Breezewood of Wilmington Condominiums Homeowners' Ass'n v. Amerisure Mutual Insurance ( 2009 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 08-1476
BREEZEWOOD OF WILMINGTON CONDOMINIUMS HOMEOWNERS’
ASSOCIATION, INCORPORATED,
Plaintiff - Appellant,
v.
AMERISURE MUTUAL INSURANCE COMPANY,
Defendant - Appellee.
Appeal from the United States District Court for the Eastern
District of North Carolina, at Wilmington. James C. Dever III,
District Judge. (7:07-cv-00050-D)
Argued: March 25, 2009 Decided: July 1, 2009
Before DUNCAN, Circuit Judge, Robert J. CONRAD, Jr., Chief
United States District Judge for the Western District of North
Carolina, sitting by designation, and Thomas D. SCHROEDER,
United States District Judge for the Middle District of North
Carolina, sitting by designation.
Affirmed by unpublished per curiam opinion.
Brian Schoolman, SAFRAN LAW OFFICES, Raleigh, North Carolina,
for Appellant. Tracy Lynn Eggleston, COZEN O’CONNOR, Charlotte,
North Carolina, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
PER CURIAM:
Breezewood of Wilmington Condominiums Homeowners’
Association, Inc. (“Breezewood CHOA”) sought a declaratory
judgment that Amerisure Mutual Insurance Company (“Amerisure”)
had a duty to defend and indemnify its insured, Quality Built
Construction, Inc. (“Quality Built”), in whose shoes Breezewood
CHOA stands by assignment, with respect to state court claims
arising out of the construction of a condominium development.
The district court granted Amerisure’s motion for summary
judgment. We conclude that Amerisure had no duty to defend
Quality Built and therefore affirm.
I.
Quality Built served as general contractor for a
condominium development in Wilmington, North Carolina (the
“Condominium Development”). On May 28, 2004, Breezewood CHOA
filed a complaint in North Carolina state court against Quality
Built and the Condominium Development developers, 1 alleging
defects in construction and design of the Condominium
Development buildings that necessitated “extraordinary repairs
and reconstruction of major portions of the common elements”
(the “Underlying Complaint”). (J.A. 38-39.) Approximately a
1
Breezewood of Wilmington, Inc., and Breezewood of Raleigh,
Inc., were the developers for the Condominium Development.
2
year later, in May 2005, Quality Built notified Amerisure of the
Underlying Complaint and submitted a claim under its commercial
general liability insurance (the “CGL policy”) for damage to the
building components and resulting loss of use. Amerisure denied
coverage on May 25, 2005, on the ground that the Underlying
Complaint did not allege “property damage” caused by an
“occurrence.” 2 (J.A. 231-33.) Breezewood CHOA subsequently
settled with Quality Built and one of the developers, accepting
a $2,000,000 judgment and an assignment of Quality Built’s
rights against Amerisure.
Breezewood CHOA initiated the present lawsuit in the
district court, seeking a declaratory judgment that Amerisure
breached its duty to defend Quality Built against the Underlying
Complaint. Amerisure counterclaimed, seeking a declaratory
judgment that Amerisure had no duty to defend Quality Built. On
cross-motions for summary judgment, the district court granted
Amerisure’s motion and denied Breezewood CHOA’s motion.
Breezewood CHOA timely appeals the district court’s decision.
2
Amerisure also declined coverage and defense based on late
notice, but that issue is not before us inasmuch as the district
court did not reach it.
3
II
We exercise jurisdiction over this appeal under 28 U.S.C.
§ 1291. A district court’s grant of summary judgment is
reviewed de novo. Jennings v. Univ. of N.C. at Chapel Hill, 482
F.3d 686, 694 (4th Cir. 2007) (en banc). Because this is a
diversity action, we apply the law of North Carolina, which
treats the interpretation of insurance policy provisions as a
question of law. ABT Bldg. Prods. Corp. v. Nat’l Union Fire
Ins. Co., 472 F.3d 99, 115 (4th Cir. 2006); N.C. Farm Bureau
Mut. Ins. Co. v. Briley, 127 N.C. App. 442, 444, 491 S.E.2d 656,
658 (1997). Insurance policies are construed in accordance with
traditional rules of contract interpretation, so where the
meaning of the policy is clear and only one reasonable
interpretation exists the courts must enforce the contract as
written. Patrick v. Wake County Dep’t of Human Servs., 188 N.C.
