Randy Kaady v. Mid-Continent Casualty Co. , 790 F.3d 995 ( 2015 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
RANDY KAADY, No. 13-35036
Plaintiff-Appellant,
D.C. No.
v. 3:11-cv-00706-
MO
MID-CONTINENT CASUALTY
COMPANY, an Ohio corporation,
Defendant-Appellee. OPINION
Appeal from the United States District Court
for the District of Oregon
Michael W. Mosman, District Judge, Presiding
Argued and Submitted
October 7, 2014—Portland, Oregon
Filed June 25, 2015
Before: Alex Kozinski, Ferdinand F. Fernandez
and Raymond C. Fisher, Circuit Judges.
Opinion by Judge Kozinski
2 KAADY V. MID-CONTINENT CAS. CO.
SUMMARY*
Insurance Law
The panel reversed the district court’s summary judgment
in favor of insurer Mid-Continent Casualty Company because
there was a triable issue whether the insured’s claim for
property damage under Mid-Continent’s commercial general
liability insurance policy was barred by the policy’s known-
loss provision, and remanded.
The insured, as part of a subcontract, affixed
manufactured stone to buildings in a multi-unit residential
project, and cracks developed in the manufactured stone. In
an underlying action, the insured settled a claim against him;
Mid-Continent denied the claim and the insured brought this
diversity action. The district court held that there was
relevant property damage prior to the insured obtaining the
policy, and that this damage was known to the insured.
First, the panel rejected Mid-Continent’s argument that so
long as the insured knew about any damage to the structure,
the known-loss provision barred coverage of any other
damage to the same structure. The panel held under Oregon
law that the insured’s knowledge of damage to his own work
did not automatically constitute knowledge of damage to the
components of the structure furnished by others; but rather
the correct inquiry was whether the claimed damage to the
structural components was a “continuation, change or
resumption” of the cracks.
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
KAADY V. MID-CONTINENT CAS. CO. 3
Second, the panel held that Mid-Continent did not
establish its contention that the damage for which the insured
sought coverage was in fact a “continuation, change or
resumption” of earlier cracks. The panel held that summary
judgment was inappropriate where there was no record
evidence connecting the cracks in the masonry that the
insured observed before the policy to the damage to the
wooden components for which the insured claimed coverage.
COUNSEL
Robert C. Muth and Peter J. Viteznik (argued), Kilmer,
Voorhees & Laurick, P.C., Portland, Oregon for Plaintiff-
Appellant.
Douglas G. Houser, Matthew E. Hedberg (argued) and Janis
C. Puracal, Bullivant Houser Bailey, P.C., Portland, Oregon,
for Defendant-Appellee.
4 KAADY V. MID-CONTINENT CAS. CO.
OPINION
KOZINSKI, Circuit Judge:
We explore the meaning of a “known-loss” provision in
a commercial general liability insurance contract.
I. Facts
Kaady, who is a mason by profession, was awarded a
subcontract for the installation of manufactured stone1 at the
Collins Lake Resort, a multi-unit residential project. Kaady
affixed manufactured stone to the wall sheathing2 of certain
buildings, wrapped deck posts with manufactured stone and
installed masonry caps on the top of the stone that was
wrapped around the deck posts. Construction was completed
in May 2006.
In September 2006, Kaady was called back to Collins
Lake to inspect cracks in the manufactured stone and
masonry caps he installed. He told the general contractor that
the cracks “had something to do with settling, being struck,
1
Manufactured stone is molded concrete veneer that is shaped and
painted to look like stone or brick. When applied to the outer surface of
a wall or column, it produces the illusion that the surface to which it is
applied is made up of solid rocks or bricks. In his briefs and declaration,
Kaady uses the term “cultured stone,” but “Cultured Stone” is the
trademark of a manufactured stone produced by Boral (formerly Owens
Corning). Mindful of the harm caused by promiscuous use of trademarks
to describe generic products, we use the term “manufactured stone”
instead.
2
Wall sheathing consists of flat panels that are attached to the
structure’s frame. It serves as an additional layer of protection from the
outside elements and strengthens the structure by increasing its rigidity.
KAADY V. MID-CONTINENT CAS. CO. 5
or the substrate contracting or expanding.” In December
2006, almost three months after he had inspected the cracks,
Kaady bought a one-year commercial general liability
insurance policy from Mid-Continent.
