Travelers Indemnity Co. v. Miller Building Corp.

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
THE TRAVELERS INDEMNITY COMPANY, 
Plaintiff-Appellee,
v.
 No. 03-1510
MILLER BUILDING CORPORATION;
PVC, INCORPORATED,
Defendants-Appellants.

Appeal from the United States District Court
for the Eastern District of North Carolina, at Wilmington.
Terrence W. Boyle, Chief District Judge.
(CA-02-41)
Argued: January 22, 2004
Decided: May 20, 2004
Before WILKINSON, LUTTIG, and TRAXLER, Circuit Judges.
Vacated and remanded by unpublished opinion. Judge Traxler wrote
the opinion, in which Judge Luttig joined. Judge Wilkinson wrote a
dissenting opinion.
COUNSEL
ARGUED: Daniel K. Bryson, LEWIS & ROBERTS, Raleigh, North
Carolina, for Appellants. Lee Hedgecock Ogburn, KRAMON &
GRAHAM, Baltimore, Maryland, for Appellee. ON BRIEF: Sandra
W. Mitterling, LEWIS & ROBERTS, Raleigh, North Carolina, for
Appellants. Geoffrey H. Genth, Steven M. Klepper, KRAMON &
GRAHAM, Baltimore, Maryland, for Appellee.
2 THE TRAVELERS INDEMNITY v. MILLER BUILDING CORP.
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
OPINION
TRAXLER, Circuit Judge:
Travelers Indemnity Company issued a comprehensive general lia-
bility insurance policy to Miller Building Corporation. Travelers
brought this action seeking a declaration that it had no duty to defend
Miller in an arbitration proceeding involving Miller and PVC, Inc.
The district court granted summary judgment in favor of Travelers,
concluding that there was no coverage under the policy and that Trav-
elers therefore had no duty to defend. Miller appeals. We conclude
that under North Carolina law,1 Travelers owes Miller a duty to
defend against PVC’s claims. We therefore vacate the district court’s
order and remand for further proceedings.
I.
The relevant facts can be stated briefly. PVC hired Miller to build
a hotel in Wrightsville Beach, North Carolina. When the hotel
opened, certain problems became apparent. The problems included an
improperly installed post-tensioning cable system, which led to exten-
sive cracking and buckling of the hotel’s concrete framework; an
improperly applied exterior wall finish, which allowed water to leak
into the hotel, damaging walls and carpet in the guest rooms; and
improperly installed windows and sliding glass doors, which also
allowed water to leak into the guest rooms. Once the problems
appeared, PVC declined to pay Miller the balance due under the con-
struction contract, and Miller initiated arbitration proceedings against
PVC. PVC asserted counterclaims, seeking to hold Miller responsible
for the costs of repairing the construction defects themselves as well
as other damage caused by the defects.
1
A federal court sitting in diversity must apply the choice-of-law rules
of the forum state. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S.
487, 496-97 (1941). The parties agree that North Carolina law governs
this dispute.
THE TRAVELERS INDEMNITY v. MILLER BUILDING CORP. 3
Acting under a reservation of rights, Travelers funded Miller’s
defense in the underlying arbitration action.2 Travelers thereafter
commenced this action seeking a declaration that it was not obligated
under the policy to defend Miller against the claims asserted by PVC.
II.
Under North Carolina law,
[a]n insurer’s duty to defend is ordinarily measured by the
facts as alleged in the pleadings; its duty to pay is measured
by the facts ultimately determined at trial. When the plead-
ings state facts demonstrating that the alleged injury is cov-
ered by the policy, then the insurer has a duty to defend,
whether or not the insured is ultimately liable.
Waste Mgmt. of Carolinas, Inc. v. Peerless Ins. Co., 340 S.E.2d 374,
377 (N.C. 1986). We are not, however, strictly limited to the allega-
tions contained in the pleadings; the facts as developed during discov-
ery are also relevant to the duty-to-defend inquiry. See Duke Univ. v.
St. Paul Fire & Marine Ins. Co., 386 S.E.2d 762, 764 (N.C. Ct. App.
1990) ("Although the insurer’s duty to defend an action is generally
determined by the pleadings, facts learned from the insured and facts
discoverable by reasonable investigation may also be considered.
Therefore, the affidavits filed by plaintiff in this case are relevant to
the determination of defendant’s duty to defend." (citation omitted)).
