City of South Pittsburg, Tennessee v. James C. Hailey and Company

IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
January 23, 2013 Session

CITY OF SOUTH PITTSBURG, TENNESSEE v. JAMES C. HAILEY
AND COMPANY, ET AL.

Appeal from the Circuit Court for Marion County
No. 18589 J. Curtis Smith, Judge

No. M2012-01185-COA-R3-CV - Filed June 27, 2013

In April 2008 the City of South Pittsburg hired a contractor to enlarge its sewage treatment
plant. During construction of the project several sinkholes developed, the last of which
occurred in February of 2009 and caused the plant’s lagoon to collapse. The City made claim
on the contractor’s builders’ risk insurance policy; the insurer denied the claim, contending
that construction of the project was complete at the time of the collapse. The City, which had
filed suit against the contractor, amended the complaint, adding the insurer as a party and
asserting a claim for breach of contract against the company; the City also requested that the
court issue a declaratory judgment that the losses sustained by the city were covered by the
policy. The court subsequently granted the insurance company’s motion for summary
judgment and denied the city’s motion for partial summary judgment. The city and the
engineering firm engaged by the City to plan the project appeal the grant of summary
judgment to the insurer and the denial of the city’s motion. We have determined that the
court erred in granting the insurer’s motion and denying the City’s; consequently, we reverse
both judgments.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court Reversed and
Remanded

R ICHARD H. D INKINS, J., delivered the opinion of the court, in which P ATRICIA J. C OTTRELL,
P. J., M. S., and F RANK G. C LEMENT, J R., J., joined.

Tracy C. Wooden, Chattanooga, Tennessee, for the appellant, City of South Pittsburg,
Tennessee.

Paul R. Leitner and Amanda E. Kelley, Chattanooga, Tennessee for the appellee, James C.
Hailey and Company.
Parks T. Chastain and Gordon C. Aulgur, Nashville, Tennessee, for the appellee, Bituminous
Casualty Corporation.
OPINION

This dispute arises out of a project initiated by the City of South Pittsburg in January
2008 to expand its wastewater treatment plant; the project included demolishing the old plant
and building a new lagoon. James C. Hailey & Co. (“Hailey”) was the engineering firm
engaged to design and supervise the project and W&O Construction Company, Inc.
(“W&O”) was the contractor. W&O’s bid for the project was accepted on April 8, 2008, the
contract signed on May 6, and the Notice to Proceed issued on May 16. W&O’s contract
with the City required it to maintain builder’s risk insurance; to comply with this
requirement, W&O added the project to its existing commercial liability policy issued by
Bituminous Casualty Corporation (“Bituminous”); the City and Hailey were listed as
additional insureds under the policy.

The City began operating the new lagoon in late 2008. In February of 2009 a hole
developed in the liner of the older lagoon, causing the wastewater to drain; about three days
later a hole developed in the liner of the new lagoon, again causing the lagoon to drain
completely. The breaches in the liners were caused by sinkholes developing beneath the
lagoon. W&O subsequently made a claim under the builder’s risk policy; Bituminous denied
coverage, contending that the project was not covered by its policy in February 2009.

The City filed suit against Hailey and W&O on August 18, 2009, to recover damages
for alleged faulty construction of the project. On January 5, 2011, the City filed an Amended
Complaint, adding Bituminous as a defendant and asserting a claim for breach of contract.1
The parties thereafter filed various dispositive motions; those germane to the issues presented
in this appeal are Bituminous’ motion for summary judgment filed October 13, and the City’s
motion for partial summary judgment filed against Bituminous, W&O, and Travelers on
November 10.2 On February 21, 2012, the court granted summary judgment to Bituminous
and denied the City’s motion for partial summary judgment. The court found that the “course
of construction” ended in late 2008 when the new lagoon went into operation and that, under
the terms of the policy, coverage ended at that time.

1
Plaintiff amended the complaint on August 15, 2011 to add Travelers Casualty and Surety
Company as a defendant; the amended complaint did not change the claim asserted against Bituminous.
2
Hailey joined in this motion on November 18.

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 The City and Hailey appeal. Both contend that the court erred in granting summary
judgment to Bituminous; in addition, the City appeals the denial of its motion for partial
summary judgment. For the reasons set forth herein, we reverse both judgments.