In June 2007, the Collins Lake Homeowners’ Association
sued the developer of the project, who sued the general
contractor, who in turn sued all the relevant subcontractors
including Kaady. The Homeowners’ Association alleged that
portions of the structures were damaged as a result of
defective workmanship. Kaady settled the claim against him
and tendered it to Mid-Continent for indemnification. Mid-
Continent denied the claim and Kaady brought this lawsuit.
He claims that the damage to the structures for which he was
sued in the underlying litigation—deterioration of the deck
posts and wall sheathing behind the manufactured
stone—was “property damage” covered by Mid-Continent’s
policy.
The district court granted summary judgment to Mid-
Continent on the ground that Kaady’s claim was barred by the
policy’s known-loss provision. According to the district
court, “there was relevant property damage prior to [Kaady’s]
obtaining the policy,” which was “known to Mr. Kaady prior
to obtaining the policy.” Kaady appeals and we review de
novo. Assurance Co. of Am. v. Wall & Assocs. LLC, 379 F.3d
557, 560 (9th Cir. 2004). Our interpretation of Mid-
Continent’s policy is governed by Oregon law. See Mid-
Century Ins. Co. v. Perkins, 149 P.3d 265, 268 (Or. Ct. App.
2006).
6 KAADY V. MID-CONTINENT CAS. CO.
II. Discussion
Kaady claims that the damage to the deck posts and wall
sheathing under the manufactured stone he installed is
“property damage” covered by the policy. The policy defines
“property damage” as “[p]hysical injury to tangible property,
including all resulting loss of use of that property.” Mid-
Continent does not dispute that “property damage” occurred
or that it was caused by Kaady. Rather, Mid-Continent
argues that Kaady’s claim is barred because he bought the
policy after he already knew of the loss. Mid-Continent relies
on the policy’s known-loss provision, which states that the
policy “applies to . . . ‘property damage’ only if . . . no
insured . . . knew that the . . . ‘property damage’ had
occurred, in whole or in part.”
Kaady admits that he was aware of cracks in the
manufactured stone and masonry caps he installed before he
purchased the policy, but states under oath that he didn’t
know about any of the damage for which he seeks indemnity:
the damage to the deck posts and wall sheathing behind the
masonry. Mid-Continent has proffered no evidence
contradicting Kaady’s declaration. Mid-Continent
nevertheless argues that, even if Kaady didn’t know about the
damage to the deck posts and wall sheathing before he
purchased the policy, Kaady’s knowledge of the cracks in the
manufactured stone he installed suffices to bar coverage. It
presents two arguments supporting that interpretation.
A. Mid-Continent first argues that, so long as the insured
knew about any damage to a structure, the known-loss
provision bars coverage of any other damage to the same
structure. According to Mid-Continent, Kaady’s
manufactured stone and the underlying structural components
KAADY V. MID-CONTINENT CAS. CO. 7
are the same “property.” Thus, once Kaady noticed that the
manufactured stone was cracked, he knew that the property
was damaged and so could not recover for any damage to that
property. Mid-Continent claims that its interpretation follows
because the policy deems “‘property damage’ . . . to have
been known to have occurred at the earliest time when any
insured . . . [b]ecomes aware . . . that . . . ‘property damage’
has occurred or begun to occur.”
But the question of whether Kaady’s knowledge of the
cracks automatically precludes coverage of damage to the
structural components depends on the level of generality at
which “tangible property” and “physical injury” are defined.
Is the “property” we must examine the structure as a whole or
only the components—the deck posts and wall
sheathing—that Kaady claims coverage for? And does prior
knowledge of one type of physical injury to property
automatically preclude coverage of all types of physical
injury to the property? Because the policy doesn’t define
“tangible property” or “physical injury,” we must examine
the policy as a whole to determine how the “ordinary
purchaser of [commercial general liability] insurance” would
understand these terms. See St. Paul Fire & Marine Ins. Co.
v. McCormick & Baxter Creosoting Co., 923 P.2d 1200, 1213
(Or. 1996) (quoting Botts v. Hartford Acc. & Indem. Co.,
585 P.2d 657, 659 (Or. 1978)); see also Hoffman Constr. Co.
v. Fred S. James & Co., 836 P.2d 703, 706–07 (Or. 1992).