"[T]he insurer’s duty to defend the insured is broader than its obli-
gation to pay damages incurred by events covered by a particular pol-
icy." Waste Mgmt., 340 S.E.2d at 377. "[A]llegations of facts that
describe a hybrid of covered and excluded events or pleadings that
disclose a mere possibility that the insured is liable (and that the
potential liability is covered) suffice to impose a duty to defend" upon
the insurer. Id. at 377 n.2 (emphasis added). "Any doubt as to cover-
age is to be resolved in favor of the insured." Id. at 378; accord Penn-
sylvania Nat’l Mut. Cas. Ins. Co. v. Associated Scaffolders & Equip.
Co., 579 S.E.2d 404, 407 (N.C. Ct. App. 2003).
2
At least as of the time that the briefs were filed, the arbitration pro-
ceedings were on-going.
4 THE TRAVELERS INDEMNITY v. MILLER BUILDING CORP.
The policy issued by Travelers states that Travelers "will pay those
sums that the insured becomes legally obligated to pay as damages
because of . . . ‘property damage,’" so long as the "‘property damage’
is caused by an ‘occurrence.’" J.A. 74. At issue in this appeal is
whether PVC seeks recovery for "property damages" within the
meaning of the policy, and, if so, whether those damages were caused
by an "occurrence" as defined by the policy.
A.
The policy defines "property damage" as "[p]hysical injury to tan-
gible property, including all resulting loss of use of that property . . .
[and] [l]oss of use of tangible property that is not physically injured."
J.A. 87. The district court concluded that 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.’"
J.A. 1223 (quoting Wm. C. Vick Constr. Co. v. Pennsylvania Nat’l
Mut. Cas. Ins. Co., 52 F. Supp. 2d 569, 582 (E.D.N.C. 1999), aff’d,
No. 99-1577, 2000 WL 504197 (4th Cir. April 28, 2000) (unpub-
lished)). The district court determined that the hotel had never been
in an undamaged condition and that PVC’s claims thus did not fall
within the scope of the policy: "The post-tensioning cable system was
never properly tensioned[,] the exterior wall finish was never properly
applied, and the doors and windows were never in proper working
order. Therefore, the Underlying Claims do not constitute claims for
property damage, rather, they are claims for defective construction."
J.A. 1224.
Under North Carolina law, liability insurance is not a substitute for
a performance bond. See, e.g., Western World Ins. Co. v. Carrington,
369 S.E.2d 128, 130 (N.C. Ct. App. 1988) ("Since the quality of the
insured’s work is a ‘business risk’ which is solely within his own con-
trol, 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 mat-
ter of contract. . . . [L]iability insurance policies are not intended to
be performance bonds."). Thus, to the extent that PVC is seeking to
recover from Miller the cost of correcting Miller’s faulty workman-
ship, the claims do not fall within the scope of the policy issued by
Travelers, because faulty workmanship does not constitute "property
THE TRAVELERS INDEMNITY v. MILLER BUILDING CORP. 5
damage." See Hobson Constr. Co. v. Great Am. Ins. Co., 322 S.E.2d
632, 635 (N.C. Ct. App. 1984). We agree with Miller, however, that
PVC’s claims are not limited to correction of the construction defects.
In addition to the claims seeking to repair Miller’s faulty workman-
ship, PVC’s counterclaim alleges that carpet in certain guest rooms
was damaged by water leaking through the improperly installed win-
dows and sliding glass doors. Even if the district court properly
treated the improper installation of the cable system, doors and win-
dows as construction defects, this aspect of PVC’s counterclaim
alleges that a particular construction defect (improper installation of
windows and doors) caused damage to separate tangible property
(guest-room carpet). This claim, therefore, clearly falls within the pol-
icy’s definition of "property damage."
Travelers, however, seems to contend that the guest-room carpet is
simply a component of Miller’s work, which was the construction of
the hotel. Travelers contends that because the hotel was never in a
non-defective condition, it is irrelevant that "the damage may have
migrated from one component of the insured’s work to another." Brief
of Respondent at 32. Under Travelers’ analysis, then, the later-
occurring water damage to the guest room carpet does not amount to
property damage under the policy because the guest-room carpet is an
undifferentiated component of the defective-from-the-beginning
hotel.
