Amended August 24, 2016 National Surety Corporation, an Illinois Corporation v. Westlake Investments, LLC, an Iowa Limited Liability Company

IN THE SUPREME COURT OF IOWA
No. 14–1274
Filed June 10, 2016
Amended August 24, 2016
NATIONAL SURETY CORPORATION, an Illinois Corporation,
Appellant,
vs.
WESTLAKE INVESTMENTS, LLC, an Iowa Limited Liability Company,
Appellee.
On review from the Iowa Court of Appeals.
Appeal from the Iowa District Court for Polk County, Robert B.
Hanson (summary judgment) and Eliza J. Ovrom (summary judgment
and trial), Judges.
An insurer seeks further review of a court of appeals decision
affirming in part a district court judgment finding it liable under the
terms of an excess commercial general liability insurance policy for
property damage arising due to defective workmanship by the insureds’
subcontractor. DECISION OF THE COURT OF APPEALS AFFIRMED;
DISTRICT COURT JUDGMENT AFFIRMED IN PART AND REVERSED
IN PART; CASE REMANDED WITH INSTRUCTIONS.
Todd S. Schenk and Amber Coisman of Tressler LLP, Chicago,
Illinois, and Mollie Pawlosky of Dickinson, Mackaman, Tyler & Hagen,
P.C., Des Moines, for appellant.
2
Todd M. Lantz of Weinhardt & Logan, P.C., and Stephen R. Eckley
of Belin McCormick, P.C., Des Moines, for appellee.
Jeffrey A. Stone of Simmons Perrine Moyer Bergman PLC, Cedar
Rapids, for amici curiae Hubbell Realty Company, Home Builders
Association of Iowa, and Associated Builders & Contractors of Iowa.
Brenda K. Wallrichs of Lederer Weston Craig PLC, Cedar Rapids,
for amici curiae American Insurance Association and Property Casualty
Insurers Association of America.
3
WIGGINS, Justice.
An insurer sought a declaratory judgment stating it was not liable
to the assignee of an excess commercial general liability (CGL) insurance
policy for damages awarded to the assignee in federal district court. The
assignee brought a counterclaim against the insurer for breach of
contract. A jury concluded the insurer was liable to the assignee for the
damages under the excess CGL policy. On appeal, the court of appeals
affirmed the verdict against the insurer but reversed the district court
award of prejudgment interest and remanded the case to the district
court with instructions. The insurer sought further review, which we
granted. On further review, we affirm the court of appeals decision
affirming the district court judgment. We conclude the district court did
not err in instructing the jury to determine whether the claimed damages
arose due to an “accident” constituting an “occurrence” under the policy
by considering “the viewpoint of the insureds and what they intended or
should reasonably have expected.” Additionally, we conclude the district
court did not err in ruling defective work performed by an insured’s
subcontractor may constitute an occurrence under the policy. The court
of appeals decision will stand as the final decision of this court with
respect to all other issues raised on appeal.
I. Background Facts and Proceedings.
In 2002, developers and a general contractor began construction
on an apartment complex in West Des Moines. In the spring of 2003,
while the complex was still under construction, Westlake Investments,
LLC, (Westlake) entered into negotiations to purchase it. In June,
Westlake executed a purchase agreement.
That summer, the developers and general contractor (the insureds)
purchased a primary CGL insurance policy with a $1,000,000 policy
4
limit from Arch Insurance Group (Arch) and an excess CGL insurance
policy with a $20,000,000 policy limit from National Surety Corporation
(NSC). The terms of the Arch policy defined the scope of coverage under
the NSC policy, as the NSC policy followed the form of and incorporated
by reference the terms, conditions, and exclusions of the Arch policy.
Both policies became effective on July 1, 2003, and expired on July 1,
2004.
During construction, numerous problems surfaced within the
complex, including visible water penetration issues in several buildings.
These problems did not hamper the sale to Westlake because the parties
believed them to be aesthetic. However, that turned out not to be true.
After the sale closed in November 2003, the construction defects
throughout the complex continued to cause widespread water
penetration issues.
In February 2008, Westlake sued the insureds in federal district
court, seeking to recover lost profits, repair costs, and other damages
under tort and contract theories. The insureds in turn sued numerous
third-party defendants, including the architect who designed the complex
and the subcontractors who helped to construct it.
As the primary insurer, Arch defended the suit on behalf of the
insureds. After extensive pretrial litigation and discovery, Westlake and
the insureds entered into settlement negotiations. Those negotiations
culminated in a settlement agreement between Westlake, the insureds,
and all but one of the subcontractors in September 2011. See Westlake
Invs., LLC v. MLP Mgmt., LLC, 842 F. Supp. 2d 1121–25 (S.D. Iowa 2012).
In February 2012, the federal district court entered a consent
judgment for $15,600,000 in favor of Westlake. Arch contributed
$1,000,000 (the policy limit on the primary CGL policy) toward
5
satisfaction of the judgment, and the third-party defendants contributed
$1,737,500. Following these contributions, $12,762,500 awarded in the
judgment remained unsatisfied. Pursuant to the settlement agreement,
the insureds assigned their claims against NSC on the excess CGL policy
to Westlake.
In October 2011, shortly after the parties agreed to settle but
before the federal district court entered the consent judgment against the
insureds, NSC initiated this declaratory judgment action in state district
court. Specifically, NSC sought entry of a declaration stating it had no
obligation under the NSC policy to pay any portion of the judgment
awarded to Westlake. Westlake counterclaimed for breach of contract
and sought entry of a declaration stating the NSC policy obligated NSC to
pay Westlake the unsatisfied portion of any judgment awarded to
Westlake.
Following discovery, Westlake and NSC filed competing motions for
summary judgment on various grounds, one of which is relevant to this
appeal. Westlake argued property damage resulting from defective work
performed by an insured’s subcontractor may constitute an accident that
qualifies as an occurrence covered by the Arch policy (and therefore the
NSC policy). In response, NSC argued property damage caused by
defective workmanship does not constitute an accident or an occurrence
under a CGL insurance policy.
Following a hearing, the district court granted Westlake’s motion
for partial summary judgment and denied NSC’s motion for summary
judgment. The district court concluded property damage resulting from
defective work performed by an insured’s subcontractor may constitute
an accident and an occurrence under a post-1986 CGL insurance policy
written to a general contractor.
6
The case proceeded to a jury trial in March 2014. Over the course
of three weeks, the jury heard testimony from numerous witnesses, and
the district court admitted hundreds of exhibits. At the close of the
evidence, both parties moved for a directed verdict. The court denied
both motions and declined to disturb its summary judgment ruling that
property damage resulting from defective work performed by an insured’s
subcontractor may constitute an accident and an occurrence under the
Arch policy.
Before the district court submitted the case to the jury, both
parties objected to several jury instructions. Of particular relevance to
this appeal, NSC objected to the jury instruction defining the terms
“accident” and “occurrence” on the ground that the meaning of the term
“accident” is objective rather than subjective. Accordingly, NSC proposed
an instruction on the meaning of the term “occurrence” that defined the
term “accident” as “an undesigned, sudden and unexpected event.”
The district court overruled all the objections to the jury
instructions, noting its instruction on the meaning of the term
“occurrence” relied on cases cited by both parties and concluding the
instruction represented an accurate statement of Iowa law. Thus, the
following jury instructions were among those the court submitted to the
jury:
Instruction No. 19
[T]o prove the National Surety policy covers the
consent judgment damages, Westlake must show that:
1. Some or all of the consent judgment damages resulted
from “property damage” that was caused by an
“occurrence,” and
2. Some or all of the consent judgment damages resulted
from “property damage” that happened between July
1, 2003 and July 1, 2004.
7
Instruction No. 20
As used in Instruction No. 19, “property damage”
means 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.
You are instructed that property damage happened at
the Westlake apartment complex at some point in time due
to water intrusion. You must determine whether property
damage happened during the policy period of July 1, 2003 to
July 1, 2004.
Instruction No. 21
As used in Instruction No. 19, an “occurrence” is an
accident, including continuous or repeated exposure to
substantially the same general harmful conditions. Defective
construction work performed by an insured is not covered by
the policy; however, defective construction work performed
by subcontractors may be an “occurrence” under the policy.
“Accident” means an unplanned, sudden, and
unexpected event.
Whether something is an “accident” must be
determined from the viewpoint of the insureds and what they
intended or should reasonably have expected. An accident is
unexpected so long as the insured does not expect both it
and some damage.
The jury deliberated for just over an hour before returning a verdict
in favor of Westlake. Following the jury verdict, the district court entered
a judgment awarding Westlake $12,439,500 with interest accruing at the
statutory rate from the date of the filing of the counterclaim. 1
Westlake moved to amend the judgment with respect to
prejudgment and postjudgment interest. Westlake argued the
prejudgment interest on the damages awarded in the declaratory
1The judgment awarded by the district court reflected the portion of the consent
judgment award that remained unsatisfied when the declaratory judgment was entered.
By the time the declaratory judgment was entered, Westlake had been awarded an
additional $253,000 following a bench trial to determine the liability of the
subcontractor who declined to join in the settlement agreement.
8
judgment action properly accrued from the date the federal suit settled
rather than the date the counterclaim in the declaratory judgment action
was filed on the theory that the damages became liquidated damages
when the parties settled. Westlake also requested an order clarifying the
postjudgment interest on the damages awarded in the declaratory
judgment action would accrue at the rate of five percent under Iowa Code
section 535.2 (2013).
The district court denied the motions. First, the court concluded
the damages awarded in the consent judgment in the underlying action
were not liquidated until the jury in the declaratory judgment action
found them to be reasonable. Accordingly, the court determined
prejudgment interest on the damages awarded in the declaratory
judgment action accrued from the date Westlake filed its counterclaim,
not the date the parties settled the underlying federal suit. The ruling
did not expressly state which Iowa Code section governed the rate at
which prejudgment interest accrued, however. Second, the court
determined Iowa Code section 535.3 properly governed the rate at which
postjudgment interest on the damages awarded in the declaratory
judgment action would accrue.