First, we are unpersuaded by Mid-Continent’s argument
that we should not treat components the insured provided and
components provided by others as separate “property.” In the
construction context, a commercial general liability insurance
policy necessarily distinguishes between the components the
insured provided and components furnished by others. That’s
8 KAADY V. MID-CONTINENT CAS. CO.
because the policy is designed to cover damage to property
that is installed by others, but exclude damage to property the
insured provided. See 9A Steven Plitt et al., Couch on
Insurance §§ 129:1, 129:17 (3d ed. 2014); see also Gregory
G. Schultz, Commercial General Liability Coverage of Faulty
Construction Claims, 33 Tort & Ins. L.J. 257, 261 (1997).
Once the insured’s work is complete, the policy covers
damage to property provided by others, including property
that the insured’s work was “performed on,”3 but it doesn’t
cover damage to the insured’s own product or work. Mid-
Continent doesn’t argue on appeal that the claimed damage
was to property that Kaady provided (nor could it). See St.
Paul Fire & Marine Ins. Co. v. Sears, Roebuck & Co.,
603 F.2d 780, 783–84 (9th Cir. 1979); Wilshire Ins. Co. v.
RJT Constr., LLC, 581 F.3d 222, 226–27 (5th Cir. 2009); see
also Schultz, Commercial General Liability Coverage of
Faulty Construction Claims, 33 Tort & Ins. L.J. at 272. Mid-
Continent has offered no reason to treat the insured’s work
and the work of others as different property in every
provision of the policy except the known-loss provision.
Thus, we conclude that the known-loss provision also
distinguishes between them. The insured’s knowledge of
damage to his own work doesn’t automatically constitute
3
Pursuant to the “[p]roducts-completed operations hazard” provision,
once the insured completes his work, the policy provides coverage for
“‘property damage’ occurring away from premises [the insured] own[s]
or rent[s] and arising out of ‘[the insured’s] product’ or ‘[the insured’s]
work.’” For example, if a roof installed by the insured leaks, resulting in
water damage to another part of the house, that water damage would be
covered but any damage to the roof itself would not be. See Robert J.
Franco, Insurance Coverage for Faulty Workmanship Claims Under
Commercial General Liability Policies, 30 Tort & Ins. L.J. 785, 796–97
(1995); see also St. Paul Fire & Marine Ins. Co. v. Sears, Roebuck & Co.,
603 F.2d 780, 783–84 (9th Cir. 1979).
KAADY V. MID-CONTINENT CAS. CO. 9
knowledge of damage to the components of the structure
furnished by others.4
Mid-Continent’s position faces a second difficulty: Even
if the masonry and underlying structural components were
considered the same “property,” the claimed damage
(deterioration of the deck posts and wall sheathing) is a
different type of damage than the known damage (cracks in
the masonry). Mid-Continent suggests that the insured’s
prior knowledge of any damage to property bars coverage for
any other damage to that property, regardless of its type. But
the known-loss provision bars coverage of “property damage”
if the insured “knew that the . . . ‘property damage’ had
occurred, in whole or in part.” (Emphasis added.) Use of the
definite article “particularizes the subject which it precedes”
and indicates that the claimed damage must be the same as
the known damage. See Gale v. First Franklin Loan Servs.,
701 F.3d 1240, 1246 (9th Cir. 2012) (internal quotation marks
omitted). Such an interpretation makes sense considering that
a commercial general liability insurance policy covers (as its
name implies) many different types of hazards that have no
relationship to one another. Thus, an insured’s knowledge of
one type of damage to property doesn’t automatically
4
Kaady argues that the cracks in the masonry aren’t “property damage”
at all because they were damage to Kaady’s own work. But nothing in the
policy says that the insured’s work isn’t “tangible property,” or that
physical injury to the insured’s own work isn’t “property damage.”
Rather, damage to the insured’s own work isn’t “‘property damage’ to
which this insurance applies,” because damage to the insured’s own work
is excluded under the “your product” and “your work” exclusions. Thus,
while we agree with Kaady that the components the insured provided and
the components provided by others should be considered separate
“property,” we reject his argument that damage to the insured’s own work
isn’t “property damage.”
10 KAADY V. MID-CONTINENT CAS. CO.
constitute knowledge of any and all damage to the property;
the claimed damage must be related to the known damage.
