forms."). From henceforth, we will
refer to these policies as the 1986 ISO CGL Policies. Of relevance in
the present appeal, the 1986 ISO CGL Policies provided:
SECTION I — COVERAGES
COVERAGE A. BODILY INJURY AND PROPERTY
DAMAGE LIABILITY
1. Insuring Agreement
a. We will pay those sums that the insured
becomes legally obligated to pay as dam-
ages 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 dam-
ages 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:
(1) The . . . "property damage" is caused by
an "occurrence" . . . .
(J.A. 157). The 1986 ISO CGL Policies applied to completed opera-
tions, as defined in said policies under "Products-completed opera-
tions hazard." (J.A. 168). This term is defined, in relevant part, as
follows:
FRENCH v. ASSURANCE CO. OF AMERICA 5
14. "Products-completed operations hazard":
a. Includes all "bodily injury" and "property
damage" occurring away from premises you
own or rent and arising out of "your product"
or "your work" except:
(1) Products that are still in your physical pos-
session; or
(2) Work that has not yet been completed or
abandoned. However, "your work" will be
deemed completed at the earliest of the
following times:
(a) When all of the work called for in your
contract has been completed.
(b) When all of the work to be done at the
job site has been completed if your con-
tract calls for work at more than one job
site.
(c) When that part of the work done at a job
site has been put to its intended use by
any person or organization other than
another contractor or subcontractor
working on the same project.
Work that may need service, maintenance, cor-
rection, repair or replacement, but which is oth-
erwise complete, will be treated as completed.
Id.The 1986 ISO CGL Policies contained several exclusions that limit
the insurance carriers’ duty to provide coverage to Jeffco. The follow-
ing two of those exclusions are relevant to the issues on appeal:
2. Exclusions
6 FRENCH v. ASSURANCE CO. OF AMERICA
This insurance does not apply to:
a. Expected or Intended Injury
". . . [P]roperty damage" expected or intended
from the standpoint of the insured.
* * *
(J.A. 157).
l. Damage to Your Work
"Property damage" to "your work" arising out
of it or any part of it and included in the
"products-completed operations hazard."
This exclusion does not apply if the damaged
work or the work out of which the damage
arises was performed on your behalf by a sub-
contractor.
(J.A. 160).
The 1986 ISO CGL Policies define the term "[o]ccurrence" as "an
accident, including continuous or repeated exposure to substantially
the same general harmful conditions." (J.A. 168). While the 1986 ISO
CGL Policies do not define the term "accident," controlling Maryland
case law provides that an act of negligence constitutes an "accident"
under a liability insurance policy when the resulting damage takes
place without the insured’s actual foresight or expectation. Sheets v.
Brethren Mut. Ins. Co., 679 A.2d 540, 548 (Md. 1996) (adopting sub-
jective test from standpoint of the insured regarding whether act of
negligence constitutes an "accident" under liability insurance policy);
see also Cole v. State Farm Mut. Ins. Co., 753 A.2d 533, 541 (Md.
2000). The test is a subjective one, because, according to Maryland’s
highest court, "[i]f we were to adopt an objective standard and hold
that the term ‘accident’ as used in liability insurance policies excludes
coverage for damage that should have been foreseen or expected by
FRENCH v. ASSURANCE CO. OF AMERICA 7
the insured, such insurance policies would be rendered all but mean-
ingless." Sheets, 679 A.2d at 549. Also of relevance here, the 1986
ISO CGL Policies define "[p]roperty damage" as "Physical injury to
tangible property, including all resulting loss of use of that property."
(J.A. 169).
Jeffco notified Assurance, U.S. Fire, Ohio Casualty, and Travelers
of the Underlying Suit and requested to be defended. Assurance and
U.S. Fire undertook to defend Jeffco pursuant to a reservation of
rights letter. Ohio Casualty also undertook to defend Jeffco, but Trav-
elers refused to provide any defense. Assurance, U.S. Fire, and Ohio
Casualty jointly retained the law firm of Sinnott, Nuckols, and Logan
to represent Jeffco in the Underlying Suit.
On July 28, 2003, the date of trial in the Underlying Suit, the only
count remaining alleged breach of contract. However, that same day,
Jeffco and the Frenches reached a settlement agreement (the Settle-
ment Agreement). Although Ohio Casualty consented to the Settle-
ment Agreement, Assurance and U.S. Fire did not.