While this argument might have some force under other circum-
stances or as to another component of the hotel, we find it unavailing
here. The record establishes that the guest-room carpet was "an owner
furnished material," J.A. 573, which indicates that the carpet was
delivered undamaged to PVC and that PVC then provided the undam-
aged carpet to Miller for installation. Given these facts and the nature
of our inquiry when resolving the duty-to-defend issue, we believe
that we must view the guest-room carpet 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.
Therefore, giving Miller the benefit of any doubt or ambiguity that
arises from PVC’s claims, we conclude that, at the very least, PVC’s
claims with regard to damage to the guest-room carpet sufficiently
6 THE TRAVELERS INDEMNITY v. MILLER BUILDING CORP.
alleges the existence of property damage within the meaning of the
policy.3 If this property damage was caused by an occurrence as
defined by the policy, then Travelers’ duty to defend is triggered,
even if none of the remaining claims asserted by PVC fall within the
reach of the policy. See Bruce-Terminix Co. v. Zurich Ins. Co., 504
S.E.2d 574, 578 (N.C. Ct. App. 1998) ("When pleadings allege multi-
ple claims, some of which may be covered by the insurer and some
of which may not, the mere possibility the insured is liable, and that
the potential liability is covered, may suffice to impose a duty to
defend.").
B.
The policy defines an "occurrence" as "an accident, including con-
tinuous or repeated exposure to substantially the same general harm-
ful conditions." J.A. 86. The policy, however, does not define
"accident." In the insurance context, North Carolina defines an acci-
dent as "an unforeseen event, occurring without the will or design of
the person whose mere act causes it; an unexpected, unusual, or unde-
signed occurrence; the effect of an unknown cause, or, the cause
being known, an unprecedented consequence of it; a casualty." Waste
Mgmt., 340 S.E.2d at 379.
Travelers contends that the district court properly concluded that
none of PVC’s claims were caused by an accident because PVC’s
claims all involve the foreseeable consequences of Miller’s allegedly
shoddy workmanship.4 We disagree.
3
This conclusion makes it unnecessary to consider Miller’s argument
that PVC’s claims constitute "property damage" under the policy’s "loss
of use" clause and Travelers’ related argument that certain policy exclu-
sions bar all loss-of-use claims.
4
In support of this position, Travelers relies heavily on an unpublished
opinion from this court. As our Local Rules make clear, reliance upon
unpublished opinions is disfavored, and this court will cite unpublished
opinions only in "unusual circumstances." 4th Cir. Loc. R. 36(c). We
find no such unusual circumstances in this case. As noted previously, this
case falls within our diversity jurisdiction, and we are required by North
Carolina’s choice-of-law rules to apply North Carolina law as declared
by North Carolina courts. North Carolina has a well-developed body of
law applicable to the duty-to-defend question with which we are con-
fronted, thus making it unnecessary to resolve the question by reference
to our own unpublished opinions.
THE TRAVELERS INDEMNITY v. MILLER BUILDING CORP. 7
Water damage to carpet is certainly a foreseeable consequence of
an improperly installed door or window, at least as the term "foresee-
able" is used in the tort context. But under North Carolina law, fore-
seeability in the context of an insurance dispute does not carry the
same meaning as it does in the context of a negligence claim.
In North Carolina, as elsewhere, a defendant may be held liable in
tort for the foreseeable consequences of his actions. See, e.g.,
Azzolino v. Dingfelder, 337 S.E.2d 528, 534 (N.C. 1985) ("Under tra-
ditional theories of tort law, defendants are liable for all of the reason-
ably foreseeable results of their negligent acts or omissions."). But as
the North Carolina Supreme Court made clear in Iowa Mutual Insur-
ance Co. v. Fred M. Simmons, Inc., 128 S.E.2d 19 (N.C. 1962) ("Iowa
Mutual I"), the fact that the consequences of an action are foreseeable
for purposes of a negligence claim does not mean that the conse-
quences are not accidental for purposes of determining coverage
under a general liability insurance policy.
In Iowa Mutual I, the insured, a roofing contractor, began a roofing
job that required the removal of the old roof. The contractor removed
the old roof and covered the exposed roofing with a tarp weighted
down by cinder blocks. Before the new roof was installed, it rained,
and water leaked into the building, causing damage. See id. at 20-21.