I. S TANDARD OF R EVIEW

A party seeking summary judgment must establish that there is no genuine issue as
to any material fact and that judgment may be rendered as a matter of law. See Tenn. R. Civ.
P. 56.04; Martin v. Norfolk S. Ry. Co., 271 S.W.3d 76, 83 (Tenn. 2008). To show there is
no genuine issue of material fact, a defendant moving party must either: “(1) affirmatively
negat[e] an essential element of the nonmoving party’s claim; or (2) show[] that the
nonmoving party cannot prove an essential element of the claim at trial.” Martin, 271
S.W.3d at 83 (citing Hannan v. Alltel Publ’g Co., 270 S.W.3d 1, 5 (Tenn. 2008)). To meet
this burden, the party must “either produce evidence or refer to evidence previously
submitted by the nonmoving party that negates an essential element of the nonmoving party’s
claim or shows that the nonmoving party cannot prove an essential element of the claim at
trial.” Id. at 84. If the moving party makes a “properly supported motion, then the
nonmoving party is required to produce evidence of specific facts establishing that genuine
issues of material fact exist.” Id. (citing McCarley v. W. Quality Food Serv., 960 S.W.2d
585, 588 (Tenn. 1998); Byrd v. Hall, 847 S.W.2d 208, 215 (Tenn. 1993).3

A trial court’s decision on a motion for summary judgment enjoys no presumption of
correctness on appeal. In re Estate of Davis, 308 S.W.3d 832, 837 (Tenn. 2010); Draper v.
Westerfield, 181 S.W.3d 283, 288 (Tenn. 2005). Because summary judgment is a matter of
law, we review the trial court’s decision de novo and make a fresh determination of whether
the requirements of Tenn. R. Civ. P. 56 have been met. Eskin v. Bartee, 262 S.W.3d 727,
732 (Tenn. 2008); Blair v. W. Town Mall, 130 S.W.3d 761, 763 (Tenn. 2004); Eadie v.
Complete Co., 142 S.W.3d 288, 291 (Tenn. 2004). In our review, we must consider the
evidence presented at the summary judgment stage in the light most favorable to the non-
moving party and draw all reasonable inferences in the non-moving party’s favor. Cumulus

3
This may be accomplished by:

(1) pointing to evidence establishing material factual disputes that were over-looked or
ignored by the moving party; (2) rehabilitating the evidence attacked by the moving party;
(3) producing additional evidence establishing the existence of a genuine issue for trial; or
(4) submitting an affidavit explaining the necessity for further discovery pursuant to Tenn.
R. Civ. P., Rule 56.0[7].

Martin, 271 S.W.3d at 84 (citing McCarley, 960 S.W.2d at 588; accord Byrd, 847 S.W.2d at 215 n.6).

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Broad., Inc. v. Shim, 226 S.W.3d 366, 373 (Tenn. 2007); Byrd v. Hall, 847 S.W.2d 208,
210–11 (Tenn. 1993).

II. D ISCUSSION

The primary issue before this court, as in the trial court, is whether the coverage
provided by the Bituminous policy was in effect at the time of the loss. The order granting
summary judgment to Bituminous and denying the City’s motion included the following
section entitled “Undisputed Facts”:

The relevant facts pertinent to the motions before the court are
undisputed. The City entered into a contract with Hailey and W&O
Construction Company, Inc. (W&O) and others to design and construct an
expansion to the City’s sewage treatment plant. As a part of the construction
project a new lagoon was to be built. Pursuant to the contract W&O obtained
a policy with Bituminous naming the City and J. C. Hailey as additional
insureds.

The new lagoon at the sewage treatment plant went into operation in
late 2008. About the second week in February 2009 a hole developed in the
liner of the older lagoon causing the wastewater to drain completely.
Approximately three days later, a hole developed in the liner of the new lagoon
surrounded by a five foot by five foot depression in the ground, causing the
wastewater to drain completely.

The court concluded that there was no coverage, stating its reasoning as follows:

Under the policy, Bituminous is to provide coverage for direct physical
loss caused by a covered peril to buildings and structures during the “course
of construction, erection, or fabrication.” The critical issue before the Court
is whether the loss resulting from the damage to the new lagoon occurred
during the “course of construction.” City alleges in its amended complaint the
new lagoon went into operation in late 2008 and the loss did not occur until the
second week of February 2009. While the facts here are unlike those in
Dennis [v. Allstate Ins. Co., No. 01-A-01-9301-CV00009, 1993 WL 177161
(Tenn. Ct. App. May 26, 1993)], the relevant issue in Dennis is identical to the
one before the Court. Since the new lagoon went into operation in late 2008,
under Tennessee law the “course of construction” on the new lagoon ceased
at that time in late 2008. The date of loss occurred after the “course of

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 construction” ceased therefore there was no coverage under the policy on the
new lagoon.