Pursuant to the Settlement Agreement: (1) Jeffco agreed to confess
judgment to the Frenches for $450,000; (2) Jeffco and Ohio Casualty
would only be responsible to collectively pay the Frenches $45,000
of the $450,000 confessed judgment; (3) the judgment would be
marked "paid and satisfied" upon the Frenches’ receipt of the
$45,000, (J.A. 111); and (4) Jeffco would assign the Frenches all
rights, claims, and interest it has or may have against Assurance and
U.S. Fire in connection with the allegations in the Underlying Suit.
Jeffco and Ohio Casualty fulfilled their obligations under the Settle-
ment Agreement and, by order entered September 2, 2003, the state
court marked the $450,000 judgment "fully paid and satisfied in
accordance with the settlement agreement." (J.A. 122).
On April 1, 2004, the Frenches, as assignees of Jeffco’s rights,
claims, and interest against Assurance and U.S. Fire in connection
with commercial general liability coverage for the allegations in the
Underlying Suit, filed the present civil action in Virginia state court
against Assurance and U.S. Fire (from henceforth, collectively, Insur-
ance Defendants). The complaint alleged counts for declaratory judg-
ment; breach of contractual duty to indemnify; breach of contractual
8 FRENCH v. ASSURANCE CO. OF AMERICA
duty to defend; breach of the implied covenant of good faith and fair
dealing; and unjust enrichment. Insurance Defendants permissibly
removed the case to federal court based upon diversity jurisdiction.
All parties agreed below and continue to agree on appeal that Mary-
land substantive law controls the coverage disputes presented in the
present action.
On January 21, 2005, the Frenches filed a motion for partial sum-
mary judgment, and the Insurance Defendants filed a motion for sum-
mary judgment. The Frenches subsequently voluntarily dismissed
their counts alleging breach of express duty to defend and unjust
enrichment. This left the counts for declaratory judgment, breach of
contractual duty to indemnify, and breach of the implied covenant of
good faith and fair dealing. "The Frenches sought summary judgment
on the basis that there was no genuine issue of material fact that the
property damage to their home was caused by an occurrence during
[the Insurance Defendants’ respective] policy periods and that they
were entitled to judgment as a matter of law for $450,000 in direct
damages." (Frenches’ Opening Br. at 4).
The district court granted summary judgment in favor of the Insur-
ance Defendants and denied the Frenches’ motion for partial sum-
mary judgment. Relying on the Maryland Court of Special Appeals’
decision in Lerner Corp. v. Assurance Co. of Am., 707 A.2d 906 (Md.
Ct. Spec. App. 1998), the district court concluded that no coverage
existed under the 1986 ISO CGL Policies pursuant to the express
exclusion of coverage for property damage expected or intended from
the standpoint of the insured.
II.
On appeal, the Frenches seek reversal of the district court’s grant
of summary judgment in favor of the Insurance Defendants with
respect to their claims for declaratory judgment and breach of contract
with respect to the express duty to indemnify.2 The Frenches base
2
Federal Rule of Appellate Procedure 28(a)(9)(A) requires that the
argument section of an appellant’s opening brief contain the "appellant’s
contentions and the reasons for them, with citations to the authorities and
FRENCH v. ASSURANCE CO. OF AMERICA 9
both claims upon their assertion that the 1986 ISO CGL Policies pro-
vide Jeffco liability coverage for the cost to correct their home’s
defective EIFS exterior and to remedy the resulting moisture damage
to the home’s otherwise nondefective structure and walls. The Insur-
ance Defendants urge affirmance based upon the reasoning of the dis-
trict court. Alternatively, the Insurance Defendants suggest
affirmance on three separate and independent grounds they asserted
below, but which the district court did not address.3 See infra at 20-
21.
We review de novo the district court’s grant of summary judgment.
Williams v. Staples, Inc., 372 F.3d 662, 667 (4th Cir. 2004). Summary
judgment is appropriate when there is no genuine issue of material
fact and the moving party is entitled to judgment as a matter of law.
Fed. R. Civ. P. 56(c); Edell & Assocs. v. Law Offices of Peter G.