Meanwhile, NSC moved for a judgment notwithstanding the
verdict, arguing once again that property damage caused by defective
workmanship does not constitute an accident or an occurrence under
Iowa law. NSC also moved for a new trial asserting the verdict was
contrary to law and not supported by substantial evidence. Westlake
resisted the motions.
Following oral argument, the district court denied both motions,
finding there was substantial evidence in the record to support the jury
finding that Westlake’s damages resulted from property damage
9
occurring within the policy period. NSC filed an expedited motion to
enlarge and amend the district court ruling, requesting the district court
to specifically rule on additional arguments raised in its posttrial
motions. The district court denied the motion, but its ruling specified
additional grounds for its denial of the posttrial motions.
NSC appealed. NSC argued the district court erroneously
instructed the jury as to the meaning of the term “occurrence” because
construction defects and resulting damage never constitute an
occurrence under Iowa law. NSC also contended the court erroneously
denied its motion for a new trial, arguing the jury did not deliberate
before making its findings, the jury findings were not supported by
substantial evidence, and the jury verdict was internally inconsistent.
Finally, NSC asserted the court abused its discretion in declining to
submit two proposed jury instructions to the jury.
In response, Westlake argued the district court correctly permitted
the jury to decide the occurrence issue and correctly denied the motion
for new trial. Westlake also cross-appealed, arguing the court
erroneously denied its motion to amend the judgment regarding
prejudgment interest.
We transferred the appeal to the court of appeals. The court of
appeals affirmed the district court rulings on NSC’s posttrial motions,
concluding the district court did not err in instructing the jury regarding
the meaning of the term “occurrence.” The court of appeals also rejected
NSC’s arguments that the jury did not deliberate, the jury findings were
not supported by substantial evidence, and the jury verdict was
internally inconsistent. On cross-appeal, the court of appeals concluded
the district court correctly determined the date from which prejudgment
interest on the damages awarded in the declaratory judgment action
10
accrued but failed to specify the applicable statutory default interest rate
in its ruling. The court of appeals thus reversed the district court ruling
on prejudgment interest and remanded the case for entry of a
supplemental judgment specifying Iowa Code section 535.2(1)(a) set the
rate at which the prejudgment interest accrued.
NSC sought further review, which we granted.
II. Issues.
On further review, we may exercise our discretion to review all the
issues raised on appeal or in the application for further review or only a
portion thereof. Gits Mfg. Co. v. Frank, 855 N.W.2d 195, 197 (Iowa
2014). In this case, we exercise that discretion to consider only whether
the district court erroneously instructed the jury as to what constitutes
an occurrence covered by the Arch policy language incorporated by
reference into the NSC policy. To decide this question, we must
determine whether property damage caused by defective work performed
by an insured’s subcontractor may constitute an accident, and therefore
an occurrence, for which coverage exists under the policy language
included in post-1986 standard-form CGL insurance policies. The court
of appeals decision will stand as the final decision of this court with
respect to all other issues raised on appeal. Hills Bank & Trust Co. v.
Converse, 772 N.W.2d 764, 770 (Iowa 2009).
III. Scope of Review.
When a party challenges a jury instruction on the ground that the
instruction was erroneous, we review the instruction for correction of
errors at law. Anderson v. State, 692 N.W.2d 360, 363 (Iowa 2005). In
contrast, we review a district court ruling refusing to give a requested
instruction for an abuse of discretion. Id.
11
To the extent our review of a district court ruling rests upon its
interpretation of an insurance policy, we ordinarily review that
interpretation for correction of errors at law. Boelman v. Grinnell Mut.
Reins. Co., 826 N.W.2d 494, 500 (Iowa 2013).
We likewise review a district court ruling denying a motion for a
directed verdict for correction of errors at law. Crow v. Simpson, 871
N.W.2d 98, 105 (Iowa 2015).
IV. The Policy Language.
The NSC policy contains the following insuring agreement:
This coverage only applies to injury or damage covered
by the Primary Insurance. The definitions, terms,
conditions, limitations and exclusions of the Primary
Policies, in effect at the inception date of this policy, apply
to this coverage unless they are inconsistent with provisions
of this policy or relate to premium, subrogation, other
insurance, an obligation to investigate or defend, the amount
or limits or insurance, payment of expenses, cancellation or
any renewal agreement.
Subject to the other provisions of this policy, We will
pay on behalf of the Insured those sums in excess of
Primary Insurance that the Insured becomes legally
obligated to pay as damages. . . .
If a Primary Policy applies on the basis of injury or
damage which occurs during the period of that policy, then
this coverage shall only apply on the same basis and in a like
manner to injury or damage which occurs during Our Policy
Period.
The NSC policy also identified the Arch policy as the “primary policy.”
Accordingly, NSC acknowledges the NSC policy followed the form of and
incorporated by reference certain terms, conditions, and exclusions of
the Arch policy, including those defining the scope of the coverage it
afforded the insureds. 2
2It is common for an excess insurance policy providing coverage in addition to
that provided by an underlying primary insurance policy to “follow the form” of and
12
The NSC policy incorporated the following insuring agreement in
the Arch policy:
We will pay those sums . . . that the insured becomes
legally obligated to pay as damages because of “bodily injury”
or “property damage” to which this insurance applies. . . .
This insurance applies only to “bodily injury” and “property
damage” which occurs during the policy period. The “bodily
injury” and “property damage” must be caused by an
“occurrence.”
The NSC policy also incorporated the following definitions
appearing in the Arch policy:
“Occurrence” means an accident, including continuous or
repeated exposure to substantially the same general harmful
conditions.
....
“Property damage” means:
a. Physical injury to tangible properly, including all
resulting loss of use of that property. All such
loss of use will be deemed to occur at the time of
physical injury that caused it; or
b. Loss of use of tangible property that is not
physically injured. All such loss will be deemed
to occur at the time of the “occurrence” that
caused it. . . .
(Emphasis added.) Although the term “accident” appeared in the
definition of the term “occurrence” in the Arch policy, neither the Arch
policy nor the NSC policy explicitly defined it.
________________________
incorporate the scope of coverage afforded under the primary policy. 4 Philip L. Bruner
& Patrick J. O’Connor, Jr., Bruner & O’Connor on Construction Law § 11:542, Westlaw
(database updated Mar. 2016). However, the extent to which the scope of coverage
afforded by a follow-form excess policy mirrors that of the underlying primary policy
ultimately depends upon the language it contains. Id. In this case, the parties do not
dispute which terms of the Arch policy defined the scope of coverage afforded under the
NSC policy.
13
The NSC policy also incorporated the following exclusions from
coverage appearing in the Arch policy, each of which is relevant to this
appeal:
This insurance does not apply to:
a. Expected or Intended Injury
“Bodily injury” or “property damage” expected or
intended from the standpoint of the insured. . . .
....
j. Damage to Property
“Property damage” to:
....
(5) That particular part of real property on which
you or any contractors or subcontractors
working directly or indirectly on your behalf are
performing operations, if the “property damage”
arises out of those operations; or
(6) That particular part of any property that must
be restored, repaired, or replaced because “your
work” was incorrectly performed on it.
....
Paragraph (6) of this exclusion does not apply to
property damage included in the “products–completed
operations hazard.”
....
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
operation 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 subcontractor.
14
m. Damage to Impaired Property or Property Not
Physically Injured
....
This exclusion does not apply to the loss of use of
other property arising out of sudden and accidental
physical injury to “your product” or “your work” after it
has been put to its intended use.
(Emphasis added.)
The NSC policy incorporated the following definition of the phrase
“your work” appearing in the Arch policy:
“Your work”:
a. Means:
(1) Work or operations performed by you or
on your behalf, and
(2) Materials, parts, or equipment furnished
in connection with such work or
operations. . . .
Finally, the NSC policy incorporated the following endorsement
addressing “property damage to construction projects” from the Arch
policy:
This insurance does not apply to property damage to the
“project” or any party of the “project” that occurs during the
course of construction. The project or part of the project will
be deemed to be within the course of construction until it
satisfies the definition of “products-completed operations
hazard” as defined in this endorsement.
....
a. “Products-completed operations hazard” includes all
“bodily injury” and “property damage” arising out of
“your product” or “your work” except:
i. Products that are still in your physical
possession; or
ii. Work that has not yet [been] completed or
abandoned.
15
b. “Your work” will be deemed completed at the earliest of
the following times:
i. Completion and acceptance of the entire
“project” by all parties designated in its
construction agreement;
ii. When all of the work to be done at the site has
been completed if the “project” calls for work at
more than one site;
iii. When that part of the work done at the “project”
has been put to its intended use by any person
or organization other than another contractor or
subcontractor working on the same “project;” or
[sic]
Work that may need service maintenance, correction, repair or
replacement, but which is otherwise complete, will be treated
as completed.
(Emphasis added.)
With the exception of the endorsement defining the scope of the
“products-completed operations hazard” under the Arch policy, the terms
of the Arch policy relevant to this appeal mirror those appearing in the
1986 standard-form CGL policy drafted by the Insurance Services Office,
Inc. (ISO). ISO is an association of domestic property and casualty
insurers that develops standard-form policies widely used in the
insurance industry. Hartford Fire Ins. Co. v. California, 509 U.S. 764,
772, 113 S. Ct. 2891, 2896, 125 L. Ed. 2d 612, 623 (1993). As the
Supreme Court has noted, “most CGL insurance written in the United
States is written on these forms.” Id. Today, virtually every contractor in
the construction industry carries a CGL policy that is substantially
identical to one of the ISO’s standard-form CGL policies. See James
Duffy O’Connor, What Every Court Should Know About Insurance
Coverage for Defective Construction, 5 J. Am. C. Constr. Law. No. 1, at 1,
1 (2011) [hereinafter O’Connor].
