Drake-Williams Steel v. Continental Cas. Co.

Nebraska Supreme Court Online Library
www.nebraska.gov/apps-courts-epub/
08/05/2016 09:11 AM CDT

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Nebraska Supreme Court A dvance Sheets
294 Nebraska R eports
DRAKE-WILLIAMS STEEL v. CONTINENTAL CAS. CO.
Cite as 294 Neb. 386

Drake-Williams Steel, Inc., appellant
and cross-appellee, v. Continental
Casualty Company, appellee
and cross-appellant.

Employers Mutual Casualty Company and EMCASCO
Insurance Company, appellees and cross-appellants,
v. Drake-Williams Steel, I nc., appellant
and cross-appellee.
___ N.W.2d ___

Filed August 5, 2016. Nos. S-15-445, S-15-446.

 1. Insurance: Contracts: Appeal and Error. The interpretation of an
insurance policy presents a question of law that an appellate court
decides independently of the trial court.
 2. Summary Judgment: Appeal and Error. An appellate court will affirm
a lower court’s grant of summary judgment if the pleadings and admit-
ted evidence show that there is no genuine issue as to any material facts
or as to the ultimate inferences that may be drawn from those facts and
that the moving party is entitled to judgment as a matter of law.
 3. Insurance: Contracts: Appeal and Error. The meaning of an insur-
ance policy is a question of law, in connection with which an appellate
court has an obligation to reach its own conclusions independently of
the determination made by the lower court.
 4. Insurance: Contracts. In construing insurance policy provisions, a
court must determine from the clear language of the policy whether the
insurer in fact insured against the risk involved.
 5. Insurance: Contracts: Proof. In a coverage dispute between an insured
and the insurer, the burden of proving prima facie coverage under a
policy is upon the insured.
  6. ____: ____: ____. If the insured meets the burden of establishing cover-
age of the claim, the burden shifts to the insurer to prove the applicabil-
ity of an exclusion under the policy as an affirmative defense.
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Nebraska Supreme Court A dvance Sheets
294 Nebraska R eports
DRAKE-WILLIAMS STEEL v. CONTINENTAL CAS. CO.
Cite as 294 Neb. 386

 7. Insurance: Contracts: Damages. Standard commercial general liability
policies provide coverage for accidents caused by faulty workmanship
only if there is bodily injury or property damage to something other than
the insured’s work product.
 8. Insurance: Contracts. The cost to repair and replace faulty workman-
ship is a business risk that is not covered under a commercial general
liability policy.
 9. Insurance. Business risks are normal, frequent, and predictable and
do not involve the kind of fortuitous events for which insurance is
obtained.
10. Insurance: Contracts: Liability. Where a product manufacturer is
liable as a matter of contract to make good on or replace products that
are defective or otherwise unsuitable because they are lacking in some
capacity, the economic loss incurred because of the product or work is
not what was bargained for as part of general liability coverage.
11. ____: ____: ____. There is a fundamental distinction between the non-
covered business risk of having to correct faulty products or work and
the covered risk of liability when faulty products or work cause damage
to other property that cannot be corrected through the correction of the
faulty products or work.

Appeals from the District Court for Douglas County: Joseph
S. Troia, Judge. Affirmed.

Steven D. Davidson, of Baird Holm, L.L.P., and Thomas A.
Vickers and Scott A. Ruksakiati, of Vanek, Vickers & Masini,
P.C., for appellant.

Karen K. Bailey, of Engles, Ketcham, Olson & Keith, P.C.,
and John F. Maher, of Colliau, Carluccio, Keener, Morrow,
Peterson & Parsons, for appellee Continental Casualty
Company.

Marvin O. Kieckhafer, of Smith Peterson Law Firm, L.L.P.,
and Brian O’Gallagher, of Cremer, Spina, Shaughnessy, Jansen
& Siegert, L.L.C., for appellees Employers Mutual Casualty
Company and EMCASCO Insurance Company.