Angelos, 264 F.3d 424, 436 (4th Cir. 2001). Thus, the overarching
issue that we must decide de novo is whether there is no genuine issue
of material fact and the Insurance Defendants are entitled to judgment
as a matter of law. To answer this question, we apply, as the parties
agree, Maryland’s substantive law regarding the interpretation of an
insurance policy, which law provides in general as follows:
[a]n insurance policy is interpreted in the same manner as
any other contract. Maryland courts do not follow the rule
parts of the record on which the appellant relies . . . ." Id. "Failure to
comply with the specific dictates of this rule with respect to a particular
claim triggers abandonment of that claim on appeal." Edwards v. City of
Goldsboro, 178 F.3d 231, 241 n.6 (4th Cir. 1999).
Here, the Frenches did not comply with the specific dictates of Federal
Rule of Appellate Procedure 28(a)(9)(A) with respect to their claim
alleging breach of the implied covenant of good faith and fair dealing,
and therefore, such claim is abandoned on appeal. While the Frenches
mention their claim alleging breach of the implied covenant of good faith
and fair dealing in the procedural history portion of their opening brief,
they never refer to it again in their opening brief.
3
These alternative arguments appear at pages 24 through 30 of the
Insurance Defendants’ appellate brief filed in response to the Frenches’
opening appellate brief.
10 FRENCH v. ASSURANCE CO. OF AMERICA
that an insurance policy must be strictly construed against
the insurer. The principal rule in the interpretation of con-
tracts is to effect the intentions of the parties. When a con-
tract’s wording is clear, the court will presume that the
parties intended what they expressed, even if the expression
differs from the parties’ intentions at the time they created
the contract. If reasonably possible, effect must be given to
every clause and phrase of a contract, so as not to omit an
important part of the agreement.
Nationwide Ins. Co. v. Rhodes, 732 A.2d 388, 390-91 (Md. Ct. Spec.
App. 1999) (internal quotation marks and citations omitted).
A.
We will first address the reasoning of the district court. The district
court relied heavily upon the Maryland Court of Special Appeals’
opinion in Lerner Corp. v. Assurance Co. of Am., 707 A.2d 906 (Md.
Ct. Spec. App. 1998), in ruling in favor of the Insurance Defendants.
The Insurance Defendants also argue that Lerner is dispositive in their
favor. Accordingly, a thorough discussion of Lerner is in order. How-
ever, before we undertake such a discussion, we deem it helpful to
provide some background information regarding relevant provisions
of the 1986 ISO CGL Policies.
Prior to 1986, the ISO had not significantly revised its standard
commercial general liability form since 1973. Ernest Martin, Jr., Dan-
iel T. Mabery, Erika L. Blomquist & Jeffrey S. Lowenstein, Insur-
ance Coverage for the New Breed of Internet-Related Trademark
Infringement Claims, 54 SMU L. Rev. 1973, 1987-88 (2001) ("ISO
frequently makes minor revisions to its CGL form, but rarely under-
takes a major, substantive overhaul. . . . The standard ISO form in
existence before the 1986 revision was promulgated in 1973 . . . .").
"‘In the 1973 version of the [ISO’s CGL policy form], the work
performed exclusion precluded coverage for "property damage to
work performed by or on behalf of the named insured arising out of
the work or any portion thereof, or out of materials, parts or equip-
ment furnished in connection therewith."’"4 Kvaerner Metals Division
4
In the 1973 version, this was exclusion (o). F. Malcolm Cunningham,
Jr. & Amy L. Fischer, Insurance Coverage in Construction-The Unan-
swered Question, 33 Tort & Ins. L. J. 1063, 1092 n.152 (1998).
FRENCH v. ASSURANCE CO. OF AMERICA 11
of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 825 A.2d 641,
656 (Pa. Super. Ct. 2003) (some internal quotation marks omitted)
(internal citations omitted) (quoting Collett v. Ins. Co. of the West, 64
Cal. App. 4th 338, 341 (Cal. Ct. App. 1998)); see also 21 Eric Mills
Holmes, Holmes’ Appleman on Insurance 2d, § 132.9 at 152 (Mat-
thew Bender, Inc. 2002). The "on behalf of" language was interpreted
to mean that no coverage existed for damage to a subcontractor’s
work, or for damage to the insured’s own work for damage resulting
from a subcontractor’s work. Kvaerner Metals, 825 A.2d at 656;
Maryland Casualty Co. v. Reeder, 221 Cal. App. 3d 961, 972 (Cal.
Ct. App. 1990); Steven Plitt, Daniel Maldonado & Joshua D. Rogers,
Couch on Insurance 3d § 129:18 (1995); Holmes’ Appleman on
Insurance 2d, § 132.9 at 153.