16
V. Interpretive Principles.
In order to determine whether the district court erred, we must
determine the meaning of the policy language governing the scope of
coverage afforded by the NSC policy. We therefore begin our analysis by
describing the principles that guide our interpretation of insurance
policies.
When we interpret an insurance policy, we determine the meaning
of the words that govern its legal effect. See Thomas v. Progressive Cas.
Ins. Co., 749 N.W.2d 678, 681 (Iowa 2008). The cardinal principle
guiding our interpretation is that the intent of the parties at the time the
policy was sold controls. LeMars Mut. Ins. Co. v. Joffer, 574 N.W.2d 303,
307 (Iowa 1998). To determine the parties’ intent, we look to the
language of the policy unless the meaning of that language is ambiguous.
Id. When the language of the policy is ambiguous, we adopt the
construction most favorable to the insured. Boelman, 826 N.W.2d at
502. Because insurance policies are contracts of adhesion, an insurer
assumes a duty to define in clear and explicit terms any limitations or
exclusions to the scope of coverage a policy affords. Id. Nevertheless,
where no ambiguity exists, we will not write a new policy to impose
liability on the insurer. Id.
The mere fact that parties disagree as to the meaning of terms in
an insurance policy does not establish the policy is ambiguous. Id.
Rather, we determine whether an insurance policy is ambiguous by
applying an objective test. Id. at 501. Policy language is ambiguous
when, considered in the context of the policy as a whole, it is susceptible
to two plausible interpretations. Id. Thus, we determine whether an
ambiguity exists not by examining clauses seriatim, but by interpreting
17
the policy in its entirety, including all endorsements, declarations, or
riders attached. Id. at 501–02.
When interpreting an insurance policy, we give each policy term
not defined in the policy its ordinary meaning. Id. at 501. We determine
the ordinary meaning of the words in an insurance policy from the
standpoint of a reasonable ordinary person, not from the standpoint of a
specialist or an expert. Grinnell Mut. Reins. Co. v. Jungling, 654 N.W.2d
530, 536 (Iowa 2002). We strive to interpret every term in an insurance
policy in a manner that will not render it superfluous unless it is evident
that adopting an interpretation giving meaning to a term would be
unreasonable when we consider the term in context. Kibbee v. State
Farm Fire & Cas. Co., 525 N.W.2d 866, 869 (Iowa 1994).
VI. Analysis.
The district court instructed the jury that the term “accident”
means “an unplanned, sudden, and unexpected event . . . determined
from the viewpoint of the insureds and what they intended or should
reasonably have expected.” The court provided the jury a separate
instruction stating, “Defective construction work performed by an
insured is not covered by the policy; however, defective construction
work performed by subcontractors may be an ‘occurrence’ under the
policy.”
Before the court submitted the case to the jury, NSC objected to
the jury instruction defining the terms “accident” and “occurrence.”
Specifically, NSC proposed a jury instruction defining an accident as “an
undesigned, sudden and unexpected event” and argued the term should
be interpreted objectively. NSC subsequently moved for a directed
verdict, arguing that defective workmanship does not constitute an
accident or an occurrence under controlling Iowa law. On appeal, NSC
18
argued the district court erroneously instructed the jury as to the
meaning of “occurrence” because construction defects and resulting
damage never constitute an occurrence. 3
We first consider whether the district court erroneously instructed
the jury to determine whether an accident occurred by considering “the
viewpoint of the insureds and what they intended or should reasonably
have expected.” We previously concluded an intentional act resulting in
unexpected and unintended property damage qualifies as an accident
that amounts to an occurrence covered by a CGL policy so long as the
insured did not expect and intend both the act itself and the resulting
harm in West Bend Mutual Insurance Co. v. Iowa Iron Works, Inc., 503
N.W.2d 596, 600–01 (Iowa 1993).
The standard-form CGL policy we interpreted in West Bend defined
the term “occurrence” as “an accident, including continuous or repeated
3The jury instruction NSC proposed on the meaning of “occurrence” did not
explicitly exclude all property damage arising due to defective construction. In relevant
part, it stated,
To establish that the “property damage” was caused by an “occurrence,”
Westlake must prove that reasonable and prudent parties in the
positions of [the insureds] did not know of or expect, and should not
have known of or expected, property damage resulting from defective
construction. You do not, however, have to find that [the insureds] knew
of, expected or should have known of, or should have expected, the full
extent of the damages resulting from the defective construction in order
to find there was no “occurrence.”
NSC requested a separate instruction that stated,
Damages resulting from “property damage” to the Westlake apartments
caused by defective construction are not caused by “occurrence.”
Westlake must prove by a preponderance of the evidence that the
property damage was not caused by defective construction.
Westlake argues NSC waived its argument that property damage caused by defective
workmanship never constitutes an occurrence by requesting neither a jury instruction
reflecting this theory nor a judgment in its favor on this basis. For purposes of our
analysis, we assume without deciding that NSC preserved error.
19
exposure to conditions, which results in bodily injury or property damage
neither expected nor intended from the standpoint of the insured.” Id. at
600. In contrast, the modern standard-form CGL policy upon which the
Arch policy was based defines the term “occurrence” as “an accident,
including continuous or repeated exposure to substantially the same
general harmful conditions.” However, it also contains an exclusion and
an exception to an exclusion particularly relevant to the meaning of the
term “accident.” Namely, it contains an exclusion from coverage for
property damage “expected or intended from the standpoint of the
insured” 4 and an exception to an exclusion from coverage assuring the
insured may collect certain damages “arising out of sudden and
accidental physical injury” to work product in limited circumstances. 5
An undefined term in an insurance policy must be construed in
light of the entire policy, including any exclusions. See Boelman, 826
N.W.2d at 501–02. Hence, we previously recognized a CGL policy
containing an exclusion precluding coverage for damage “expected or
intended from the standpoint of the insured” relies on the “common
definition” of the term “accident” as “an unexpected and unintended
event.” United Fire & Cas. Co. v. Shelly Funeral Home, Inc., 642 N.W.2d
648, 652 (Iowa 2002) (quoting Weber v. IMT Ins. Co., 462 N.W.2d 283,
287 (Iowa 1990)). Moreover, we previously found the use of the words
“sudden and accidental” in a CGL insurance policy forecloses any
interpretation of the term “sudden” that would render that term
redundant in light of our interpretation of the term “accidental.” Iowa
4See exclusion (a) reproduced in section IV of this opinion.
5See exclusion (m) reproduced in section IV of this opinion.
20
Comprehensive Petroleum Underground Storage Tank Fund Bd. v.
Farmland Mut. Ins. Co., 568 N.W.2d 815, 818 (Iowa 1997).
Applying the same logic, we conclude that in the context of a
modern standard-form CGL policy containing an exclusion precluding
coverage for property damage “expected or intended from the standpoint
of the insured,” the term “accident” means “an unexpected and
unintended event.” See Shelly Funeral Home, 642 N.W.2d at 652; cf. 4
Douglas L. Patin, Law & Practice of Insurance Coverage Litigation § 45:9,
Westlaw (database updated July 2015) (concluding “there is no
significant difference” between the definition of “occurrence” contained in
the 1973 and 1986 standard-form CGL policies). An intentional act
resulting in property damage the insured did not expect or intend
qualifies as an accident amounting to an occurrence as defined in a
modern standard-form CGL policy so long as the insured did not expect
and intend both the act itself and the resulting property damage. See W.
Bend Mut., 503 N.W.2d at 600–01.
Considered from the standpoint of the insured, “a deliberate act,
performed negligently, is an accident if the effect is not the intended or
expected result; that is, the result would have been different had the
deliberate act been performed correctly.” Lamar Homes, Inc. v. Mid-
Continent Cas. Co., 242 S.W.3d 1, 8 (Tex. 2007); see Shelly Funeral
Home, 642 N.W.2d at 653 (rejecting the argument that “the standpoint of
the insured is irrelevant” in determining whether an accident
constituting an occurrence triggering CGL coverage took place).
Accordingly, an intentional act does not constitute an accident that
qualifies as an occurrence covered by a modern standard-form CGL
policy when the resulting harm “was the natural and expected result of
the insured’s actions, that is, was highly probable whether the insured
21
was negligent or not.” Lamar Homes, 242 S.W.3d at 9; see Shelly Funeral
Home, 642 N.W.2d at 653–55 (concluding injuries resulting from an
insured’s negligent supervision of an employee constituted an occurrence
because the insured did not know harmful consequences would flow
from its own acts or omissions).
Accordingly, we conclude the district court correctly instructed the
jury to determine whether the claimed damages arose due to an accident
that constituted an occurrence eligible for coverage under the insuring
agreement in the Arch policy by considering “the viewpoint of the
insureds and what they intended or should reasonably have expected.” 6
Whether an event amounts to an accident that constitutes an occurrence
triggering coverage under a modern standard-form CGL policy turns on
whether the event itself and the resulting harm were both “expected or
intended from the standpoint of the insured.”
We next consider whether the district court erroneously denied
NSC’s motion for directed verdict. The court denied NSC’s motion
because it concluded defective work performed by an insured’s
subcontractor may constitute an occurrence under the Arch policy. NSC
claims defective workmanship cannot constitute an accident or an
occurrence as a matter of law.
6Though the jury instruction defined “accident” as “an unplanned, sudden, and
unexpected event” rather than “an unexpected and unintended event,” we need not
consider whether the district court’s inclusion of a temporal component in this
definition was erroneous because NSC’s proposed instruction on the meaning of
“occurrence” defined “accident” to mean “an undesigned, sudden and unexpected
event.” In any event, we note that ongoing exposure to harmful conditions appears to
qualify as an accident that constitutes an occurrence covered by the Arch policy, as the
policy defined “occurrence” as “an accident, including continuous or repeated exposure
to substantially the same general harmful conditions.”