App. 592, 596, 655 S.E.2d 920, 924 (2008) (citing Dawes v. Nash
County, 357 N.C. 442, 448, 584 S.E.2d 760, 764 (2003)). The
party seeking benefits under an insurance contract bears the
burden of showing coverage for its claim. Fortune Ins. Co. v.
Owens, 351 N.C. 424, 430, 526 S.E.2d 463, 467 (2000). Until the
insured makes a prima facie case of coverage, the insurer has no
burden to prove the applicability of any policy exclusion. Id.
at 430, 526 S.E.2d at 467.
4
An insurer’s duty to defend is broader than its duty to
indemnify -- the former ordinarily being measured by the facts
as alleged in the pleadings while the latter by facts ultimately
determined at trial. Waste Mgmt. of Carolinas, Inc. v. Peerless
Ins. Co., 315 N.C. 688, 691, 340 S.E.2d 374, 377 (1986). North
Carolina applies the “comparison test” to determine whether the
damage alleged by the insured is covered by the insurer’s
policy. Id. at 693, 340 S.E.2d at 378. Under the comparison
test, “the pleadings are read side-by-side with the policy to
determine whether the events as alleged are covered or
excluded.” Id. at 693, 340 S.E.2d at 378; Harleysville Mut.
Ins. Co. v. Buzz Off Insect Shield, L.L.C., ___ N.C. App. ___,
664 S.E.2d 317, 320 (2008). If the pleadings “state facts
demonstrating that the alleged injury is covered by the policy,
then the insurer has a duty to defend, whether or not the
insured is ultimately liable.” Waste Mgmt., 315 N.C. at 391,
340 S.E.2d at 377. This is true even if the pleadings describe
a hybrid of covered and excluded events or “disclose a mere
possibility that the insured is covered.” Id. at 391 n.2, 340
S.E.2d at 377 n.2. On the other hand, if the pleadings “allege
facts indicating that the event in question is not covered, and
the insurer has no knowledge that the facts are otherwise, then
it is not bound to defend.” Id. at 391, 340 S.E.2d at 377.
5
However, once “the insurer knows or could reasonably
ascertain facts that, if proven, would be covered by its
policy,” the duty to defend is not dismissed simply because the
facts alleged in the complaint appear to be outside coverage.
Waste Mgmt., 315 N.C. at 691, 340 S.E.2d at 377-78. Thus, the
insurer has a “duty to investigate and evaluate facts expressed
or implied in the []complaint as well as facts learned from the
insured and from other sources.” Id. at 691; 340 S.E.2d at 378;
accord Duke Univ. v. St. Paul Fire and Marine Ins. Co., 96 N.C.
App. 635, 638, 386 S.E.2d 762, 764 (1990). Any doubt as to
coverage is resolved in favor of the insured. Waste Mgmt., 315
N.C. at 693, 340 S.E.2d at 378. If it is later determined that
an insurer breached its duty to defend, “the insurer is estopped
from denying coverage and is obligated to pay the amount of any
reasonable settlement made in good faith by the insured of the
action brought against him by the injured party.” Pulte Home
Corp. v. Am. S. Ins. Co., 185 N.C. App. 162, 165, 647 S.E.2d
614, 617 (2007) (citation omitted).
6
III.
With these principles in mind, we turn to the
interpretation of the terms of the CGL policy in this case. 3 The
CGL policy requires Amerisure to pay those sums Quality Built
becomes legally obligated to pay because of “property damage”
“caused by an ‘occurrence’ that takes place in the ‘coverage
territory’ and . . . during the policy period.” (J.A. 79.) The
dispute in this case is whether Breezewood CHOA alleged
“‘property damage’ caused by an ‘occurrence.’” Because we
conclude that the allegations do not allege “property damage”
covered by the CGL policy, we do not address whether Breezewood
CHOA alleged the existence of an “occurrence.”
A.
Where an insurance policy defines a term, that definition
is to be used in interpreting the pertinent provision. C.D.
