Plasticrete Corp. v. American Policyholders Insurance

Peters, J.

This is a dispute arising out of an insurance policy providing comprehensive coverage against general and contractual liability. The plaintiff, Plastierete Corporation, brought an action claiming that the defendant, American Policyholders Insurance Company, had, in violation of its contractual obligation under the policy, refused to defend the plaintiff in a lawsuit brought against the plaintiff by a customer in New York City. This action sought damages and a declaratory judgment to determine the applicability of the insurance policy. The defendant’s answer denied liability and raised two special defenses, the insured’s failure to give timely notice and its failure to cooperate. After a full hearing, the state referee, acting as the trial court, found the issues for the plaintiff. Prom the judgment thereafter rendered, the defendant has appealed.

The underlying facts that appear in the trial court’s finding are undisputed. The plaintiff Plasticrete is a corporation that manufactures masonry building materials, including masonry blocks. In 1971, Plastierete entered into a contract with LaSala Masonry Corporation to provide masonry blocks for the construction of the outside walls of a building in New York City known as Tracey Towers for which Leon D. DeMateis & Sons, Inc. was the general contractor. The general contract called for a cavity wall construction, in effect a double wall composed of an outer wall built with Plastierete blocks, a cavity, and then an inner wall for which Plastierete did not supply the materials. Such a wall design is intended to allow water that penetrates the outer wall to be carried away from the building through “weep holes.” Plasticrete’s sole responsibility under its contract was to supply masonry blocks manufactured in accordance with architectural specifications. It had no responsibility whatsoever for the inner wall; even for the outer wall it was only the supplier and not the installer of the masonry blocks.

During the time when this contract was being performed, the defendant American Policyholders Insurance Company (American Policyholders) insured Plasticrete against comprehensive general liability and contractual liability. The policy obligated American Policyholders to defend Plasticrete in any litigation in connection with property damage. The policy defined the occurrences for which insurance coverage was provided, imposed upon Plasticrete duties of notice and cooperation, and expressly made compliance with each of the terms of the policy a condition of American’s obligations.

Plasticrete delivered masonry blocks to the work-site from 1971 to 1973. In June, 1973, after deliveries had been completed, the general contractor, DeMateis, notified Plasticrete that the exterior wall was leaking and that he was considering waterproofing at an estimated cost of $400,000. A subsequent letter, on July 5, 1973, sought a response from Plasticrete and contained a revised estimate of the cost of waterproofing in the amount of $900,000. Plasticrete replied on July 12,1973, denying responsibility and attributing the problem to improper workmanship by the installer. This explanation was rejected by the general contractor, who subsequently informed Plasticrete, on November 27, 1973, that he was proceeding with the waterproofing. On May 9, 1974, after a number of further intermediate communications, Plasticrete’s president met with the general contractor and the masonry subcontractor. Plasticrete continued to maintain that the porosity of its masonry blocks was not a breach of warranty but instead conformed to the specifications of the architect. Nonetheless, in order to resolve the problem, Plasticrete offered to pay a quarter of the costs of rectifying it. To Plasticrete, this contract was important because it was a large one and in a new market in which it wanted to compete. Nothing was resolved at the May meeting, and there was no further contact with the general contractor until June, 1975, when litigation was instituted against Plasticrete in New York. Plasticrete then promptly notified American Policyholders. The insurer, however, denied its liability in the event of a judgment against Plasticrete and refused to defend Plasticrete in the New York litigation because, it said, Plasticrete was in breach of its obligations, under the policy, to notify the insurer promptly of an occurrence and to cooperate in the defense against a claim. This action by Plasticrete against its insurer ensued.

At the trial, one of American Policyholder’s defenses was that Plasticrete had failed to comply with its duty, under the policy, to give the defendant timely notice. The policy provides: “In the event of an occurrence, written notice containing particulars sufficient to identify the insured and also reasonably obtainable information with respect to the time, place and circumstances thereof, and the names and addresses of the injured and of available witnesses, shall be given by or for the insured to the company or any of its authorized agents as soon as practicable.”¹ Compliance with this term of the policy is expressly made a condition precedent to the liability of the insurer. The term “occurrence” is defined in the policy to mean “an accident, including continuous repeated exposure to conditions which result in bodily injury or property damage, neither expected nor intended from the standpoint of the insured.”² The insurer’s obligation to pay is limited to damages “caused by an occurrence.”³

The trial court noted that these provisions were difficult to apply to a claim for damages that arose out of an event that was, as everyone conceded, not an accident. It ultimately found that there had not been an occurrence within the definition of the policy. Nevertheless the court found that Plasticrete had given timely notice after it had received service of the New York lawsuit and that this notice was sufficient under the insurance policy to entitle Plasticrete to defense and indemnification. Alternatively, the court also determined that American Policyholders had not proven that it had been prejudiced because of the claimed failure of Plasticrete to comply with its obligation to give timely notice.