22
The cornerstone of NSC’s argument that defective workmanship
never constitutes an accident or an occurrence under Iowa law is Pursell
Construction v. Hawkeye-Security Insurance, 596 N.W.2d 67 (Iowa 1999).
In Pursell, we considered whether a CGL policy covered damages arising
from breach-of-contract and negligence claims brought against an
insured who failed to construct two houses in a floodplain at the
elevation required by city ordinance, thereby causing the houses to be
uninhabitable. Id. at 68. We treated the claim against the insurer as
one for the cost of repairing the insured’s own defective workmanship, as
the claimed damages were the cost of raising the elevation of the houses
by approximately two feet. Id. at 68, 70. We concluded the policy did
not cover the cost of repairing an insured’s own defective work product
because “defective workmanship standing alone, that is, resulting in
damages only to the work product itself, is not an occurrence under a
CGL policy.” Id. at 71. In arriving at this conclusion, we reasoned that
interpreting the policy to cover repairs to the insured’s own defective
workmanship would convert the insurer into “a guarantor of the
insured’s performance” on a contract, causing the policy to take on “the
attributes of a performance bond.” Id. (quoting U.S. Fid. & Guar. Corp. v.
Advance Roofing & Supply Co., 788 P.2d 1227, 1233 (Ariz. Ct. App.
1989)).
For several reasons, we reject NSC’s argument that Pursell is
controlling in this case. First, determining whether defective work
performed by an insured’s subcontractor may constitute an occurrence
covered by the Arch policy requires us to consider the entire policy before
us, including its relevant exceptions and exclusions. See Boelman, 826
N.W.2d at 501–02. Notably, the standard-form CGL policy upon which
the Arch policy was based defines the term “occurrence” as “an accident,
23
including continuous or repeated exposure to substantially the same
general harmful conditions,” but it does not define the term “accident.”
Interpreting an undefined term in an insuring agreement requires us to
determine whether the term is ambiguous in the context of the policy as
a whole. Id. Consequently, interpreting the insuring agreement in the
Arch policy requires us to evaluate the meaning of the term “accident” in
the context of the policy as a whole. In Pursell, we did not address
whether language contained in the exceptions and exclusions appearing
in the body of the policy created any ambiguity with respect to the
meaning of the term “accident.” See 596 N.W.2d at 69–70.
Relatedly, Pursell is factually distinguishable from the present
case. In Pursell, the contractor who performed the defective work was
the insured. Id. at 68. The only damage alleged to have resulted from
the defective work was the cost of repairing the insured’s own defective
work product. Id. at 68, 70–71. In contrast, Westlake proved defective
installation of the building wrap and flashings resulted in water
penetration that caused widespread consequential damage to interior
building components that were not defective, including the wood framing,
drywall, insulation, carpet, nails, staples, and other metal fasteners
inside the walls. 7 Westlake also established the defective work that led
to the claimed damages was performed by insureds’ subcontractors, not
the insureds themselves.
7NSC argues the damages in the consent judgment included the cost of
removing and reinstalling the defectively installed building wrap and flashings.
However, Westlake established this defective work product resulted from defective work
performed by the insureds’ subcontractors, not the insureds themselves. In addition,
Westlake presented evidence demonstrating water penetration caused widespread
consequential physical damage to interior building components underneath the building
wrap and flashings such that removing the building envelope was a necessary step in
repairing the consequential damage to other parts of the complex.
24
Most importantly, our holding in Pursell was limited by its plain
language to situations in which the insured performed defective work
and sought coverage for the cost of repairing the defective work product.
Id. at 71. By implication, Pursell anticipated that a CGL policy might
provide coverage for at least some claims arising from defective
construction, just not claims seeking coverage for repairing or replacing
the insured’s own defective work product. 8
Finally, although we have never explicitly overruled Pursell, we
later interpreted identical language defining the terms “accident” and
“occurrence” in a CGL policy to cover compensatory damages awarded
based on an insured’s negligent supervision in Shelly Funeral Home. 642
N.W.2d at 653. As here, the claim we considered in Shelly Funeral Home
stemmed from a suit against an insured in which one third party who
was not a party to an insurance contract sought damages against the
insured for harm caused by another third party who worked under the
insured’s supervision. Id. at 651. Because the policy explicitly
precluded coverage for harm “expected or intended from the standpoint
of the insured,” we reasoned, it relied upon “the common definition” of
the term “accident” as an “unexpected and unintended” event. Id. at
652–53 (citing Weber, 462 N.W.2d at 287). We therefore determined
harm resulting from the insured’s negligent supervision of an employee
constituted an occurrence for which there was coverage under the
policy’s insuring agreement because the insured did not expect or intend
the harmful consequences that flowed from its own acts or omissions.
8Because NSC does not dispute that the damage to the apartment complex
resulted from the insureds’ subcontractors’ defective workmanship, we need not
consider whether property damage arising due to the insured’s own defective
workmanship may constitute an occurrence in the context of a modern standard-form
CGL policy containing the exclusions the Arch policy contains.
25
Id. at 653–54. We concluded that when “an injury occurs without the
agency of the insured, it may be logically termed ‘accidental,’ even
though it may be brought about designedly by another person.” Id. at
654 (quoting Silverball Amusement, Inc. v. Utah Home Fire Ins. Co., 842 F.
Supp. 1151, 1157–58 (W.D. Ark.), aff’d, 33 F.3d 1476 (8th Cir. 1994)).
Our holding in Shelly Funeral Home calls into question the
applicability of the holding NSC relies upon in the context of the claim
before us. 9 NSC essentially argues the claimed damages arose due to the
insureds’ negligent supervision of the subcontractors whose defective
workmanship resulted in damage to the Westlake complex.
We are unable to identify any case in which this court previously
considered the question of whether defective work negligently performed
by an insured’s subcontractor may constitute an occurrence covered by a
modern standard-form CGL policy. Our past cases considering whether
defective workmanship constituted an occurrence triggering coverage
under an insurance policy based on the modern standard-form CGL
policy under Iowa law involved defective work performed by the insured,
not the insured’s subcontractor. See Pursell, 596 N.W.2d at 68; Yegge v.
Integrity Mut. Ins. Co., 534 N.W.2d 100, 101 (Iowa 1995); see also Liberty
Mut. Ins. Co. v. Pella Corp., 650 F.3d 1161, 1164 (8th Cir. 2011).
9We need not decide whether to overrule Pursell to decide the case before us, as
the damages Westlake claims arose because defective work performed by the insureds’
subcontractors caused extensive property damage to the complex. We note many
courts that have concluded defective workmanship does not constitute an occurrence
under circumstances similar to those we considered in Pursell have subsequently
concluded defective workmanship performed by an insured’s subcontractor may
constitute an occurrence covered by the insuring agreement in a modern standard-form
CGL policy. See, e.g., Sheehan Constr. Co. v. Cont’l Cas. Co., 935 N.E.2d 160, 170 (Ind.
2010); Architex Ass’n, Inc. v. Scottsdale Ins. Co., 27 So. 3d 1148, 1157–61 (Miss. 2010);
Auto Owners Ins. Co. v. Newman, 684 S.E.2d 541, 544–45 (S.C. 2009); Travelers Indem.
Co. of Am. v. Moore & Assocs., Inc., 216 S.W.3d 302, 308, 310–11 (Tenn. 2007); Lamar
Homes, 242 S.W.3d at 8–12; Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 673 N.W.2d 65,
75–78, 84 (Wis. 2004).
26
NSC argues the exceptions and exclusions the Arch policy contains
are irrelevant to the question of what qualifies for coverage under its
insuring agreement. We disagree.
To determine if an insurance policy affords coverage under a
particular set of circumstances, we generally look first to the insuring
agreement, then to the exclusions and the exceptions to the exclusions.
Pursell, 596 N.W.2d at 69. But before we can construe the language in
an insuring agreement, we must first determine whether it is ambiguous.
See Boelman, 826 N.W.2d at 501. In making that determination, our
analysis begins with consideration of the policy as a whole. See id. at
501–02. Thus, although exceptions and exclusions cannot “create
coverage that otherwise is lacking” under an insuring agreement, they
offer insight into whether coverage exists under an insuring agreement
by shedding light on what the terms it contains mean. Amish
Connection, Inc. v. State Farm Fire & Cas. Co., 861 N.W.2d 230, 239 (Iowa
2015) (quoting Hartford Cas. Ins. Co. v. Evansville Vanderburgh, Pub.
Library, 860 N.E.2d 636, 646 (Ind. Ct. App. 2007)); see U.S. Fire Ins. Co.
v. J.S.U.B., Inc., 979 So. 2d 871, 886 (Fla. 2007); Sheehan Constr. Co. v.
Cont’l Cas. Co., 935 N.E.2d 160, 171 (Ind. 2010).
Reading the Arch policy as a whole, we conclude it plainly
contemplates coverage for some property damage caused by defective
work performed by an insured’s subcontractor. In short, interpreting the
term “accident” or the term “occurrence” so narrowly as to preclude
coverage for all property damage arising from negligent work performed
by an insured’s subcontractor would be unreasonable in light of the
exceptions and exclusions the Arch policy contains.
For example, the policy’s “damage to property” exclusion generally
excludes from coverage property damage to the “particular part of any
27
property that must be restored, repaired, or replaced” due to work
“incorrectly performed on it” by or on behalf of the insured.10
Nonetheless, this exclusion does not apply to property damage included
within the policy’s definition of “products-completed operations hazard.”
Thus, property damage requiring property to be restored, repaired, or
replaced due to work incorrectly performed on it by or on behalf of the
insured is generally not excluded from coverage if the property damage
arises out of completed work. 11 18 New Appleman on Insurance Law
Library Edition § 18.03[13][iv], at 18-91 (Jeffrey E. Thomas & Francis J.
Mootz, III, eds., 2015); see Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 673
N.W.2d 65, 81–82 (Wis. 2004).