Mid-Continent’s proffered interpretation would eviscerate
the known-loss provision’s “continuing property damage”
language. The provision states that if the insured “knew,
prior to the policy period, that the . . . ‘property damage’
occurred, then any continuation, change or resumption of
such . . . ‘property damage’ during or after the policy period
will be deemed to have been known prior to the policy
period.” (Emphasis added.) But if the insured’s knowledge
of any damage to any part of the structure automatically
barred coverage of all damage to that structure, it wouldn’t
matter whether the claimed damage was a “continuation,
change or resumption” of the known damage. The problem
is avoided if the known-loss provision is interpreted as
barring coverage only if the claimed damage is a
“continuation, change or resumption” of the known damage.
This interpretation permits coverage of damage unrelated to
the damage known before acquisition of the policy, but
prevents insurance of a loss in progress.
Applying our interpretation of the policy to Kaady’s
claim, we conclude that Kaady’s knowledge of the cracks in
the masonry before he bought the policy doesn’t constitute
knowledge of the claimed “property damage” to the structural
components. Not only are the wooden deck posts and wall
sheathing different “property” than the manufactured stone
and masonry caps, the claimed damage is of a different type.
We don’t think that the ordinary purchaser of the policy
would interpret the known-loss provision as broadly as Mid-
Continent advocates. Rather, the correct inquiry is whether
the claimed damage to the structural components was a
“continuation, change or resumption” of the cracks. If it was,
KAADY V. MID-CONTINENT CAS. CO. 11
Kaady’s knowledge of the cracks would bar coverage of the
claimed damage; if not, his knowledge of the cracks wouldn’t
bar coverage.
B. Mid-Continent also argues that the damage for which
Kaady seeks coverage was in fact a “continuation, change or
resumption” of the earlier cracks. According to Mid-
Continent, it’s “undisputed that the cracks in the masonry
permitted water intrusion” and, therefore, that the damage to
the wooden deck posts and wall sheathing “flowed from” the
cracks. But Kaady did dispute this contention in the district
court. In his opposition to summary judgment, Kaady argued
that Mid-Continent had not “submitted any evidence [that]
the cracks in the top caps were the source, cause or basis of
the damage to the deck posts.” Kaady’s admission that the
damage to the deck posts and wall sheathing arose from his
defective workmanship is not an admission that the damage
was caused by the cracks.
In any event, it was not Kaady’s burden to present
evidence disputing the connection between the cracks in the
manufactured stone and the damage to the underlying
structure. On summary judgment, the moving party has the
initial burden of “identifying those portions of the pleadings,
depositions, answers to interrogatories, and admissions on
file, together with the affidavits, if any, which it believes
demonstrate the absence of a genuine issue of material fact.”
Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986) (internal
quotation marks omitted); see also 10A Charles Alan Wright
et al., Federal Practice & Procedure § 2727 (3d ed. 2015).
The parties haven’t stipulated to any facts and nothing in the
scant evidentiary record proffered by Mid-Continent—which
consists solely of Kaady’s declaration, Kaady’s deposition in
the underlying construction defect litigation and some barely
12 KAADY V. MID-CONTINENT CAS. CO.
viewable photographs of the structures—explains the
relationship, if any, between the cracks and the underlying
structural damage. Because Mid-Continent hadn’t met its
initial burden of presenting evidence supporting its theory,
there was nothing for Kaady to dispute.
It may well be that the cracks in the masonry allowed
water to seep in and damage the wood beneath. If so, then
the claimed damage might well be considered a
“continuation, change or resumption” of the cracks.5 But
without any record evidence connecting the cracks in the
masonry that Kaady observed before he bought the policy to
the damage to the wooden components for which Kaady
claims coverage, summary judgment was inappropriate. See
St. Paul Fire & Marine Ins. Co., 603 F.2d at 785–86;
Westfield, 840 N.W.2d at 454–55.
REVERSED and REMANDED.
5
In Westfield Insurance Co. v. Wensmann, Inc., 840 N.W.2d 438 (Minn.
Ct. App. 2013), the court stated that, in order for the claimed damage to
be a “continuation, change or resumption” of the known damage, the two
must “share the same cause.” Id. at 453. Similarly, in Alkemade v.
Quanta Indemnity Co., 28 F. Supp. 3d 1125 (D. Or. 2014), the court stated
that the claimed damage is a “continuation, change or resumption” of the
known damage at least when the two are “damage of the same type, from
the same cause.” Id. at 1131. We have no occasion to decide whether
these two interpretations are correct under Oregon law.