"Many contractors were unhappy with this state of affairs, since
more and more projects were being completed with the help of sub-
contractors." American Family Mut. Ins. Co. v. American Girl, Inc.,
673 N.W.2d 65, 82-83 (Wis. 2004). See also Couch on Insurance 3d
§ 129:18 ("Due to the increasing use of subcontractors on construc-
tion projects, many general contractors were not satisfied with the
lack of coverage provided under [the 1973 ISO CGL] commercial
general liability policies where the general contractor was not directly
responsible for the defective work."). In response to this unhappiness,
beginning in 1976, an insured under the 1973 ISO CGL policy form
could pay a higher premium to obtain a broad form property damage
endorsement (the BFPD Endorsement) which effectively eliminated
the "on behalf of" language and excluded coverage only for property
damage to work performed by the named insured. Kvaerner Metals,
825 A.2d at 656; Reeder, 221 Cal. App. 3d at 972; Couch on Insur-
ance 3d § 129:18; Holmes’ Appleman on Insurance 2d, § 132.9 at
153. Thus, liability coverage was extended to the insured’s completed
work when the damage arose out of work performed by a subcontrac-
tor. Kvaerner Metals, 825 A.2d at 656; Reeder, 221 Cal. App. 3d at
972; Couch on Insurance 3d § 129:18; Holmes’ Appleman on Insur-
ance 2d, § 132.9 at 153.
In 1986, as part of a major revision, the subcontractor exception
aspect of the BFPD Endorsement was added directly to the body of
the ISO’s CGL policy in the form of an express exception to the
"Your Work" exclusion. Limbach Co. LLC v. Zurich Am. Ins. Co.,
12 FRENCH v. ASSURANCE CO. OF AMERICA
396 F.3d 358 (4th Cir. 2005); American Family Mut. Ins. Co., 673
N.W.2d at 83. Thus, under the 1986 ISO CGL Policies, the "Your
Work" exclusion, i.e., exclusion (l), specifically states that it "does
not apply if the damaged work or the work out of which the damage
arises was performed on [the insured contractor’s] behalf by a sub-
contractor." (J.A. 160) (emphasis added).
One other distinction between the 1973 ISO CGL policy and the
1986 ISO CGL Policies is the definition of "[o]ccurrence." Rather
than containing a separate exclusion from coverage for property dam-
ages "expected or intended from the standpoint of the Insured," as
does the 1986 version of the ISO CGL policy, i.e., exclusion (a), the
1973 version includes the same language within its definition of
occurrence. "‘Occurrence’ is defined by the 1973 [ISO CGL] policy
as ‘an accident, including continuous or repeated exposure to condi-
tions, which results in bodily injury or property damage neither
expected or intended from the standpoint of the Insured.’" Lerner,
707 A.2d at 909.
With this background in mind, we now turn to a thorough discus-
sion of Lerner. In Lerner, the Maryland Court of Special Appeals
addressed the issue, in the construction context, of what damages are
"expected" from the standpoint of the insured under the terms of a
1973 ISO CGL policy and a 1986 ISO CGL policy. In Lerner, the
plaintiffs were a developer and the firm that provided the developer
with construction management services in regard to the construction
of an office building in Rockville, Maryland. Id. at 907. A third party
acted as the general contractor and all construction work on the build-
ing was performed by subcontractors. Id.The plaintiffs sold the building to the United States. Id. at 907-08.
The contract of sale provided that acceptance of the work performed
under the contract was deemed to be final except as to latent defects.
Id. Following the actual sale of the building, the General Services
Administration (GSA) discovered latent defects in the building’s mar-
ble and stone exterior facade. Id. at 908. There was no damage to
other parts of the building resulting from such defects.
The plaintiffs undertook to repair the defective facade and then
sued their commercial general liability insurers for indemnity. Id. at
FRENCH v. ASSURANCE CO. OF AMERICA 13
908. The defendant general liability carriers defended on the ground
that the policies did not provide coverage for the plaintiffs’ economic
losses arising out of breach of contract and, in addition, that any
alleged damages were specifically excluded under the provisions of
the policy. Id. at 907.