Similarly, the policy’s “your work” exclusion generally excludes
from coverage property damage arising out of completed work performed
by or on behalf of the insured. 12 However, the exclusion contains an
exception indicating property damage to work performed on behalf of the
insured remains compensable assuming no other coverage exclusion
applies if it was performed by the insured’s subcontractor. Specifically, it
states the “your work” exclusion does not apply if “the damaged work or
the work out of which the damage arises was performed . . . by a
subcontractor” on behalf of the insured. 13 The effect of this
subcontractor exception to the “your work” exclusion is to preserve
10See exclusion (j)(6) and paragraph (a)(1) of the definition of “your work”
reproduced in section IV of this opinion.
11See exclusion (j)(6), the exception to exclusion (j)(6), and the definition of the
“products-completed operations hazard” reproduced in section IV of this opinion.
12See exclusion (l), paragraph (a)(1) in the definition of “your work,” and the
definition of the “products-completed operations hazard” reproduced in section IV of
this opinion.
13See the exception to exclusion (l) reproduced in section IV of this opinion.
28
coverage the “your work” exclusion would otherwise negate. K & L
Homes, Inc. v. Am. Family Mut. Ins. Co., 829 N.W.2d 724, 737 (N.D. 2013)
(quoting Lamar Homes, 242 S.W.3d at 12); see 18 New Appleman on
Insurance Law Library Edition § 18.03[12][d], at 18-95.
It would be illogical for an insurance policy to contain an exclusion
negating coverage its insuring agreement did not actually provide or an
exception to an exclusion restoring it. See Greystone Constr., Inc. v. Nat’l
Fire & Marine Ins. Co., 661 F.3d 1272, 1287 (10th Cir. 2011); J.S.U.B.,
979 So. 2d at 880; Sheehan Constr., 935 N.E.2d at 171; Lee Builders, Inc.
v. Farm Bureau Mut. Ins. Co., 137 P.3d 486, 494 (Kan. 2006); Architex
Ass’n, Inc. v. Scottsdale Ins. Co., 27 So. 3d 1148, 1161 (Miss. 2010). Just
as we will not strain to interpret an insurance policy to impose liability
on an insurer, we will not strain to interpret an insurance policy to
deprive an insured of coverage the policy clearly contemplates. See
Boelman, 826 N.W.2d at 501–02. Nor will we interpret an insurance
policy in a manner that renders an exception or exclusion it contains to
be superfluous unless it is evident interpreting the policy to give meaning
to a particular exception or exclusion would be unreasonable in the
context of the structure and format of the policy as a whole. Cf. Kibbee,
525 N.W.2d at 869.
We think a reasonable ordinary person who read the modern
standard-form CGL policy containing the subcontractor exception to the
“your work” exclusion in its entirety would believe it covered defective
work performed by the insured’s subcontractor unless the resulting
property damage was specifically precluded from coverage by an
exclusion or endorsement. See Jungling, 654 N.W.2d at 536.
Accordingly, we interpret the insuring agreement in the modern
standard-form CGL policy as providing coverage for property damage
29
arising out of defective work performed by an insured’s subcontractor
unless the resulting property damage is specifically precluded from
coverage by an exclusion or endorsement. In addition, we conclude the
defective work performed by the insureds’ subcontractors falls within the
definition of “occurrence” in the insuring agreement appearing in the
Arch policy.
Our conclusion that the insuring agreement in a modern standard-
form CGL policy ordinarily covers property damage arising due to
defective workmanship by an insured’s subcontractor is reinforced by
both the nature of the ISO’s standard-form CGL policy and its evolution.
The purpose of CGL policies used in the home-construction industry is to
protect homebuilders from risks associated with homeowners asserting
postconstruction claims for damage to homes caused by alleged
construction defects. Auto Owners Ins. Co. v. Newman, 684 S.E.2d 541,
545 (S.C. 2009). Construction-specific exclusions narrow the scope of
coverage afforded by standard-form CGL policies and exclude from
coverage property damage associated with certain categories of risks. Id.
Over time, the language contained in the insuring agreements and the
exclusions appearing in standard-form CGL policies have been
periodically updated to adjust the scope of coverage such policies afford.
The precursor to the modern standard-form CGL policy was
promulgated in 1940 and subsequently underwent five principal
revisions, the most recent of which occurred in 1986. Sheehan Constr.,
935 N.E.2d at 162. Unlike the 1986 version of the standard-form CGL
policy upon which the Arch policy was based, prior versions of the
standard-form CGL policy contained an exclusion precluding 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
30
materials, parts or equipment furnished in connection therewith.” Id.
(quoting French v. Assurance Co. of Am., 448 F.3d 693, 700 (4th Cir.
2006)). Courts interpreted the language of this “work performed”
exclusion to preclude from coverage property damage resulting from
work performed by an insured’s subcontractor, including damage to the
insured’s own work. See French, 448 F.3d at 700. As subcontractors
grew increasingly integral to the construction industry, however, many
general contractors became unhappy with the scope of coverage provided
under standard-form CGL policies. Greystone, 661 F.3d at 1287.
“General contractors needed coverage for property damage that arose
from the work of their subcontractors, a risk they could not control by
the exercise of general supervision and coordination.” O’Connor, 5 J.
Am. C. Constr. Law., no. 1, at 5.
The insurance industry responded by offering two versions of an
optional broad form property damage (BFPD) endorsement intended to
narrow the “work performed” exclusion. Scott C. Turner, Insurance
Coverage of Construction Disputes § 3:8, Westlaw (database updated
June 2016). With respect to ongoing work, both versions of the
endorsement narrowed the “work performed” exclusion to preclude
coverage only for “that particular part” of the ongoing work that was
defective, rather than “any portion” of the insured’s ongoing work. Id.
With respect to completed work, one version of the endorsement also
eliminated the “on behalf of” language from the “work performed”
exclusion. Id. The elimination of this language effectively extended
liability coverage under a CGL policy including the endorsement to
damage arising out of work performed by an insured’s subcontractor.
Greystone, 661 F.3d at 1288.
31
By the mid-1970s, insureds were paying higher premiums to add
the latter endorsement to their CGL policies in order to extend their CGL
coverage to damage arising out of their subcontractors’ work. See id.;
French, 448 F.3d at 701. By 1986, the BFPD endorsement extending
liability coverage to work performed by subcontractors was so popular
that the ISO incorporated it directly into the body of its standard-form
CGL policy in the form of a subcontractor exception to the “your work”
exclusion. See O’Connor, 5 J. Am. C. Constr. Law., no. 1, at 5. “This
resulted both because of the demands of the policyholder community . . .
and the view of insurers that the CGL was a more attractive product that
could be better sold if it contained this coverage.” Greystone, 661 F.3d at
1288 (quoting 2 Jeffrey W. Stempel, Stempel on Insurance Contracts
§ 14.13[D] (2007)).
Following the 1986 revisions to its standard-form CGL policy, the
ISO broadcast to both the construction and insurance industries that the
revisions were intended to extend CGL coverage under standard-form
policies to property damage arising from defective construction.
O’Connor, 5 J. Am. C. Constr. Law., no. 1, at 5–6. In a circular intended
to provide guidance regarding the impact of the 1986 revisions, the ISO
confirmed their effect was to provide coverage for “damage caused by
faulty workmanship to other parts of work in progress; and damage to, or
caused by, a subcontractor’s work after the insured’s operations are
completed.” J.S.U.B., 979 So. 2d at 879 (quoting Insurance Services
Office Circular, Commercial General Liability Program Instructions
Pamphlet, No. GL–86–204 (July 15, 1986)).
The history of the standard-form CGL policy and the industry’s
own interpretative literature over the course of that history confirm that
our interpretation of the insuring agreement in the Arch policy is correct.
32
Of course, “CGL policy provisions have a special meaning within the
insurance industry, which includes the insurance brokers and risk
managers who advise contractors, real estate developers, and others
within the construction industry as to what CGL coverage to purchase.”
Turner, Insurance Coverage of Construction Disputes § 3:8. Clearly, the
1986 standard-form CGL policy upon which the Arch policy was based
“was specifically designed to provide general contractors with at least
some insurance coverage for damage caused by the faulty workmanship
of their subcontractors.” Greystone, 661 F.3d at 1287. Consequently,
our conclusion that defective work performed by an insured’s
subcontractor may constitute an occurrence triggering coverage under
the modern standard-form CGL policy reflects the overwhelming trend
among courts and commentators interpreting such policies. See, e.g.,
Greystone, 661 F.3d at 1290 (applying Colorado law); French, 448 F.3d at
706 (applying Maryland law); J.S.U.B., 979 So. 2d at 888 (Florida);
Sheehan Constr., 935 N.E.2d at 171 (Indiana); Lee Builders, 137 P.3d at
495 (Kansas); Architex, 27 So. 3d at 1161 (Mississippi); K & L Homes,
829 N.W.2d at 736 (North Dakota); Auto Owners Ins., 684 S.E.2d at 544
(South Carolina); Lamar Homes, 242 S.W.3d at 11; Travelers Indem., 216
S.W.3d at 310 (Tennessee); Am. Girl, 673 N.W.2d at 83–84 (Wisconsin);
see also Turner, Insurance Coverage of Construction Disputes § 33:9
(listing cases and commentators interpreting standard-form CGL policies
to cover property damage caused by subcontractor work in light of the
subcontractor exception to the “your work” exclusion).
Finally, our decision is further reinforced by recent decisions of
other state supreme courts interpreting CGL policies containing the
subcontractor exception to the “your work” exclusion in the context of
property damage arising when exposure to moisture resulted from
33
defective workmanship. Sheehan Constr., 935 N.E.2d at 171–72; Lee
Builders, 137 P.3d at 489, 494; Travelers Indem., 216 S.W.3d at 304,
306.