The parties agree that the coverage at issue arises from Bituminous policy CLP
3249023, which was attached as an exhibit to the amended complaint. The initial policy
period was January 1, 2008 to January 1, 2009, with the inception date of coverage for the
lagoon project of April 14, 2008. A declarations page included in the exhibit shows that
policy CLP 3249023 was renewed by policy CLP 3259865 for the period January 1, 2009 to
January 1, 2010.4 The parties also agree that the policy language pertinent to the issues in
this appeal is the following:

1. Coverage Not Provided During Occupancy And Use - - “We” do not
provide coverage under this policy if, without “our” prior written
consent, a covered building or structure as described under Property
Covered is:
a. occupied in whole or in part; or
b. put to its intended use.

2. When Coverage Ceases - - Coverage will end when one of the
following first occurs:
a. this policy expires or is canceled;
b. a covered building or structure is accepted by the
purchaser;
c. “your” insurable interest in the covered property ceases;
d. “you” abandon construction with no intent to complete it;
or
e. a covered building or structure has been completed for more
than 90 days.

A. Bituminous’ Motion for Summary Judgment

The basis of Bituminous’ motion was that “there is no coverage under the Builders’
Risk Coverage because the ‘course of construction’ of the new lagoon had been completed
and the new lagoon was put to its intended use months before the date of loss during the
second week of February 2009”; in accordance with the requirements of Tenn. R. Civ. P.
56.03, Bituminous filed a Statement of Undisputed Material Facts in support of its motion.

4
In its Brief on appeal, Bituminous asserts that the applicable policy period was January 1, 2009
to January 1, 2010.

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At the trial court and on appeal, Bituminous extrapolates from the allegation in the Amended
Complaint that “[t]he new lagoon went into operation in late 2008” to argue:

In this case, City of South Pittsburg’s own Amended Complaint clearly
establishes the “course of construction” ceased prior to City of South
Pittsburg’s own date of loss. As alleged in its Amended Complaint the new
lagoon went into operation in late 2008 and the loss did not occurred [sic] until
the second week of February of 2009. . . . Therefore, the Amended Complaint
and Cross-Claim both rest on the undisputed fact that the date of loss occurred
after the “course of construction” ceased, thus there is no coverage under the
Builders’ Risk Coverage.

The City denied or gave qualified admissions to several statements in its response to
Bituminous’ Tenn. R. Civ. P. 56.03 statement.5 The following responses to the statements
of material fact appear to be most pertinent with respect to the court’s ruling:

5. The Builders Risk policy issued to W&O provides in section IM-724f
that the policy covers “direct physical loss caused by a covered peril to
buildings and structures while in the course of construction, erection, or
fabrication.”
RESPONSE: Denied that it only provides coverage while in the course
of construction, erection or fabrication. . . .

***

9. The new lagoon at the sewer treatment plant went into operation in late
2008.
RESPONSE: Admitted that the new lagoon was tested prior to
completion, during the reasonable testing period contemplated by the contract
between the City and W&O. For instance, the contract between the City and
W&O requires that the builder’s risk policy “allow for partial utilization of the
Work by Owner,” “include testing and startup,” and remain in effect until the
last payment is made. The builders risk policy purchased by W&O states that
coverage will end when the project has been “completed for more than 90
days.”

5
In its response, the City also filed the affidavit of William Johnson, an engineer; a letter denying
coverage from Michael Swallows, Bituminous’ agent; and a memorandum in which it referenced as part of
its response W&O’s contract with the City which, along with the Standard General Conditions, had been
attached as an exhibit to W&O’s answer.

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 ***

15. The builder’s risk policy provides coverage for direct physical loss
caused by a covered peril to buildings and constructions while in the course of
construction, erection or fabrication.
RESPONSE: Denied that it only provides coverage while in the course
of construction, erection or fabrication. . . .

16. Finally, the builder’s risk policy provides the additional coverage
limitation that the policy does not provide coverage without prior written
consent once a covered building or structure is put to its intended use.
RESPONSE: Denied that the lagoon was fully put to its intended use,
as the contracts between the parties clearly contemplate a reasonable testing
period to ensure that the project is truly complete and working properly. The
contract between the City and W&O requires that the builder’s risk policy
remain in effect until the last payment is made. The builders risk policy
purchased by W&O states that coverage will end when the project has been
“completed for more than 90 days.”