The insurer brought a declaratory judgment action seeking a declara-
tion that it was not obligated to defend the contractor against the
claims of the building owner. The insurer argued that its policy cov-
ered damage "caused by accident," and that because it was foresee-
able that rain could get in under the tarp, the damage was not caused
by an accident. The North Carolina Supreme Court rejected this argu-
ment:
[W]e do not subscribe to the view that the term "accident,"
used in the liability policy here, considered in its usual, ordi-
nary, and popular sense necessarily excludes human fault
called negligence, because negligence would most probably
be the predicate of any likely liability against appellant. To
adopt the narrow view that the term "accident" in liability
policies of insurance, as in the policy here, necessarily
excludes negligence would mean that in most, if not all,
8 THE TRAVELERS INDEMNITY v. MILLER BUILDING CORP.
cases the insurer would be free of coverage and the policy
would be rendered meaningless.
Id. at 25; see also Iowa Mut. Ins. Co. v. Fred M. Simmons, Inc., 138
S.E.2d 512, 515 (N.C. 1964) ("Iowa Mutual II") ("We are of the opin-
ion . . . that the policy afforded the insured protection against legal
liability for injury to person or property resulting from insured’s neg-
ligent failure to exercise due care.") (opinion after remand from Iowa
Mutual I).
More recent cases from North Carolina confirm that foreseeability
in the tort sense does not preclude coverage under a liability insurance
policy. As the North Carolina Court of Appeals has explained,
[T]he question we must answer on examining the com-
plaints is whether the facts alleged suggest a potential that
an accident occurred and do not suggest conclusively that
the insured actually foresaw or intended that its activity
would result in bodily injury or property damage. We stress
that our examination of intent or expectation should be a
subjective one, from the standpoint of the insured, and not
an objective one asking whether the insured ‘should have’
expected the resulting damage.
Waste Mgmt. of Carolinas, Inc. v. Peerless Ins. Co., 323 S.E.2d 726,
731 (N.C. Ct. App. 1984) (emphasis added), rev’d in part on other
grounds, 340 S.E.2d 374 (N.C. 1986); accord Washington Hous.
Auth. v. North Carolina Hous. Auth. Risk Retention Pool, 502 S.E.2d
626, 630 (N.C. Ct. App. 1998).
Travelers’ view of what constitutes an occurrence is precisely the
one rejected by the Iowa Mutual court, and acceptance of Travelers’
view would, as the court noted in Iowa Mutual I, render the policy
virtually meaningless. As mentioned above, liability for negligence is
premised upon the foreseeability of injury. If the injury is reasonably
foreseeable, there is liability; if the injury is not reasonably foresee-
able, there is no liability. Travelers contends that a liability insurance
policy provides no coverage for the foreseeable consequences of an
insured’s actions. Under Travelers’ interpretation, then, liability insur-
ance policies provide coverage only for unforeseeable consequences
THE TRAVELERS INDEMNITY v. MILLER BUILDING CORP. 9
—that is, only in those situations where the law would not impose lia-
bility and where there would be no need for insurance coverage. See
Iowa Mutual II, 138 S.E.2d at 515 ("To limit the word accident to ‘an
unforseen event occurring without will or design of the person whose
mere act causes it’ would for all practical purposes render the policy
valueless so far as the quoted coverages are concerned. To impose
legal liability for injury to person or damage to property, the one
causing the damage must have been able to reasonably foresee an
injurious effect from the manner in which he acted."). An interpreta-
tion of a liability insurance policy that renders the policy meaningless
simply cannot be the proper interpretation. Cf. Great Am. Ins. Co. v.
C.G. Tate Const. Co., 279 S.E.2d 769, 771 (N.C. 1981) (explaining
that insurance contract provisions should be construed in accord with
their purposes and with the reasonable expectations of the parties).
Applying the proper subjective standard, we conclude that PVC’s
claim of damage to guest-room carpet caused by Miller’s improper
installation of windows and sliding glass doors falls within the scope
of the policy issued by Travelers. While it is certainly foreseeable (in
the tort sense) that defective windows and sliding glass doors could
lead to water intrusion and water damage, there is nothing in the
record indicating that Miller subjectively intended to cause damage to
the guest rooms. Thus, PVC’s claim that Miller’s allegedly shoddy
workmanship caused damage to the guest-room carpets sufficiently
alleges an "occurrence" within the meaning of the policy, notwith-
standing the fact that damage to the carpet was a foreseeable conse-
quence of the improper installation of guest-room windows and
sliding glass doors.