In particular, the Indiana Supreme Court recently determined a
CGL policy containing the subcontractor exception to the “your work”
exclusion covered water damage caused by the defective work of the
insured’s subcontractors. Sheehan Constr., 935 N.E.2d at 163–64. The
defective workmanship included,
lack of adequate flashing and quality caulking around the
windows, lack of a weather resistant barrier behind the brick
veneer to protect the wood components of the wall,
improperly installed roofing shingles, improperly flashed or
sealed openings for the chimney and vents, and inadequate
ventilation in the crawl space.
Id. at 163. The court concluded the question of whether repair or
replacement of “leaking windows, fungus growth on the siding, decayed
OSB sheathing, deteriorating and decaying floor joists, and . . . water
stained carpeting” was covered under the policy turned on whether the
defective workmanship was “intentional from the viewpoint of the
insured.” Id. at 163, 169–72. In arriving at this conclusion, the court
noted,
A shingle falling and injuring a person is a natural
consequence of an improperly installed shingle just as water
damage is a natural consequence of an improperly installed
window. If we assume that either the shingle or the window
installation will be completed negligently, it is foreseeable
that damages will result. If, however, we assume that the
installation of both the shingle and the window will be
completed properly, then neither the falling shingle nor the
water penetration is foreseeable and both events are
“accidents.”
Id. at 170 (quoting Travelers Indem., 216 S.W.3d at 309).
Similarly, the Kansas Supreme Court recently determined a CGL
policy containing the subcontractor exception to the “your work”
34
exclusion covered property damage caused by continuous exposure to
moisture arising due to faulty materials and workmanship provided by
the insured’s subcontractor because the resulting damage was “both
unforeseen and unintended.” Lee Builders, 137 P.3d at 489–91, 495. In
doing so, the court reasoned that clearly distinguishing between what
constituted an occurrence and what did not was the obligation of the
insurer who drafted the policy. Id. at 495. Accordingly, the court
determined coverage existed in part because, even if the court were to
assume the policy language defining an “occurrence” as “an accident,
including continuous or repeated exposure to substantially the same
general harmful conditions” was ambiguous, it was required to construe
such ambiguity against the insurer. Id.
Likewise, the Tennessee Supreme Court recently determined
property damage arising due to water penetration resulting from an
insured’s subcontractor’s faulty installation of windows constituted an
occurrence covered by a CGL policy containing the subcontractor
exception to the “your work” exclusion. Travelers Indem., 216 S.W.3d at
304, 306. The court rejected the insurer’s argument that water
penetration was not unforeseen or unexpected from the standpoint of the
insured because it was a natural consequence of faulty window
installation. Id. at 308. Interpreting the term “accident” in a manner
that would exclude from coverage all property damage arising from
negligence, the court reasoned, would render CGL policies “almost
meaningless.” Id. Accordingly, the court compared water penetration
caused by defective window installation “to the automobile accident that
is caused by the faulty tire.” Id. at 310. The court thus concluded the
property damage resulting from water penetration constituted an
occurrence covered by the policy because the insured could not have
35
foreseen the water penetration if the work had been completed properly.
Id. at 311.
As the United States Court of Appeals for the Tenth Circuit has
observed, “the degree of business risk that is covered by a CGL policy is a
negotiated agreement between contractual parties, which should not be
disturbed by a court’s view of whether business-risk coverage is
appropriate.” Greystone, 661 F.3d at 1288. Insurers know how to
modify the allocation of risk in CGL policies should they wish to do so.
See id.; J.S.U.B., 979 So. 2d at 891; see also Lamar Homes, 242 S.W.3d
at 12; 18 New Appleman on Insurance Law Library Edition § 18.03[12][d],
at 18-95. Therefore, we decline to interpret the ambiguous insuring
agreement in the Arch policy to preclude coverage for the property
damage Westlake claimed. See Boelman, 826 N.W.2d at 502.
For the foregoing reasons, we conclude defective workmanship by
an insured’s subcontractor may constitute an occurrence under a
modern standard-form CGL policy containing a subcontractor exception
to the “your work” exclusion. We therefore conclude the court of appeals
correctly determined the district court correctly interpreted the Arch
policy.
VII. Disposition.
Determining whether coverage exists under an insurance policy
requires us to determine whether its terms are ambiguous in the context
of the policy as a whole, including all relevant exceptions and exclusions.
Accordingly, we conclude defective workmanship by an insured’s
subcontractor may constitute an occurrence under the terms of the Arch
policy incorporated by reference into the NSC policy. We thus affirm the
court of appeals decision affirming the district court rulings as to the
meaning of the term “occurrence” for purposes of determining the scope
36
of coverage afforded by the Arch policy. The court of appeals decision
shall stand as the final decision of this court with respect to all other
issues raised on appeal. Therefore, we affirm in part and reverse in part
the district court judgment and remand the case to the district court
with instructions to enter a supplemental judgment specifying the
statutory rate at which prejudgment interest accrued consistent with the
decision of the court of appeals.
DECISION OF THE COURT OF APPEALS AFFIRMED; DISTRICT
COURT JUDGMENT AFFIRMED IN PART AND REVERSED IN PART;
CASE REMANDED WITH INSTRUCTIONS.
All justices concur except Waterman, J., Cady, C.J., and
Mansfield, J., who dissent.
37
#14–1274, Nat’l Surety Corp. v. Westlake Invs.
WATERMAN, Justice (dissenting).
I respectfully dissent. In my view, there was no liability coverage
for the builder under the facts of this case because there was no accident
as required under the terms of the insurance contract. National Surety
Corporation, therefore, was entitled to a directed verdict on Westlake’s
coverage claims. Our precedent defines “accident”—as used in a
commercial general liability (CGL) occurrence policy with the same
“occurrence” definition—to mean “an undesigned, sudden, and
unexpected event.” Pursell Constr., Inc. v. Hawkeye-Sec. Ins. Co., 596
N.W.2d 67, 70 (Iowa 1999) (emphasis added) (quoting Cent. Bearings Co.
v. Wolverine Ins. Co., 179 N.W.2d 443, 448 (Iowa 1970)). There is
nothing sudden about the gradual infiltration of rainwater through leaky
window frames over several seasons, which the United States Court of
Appeals for the Eighth Circuit squarely held is not a covered occurrence
in a recent case applying Iowa law to the same policy language. Liberty
Mut. Ins. Co. v. Pella Corp., 650 F.3d 1161, 1175–76 (8th Cir. 2011). The
majority disregards that persuasive decision directly on point and
instead relies on inapposite Iowa authority finding liability coverage for a
landlord’s negligent supervision of an employee who flashed tenants.
United Fire & Cas. Co. v. Shelly Funeral Home, Inc., 642 N.W.2d 648, 651
(Iowa 2002). That makes no sense to me.
I would honor stare decisis and conclude that defective
workmanship that allows rainwater to leak into a residence is not an
accident and, therefore, is not a covered occurrence under the CGL
policy. The policy defines an occurrence as “an accident, including
continuous or repeated exposure to substantially the same general
harmful conditions.” This is the same policy language that we
38
interpreted in Pursell and the Eighth Circuit applied in Pella Corp. The
majority never identifies the “sudden unexpected event” that triggers
liability coverage for the mold and water damage resulting from leaky,
defective window frames. The majority in effect converts the liability
insurance policy into a home warranty.
Both parties agreed that an accident required a sudden event. At
oral argument, Westlake’s counsel contended that rainfall or poor
workmanship was the sudden event:
CHIEF JUSTICE CADY: What is the sudden nature of
the event? A. I think the sudden nature of the water leaks
are that they happen primarily when a rain event occurs. A
rain event doesn’t happen all the time. It can be a sudden
event from the perspective of a general contractor, and event
causes damage. Setting that aside, I think the sudden event
could also be subcontractor work being done defectively.
Counsel also argued the severe winter in 2003–2004, with hard frosts, 14
caused insured damage to the apartment buildings. A majority of courts
in other jurisdictions hold poor-workmanship claims are not covered
under CGL policies. See Grp. Builders, Inc. v. Admiral Ins. Co., 231 P.3d
67, 73 (Haw. Ct. App. 2010) (surveying cases to conclude “[a] majority of
. . . jurisdictions ha[ve] held that claims of poor workmanship, standing
alone, are not occurrences that trigger coverage under CGL policies”
(quoting Gen. Sec. Indem. Co. of Ariz. v. Mountain States Mut. Cas. Co.,
205 P.3d 529, 535 (Colo. App. 2009), superseded by statute, Colo. Rev.
Stat. Ann. § 13–20–808(1)(b)(III) (effective May 21, 2010)). “In contrast, a
minority of jurisdictions ha[ve] held that the damage resulting from
faulty workmanship is an accident, and thus, a covered occurrence, so
long as the insured did not intend the resulting damage.” Id. (quoting
14Westlake cites no case holding frost damage to a building is a covered accident
under a CGL policy.
39
Gen. Sec. Indem. Co., 205 P.3d at 535). The case directly on point
applying Iowa law and the majority rule—Pella Corp.—holds there is no
CGL coverage for water damage from leaky window frames. I would
follow that authority.
My colleagues, without finding any ambiguity in the occurrence
definition, rely heavily on the insurance industry’s drafting history for
that standard policy language. We should not go beyond the four
corners of the insurance contract to interpret unambiguous policy
language. Westlake makes no claim that its assignee relied on any
industry understanding or drafting history when it purchased the
insurance policies at issue. More likely, the premiums for the policy
were priced based on risks under well-settled Iowa law holding poor
workmanship is not covered. In Iowa Comprehensive Petroleum
Underground Storage Tank Fund Board v. Farmland Mutual Insurance
Co., we concluded the drafting history of a CGL policy’s pollution
exclusion was irrelevant because the contract language was
unambiguous. 568 N.W.2d 815, 819 (Iowa 1997) (“We reject the
[insured’s] argument that the court should have considered the industry
‘understanding’ in 1970 in interpreting the sudden and accidental
language of the policies.”). The majority ignores that case and the well-
settled principle it applies.
The majority relies on language in an exception to exclusion “m” to
change the scope of coverage under the occurrence definition:
m. Damage to Impaired Property or Property Not
Physically Injured
....