In addition, Mr. Johnson’s affidavit included the following statements relative to the court’s
finding that the project was completed in late 2008 and that coverage under the policy ended
at that time:

17. Based upon my observations, knowledge, and experience, W&O
Construction has not completed the project according to the requirements of
its Agreement with the City of South Pittsburg, Tennessee.

18. Based upon my observations, knowledge, and experience, W&O
Construction’s Agreement with the City of South Pittsburg, Tennessee was to
place the expanded sewer treatment facility into an operational condition.
Such facility is not in an operational condition.

***

20. Based upon my observations, knowledge, and experience, the formation
of the sinkhole which has rendered the expanded facility unusable was an
entirely foreseeable event, which W&O Construction agreed to remedy under
its Agreement with the City of South Pittsburg, Tennessee.

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 Bituminous relied upon the allegation of the complaint that the plant “went into
operation in late 2008” to satisfy its duty to negate an essential element of the City’s claim;
it argues that the fact that the lagoon was “put to its intended use” in 2008 means that,
pursuant to Section 1 of the Additional Coverage Limitations, no coverage was available.
The City contends, to the contrary, that its contract with W&O required a testing period, the
issuance of appropriate operational permits, the City’s acceptance of the project, and final
payment before the project was “put to its intended use.”6 The materials put forth by the City
satisfied its responsibility to produce evidence establishing genuine issues of material fact
for trial, i.e., the date at which construction was completed and the plant put to its intended
use in accordance with the contract. Bituminous failed to negate an essential element of the
City and Hailey’s action, i.e., that coverage was in effect when the damage occurred;
consequently summary judgment to Bituminous was inappropriate.7

6
We note that W&O’s response to the City’s motion for partial summary judgment states, in part:

The City has moved for summary judgment against Bituminous on the grounds that the
insurance policy that Bituminous issued to W&O regarding the South Pittsburg Sewer
Treatment Plant Expansion Project at issue covers the alleged damages of the City. On or
about April 15, 2008, W&O obtained the policy from Bituminous attached as Exhibit D to
the City’s Amended Complaint with the intent that the policy would adhere to the
requirements of W&O to obtain insurance as outlined in the contract between W&O and the
City.

This statement is likewise pertinent to the issues raised by Bituminous’ motion.
7
We do not agree with the trial court’s application of Dennis, 1993 WL 177161 to hold that the
“course of construction” in this case ended in 2008. In Dennis, a homeowner sought to recover under a
homeowners policy for damages caused when the basement wall collapsed following a period of heavy rain.
While the property owner conceded that an exclusion for damage resulting from water would prevent
coverage, she sought to recover under a separate provision that provided coverage for collapse or the building
structure if the collapse occurred in the course of construction; the trial court found coverage. On appeal this
court reversed, holding that, in light of evidence that the wall which collapsed had been built during the early
stages of the construction project and that the homeowner had been living in the home for more than seven
months at the time of the wall collapse with the unfinished items being completed as money became
available, the structure was “essentially complete” when the homeowner moved in and, consequently, the
collapse did not occur in the course of construction. In this case there is no proof that the construction
required by W&O’s contract with the City was completed in 2008; to the contrary, the materials filed by the
City demonstrate that it was not.

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 B. The City’s Motion for Partial Summary Judgment

In support of its motion, the City filed a Tenn. R. Civ. P. 56.03 statement, to which
Bituminous responded, the salient portions of which are as follows:8

1. The City and the W&O Construction Company, Inc., (“W&O”),
entered into “Contract 106” for the expansion of the Sewer Treatment Plant
(the “Contract”) on May 6, 2008.

2. Exhibit C to the Amended Complaint is a true and accurate copy
of the Standard General Conditions of the Contract between W&O
Construction Company, Inc. and the City of South Pittsburg, Tennessee.

***

4. Article 5.06 of the General Conditions requires W&O to
“purchase and maintain property insurance upon the Work at the Site in the
amount of the full replacement cost thereof.”

5. Article 5.06(A)(2) of the General Conditions requires that the
insurance “be written on a Builder’s Risk “all-risk” or open peril or special
causes of loss policy from that shall at least include insurance for physical loss
or damage to the Work... and shall insure against at least the following perils
or causes of loss: ...extended coverage...collapse...debris removal...”.

***

7. Article 5.06(A)(6) of the General Conditions requires that the
insurance “include testing and startup.”

8. Article 5.06(A)(7) of the General Conditions requires that the
insurance shall “be maintained in effect until final payment is made unless
otherwise agreed to in writing by Owner, Contractor and Engineer”.