Heavican, C.J., Wright, Connolly, Cassel, and K elch, JJ.
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Nebraska Supreme Court A dvance Sheets
294 Nebraska R eports
DRAKE-WILLIAMS STEEL v. CONTINENTAL CAS. CO.
Cite as 294 Neb. 386

Wright, J.
I. NATURE OF CASE
This case concerns the meaning of coverage provisions in a
general liability and umbrella policy insuring the fabricator of
steel rebar under a purchase agreement with a general contrac-
tor. The rebar was improperly fabricated and had a reduced
reinforcing capacity as a result. The defective rebar was incor-
porated into the construction of concrete pile caps that would
form support for the Pinnacle Bank Arena (Arena). Several of
the pile caps had to be modified in order to conform to the
required specifications of the contract. The insurers refused
to reimburse Drake-Williams Steel, Inc. (DWS), for costs
incurred to modify these compromised pile caps. The insurers
claimed the costs of the remedial measures did not fall under
the coverage of the policies. The district court entered sum-
mary judgment in favor of the insurers. DWS appeals, and the
insurers cross-appeal.
II. BACKGROUND
1. R ebar
M.A. Mortenson Company (Mortenson) is a general con-
tractor hired by the city of Lincoln to build the Arena.
Mortenson entered into a purchase agreement with DWS to
supply rebar for the Arena. The rebar was improperly bent
when it was fabricated by DWS and therefore did not conform
to the terms of the purchase agreement. The rebar was incor-
porated into three components of the Arena: the columns, the
grade beams, and the pile caps. The pile caps provide support
for the Arena’s columns, which in turn support the floor and
the roof. The pile caps were made of concrete with reinforc-
ing rebar and were installed below ground level on top of the
concrete piles that extended to the bedrock. The grade beams
were also made of concrete and rebar. The beams formed an
oval around the Arena and connect different pile caps together
and were also installed below ground level. DWS did not seek
to recover any expenses for any corrections that were made to
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DRAKE-WILLIAMS STEEL v. CONTINENTAL CAS. CO.
Cite as 294 Neb. 386

the columns that contained the improperly bent rebar. No cor-
rections were made to the grade beams.
The rebar was bent by DWS at too tight a radius and did
not meet the specifications. This incorrect radius was deter-
mined to be the result of machine and operator error during
the process of fabrication. Because of the incorrect radius, the
rebar had approximately 50 percent of its normal reinforcing
capacity. The nonconforming rebar that had not been cast in
the concrete pile caps was removed and replaced by DWS.
And DWS made no claim on this replacement. There were
52 pile caps that had been cast with improperly bent rebar.
Approximately half of these pile caps with the nonconform-
ing rebar would nevertheless perform adequately given the
particular pile caps’ shape or placement. But the other half
were deemed incapable of providing the required structural
support, because of the diminished reinforcing capacity of the
nonconforming rebar. If these pile caps were not modified,
they would not provide the support required. This could have
resulted in a structural failure in part of the Arena. Engineers
eventually determined that the most cost-effective solution
was to install a reinforcing band around each of the compro-
mised pile caps. This modification would provide the neces-
sary structural support.
To modify these pile caps, new concrete was adhered to the
sides of pile caps to make the existing pile caps wider. The
new concrete was joined to the existing pile caps by new rebar
that was drilled and epoxied into the existing pile caps. This
process, once completed, made the pile caps wider and suit-
able for their intended purpose. The pile caps were essentially
wrapped in a ring of concrete and rebar that would then per-
form as originally designed. The process required excavating
around the pile caps, assembling a new form around the pile
caps, placing rebar into that form, and pouring concrete into
the form.
DWS initially refused to pay for the costs of the correc-
tion. Mortenson paid the costs and sought reimbursement from
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DRAKE-WILLIAMS STEEL v. CONTINENTAL CAS. CO.
Cite as 294 Neb. 386