This exclusion does not apply to the loss of use of
other property arising out of sudden and accidental
40
physical injury to “your product” or “your work” after it
has been put to its intended use.
(Emphasis added.) The majority erroneously concludes that the phrase
“sudden and accidental” in exclusion “m” means the term “accident” in
the occurrence definition does not mean a sudden unintended event.
Westlake never made that argument, and no other court has reached the
same conclusion. I would not make that leap. In Iowa Comprehensive,
we interpreted the phrase “sudden and accidental” in a CGL policy’s
pollution exclusion to hold sudden had a temporal meaning (“abrupt”)
when paired with accidental. 568 N.W.2d at 818–19. Accordingly, that
exclusion barred coverage for “pollution [that] occurred over a period of
many years.” Id. at 819. And we interpreted accidental in the same
pairing to mean “unexpected and unintended.” Id. at 818 (quoting Weber
v. IMT Ins. Co., 462 N.W.2d 283, 287 (Iowa 1990)). We did so to give each
word in the pair a meaning that avoided rendering the other word
redundant. Id. That is, if we had interpreted accidental to mean
sudden, then the term “sudden” in that pairing would be surplusage. Id.
at 818–19. The problem with the majority’s analysis is that the
occurrence definition uses the word “accident” alone, and as we held in
Pursell, it means a sudden, unexpected event. Pursell Constr., 596
N.W.2d at 70. There was nothing sudden about the damage from water
leaks over the winter of 2003–2004 in this case. See Iowa
Comprehensive, 568 N.W.2d at 819 (rejecting argument that each leakage
of pollutants was a discrete, sudden event).
I acknowledge there is a split in authority on these coverage
questions. Many courts cited by today’s majority have held defective
work by a subcontractor can be an occurrence. I agree that defective
workmanship can lead to an occurrence covered under CGL policies if
41
and when there is a sudden and unexpected event resulting in damage to
a third party, rather than to the poorly constructed building itself. If a
defectively installed balcony collapses and injures a passerby who sues
the builder, that strikes me as a covered occurrence under a liability
policy. But a property owner who sues the builder to replace a sagging
balcony before it collapses does not allege an occurrence covered under
the builder’s CGL policy.
What Westlake lacks is a sudden event causing damage to
something other than the buildings. A subcontractor’s faulty work that
causes gradual water infiltration is not an accident or covered
occurrence, and the CGL insurer is not required to pay for the resulting
water damage requiring repairs to the building itself. As the Seventh
Circuit aptly observed, if “insurance proceeds could be used for damages
from defective workmanship, a contractor could be initially paid by the
customer for its work and then by the insurance company to repair or
replace the work.” Lagestee-Mulder, Inc. v. Consol. Ins. Co., 682 F.3d
1054, 1057 (7th Cir. 2012) (quoting CMK Dev. Corp. v. W. Bend Mut. Ins.
Co., 917 N.E.2d 1155, 1168 (Ill. App. Ct. 2009)). Accordingly, the better-
reasoned opinions
require that for an incident to constitute an “occurrence” or
“accident” in the building construction context, “there must
be damage to something other than the structure, i.e., the
building, in order for coverage to exist.” “[T]he natural and
ordinary consequences of defective workmanship . . . d[o] not
constitute an occurrence.’ ”
Cincinnati Ins. Co. v. Northridge Builders, Inc., No. 12 C 9102, 2015 WL
5720256, at *5 (N.D. Ill. Sept. 30, 2015) (quoting Viking Constr. Mgmt.,
Inc. v. Liberty Mut. Ins. Co., 831 N.E.2d 1, 16 (Ill. App. Ct. 2005)). The
damages awarded by the jury here were for the costs of repairing the
apartment buildings, not other property.
42
I take issue with my colleagues’ conclusion that most other courts
would find CGL coverage on this record. Westlake seeks recovery of the
costs to remedy poor workmanship. The following state supreme courts
have held that the cost to repair defective construction is not covered
under a CGL policy. Owners Ins. Co. v. Jim Carr Homebuilder, LLC, 157
So. 3d 148, 156 (Ala. 2014) (per curiam) (“In sum, the cost of repairing or
replacing faulty workmanship is not the intended object of a CGL policy
issued to a builder or contractor.”); Essex Ins. Co. v. Holder, 261 S.W.3d
456, 460 (Ark. 2008) (per curiam) (“Faulty workmanship is not an
accident; instead, it is a foreseeable occurrence, and performance bonds
exist in the marketplace to insure the contractor against claims for the
cost of repair or replacement of faulty work.”), superseded by statute,
Ark. Code Ann. § 29–79–155(a)(2) (West 2011); Cincinnati Ins. Co. v.
Motorists Mut. Ins. Co., 306 S.W.3d 69, 76 (Ky. 2010) (holding there was
no occurrence because “[o]ne cannot logically say . . . that the allegedly
substandard construction of the . . . home by the [contractor] was a
fortuitous, truly accidental, event”); Concord Gen. Mut. Ins. Co. v. Green &
Co. Bldg. & Dev. Corp., 8 A.3d 24, 28 (N.H. 2010) (holding defective work
in constructing a chimney that required replacement was not an
occurrence under CGL policy); Westfield Ins. Co. v. Custom Agri Sys., Inc.,
979 N.E.2d 269, 273 (Ohio 2012) (holding defective work constructing
grain bin was not an occurrence because faulty workmanship is not
fortuitous); Oak Crest Constr. Co. v. Austin Mut. Ins. Co., 998 P.2d 1254,
1257–58 (Or. 2000) (holding deficient performance of a construction
contract cannot be an accident under a CGL policy); Kvaerner Metals Div.
of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888, 899
(Pa. 2006) (holding owner’s claims against builder arising from faulty
workmanship constructing industrial facility were not covered under
43
CGL policy “intended to insure against accidents”); L-J, Inc. v. Bituminous
Fire & Marine Ins. Co., 621 S.E.2d 33, 36 (S.C. 2005) (“[B]ecause faulty
workmanship is not something that is typically caused by an accident or
by exposure to the same general harmful conditions, we hold that the
damage in this case did not constitute an occurrence.”), superseded by
statute, S.C. Code Ann. § 38–61–70(B)(2) (2011); see also Transp. Ins. Co.
v. AARK Constr. Grp., Ltd., 526 F. Supp. 2d 350, 356–57 (E.D.N.Y. 2007)
(holding CGL insurer did not cover cost to repair parking garage or loss
of use of the structure because “[t]o hold otherwise would convert [the
CGL insurer] into a surety for [the builder’s] performance”); Gen. Sec.
Indem. Co., 205 P.3d at 535 (discussing the competing approaches and
adopting the majority approach that faulty construction is not an
occurrence under a CGL policy); Grp. Builders, Inc., 231 P.3d at 69, 73
(holding that mold damage to apartment building caused by defective
construction was not an occurrence); Prod. Sys., Inc. v. Amerisure Ins.
Co., 605 S.E.2d 663, 666 (N.C. Ct. App. 2004) (“[D]amages based solely
on shoddy workmanship . . . are not ‘property damage’ within the
meaning of a standard form CGL policy.” (quoting Wm. C. Vick Constr. Co.
v. Pa. Nat’l Mut. Cas. Ins. Co., 52 F. Supp. 2d 569, 583 (E.D.N.C. 1999))).
I would keep our state in this majority.
In Pursell, we held that defective workmanship is not an
occurrence under a CGL policy. 596 N.W.2d at 71. Pursell
Construction, Inc. was hired to build the basements, footings, block
works, sidewalks, and driveways for two houses in Council Bluffs. Id. at
68. The homes were built on a floodplain, and Pursell had violated a city
ordinance that required the basement to be elevated above the floodplain.
Id. As a result, the homeowner could not legally occupy, rent, or sell the
houses. Id. The homeowner sued Pursell, alleging breach of contract
44
and negligence for failing to build the lowest floor at the required
elevation. Id. Pursell brought a declaratory judgment action against its
CGL insurer to determine coverage. Id. The district court held that there
was an occurrence under the policy requiring the insurer to defend the
owner’s lawsuit against Pursell. Id.
We reversed and held that under the standard CGL policy, an
occurrence requires an accident. Id. at 70. We defined the term
“accident” in the CGL policy as
an undesigned, sudden, and unexpected event, usually of an
afflictive or unfortunate character, and often accompanied by
a manifestation of force. . . . [G]iving to the word the
meaning which a man of average understanding would, we
think [“accident”] clearly implies a misfortune with
concomitant damage to a victim, and not the negligence
which eventually results in that misfortune.
Id. (quoting Cent. Bearings Co., 179 N.W.2d at 448). We noted that the
“majority of courts that have considered this issue have concluded that a
CGL policy does not provide coverage for claims against an insured for
the repair of defective workmanship that damaged only the resulting
work product.” Id. “In short, defective workmanship, standing alone, is
not an occurrence under a CGL policy.” Id. at 71. “If the [CGL] policy is
construed as protecting a contractor against mere faulty or defective
workmanship, the insurer becomes a guarantor of the insured’s
performance of the contract, and the policy takes on the attributes of a
performance bond.” Id. (quoting U.S. Fid. & Guar. Corp. v. Advance
Roofing & Supply Co., 788 P.2d 1227, 1233 (Ariz. Ct. App. 1989)); see
also Auto-Owners Ins. Co. v. Home Pride Cos., 684 N.W.2d 571, 577 (Neb.
2004) (“[T]he cost to repair and replace the damages caused by faulty
workmanship is a business risk not covered under a CGL policy.”).
45
The majority gives short shrift to stare decisis. Although the
majority initially distinguishes Pursell by noting that the court “need not
consider whether property damage arising due to the insured’s own
defective workmanship may constitute an occurrence,” the majority goes
on to state we “call[ed] into question” Pursell in Shelly Funeral Home, a
case that never mentions Pursell. In Shelly Funeral Home, Ted Shelly, a
manager for the insured funeral home, took advantage of having keys to
gain access to rental units owned by his employer. 642 N.W.2d at 650.