The trial court granted summary judgment in favor of the defendant
insurance carriers on the ground that the damages alleged by the
plaintiffs arose out of a breach of contract and therefore, were not
covered. Id. The plaintiffs appealed. Id.On appeal, Maryland’s Court of Special Appeals affirmed, holding
that the plaintiffs’ liability to correct the building’s defective facade
did not result from "the happening of an ‘accident’" but resulted "sim-
ply from its failure to satisfy its obligation under their contract," and
therefore, did not constitute an "occurrence" under any of the CGL
policies at issue. Id. at 911. The court reasoned that "[i]f the damages
suffered relate to the satisfaction of the contractual bargain, it follows
that they are not unforeseen. In other words, and in the context of this
case, it should not be unexpected and unforeseen that, if the Building
delivered does not meet the contract requirements of the sale, the pur-
chaser will be entitled to correction of the defect." Id. at 912. The Ler-
ner court went on to opine in dicta, however, that "if the defect causes
unrelated and unexpected . . . property damage to something other
than the defective object itself, the resulting damages, subject to the
terms of the applicable policy, may be covered. For example, if a col-
lapse of the veneer had injured a user of the facility or damaged prop-
erty other than the veneer itself, these may well be covered." Id.In the case before us, the district court held that coverage to correct
the defective EIFS exterior of the Frenches’ home and to remedy the
resulting damage to the nondefective structure and walls of such
home was excluded pursuant to the express exclusion in the 1986 ISO
CGL Policies for property damage that was expected from the stand-
point of the insured.5 Relying on Lerner Corp. v. Assurance Co. of
Am., 707 A.2d 906 (Md. Ct. Spec. App. 1998), the district court held
that "the property damage to the residence was ‘expected’ from the
5
There is no contention that the property damage at issue was intended
by anyone.
14 FRENCH v. ASSURANCE CO. OF AMERICA
standpoint of Jeffco," and therefore, no coverage existed for the
Frenches’ breach of contract claim. (J.A. 211).
In our view, the district court is partly right and partly wrong.
Under the 1986 ISO CGL Policies, the Insurance Defendants agreed
to defend and, if necessary, indemnify Jeffco for "property damage"
caused by an "occurrence," unless such "property damage" was other-
wise excluded by the terms of the policies. An "[o]ccurrence" is
defined by the 1986 ISO CGL Policies as "an accident, including con-
tinuous or repeated exposure to substantially the same general harm-
ful conditions." (J.A. 168). "Property damage" is defined as "Physical
injury to tangible property, including all resulting loss of use of that
property." (J.A. 169). Thus, our initial inquiry is whether the property
damage to the Frenches’ home falls within the initial grant of cover-
age in the 1986 ISO CGL Policies.
For analytical purposes, we deem it necessary to divide the prop-
erty damage to the Frenches’ home into two categories. The first cate-
gory is the defective EIFS exterior. The second category is the
damage to the nondefective structure and walls of the Frenches’ home
directly resulting from moisture intrusion through the defective EIFS
exterior.
With respect to the first category, Lerner unequivocally answers
the question. We hold that just as the defective application of the
building’s stone facade in Lerner did not constitute an "accident,"
and, therefore, not an "occurrence" under the materially similar CGL
policies at issue in Lerner, so does the defective application of the
EIFS exterior to the Frenches’ home not constitute an "accident," and
therefore, not an "occurrence" under the 1986 ISO CGL Policies.6
Lerner, 707 A.2d at 912-13. As the Lerner court reasoned: "[T]he
obligation to repair the facade itself is not unexpected or unforeseen
under the terms of the sales contract. Therefore, the repair or replace-
6
Similarly, as the district court held in the case before us, Jeffco’s con-
tractual obligation to provide the Frenches with a defect-free EIFS exte-
rior was known to Jeffco at the time that it entered into the contract to
construct the Frenches’ home, and therefore, the exclusion for "‘property
damage’ expected or intended from the standpoint of the insured," (J.A.
157), operates to defeat coverage.
FRENCH v. ASSURANCE CO. OF AMERICA 15
ment damages represent economic loss and consequently would not
trigger a duty to indemnify under a CGL policy." Id. at 911-12.
However, despite the position of the district court and the Insur-
ance Defendants, Lerner does not answer the question with respect to
the second category of damage claimed by the Frenches—i.e., dam-
age to the nondefective structure and walls of the Frenches’ home
caused by moisture intrusion through the defectively installed EIFS
exterior. Unlike the undisputed factual situation in the case before us,
factually, Lerner did not involve property damage to otherwise non-
defective parts of the building. This is a significant distinction, and
one which brings into play the subcontractor exception to the "Your
Work" exclusion in the 1986 ISO CGL Policies.