Spangler Constr. Co. v. Indus. Crankshaft and Eng’g Co., 326
N.C. 133, 142, 388 S.E.2d 557, 563 (1990). The CGL policy
defines “property damage” as follows:
(a) Physical injury to tangible property, including
all resulting loss of use of that property. All such
loss of use shall be deemed to occur at the time of
the physical injury that caused it; or
3
Amerisure issued both an Umbrella Liability Policy and the
CGL policy in favor of Quality Built, and the pertinent insuring
provisions and definitions contained in both are identical.
Because Breezewood CHOA addresses only the CGL policy on appeal
our analysis involves only the provisions of that policy.
7
(b) Loss of use of tangible property that is not
physically injured. All such loss of use shall be
deemed to occur at the time of the ‘occurrence’ that
caused it.
(J.A. 91.)
North Carolina state courts and federal courts sitting in
diversity have consistently held that “property damage” in the
context of commercial general liability policies means “damage
to property that was previously undamaged” and does not include
“the expense of repairing property or completing a project that
was not done correctly or according to contract in the first
instance” by the insured. Prod. Sys., Inc. v. Amerisure Ins.
Co., 167 N.C. App. 601, 606, 605 S.E.2d 663, 666 (2004) (citing
Hobson Constr. Co. v. Great Am. Ins. Co., 71 N.C. App. 586, 590,
322 S.E.2d 632, 635 (1984)); accord W. World Ins. Co. v.
Carrington, 90 N.C. App. 520, 524-25, 369 S.E.2d 128, 130-31
(1998); Wm. C. Vick Constr. Co. v. Penn Nat’l Mut. Cas. Ins.
Co., 52 F. Supp. 2d 569, 581 (E.D.N.C. 1999), aff’d per curiam,
213 F.3d 634 (4th Cir. 2000). The rationale underlying this
view is that “the quality of the insured’s work is a ‘business
risk’ which is solely within his own control,” and that
“liability insurance generally does not provide coverage for
claims arising out of the failure of the insured’s product or
work to meet the quality or specifications for which the insured
may be liable as a matter of contract.” W. World, 90 N.C. App.
8
at 523, 369 S.E.2d at 130. Rather, such business risks are the
purpose of performance bonds, not liability insurance policies.
Id.; see also 9A Lee R. Russ & Thomas F. Segalla, Couch on
Insurance, § 129.1 (3rd ed. 2008) (explaining that general
commercial liability policies do not cover business risks that
“occur as a consequence of the insured not performing well and
[are] a component of every business relationship that is
necessarily borne by the insured in order to satisfy its
customers”).
This view was also recognized in Travelers Indemnity Co. v.
Miller Building Corp., 97 F. App’x 431, 434 (4th Cir. 2004)
(unpublished) (“Miller I”), a case upon which both parties rely
heavily. In Miller I, this Court addressed the definition of
“property damage” under North Carolina law in a commercial
general liability insurance policy containing insuring language
equivalent to that in the Amerisure policy. 4 The general
contractor was insured under a commercial general liability
policy and constructed a hotel that suffered damage after its
completion. Id. at 432. Due to the damage to the hotel, the
4
Although Miller I was unpublished and holds no
precedential authority, its factual scenario renders it worthy
of consideration given the facts before us. See Collins v. Pond
Creek Mining Co., 468 F.3d 213, 219 (4th Cir. 2006) (recognizing
that “we ordinarily do not accord precedential value to our
unpublished decisions” and that such decisions “are entitled
only to the weight they generate by the persuasiveness of their
reasoning” (citation omitted)).
9
developer refused to pay the general contractor. Id. The
general contractor initiated arbitration proceedings against the
developer, who counterclaimed for the cost of repairing the
construction defects and the damage. Id. at 432-33. The
insurer sought a declaratory judgment that it was not obligated
to defend the general contractor against the developer’s
counterclaims. Id. at 433.