DWS in the amount of $1,355,860. Eventually DWS reim-
bursed Mortenson. DWS sought coverage from its insurers.
The insurers denied DWS’ claim and commenced this action
to determine their obligations under the policies of insurance.
2. Policies
For the period of November 1, 2010, to November 1,
2011, DWS was insured through a primary commercial gen-
eral liability (CGL) policy with Employers Mutual Casualty
Company (Employers). From November 1, 2011, to November
1, 2012, DWS was insured through a primary CGL policy with
EMCASCO Insurance Company (EMCASCO). DWS was also
insured during the relevant time period through an umbrella
policy with Continental Casualty Company (Continental).
DWS sought coverage under its CGL policies and the umbrella
policy. We refer to the insurance companies collectively as
“the Insurers.”
The relevant coverage provisions of the umbrella policy
with Continental are substantially similar to the provisions of
the policies with Employers and EMCASCO.
(a) Damages and Property Damage
The policies agreed to cover “those sums that [DWS]
becomes legally obligated to pay as damages because of . . .
‘property damage’ to which this insurance applies.”
“Property damage” is defined by the EMCASCO policy as:
a. 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; or
b. Loss of use of tangible property that is not physi-
cally injured. All such loss of use shall be deemed to
occur at the time of the “occurrence” that caused it.
(b) Occurrence
The insurance applied to “‘property damage’ only if” the
property damage “is caused by an ‘occurrence.’”
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Nebraska Supreme Court A dvance Sheets
294 Nebraska R eports
DRAKE-WILLIAMS STEEL v. CONTINENTAL CAS. CO.
Cite as 294 Neb. 386

“Occurrence” is defined by the policy as “an accident,
including continuous or repeated exposure to substantially the
same general harmful conditions.”
3. Denial of Claim and Suit
The Insurers refused reimbursement under the cover-
age provisions and exclusions in their respective policies.
Employers and EMCASCO eventually brought suit against
DWS for declaratory judgment. DWS counterclaimed with
actions for declaratory judgment and breach of contract.
DWS also filed a separate complaint against Continental for
declaratory judgment and breach of contract. The cases were
consolidated.
The district court entered summary judgment in favor of the
Insurers and overruled DWS’ motion for partial summary judg-
ment. The district court reasoned:
Having now fully reviewed the exhibits, pleadings,
arguments of counsel and the law, the Court finds that the
pile caps with the nonconforming rebar (DWS’s product)
were damaged as a result of the nonconforming rebar
in that the pile caps were deficient and unable to sus-
tain the load that they were designed for had the proper
rebar been used. The majority of courts have found that
faulty workmanship would not constitute an accident
and, therefore, be an occurrence per policy. The Court
finds that for the impaired property exclusion to apply, it
would have been necessary for the rebar to be repaired,
replaced, adjusted, or removed. By installing the collar/
band around the pile caps the impaired pile caps were
restored to their intended use and there was no occur-
rence. The Court, therefore, finds that the “impaired
property” exclusion applies.
DWS appeals. The Insurers cross-appeal.
III. ASSIGNMENTS OF ERROR
DWS assigns that the district court erred in (1) overrul-
ing DWS’ motions for summary judgment, (2) sustaining the
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Nebraska Supreme Court A dvance Sheets
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DRAKE-WILLIAMS STEEL v. CONTINENTAL CAS. CO.
Cite as 294 Neb. 386