Thus, the question only referenced by Lerner in dicta, and not
answered by any other controlling Maryland authority, is whether,
under Maryland law, the 1986 ISO CGL Policies provide a general
contractor liability coverage for the cost to remedy property damage
to the contractor’s otherwise nondefective work-product caused by a
subcontractor’s defective workmanship? The Supreme Court of Wis-
consin’s thoughtful opinion in American Family Mutual Insurance
Company v. American Girl, Inc., 673 N.W.2d 65 (Wis. 2004) and
dicta in Lerner conclusively persuade us that the answer to this ques-
tion is yes.
In American Family, the Supreme Court of Wisconsin considered
a materially analogous set of facts. The court found coverage under
the 1986 version of the ISO CGL policy to indemnify a general con-
tractor for the costs to remedy property damage to a warehouse (i.e.,
the sinking of the building’s foundation and buckling and cracking of
the building’s structure necessitating the building being declared
unsafe and torn down) caused by faulty site-preparation advice by a
soil engineering subcontractor. Id. 69-71. With respect to the initial
grant of coverage, the court held that the property damage to the
warehouse was the result of an accident, i.e., the settling of the soil,
and therefore, an "occurrence" within the meaning of the 1986 ISO
CGL policy form. Id. at 78.
Moreover, in American Family, the liability carrier, like the Insur-
ance Defendants here, asserted, inter alia, that the "expected or
16 FRENCH v. ASSURANCE CO. OF AMERICA
intended" exclusion, i.e., exclusion (a), applied to defeat coverage in
full. Id. at 79. Specifically, the liability carrier argued that given poor
soil conditions at the site and the insured general contractor’s recogni-
tion that special measures were required to prepare the soil to carry
the weight of the warehouse, the insured general contractor expected
that some settlement would occur, and thus, the exclusion applied. Id.
The court held the exclusion was not triggered because the liability
carrier was not arguing that property damage was expected or
intended by the general contractor, but only that some degree of set-
tlement must have been expected under the circumstances. Id.
Additionally, the insurance carrier in American Family also argued
that coverage to remedy the property damage caused by the faulty
site-preparation advice by one of the insured general contractor’s sub-
contractors was defeated by the "Your Work" exclusion, i.e., exclu-
sion (l). After recounting the history of the ISO’s inclusion of the
subcontractor exception to the "Your Work" exclusion in the 1986
ISO CGL policy form, the Supreme Court of Wisconsin reiterated
that the 1986 revision restored otherwise excluded coverage for dam-
age caused to construction projects by subcontractor negligence. Id.
at 83. The court also admonished against applying case law involving
the 1973 ISO CGL policy form to cases involving the 1986 ISO CGL
policy form. Id.
With respect to the costs to remedy the property damage to the
structure and walls of the Frenches’ home, the case before us appears
to be on all fours with American Family. Here, there is no evidence
that Jeffco subjectively expected or intended that the nondefective
structure and walls of the Frenches’ home would suffer damage from
moisture intrusion. Indeed, there does not appear even to be an allega-
tion that Jeffco either expected or intended that its subcontractor
(Coronado Stucco & Stone) would defectively install the EIFS exte-
rior on the Frenches’ home. Accordingly, as was the case of the sink-
ing soil in American Family, the moisture intrusion into the
nondefective structure and walls of the Frenches’ home was an acci-
dent, and therefore, an "occurrence" under the initial grant of cover-
age of the 1986 ISO CGL Policies, which coverage is not defeated by
the express exclusion for coverage of damage which is expected or
intended from the standpoint of the insured.
FRENCH v. ASSURANCE CO. OF AMERICA 17
Critically, we emphasize that the record contains no evidence, and
there appears to be no allegation, that upon completion of the
Frenches’ home, and the issuance of the Certificate of Occupancy for
the home in December 1994, any defect existed with respect to the
structure and walls of the Frenches’ home. The nondefective structure
and walls were damaged over a period of nearly five years when the
defective EIFS exterior allowed harmful moisture and water penetra-
tion. Thus, to the extent the Frenches, standing in the shoes of Jeffco,
seek coverage for the costs to remedy the property damage to the oth-
erwise nondefective structure and walls of their home, our holding in
favor of such coverage does not act as a source of warranty for con-
tractually provided workmanship. As delivered per the construction
contract, the structure and walls of the Frenches’ home were defect-
free.