In construing the definition of “property damage,” this
Court recognized that under North Carolina law “to fall within
the scope of a general liability policy, the property allegedly
damaged has to have been undamaged or uninjured at some previous
point in time.” Id. at 433-34 (citation omitted). The Court
concluded that the underlying allegations were claims for
defective construction and that “property damage” does not
contemplate faulty workmanship. Id. at 434. However, the
general contractor’s faulty installation of windows and sliding
glass doors caused water damage to guest-room carpet that had
been provided (undamaged) by the hotel owner. Id. The insurer
argued that such damage was not covered because the carpet was a
component of the “defective-from-the-beginning hotel,” which was
not “previously undamaged.” Id. This Court held that the
damage to the carpet fell within the scope of “property damage”
because it was “separate tangible property” from the hotel
inasmuch as it had been supplied by the owner, not the general
10
contractor. Id. While the insurer’s argument “might have some
force . . . as to another component of the hotel,” the opinion
noted, the owner-provided guest-room carpet must be viewed as
“separate from the hotel, not an undifferentiated component of
the hotel, and the damage to that carpet as a discrete form of
property damage.” Id. The district court’s grant of summary
judgment to the insurance company was vacated and the case
remanded. Id. at 437.
On remand, the district court determined that coverage
under the commercial general liability policy “extends to damage
to property separate from the hotel that was not subjectively
foreseeable” to the general contractor (i.e., an “occurrence”).
Travelers Indem. Co. v. Miller Bldg. Co., 221 F. App’x 265, 267
(4th Cir. 2007) (unpublished) (“Miller II”). In affirming the
district court’s decision, this Court restated that “the only
claims that could fall within the definition of ‘property
damage,’ as we construed North Carolina law, were those that
alleged damages to the owner’s own property that was separate
from the hotel.” Id. at 269. The opinion specifically noted
that between Miller I and Miller II, the North Carolina Court of
Appeals clarified the definition of “property damage” in
Production Systems Inc. v. Amerisure Insurance Co., 167 N.C.
App. 601, 605 S.E.2d 663 (2004), and its interpretation was
11
consistent with the Miller I analysis. Miller II, 221 F. App’x
at 269.
Production Systems involved a contractor who defectively
installed conveyor belts in two oven feed line systems. 167
N.C. App. 602-603, 605 S.E.2d at 664. The insured-contractor
was responsible for “designing, building and installing the two
line systems.” Id. at 603, 605 S.E.2d at 664. “[D]efective
conveyor belt assemblies caused damage to other [correctly
installed] parts of the oven line system” resulting in loss of
use of the line system. Id. at 603, 605 S.E.2d at 664. The
trial court concluded there was no “property damage” under
virtually identical insuring provisions. Id. at 605-07, 605
S.E.2d at 666-67. The North Carolina Court of Appeals affirmed,
reiterating that “property damage” contemplates coverage of
“damage to property that was previously undamaged, and not the
expense of repairing property or completing a project that was
not done correctly or according to contract in the first
instance.” Id. at 606, 605 S.E.2d at 666. The court then
stated: “We conclude that under the precedent of Hobson,
‘property damage’ does not refer to repairs to property
necessitated by an insured’s failure to properly construct the
property to begin with.” Id. at 607, 605 S.E.2d at 666 (citing
Hobson Constr. Co., Inc. v. Great Am. Ins. Co., 71 N.C. App.
586, 322 S.E.2d 632). The North Carolina Court of Appeals then
12
applied this conclusion to the facts and held that “there was no
‘property damage’ to the oven feed line systems because the only
‘damage’ was repair of defects in, or caused by, the faulty
workmanship in the initial construction.” Id. at 607, 605
S.E.2d at 667 (emphasis added). The trial court’s grant of
summary judgment dismissing the case was affirmed. Id. at 607,
605 S.E.2d at 667.
With this outline of the case law in mind, we turn to the
issues in this case.
B.
The insured, in this case Breezewood CHOA standing in the
shoes of Quality Built, bears the burden of proving coverage
under the CGL policy. Fortune Ins. Co. v. Owens, 351 N.C. 424,
430, 526 S.E.2d 463, 467 (2000). Breezewood CHOA makes the
following arguments: (1) the Underlying Complaint alleges events
covered by the CGL policy; (2) if it does not, sufficient facts
were discoverable so as to warrant coverage; and (3) loss of use
resulting from the damage should be covered.
1.