These conclusions are, at least in part, irreconcilable. There is no basis for imposing liability upon American Policyholders if there has been no occurrence within the language of the policy. Without an “occurrence” there is, under the policy, no coverage for either bodily injury or property damage. It is axiomatic that no insurer is bound to provide indemnification or defense beyond the scope of the coverage described in the insurance contract, the policy. London & Lancashire Indemnity Co. v. Duryea, 143 Conn. 53, 58, 119 A.2d 325 (1955); and see Smedley Co. v. Employers Mutual Liability Ins. Co. of Wisconsin, 143 Conn. 510, 513, 123 A.2d 755 (1956). To the extent that the policy’s definition of “occurrence” is ambiguous, its scope may be interpreted to encompass the meaning reasonably attached to that definition by the insured, rather than by the insurer.⁴ Simses v. North American Co. for Life & Health Ins., 175 Conn. 77, 84-85, 394 A.2d 710 (1978); Roby v. Connecticut General Life Ins. Co., 166 Conn. 395, 402, 349 A.2d 838 (1974); Raff el v. Travelers Indemnity Co., 141 Conn. 389, 392, 106 A.2d 716 (1954); see also 4 Williston, Contracts (3d Ed. 1961) § 621. But the total absence of coverage is fatal to recovery by the insured. The absence of an occurrence, instead of postponing the time when notice must be given, means that nothing has happened about which notice must ever be given because the insurer will never be obligated to defend. We cannot ignore the finding that there was no occurrence, which Plastierete has not attacked. We therefore cannot sustain the judgment against American Policyholders.

The court made other findings which indicate that there was evidence that would have supported the conclusion that there was, in fact, an occurrence as defined by the policy. Whether there was property damage “neither expected nor intended from the standpoint of the insured” with regard to the outside wall was clearly established to have been one of the points at issue between the underlying parties (the parties to the New York lawsuit). Plasticrete consistently took the position that porosity was a built-in consequence of the architect’s design and specifications, while the general contractor deemed the porosity excessive. In addition, there was also controversy about the effect of this construction on the inside cavity wall, and as to this interior wall, the trial court expressly found that water seepage was a condition that was neither expected nor intended. It is therefore proper to remand this case for a new trial to determine if there was an occurrence under the policy.

Upon retrial, the trial court must determine not only whether there was an occurrence but also when there was an occurrence. The latter is likely to be the more difficult question. Insurance coverage defined to encompass “continuous repeated exposure to conditions which result in . . . property damage” appears to contemplate a developing condition that may be difficult to locate in a specific time frame. Yet the duty to give notice “as soon as practicable” must be triggered by an identifiable event.⁵ In that regard, the trial court must determine further whether notification to the insured that there is a problem is itself an occurrence, when the insured believes in good faith that the problem is one for which it bears no legal responsibility. In the circumstances of this case, questions relating to occurrence and the duty to give timely notice are inevitably entwined. Possibly spillover obligations arising ont of the dnty to cooperate with the insurer create a supplemental duty to notify the insurer of claims as they emerge, but that issue, too, requires further inquiry.

The commercial dilemma that the trial court must resolve arises out of the inherent conflict between a merchant’s interest in keeping his customers contented, particularly where the merchant is venturing into a new market, and an insurer’s interest in early warning signals about potential claims. From the point of view of the merchant, it is reasonable to contemplate considerable accommodation with respect to any one contract in order to reap the gains of future contractual relationships. The insurance policy recognizes this, in part, in the provision permitting “the insured ... at his own cost, voluntarily [to] make any payment.”⁶ From the point of view of the insurer, however, discussions looking to accommodation complicate the insurer’s responsibility to defend the merchant at a later date, if the settlement efforts do not succeed. No matter how assiduously the merchant attempts and intends to separate discussions about settlement from concession of breach, the insurer has a justifiable concern that, in defending a subsequent lawsuit, it will be confronted with statements by the merchant that may be characterized as admissions against interest. Under the policy, the insured is obligated “to defend any suit against the insured seeking damages . . . even if any of the allegations of the suit are groundless, false or fraudulent____”⁷

The trial court, on remand, must reconcile the provisions of the insurance policy with these competing legitimate interests of the insurer and the insured. It must determine whether and when an insured event, an “occurrence,” took place. If it finds that an “occurrence” took place, it must then decide whether, in light of that determination, Plasticrete complied with the other conditions of the policy.

There is error, the judgment is set aside and the case is remanded for a new trial in accordance with this opinion.

In this opinion Healey and Weight, Js., concurred.

1 “Conditions ... 4. Insured’s Duties in the Event of an Occurrence, Claim or Suit: (a).”

2 “Definitions . . . 'occurrence.’ ”

3 “Coverage Z ■—■ Contractual Property Damage Liability.”

4 The definition of an occurrence which gives rise to the insurer’s duty to defend the insured in a suit for damages must, logically, be broader than that of an occurrence which gives rise to the duty to indemnify the insured. Smedley Co. v. Employers Mutual Liability Ins. Co. of Wisconsin, 143 Conn. 510, 516, 123 A.2d 755 (1956). See footnote 7, infra.

5 Wo note that the duty to give written notice is premised, by the terms of § 4 (a) of the insurance policy, upon “the event of an occurrence,” not upon a claim, that there has been an occurrence. Yet a reasonable reading of this clause must delay the rise of the duty until the insured has or reasonably should have knowledge of the event. Often this will come only with a claim.

6 “Conditions ... 4. Insured’s Duties in the Event of Occurrence, Claim or Suit: . . . (c).”

7 “Coverage Z — Contractual Property Damage Liability.”

Thus the policy contemplates at least some obligations to defend which will, because the suits are entirely groundless, false or fraudulent, arise without any independent “event” or “occurrence” of which the insured can notify the insurer; as to these, at least, notice must be timely if given when the insured receives notice of the claim, or is sued.