III.
Because at least some of the claims asserted by PVC against Miller
seek recovery for "property damage" caused by an "occurrence" as
those terms are used in the policy, Travelers has a duty to defend Mil-
ler against PVC’s claims. Accordingly, we vacate the district court’s
order granting summary judgment to Travelers and remand for any
further proceedings that might be warranted.5
5
Our conclusion that summary judgment was improperly granted ren-
ders moot Miller’s claim that the district court should have permitted fur-
ther discovery.
10 THE TRAVELERS INDEMNITY v. MILLER BUILDING CORP.
VACATED AND REMANDED
WILKINSON, Circuit Judge, dissenting:
I respectfully dissent. The district court properly found that the
defective construction meant the hotel was never in an undamaged
state and thus did not suffer "property damage" under the terms of the
Policy.* North Carolina law clearly resolves what constitutes property
damage under the Policy. See Wm. C. Vick Constr. Co. v. Pa. Nat’l
Mut. Cas. Ins. Co., 52 F. Supp. 2d 569, 580-83 (E.D.N.C. 1999), aff’d
213 F.3d 634 (4th Cir. 2000); Hobson Constr. Co. v. Great Am. Ins.
Co., 322 S.E.2d 632, 635 (N.C. App. 1984). Since Miller has failed
to show that property damage has occurred under the terms of the Pol-
icy, the district court properly granted summary judgment to Travel-
ers.
I.
The Policy provides that "[t]his insurance applies to ‘bodily injury’
and ‘property damage’ only if . . . [t]he ‘bodily injury’ or ‘property
damage’ is caused by an ‘occurrence.’" The Policy defines property
damage as "[p]hysical injury to tangible property, including all result-
ing loss of use of that property; or . . . [l]oss of use of tangible prop-
erty that is not physically injured."
To be considered property damage under North Carolina law, "the
property allegedly damaged has to have been undamaged or uninjured
at some previous point in time." Vick, 52 F. Supp. 2d at 582. Damages
based solely on faulty workmanship do not constitute property dam-
age under a standard comprehensive general liability policy. Hobson
Constr. Co., 322 S.E.2d at 635.
Interpreting the facts in the light most favorable to Miller, the dis-
trict court properly found that the extensive damage caused by defec-
tive construction meant the hotel as a whole was never in an
*The district court also found that no occurrence had taken place under
the terms of the Policy. Since the absence of property damage resolves
this case, I need not address this other ground for granting summary
judgment.
THE TRAVELERS INDEMNITY v. MILLER BUILDING CORP. 11
undamaged condition. This defective workmanship included the
improper installation of the post-tensioning cable system that caused
the hotel’s concrete framework to crack and buckle, and the improper
application of the exterior wall finish and the improper installation of
doors and windows that led to extensive water damage.
The majority contends that the guest-room carpeting was undam-
aged at the time it was installed and therefore holds that the subse-
quent water damage to the carpeting constitutes covered property
damage under the Policy. The problem with that view is that the water
damage to the carpeting was a direct consequence of the improperly
applied exterior wall finish and improperly installed doors and win-
dows. This damage is substantively an extension of the defective
workmanship. Admittedly, Miller neither built the windows and doors
nor wove the carpet. But this fact does not matter. Defective work-
manship during the installation of these items caused the windows,
doors, and carpet to suffer significant damage during inclement
weather well before the hotel was completed. The majority seeks to
create an expansive understanding of property damage by attempting
to parse defective workmanship from its direct consequences. But the
damage here is ultimately part and parcel of the defective workman-
ship. The hotel was in an unusable, damaged state from its inception
because of the defective workmanship, and therefore none of the
damages are covered as property damage under the Policy.
II.
Faulty workmanship and "property damage" are quite different
things. Finding that "property damage" has occurred here effectively
transforms a commercial general liability insurance policy into a per-
formance bond. Neither party contracted into such an arrangement,
and Miller Building Corporation may now receive a windfall for a
very poor job of construction. Even if Travelers had agreed to assume
such a sweeping risk, Miller Building Corporation would have had to
pay a substantially higher premium to enjoy this protection. By the
plain language of this Policy the parties anticipated coverage to
extend only to initially undamaged property. Appellants’ interpreta-
tion leaves language an unpredictable guide to coverage and liability.
Unsettling commercial expectations created through clear contractual
language is the bane of any system of insurance.