The Underlying Complaint charges that “[p]roblems and
defects have been discovered as a result of defective design
and/or construction.” (J.A. 38.) It provides a non-exhaustive
list of fourteen “defects in construction and design complained
of,” and alleges that “[a]s a direct and proximate result of the
13
above-referenced design and construction deficiencies,
Breezewood [C]HOA has [spent] and will continue to spend
substantial sums of money for the extraordinary repairs and
reconstruction of major portions of the common elements.” (J.A.
38-39.) The Underlying Complaint alleges causes of action for,
among other things, construction negligence (failure to “deliver
the project free of construction defects and design and built in
conformity with the customary and ordinary standards of the
building and construction industry”), breach of duty (to
“supervise and review the design and otherwise deliver the
project free of construction defects and design”), breach of
express warranty (“that the buildings would be free from
construction defects”), breach of implied warranty (that “the
project would be constructed in a careful, diligent, and
workmanlike manner, free of construction defects”), unfair and
deceptive trade practices (failure to “disclose design and/or
construction defects”), and fraud. (J.A. 39-45.) The
Underlying Complaint seeks compensatory and punitive damages for
“extraordinary repairs, maintenance and reconstruction costs.”
(J.A. 40-41, 44, 46.)
Breezewood CHOA’s allegations in the Underlying Complaint
squarely allege faulty workmanship by the insured and damages
associated with repairing the deficient construction. Under
North Carolina law, such allegations do not constitute property
14
damage. Prod. Sys. Inc. v. Amerisure Ins. Co., 167 N.C. App.
601, 607, 605 S.E.2d 663, 667 (2004) (holding “property damage”
does not include “repair of defects in, or caused by, the faulty
workmanship in the initial construction”). Breezewood CHOA also
charges that Quality Built did not construct the Condominium
Development according to contract in the first instance. Costs
associated with bringing the project into compliance with
Breezewood CHOA’s contractual expectations is not “property
damage” covered by a CGL policy. Id. at 606, 605 S.E.2d at 666(holding “property damage” does not include “the expense of . .
. completing a project that was not done correctly or according
to contract in the first instance”); Wm. C. Vick Constr. v. Penn
Nat’l Mut. Cas. Ins. Co., 52 F. Supp. 2d 569, 582 (E.D.N.C.
1999), aff’d per curiam, 213 F.3d 634 (4th Cir. 2000). Thus,
the district court properly concluded that the Underlying
Complaint failed to allege “property damage” under North
Carolina law.
2.
Breezewood CHOA contends next that, even if the Underlying
Complaint did not establish “property damage,” coverage was
established when Amerisure was apprised of sufficient facts
through two other sources: investigative reports prepared by
R.V. Buric Construction Consultants (“Buric”), and a letter from
15
Breezewood CHOA to Quality Built dated July 25, 2006. We
disagree.
In pursuing the allegations in its Underlying Complaint,
Breezewood CHOA retained Buric to investigate the cause and
extent of the damage to the Condominium Development. Buric
prepared two reports, a preliminary report dated January 14,
2005 (the “Buric preliminary report”), and a full report dated
May 26, 2006 (the “Buric full report”). It is apparent that the
Buric preliminary report was delivered to Amerisure no earlier
than Breezewood CHOA’s initial notice to Amerisure in May 2005.
However, the record is unclear as to whether the Buric full
report was provided to Amerisure. 5 Nevertheless, because neither
report contains allegations of damage that would be covered
under the CGL policy, as noted below, their receipt by Amerisure
does not impact our conclusion.
The Buric preliminary report reveals a non-exhaustive list
of “exterior building deficiencies and damages,” “exterior site
and parking lot deficiencies and damages,” and “interior
building deficiencies and damages” which constitute “violations
5
Breezewood CHOA’s counsel could not represent
affirmatively at oral argument that the Buric full report had
been shared with Amerisure. However, he did point out that
Quality Built’s counsel testified by affidavit that it would
have been his standard practice to forward such documents to
Amerisure. Breezewood CHOA’s counsel further noted that this
assertion by Quality Built’s counsel was not contested.
16
of building code or failure to comply with appropriate industry
standards.” (J.A. 278-79.) It also indicates, however, that
“excessive moisture is being introduced into the wood products
and may be causing damage.” (J.A. 279.) The reported water-
related damage was to a “wood rail” and “interior finishes” of
the Condominium Development. (Id.) The report concludes that
further investigation and testing is needed with respect to “the
necessary repairs and the cost for such repairs.” (Id.)