He “emotionally injured . . . elderly tenants by repeatedly exposing
himself and subjecting them to displays of pornography” while working
for Shelly Funeral Home. Id. The funeral home’s liability insurer
brought a declaratory judgment to determine coverage. Id. at 652. The
insurer argued its policy did not cover damages intentionally inflicted by
the employee. Id. at 653. We reframed the coverage question as to
whether the policy covered claims alleging the employer’s negligent
supervision, noting “[t]he conduct ascribed to the actor—Shelly Funeral
Home—is not intentional sexual misconduct but negligent supervision of
its employee.” Id. at 654. We held the liability policy covered claims
alleging the employer’s negligent supervision of its employee. Id. Shelly
Funeral Home in no sense “call[ed] into question” Pursell; those cases
adjudicated different issues. 15 A key difference is that in Shelly Funeral
Home, we found the liability policy covered the injury claims asserted by
third-party tenants. Here, and in Pursell, the damages sought were for
15NeitherWestlake nor the amici ask us to overrule Pursell or argue Shelly
Funeral Home implicitly or explicitly overruled Pursell. The parties’ briefs in Shelly
Funeral Home did not even cite Pursell, much less ask us to overrule it. Normally, we
do not overrule our precedent sua sponte. Nor has the Iowa legislature overruled
Pursell.
46
the costs to remedy the construction defects, not harm to a third party or
other property.
Our court of appeals correctly considered Pursell good law in 2009,
five years after we decided Shelly Funeral Home. W.C. Stewart Constr.,
Inc. v. Cincinnati Ins. Co., No. 08–0824, 2009 WL 928871, at *2–4 (Iowa
Ct. App. Apr. 8, 2009). In that case, a subcontractor sought
indemnification for defective subgrading that caused a wall, built by a
different subcontractor, to crack. Id. at *1. The court applied Pursell
and concluded the policy did not cover the damage. Id. at *3–4.
The Eighth Circuit likewise considered Pursell good law in Pella
Corp., 650 F.3d at 1175. The plaintiff homeowners in the underlying
lawsuits alleged Pella sold defective windows that allowed water to leak
through the windows’ aluminum cladding. Id. at 1164. The Eighth
Circuit, relying on Pursell, held that
the property damage—whether to the windows themselves or
the structure of the building near the windows—was caused
by a defect that Pella was alleged to have known about.
Under Iowa law, such defective workmanship . . . cannot be
considered an occurrence, i.e., “an undesigned, sudden, and
unexpected event.”
Id. at 1176 (quoting Pursell, 596 N.W.2d at 70). I reach the same
conclusion here.
A different result is not warranted because the defective work here
was performed by subcontractors rather than the insured general
contractor responsible for their work. “Damage resulting from defective
work performed by subcontractors is also not an ‘accident’ and thus not
an ‘occurrence’ within the meaning of a general contractor’s CGL policy
. . . .” Northridge Builders, Inc., 2015 WL 5720256, at *5. An occurrence
is “dependent on the nature of the act, not on who performs it.” Hastings
Mut. Ins. Co. v. Mosher, Dolan, Cataldo & Kelly, Inc., No. 265621, 2006
47
WL 1360404, at *3, 6 (Mich. Ct. App. May 18, 2006) (holding mold
damage in the subfloor material and joists above the basement ceiling
caused by defective construction was not an occurrence); see also Oak
Crest Constr. Co., 998 P.2d at 1257–58 (holding subcontractor’s
“deficient” painting work was not an accident and, therefore, not an
occurrence under the CGL policy); Millers Capital Ins. Co. v. Gambone
Bros. Dev. Co., 941 A.2d 706, 715–16 (Pa. Super. Ct. 2007) (holding
subcontractor’s faulty construction was not an occurrence under a CGL
policy with a subcontractor exception to a “your work” exclusion).
The majority improperly relies on the exceptions to the “your work”
exclusion to create coverage. We recently held that exceptions to
exclusions cannot be used to broaden the grant of coverage in the
insuring clause (occurrence definition). Amish Connection, Inc. v.
State Farm Fire & Cas. Co., 861 N.W.2d 230, 239–40 (Iowa 2015) (“In
simplistic terms, the process is such: if the insuring clause does not
extend coverage, one need look no further. If coverage exists, exclusions
must then be considered.” (quoting Hartford Cas. Ins. Co. v. Evansville
Vanderburgh, Pub. Library, 860 N.E.2d 636, 646 (Ind. Ct. App. 2007))).
“[A]n exception to an exclusion does not create coverage or provide an
additional basis for coverage but, rather, ‘merely preserves coverage
already granted in the insuring provision.’ ” Stoneridge Dev., 888 N.E.2d
at 656 (citation omitted) (quoting W. Cas. & Sur. Co. v. Brochu, 475
N.E.2d 872, 878 (Ill. 1985)); see also Aquatectonics, Inc. v. Hartford Cas.
Ins. Co., No. 10-CV-2935 (DRH) (ARL), 2012 WL 1020313, at *7 (E.D.N.Y.
Mar. 16, 2012) (holding a subcontractor exception to a “your work”
exclusion did not broaden definition of an “occurrence” under the policy);
Millers Capital Ins. Co., 941 A.2d at 715–16 (declining to find exception in
“your work” exclusion with a subcontractor exception broadened
48
insurance coverage). There is no coverage without a sudden event,
regardless of whether the defective work was performed by a
subcontractor instead of the insured general contractor.
Some courts cited by the majority hold faulty construction can be
an occurrence under a CGL policy based on a judicial definition of
accident that omits the word sudden. For example, in Cherrington v. Erie
Insurance Property & Casualty Co., the West Virginia Supreme Court
began its analysis of whether faulty construction can be an occurrence
as we did in Pursell—by defining accident. 745 S.E.2d 508, 520 (W. Va.
2013). But it defined accident as “not deliberate, intentional, expected,
desired, or foreseen” by the insured. Id. (quoting Columbia Cas. Co. v.
Westfield Ins. Co., 617 S.E.2d 797, 801 (W. Va. 2005)). The court
concluded that under this definition of accident, faulty construction
must be an occurrence because “[t]o find otherwise would suggest that
[the contractor] deliberately sabotaged the very same construction project
it worked so diligently to obtain.” Id. Such cases are readily
distinguishable from Pursell in which we defined accident to include the
temporal requirement that it be sudden. That requirement does not
encompass Westlake’s claim for gradual damage from water infiltration
over a period of months.
The majority cites several state supreme court decisions without
mentioning the dissents in those cases. Chief Justice Shepard, in his
dissenting opinion in Sheehan Construction Co. v. Continental Casualty
Co., noted CGL policies “are neither designed nor priced as coverage for
whatever demands the insured may face in the nature of ordinary
consumer claims about breach of warranty.” 935 N.E.2d 160, 172 (Ind.
2010) (Shepard, C.J., dissenting). He questioned whether there “exist[s]
in the marketplace an insurance product that ‘covers me when I don’t do
49
a very good job.’ ” Id. Another dissenting justice emphasized the
distinction between an uncovered repair to the building itself and a
covered accident when defective construction results in harm to another.
Id. at 172–73 (Sullivan, J., dissenting). Chief Justice Vande Walle,
dissenting in K & L Homes, Inc. v. American Family Mutual Insurance Co.,
agreed with the Indiana dissent and disagreed with overruling
North Dakota precedent holding “property damage caused by faulty
workmanship is a covered occurrence [only] to the extent it causes
damage to property other than the work product.” 829 N.W.2d 724, 743
(N.D. 2013) (Vande Walle, C.J., dissenting). Again, Westlake was
awarded damages for repairs to the building itself. I fall on the side of
the numerous courts holding those costs are not covered under this CGL
policy.
In Motorists Mutual Insurance Co., the contractor built a home “so
poorly . . . that it was beyond repair and needed to be razed” within five
years of its completion. 306 S.W.3d at 71. The Kentucky Supreme Court
held that defective workmanship, standing alone, is not an occurrence
under a CGL policy. Id. at 73. The court defined an accident in the
insurance law context as “something that does not result from a plan,
design, or . . . intent on the part of the insured.” Id. at 76 (quoting Stone
v. Ky. Farm Bureau Mut. Ins. Co., 34 S.W.3d 809, 812 (Ky. Ct. App.
2000)). “[F]ocusing solely upon whether [the contractor] intended to
build a faulty house is insufficient. Rather, a court must also focus upon
whether the building of the . . . house was a ‘ “chance event” beyond the
control of the insured . . . .’ ” Id. (quoting 16 Eric Mill Holmes, Holmes’
Appleman on Insurance 2d § 116.1B, at 6 (2000)). Because the
contractor had control over the construction of the home, whether
50
directly or through its subcontractors, there was no accident or covered
occurrence. Id.
The Third Circuit reached the same conclusion in Specialty
Surfaces International, Inc. v. Continental Casualty Co., 609 F.3d 223,
238–39 (3d Cir. 2010). In Specialty Services, a general contractor
installed a turf football field for a school. Id. at 227. Within a year of its
completion, the field “began to exhibit defects in materials and
workmanship” caused by a defectively constructed water drainage
system. Id. at 228. The insured general contractor argued the liability
insurer owed a duty to defend because the subgrade, which was the
cause of the drainage problems, was installed by a subcontractor. Id. at
238. The Third Circuit applied Pennsylvania law and rejected the
contractor’s coverage claims. Id. The Third Circuit held that “[f]aulty
workmanship, even when cast as a negligence claim, does not constitute
such an [occurrence]; nor do natural and foreseeable events like rainfall.”
Id. at 231. These cases are persuasive and consistent with Pursell. I
would follow those decisions.
For these reasons, I respectfully dissent.
Cady, C.J., and Mansfield, J., join this dissent.