At oral argument, counsel for Insurance Defendants candidly and
correctly acknowledged that had a portion of the defective EIFS exte-
rior on the Frenches’ home fallen outwardly onto an automobile or
inwardly onto a painting hanging on an interior wall or on furniture
in the home, the 1986 ISO CGL Policies would have provided Jeffco
liability coverage for damages to the automobile, the painting, and the
furniture. In this same vein, it is illogical to contend that had the
defective EIFS exterior on the Frenches’ home failed and caused
damage to the flooring inside the home or to the structural members
of the house, neither of which was defective at completion of con-
struction and certification for occupancy, coverage would not have
been provided under the 1986 ISO CGL Policies. This aspect of cov-
erage is inherently different from coverage to correct the defective
EIFS exterior on the Frenches’ home. As we have already held, cov-
erage to correct the defective EIFS exterior is not provided under the
1986 ISO CGL Policies, as opposed to damage to other nondefective
parts of the home, i.e., the interior and structural members of the
home, which were not damaged or defective upon completion of con-
struction, certification for occupancy and delivery of the home, but
may have sustained damage as the result of the failure of the EIFS
exterior.
Maryland’s Court of Special Appeals makes the same point in dicta
in Lerner. There, the court distinguished between the cost to correct
a defect in work performed under a construction contract, for which
18 FRENCH v. ASSURANCE CO. OF AMERICA
no coverage under the 1986 ISO CGL policy form exists, and "prop-
erty damage to something other than the defective object itself . . . ."
Lerner, 707 A.2d at 912. "For example, if a collapse of the veneer had
injured a user of the facility or damaged property other than the
veneer itself, these may well be covered." Id. That is exactly the situa-
tion here. The defective EIFS exterior on the Frenches’ home allowed
moisture intrusion into the structure and walls of the Frenches’ home,
which constitutes damage to property other than to the defective EIFS
exterior itself. This dicta in Lerner strongly suggests that, if faced
with the facts before us in the present appeal, Maryland’s highest
court would find in favor of coverage for the costs to remedy the
property damage to the otherwise nondefective structure and walls of
the Frenches’ home.
Finally and significantly, our holding today that, under Maryland
law, coverage exists under the 1986 ISO CGL Policies for the costs
to remedy the damage to the nondefective structure and walls of the
Frenches’ home, unlike that of the district court and the position of
the Insurance Defendants, gives effect to the subcontractor exception
to the "Your Work" exclusion in these policies. As Maryland’s high-
est court has continually reiterated: "It is a recognized rule of con-
struction that a contract must be construed in its entirety and, if
reasonably possible, effect must be given to each clause or phrase so
that a court does not cast out or disregard a meaningful part of the
writing." Bausch & Lomb, Inc. v. Utica Mutual Ins. Co., 625 A.2d
1021, 1033 (Md. 1993). The very existence of the "Your Work"
exclusion and the history of subcontractor exception to that exclusion
provide us solid confirmation that our holding with respect to the non-
defective structure and walls of the Frenches’ home is correct. As the
Court of Appeals of Kansas expressly quoted with approval:
"If the policy’s exclusion for damage to the insured’s work
contains a proviso stating that the exclusion is inapplicable
if the work was performed on the insured’s behalf by a sub-
contractor, it would not be justifiable to deny coverage to
the insured, based upon the absence of an occurrence, for
damages owed because of property damage to the insured’s
work caused by the subcontractor’s work. Reading the pol-
icy as a whole, it is clear that the intent of the policy was
to cover the risk to the insured created by the insured’s use
FRENCH v. ASSURANCE CO. OF AMERICA 19
of a subcontractor. Moreover, if coverage were never avail-
able for damage to the insured’s work because of a subcon-
tractor’s mistake, on the theory that there was no occurrence
even under those circumstances, the foregoing subcontractor
proviso to the exclusion for damage to the insured’s work
would be meaningless, and if possible, policies should not
be interpreted to render policy provisions meaningless."
Lee Builders, Inc. v. Farm Bureau Mut. Ins. Co., 104 P.3d 997, 1003
(Kan. Ct. App. 2005) (quoting Windt, Insurance Claims and Disputes
§ 11.3, Supp. p. 48 (4th ed. 2001)).