The Buric full report specifically attributes “damages to
building components” to “Code violations and improper
workmanship.” (J.A. 348-49.) The report groups the damage into
four categories of deficiencies 6 and concludes that “[d]ue to
Code violations and improper workmanship, water damage has
occurred to the exterior wall sheathing, framing, and other
building components at the Breezewood Condominiums.” (J.A. 348-
49.) The report prefaces its recommendations with the
following:
Construction deficiencies from original construction
are causing building problems and damages to the
buildings at Breezewood Condominiums. Water intrusion
must be stopped and water-damaged and incorrectly
installed building components repaired or replaced.
(J.A. 350.)
6
The deficiencies are categorized as “Cladding Systems
Installation Deficiencies”, “Flashing Installation
Deficiencies”, “Grading and Drainage Deficiencies”, and
“Additional Building Deficiencies.” (J.A. 348-49.)
17
On July 25, 2006, Breezewood CHOA addressed Amerisure’s
denial of coverage in a letter to Quality Built, which Quality
Built forwarded to Amerisure. 7 The letter states that Breezewood
CHOA’s claim was “not limited to the correction of defective
work, but also includes costs for water damage to other building
components which were previously undamaged” when installed,
including wall sheathing, framing, hand rails, and metal stairs.
(J.A. 236.) The letter concludes that “as a result of the
construction performed by Quality Built, water was able to
penetrate the exterior of the condominium buildings” and “was a
cause of at least some of the damage to the buildings.” (J.A.
235.) To be sure, Breezewood CHOA clearly continued to contend
that the water damage to the Condominium Development arose out
of or was caused by Quality Built’s deficient construction.
Based on both Buric reports and the letter, Breezewood CHOA
now argues that, even if the faulty workmanship is considered
previously damaged property, proper notice was provided that the
resulting water damage occurred in previously undamaged property
and is therefore covered by the CGL policy. Amerisure responds
that Quality Built’s product is the Condominium Development as a
whole. As such, Breezewood CHOA’s allegations of defect, it
contends, relate to tangible property which is not separate from
7
Amerisure acknowledged receipt of the letter in
correspondence dated October 23, 2006.
18
the Condominium Development itself. Because the Condominium
Development was “defective-from-the-beginning,” it reasons, the
analysis of Miller I leads to the conclusion that the water-
damaged property is not covered “property damage.” Travelers
Indem. Co. v. Miller Bldg. Corp., 97 F. App’x 431, 434 (4th Cir.
2004) (unpublished).
We do not need to decide whether Quality Built’s product is
the entire Condominium Development (including all separate
buildings) under the “defective-from-the-beginning” argument
advanced by Amerisure, 8 because under North Carolina law, not
only is the cost of repair or replacement of faulty workmanship
not “property damage,” but neither is damage to the insured’s
8
Miller I supports the inference that, had the carpet been
supplied by the insured-general contractor rather than the hotel
owner, it would have been considered an undifferentiated
component of the hotel and any damage to it would not have
constituted covered “property damage.” 97 F. App’x at 434-35.
Miller I did not so hold, however, merely stating that this
argument was “unavailing” with respect to this case because the
carpet was supplied by the owner. Id. As an unpublished case,
it also lacks precedential authority. However, the same
inference can be drawn from Production Systems, where the North
Carolina Court of Appeals denied coverage for damage to
previously undamaged components of the insured’s work resulting
from the insured’s faulty workmanship. 167 N.C. App. at 603,
605 S.E. 2d at 664 (where the ovens as a whole may have been
deemed previously undamaged). This logic also finds support in
cases from other jurisdictions. See, e.g., Westfield Ins. Co.
v. Sheehan Constr. Co., Inc., 580 F. Supp. 2d 701, 711 (S.D.
Ind. 2008) (refusing to treat damage to non-faulty portions of a
house as distinct from the faulty workmanship itself and holding
under Indiana law that “a general contractor’s product is the
entire project or house which he built and sold, including
components”).
19
own work that is “caused by” such faulty workmanship. Prod.