9. The final payment to W&O had not been made as of the time of
the failure of the waste water treatment project.

8
Unless otherwise specified, Bituminous’ response to each statement was “Admitted only for
purposes of the Motion for Summary Judgment.”

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 10. Defendant Bituminous Casualty Corporation (“Bituminous,”
“Insurer”) provided insurance for the sewer treatment plant expansion project
through a policy of insurance purchased by Defendant W&O Construction
Company, Inc.

RESPONSE: Admitted Bituminous only provided a Builder’s Risk
policy and this policy was subject of its terms and conditions.

***

14. Policy No. 3 259 865 was in effect from January 1, 2009 to
January 1, 2010.

***

17. The policy specifically covers sinkholes.

RESPONSE: Admitted the policy terms and conditions speak for
themselves.

***

20. The structure had not been accepted by the City.

21. W&O’s insurable interest in the project had not ceased, as its
contract required it to maintain insurance on the site to include “testing and
startup” and to last “until final payment is made.”

RESPONSE: Admitted the terms and conditions of the policy
speak for themselves.

22. W&O had not “abandoned construction with no intent to
complete it” at the time of the occurrence of the sinkholes.

23. The new waste water treatment lagoon had not been completed,
if at all, for more than 90 days by the second week of February, 2009.

RESPONSE: Admitted only for purposes of the Motion for
Summary Judgment. However, the new waste water treatment lagoon
was put to its intended use in November 2008.

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 The materials filed relative to the City’s motion established that the Bituminous policy
was purchased by W&O to satisfy its obligations under the contract with the City and was
in effect in the fall of 2008 as well as February 2009; that the policy covered sinkholes; and
that, in February 2009 the project was not “completed.” This was sufficient to show the
absence of a material fact regarding Bituminous’ contention that there was no coverage under
the policy for the incident in February 2009. 4 Nancy Fraas MacLean, Claudia Bonnyman,
& Robert Brandt, Tennessee Practice Series—Rules of Civil Procedure AC 56:5 (3d ed.
2000). Bituminous did not file affidavits or other materials to create an issue of fact in
response to the City’s motion; rather it reiterated its argument that, because the property had
been “put to its intended use” in the fall of 2008, there was no coverage.

Inasmuch as there was no issue of fact, we proceed to a determination of whether the
City was entitled to judgment as a matter of law.

Bituminous does not contest that the policy covers damage due to sinkholes; rather,
it reiterates its contention that the fact that the lagoon was put into operation in 2008 means
that, pursuant to Section 1 of the Additional Coverage Limitations, no coverage was
available.9 The record, however, shows that, while construction on the new lagoon had
reached a point in the fall of 2008 at which time the plant could be put into operation for
purposes of testing and startup, it was not in such an operational condition that construction
was complete. The project had not been “put to its intended use” at the time of the February
2009 incident.10

9
Bituminous also argues that the City’s arguments regarding the 2008 sinkholes were not presented
to the trial court and that, in any event, the Amended Complaint does not allege that the 2008 sinkholes
caused any damage; this is contrary to the record. The amended complaint includes the following
allegations:

42. No less than six sinkholes developed within the new lagoon site during the
Contractor’s construction work on the project requiring some manner of repair.
43. Upon information and belief, Contractor did not investigate or insist on
additional technical studies into the cause of the sinkholes developing at the site, not into
whether sinkholes would continue to develop at the site after the lagoon was places in
operation and what additional steps would be necessary to remedy the defects.

In addition, in its Motion To Revise the court’s order granting summary judgment to Bituminous, the City
argued (with citations to the record) that “the failure of the project began in the summer of 2008,” “the
sinkhole development clearly began during construction,” and that “a series of sinkholes developed during
the work at the site.”
10
In neither the pleadings it filed in support of its motion for summary judgment nor those filed in
opposition to the City’s motion does Bituminous explain the apparent inconsistency between its position that
(continued...)

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 On the record before us, we agree with the City that the policy was in effect in
February 2009 and covered the incident at issue; consequently, the City was entitled to
summary judgment.

III. C ONCLUSION

For the foregoing reasons, we reverse the grant of Bituminous’ motion for summary
judgment and the denial of the City’s motion for partial summary judgment and remand for
further proceedings consistent with this opinion.

___________________________________
RICHARD H. DINKINS, JUDGE

10
(...continued)
coverage ended in the fall of 2008 with the fact that it reissued the builder’s risk policy effective January 1,
2009.

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