The 1986 ISO CGL Policies, like the ISO liability policies before
them, are structured such that express exclusions, like the "Your
Work" exclusion, limit an initial grant of coverage. Then exceptions
to exclusions, such as the subcontractor exception to the "Your Work"
exclusion, restore otherwise excluded coverage. See, e.g., Lee Build-
ers, Inc. v. Farm Bureau Mut. Ins. Co., 104 P.3d 997, 1003 (Kan. Ct.
App. 2005) (concluding that damage caused to structure of home as
a result of continuous exposure to moisture due to subcontractor’s
defective materials and work was an occurrence triggering indemnity
provisions of ISO CGL policy containing subcontractor exception to
"Your Work" exclusion); American Family, 673 N.W.2d at 83-84
("There is coverage [to remedy damage to warehouse resulting from
subcontractor’s faulty site-preparation advice] under the insuring
agreement’s initial coverage grant. Coverage would be excluded by
the business risk exclusionary language, except that the subcontractor
exception to the business risk exclusion applies, which operates to
restore the otherwise excluded coverage."); O’Shaughnessy v. Smuck-
ler Corp., 543 N.W.2d 99 (Minn. Ct. App. 1996) (recognizing that
1986 amendments to "Your Work" exclusion changed standard CGL
policy so as to provide coverage for property damage to a contractor’s
work when that damage is caused by a subcontractor’s defective
work), abrogated on other grounds by Gordon v. Microsoft Corp.,
645 N.W.2d 393 (Minn. 2002). In sum, our holding is consistent with
the intent and structure of the 1986 ISO CGL Policies and Maryland
law.
To be clear, we will reiterate our holdings. We hold that, under
Maryland law, a standard 1986 commercial general liability policy
20 FRENCH v. ASSURANCE CO. OF AMERICA
form published by the ISO does not provide liability coverage to a
general contractor to correct defective workmanship performed by a
subcontractor. We also hold that, under Maryland law, the same pol-
icy form provides liability coverage for the cost to remedy unexpected
and unintended property damage to the contractor’s otherwise nonde-
fective work-product caused by the subcontractor’s defective work-
manship. With respect to this last holding, we assume arguendo that
no other policy exclusion applies.
Based upon these holdings, we: (1) affirm the district court’s grant
of summary judgment in favor of the Insurance Defendants with
respect to the Frenches’ claims for declaratory judgment and breach
of the express duty to indemnify to the extent those claims seek cov-
erage under the 1986 ISO CGL Policies to correct the defective EIFS
exterior on the Frenches’ home; (2) vacate the district court’s grant
of summary judgment in favor of the Insurance Defendants with
respect to the Frenches’ claims for declaratory judgment and breach
of the express duty to indemnify to the extent those claims seek cov-
erage to remedy the damage to the otherwise nondefective structure
and walls of the Frenches’ home; and (3) remand for further proceed-
ings consistent with this opinion.
B.
Because the district court did not address the Insurance Defen-
dants’ three alternative arguments and each appears to involve at least
one underlying factual dispute, we adhere to the general rule that a
federal appellate court does not consider an issue not passed upon
below. Singleton v. Wulff, 428 U.S. 106, 120 (1976) ("It is the general
rule, of course, that a federal appellate court does not consider an
issue not passed upon below."). On remand, the district court is free
to consider the three alternative arguments raised by the Insurance
Defendants both below and in the present appeal, which arguments
the district court did not previously pass upon.
If none of the Insurance Defendants’ alternative arguments defeat
coverage to remedy the damage to the otherwise nondefective struc-
ture and walls of the Frenches’ home, the district court should con-
duct proceedings to apportion any damages due the Frenches between
the costs to correct the defective EIFS exterior and the costs to rem-
FRENCH v. ASSURANCE CO. OF AMERICA 21
edy the damage to the otherwise nondefective structure and walls of
the Frenches’ home. Following such apportionment, the district court
should enter an appropriate judgment in favor of the Frenches with
respect to their declaratory judgment claim and their claim for breach
of the duty to indemnify for an amount equal to the amount appor-
tioned for remedying the damage to the otherwise nondefective struc-
ture and walls of the Frenches’ home.
III.
For the reasons stated, we affirm in part, vacate in part, and remand
for further proceedings consistent with this opinion.
AFFIRMED IN PART, VACATED IN PART,
AND REMANDED