Sys., 167 N.C. App. at 607, 605 S.E.2d at 667 (rejecting
coverage as “property damage” for repair work and alleged
consequential damages from faulty construction). 9 Here,
Breezewood CHOA’s own evidence charges that Quality Built’s
faulty workmanship caused water damage to the Condominium
Development, Quality Built’s work. Thus, it cannot be “property
damage” under North Carolina law.
This conclusion is consistent with the CGL policy, read as
a whole, which contains a “your work” exclusion to coverage.
Henderson v. U.S. Fid & Guar. Co., 124 N.C. App. 103, 108-09,
476 S.E.2d 459, 462 (1996) (“The terms of an insurance policy
cannot be read in isolation but must be construed in the context
of [the] instrument as a whole.”) (citations omitted)). Like
most such policies, the CGL policy contains an exclusion for
“‘property damage’ to ‘your work’ arising out of it or any part
of it.” 10 (J.A. 82.)
9
See also Miller I, 97 F. App’x at 438 (Wilkinson, J.,
dissenting) (stating that the water damage to the owner’s carpet
was a direct consequence, and “substantively an extension,” of
the defective workmanship).
10
“Your work” is defined in pertinent part as “work or
operations performed by you or on your behalf.” (J.A. 91.) The
record indicates that Quality Built’s construction of the
Condominium Development falls within this definition as Quality
Built was the Condominium Development’s builder and general
contractor. The exclusion also requires that the work be
“included in the ‘products-completed operations hazard,’” which
(Continued)
20
This Court examined the “your work” exclusion in Limbach
Co. LLC v. Zurich American Ins. Co., 396 F.3d 358 (4th Cir.
2005) (applying Pennsylvania law), where it was noted that
“[g]eneral liability insurance policies are intended to provide
coverage where the insured’s product or work causes personal
injury or damage to the person or property of another.” Id. at
365 (emphasis added) (quoting Ryan Homes, Inc. v. Home Indem.
Co., 436 Pa. Super. 342, 348-49, 647 A.2d 939, 942 (1994)). The
Court observed that the “your work” exclusion does not exclude
all property damage arising from an insured’s work but “[b]y its
plain language . . . only excludes coverage for damage to an
insured’s work that arises out of the insured’s faulty
workmanship.” Id. The Court thus concluded that the commercial
general liability policy covered damage to a third party’s work
includes property damage “occurring away from premises you own
or rent and arising out of ‘your product’ or ‘your work.’”
(J.A. 90.) The record indicates that Genesis Built, Inc.
(“Genesis Built”), was the owner of the real estate and
buildings in the Condominium Development and held declarant
control over the Breezewood CHOA until approximately July 2002.
Breezewood CHOA alleged in its First Amended Complaint that
Genesis Built was the predecessor of Breezewood of Wilmington.
Thus, the record indicates that Quality Built, as the
Condominium Development’s builder and general contractor,
neither owned nor rented the property.
21
that resulted from the general contractor’s effort to repair his
faulty workmanship. Id. 11
Moreover, in French v. Assurance Co. of America, 448 F.3d
693 (4th Cir. 2006) (applying Maryland law), this Court examined
in depth the “your work” exclusion and its interplay with the
exception for damages caused by the faulty work of a
subcontractor. In French, a subcontractor negligently applied
exterior synthetic stucco to a house which otherwise had been
properly built by the general contractor. 448 F.3d at 704-05.
The subcontractor’s faulty application caused moisture damage to
major portions of the components of the house built by the
general contractor. Id. at 704. There, as here, the
subcontractor exception provided: “This [‘your work’] exclusion
does not apply if the damaged work or the work out of which the
damage arises was performed on your behalf by a subcontractor.”
Id. at 698; (J.A. 82.) The Court noted that the subcontractor
exception restored coverage limited by the “your work”
11
Accord Missouri Terrazzo Co. v. Iowa Nat’l Mut. Ins. Co.,
740 F.2d 647, 650 (8th Cir. 1984) (holding under Missouri law
that the “your work” exclusion in a predecessor Insurance
Services Office (“ISO”) form “did not bar coverage for injury to
property other than that of the insured”); Westfield, 580 F.
Supp. 2d at 710 (noting under Indiana law that in general two
types of risk arise from a contractor’s work: the (uncovered)
business risk that a contractor will have to pay to repair
faulty workmanship; and the (covered) risk that the completed
product of the contractor, once relinquished, will cause bodily
injury or damage “to property other than the product or
completed work itself”) (internal citations omitted)).
22
exclusion. French, 448 F.3d at 706. The Court also observed
that a plain reading, along with a thorough examination of the
history of the “your work” provision, compelled the following
conclusion: the standard comprehensive general liability policy
does not provide coverage to a general contractor to correct
defective workmanship of a subcontractor but does provide
coverage to the general contractor for the damages caused by the
subcontractor’s defective workmanship. 12 Id. Thus, the damage
to the general contractor’s work was covered only because it
fell within the subcontractor exception to the “your work”
exclusion. 13
12
Breezewood CHOA’s argument that the CGL covers damage
caused by the insured’s faulty workmanship to the insured’s own
property would make the subcontractor exception meaningless.
The purpose of the subcontractor exception is to restore
coverage for damage to the insured’s property only to the extent
it was caused by a subcontractor’s faulty workmanship. The
subcontractor exception thus informs the scope of the “your
work” exclusion, Stanley Martin Cos. v. Ohio Cas. Group, No. 07-
2102, 2009 WL 367589, at *11 n.2 (4th Cir. Feb. 12, 2009)
(applying Virginia law) (unpublished), and Breezewood CHOA’s
argument is simply incompatible with any reasonable
reconciliation of the two.
13
See also Stanley Martin, 2009 WL 367589, at *4 (holding
under Virginia law that the commercial general liability policy
covers mold damage to the general contractor’s work caused by a
subcontractor’s installation of defective trusses but does not
cover the replacement cost of the defective trusses). Both
French and Stanley Martin found coverage under the subcontractor
exception to the “your work” exclusion and therefore needed to
reach the issue of whether an “occurrence” existed to decide the
issue of coverage. Here, we do not reach the “occurrence” issue
because we find there is no allegation of covered “property
damage.”
23
Our holding today that the CGL policy excludes coverage for
damage to an insured’s completed property caused by an insured’s
faulty workmanship is fully consistent with this Court’s
previous interpretations of the “your work” exception inasmuch
as the alleged water damage “arises out of” Quality Built’s work
within the meaning of the “your work” exclusion and is not
alleged to have been performed by a subcontractor. 14
3.
Finally, Breezewood CHOA argues that Amerisure should have
defended the Underlying Complaint because it alleged “loss of
use” of the Condominium Development resulting from the damaged
property. As noted earlier, the CGL Policy defines “property
damage” as “[p]hysical injury to tangible property, including
all resulting loss of use of that property.” (J.A. 91.) In
Production Systems, the plaintiff also sought damages for loss
of use of the defective oven line systems while they were being
repaired, yet the North Carolina Court of Appeals denied
coverage when it held that all damages resulted from “faulty
14
At oral argument, Breezewood CHOA argued that Amerisure’s
duty to defend was triggered because some of the damage could
have been caused by a subcontractor’s faulty workmanship. The
burden of producing such evidence rests with the party seeking
application of the exception to the exclusion – here, Breezewood
CHOA. Home Indem. Co. v. Hoechst Celanese Corp., 128 N.C. App.
189, 202, 494 S.E.2d 774, 783 (1998). We find nothing in the
record to indicate that any of the water-damaged work at issue
was performed by a subcontractor, nor could Breezewood CHOA’s
counsel represent during oral argument that it was.
24
workmanship in the initial construction.” 167 N.C. App. at 607,
605 S.E.2d at 665, 667. Having rejected coverage for faulty
workmanship and damage it caused to undamaged property of the
insured, it was a logical conclusion to deny coverage as to any
loss of use “caused by” the faulty workmanship as well.
Accordingly, we conclude that claims of loss of use resulting
from Quality Built’s allegedly defective construction fall
outside the coverage of the CGL policy.
IV.
For the foregoing reasons, we conclude that Breezewood
CHOA’s allegations do not establish coverage under the CGL
policy. Amerisure had no duty to defend and is therefore not
liable for indemnity of the loss. Accordingly, the district
court’s grant of Amerisure’s motion for summary judgment is
AFFIRMED.
25