Insurers’ motions for summary judgment, (3) determining that
there was no occurrence as defined in the policies, and (4)
finding that the “impaired property” exclusion applied to pre-
clude coverage.
The Insurers cross-appeal to the extent that the district court
found that damages at issue consisted of “property damage”
under the policies.
IV. STANDARD OF REVIEW
[1] The interpretation of an insurance policy presents a ques-
tion of law that we decide independently of the trial court.1
[2] An appellate court will affirm a lower court’s grant of
summary judgment if the pleadings and admitted evidence
show that there is no genuine issue as to any material facts
or as to the ultimate inferences that may be drawn from those
facts and that the moving party is entitled to judgment as a
matter of law.2
V. ANALYSIS
[3,4] The facts are not disputed; the correctness of the
district court’s order in favor of the Insurers depends on the
interpretation of the CGL policies. The meaning of an insur-
ance policy is a question of law, in connection with which an
appellate court has an obligation to reach its own conclusions
independently of the determination made by the lower court.3
In construing insurance policy provisions, a court must deter-
mine from the clear language of the policy whether the insurer
in fact insured against the risk involved.4
[5,6] In a coverage dispute between an insured and the
insurer, the burden of proving prima facie coverage under a

 1
Federated Serv. Ins. Co. v. Alliance Constr., 282 Neb. 638, 805 N.W.2d
468 (2011).
 2
Phillips v. Liberty Mut. Ins. Co., 293 Neb. 123, 876 N.W.2d 361 (2016).
 3
Auto-Owners Ins. Co. v. Home Pride Cos., 268 Neb. 528, 684 N.W.2d 571
(2004).
 4
Id.
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Nebraska Supreme Court A dvance Sheets
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DRAKE-WILLIAMS STEEL v. CONTINENTAL CAS. CO.
Cite as 294 Neb. 386

policy is upon the insured.5 If the insured meets the burden
of establishing coverage of the claim, the burden shifts to the
insurer to prove the applicability of an exclusion under the
policy as an affirmative defense.6 The district court concluded
that there was not an occurrence and also concluded, in the
alternative, that the impaired property exclusion applied. We
find as a matter of law that there was no “property damage.”
Therefore, for different reasons from those stated by the dis-
trict court, we conclude there was no coverage.7 Because there
was no coverage under the policies, we do not determine the
applicability of any exclusions.
In a similar case, the court in F & H Const. v. ITT Hartford
Ins. Co.8 held that there was no property damage under the
CGL policy. The insured was to supply pile caps fabricated
with a certain grade of steel. The insured mistakenly sup-
plied caps with an inferior grade of steel. Those caps were
welded onto steel piles before the defect was discovered. As a
result, the structural units were inadequate for their intended
purpose. In order to avoid the prohibitive cost of remov-
ing and replacing the piles, or cutting off the pile caps, the
insured modified the pile caps by adding stiffener ribs and
welding them onto the piles. Doing so resulted in the nec-
essary structural support for the building. The project was
thereby completed on time, and there was no claim for liqui-
dated damages.
The question presented was whether welding defective pile
caps to the piles was property damage within the meaning of
the policy, because the welded units were inadequate to meet

 5
See, Farm Bureau Ins. Co. v. Martinsen, 265 Neb 770, 659 N.W.2d 823
(2003); 44A Am. Jur. 2d Insurance § 1974 (2013).
 6
44A Am. Jur. 2d, supra note 5.
 7
See Hamilton Cty. EMS Assn. v. Hamilton Cty., 291 Neb. 495, 866 N.W.2d
523 (2015).
 8
F & H Const. v. ITT Hartford Ins. Co., 118 Cal. App. 4th 364, 12 Cal.
Rptr. 3d 896 (2004).
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Nebraska Supreme Court A dvance Sheets
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DRAKE-WILLIAMS STEEL v. CONTINENTAL CAS. CO.
Cite as 294 Neb. 386

contractual design specifications. The parties did not dispute
that an occurrence took place within the “coverage territory”
and during the “policy period.”
The court held that the costs of remediation were not “prop-
erty damage” under the policy.9 The court stated the prevailing
view was that incorporation of a defective component or prod-
uct into a larger structure does not constitute property damage
unless and until the defective component causes physical injury
to tangible property in at least some other part of the system.10
Property damage is not established by the mere failure of a
defective product to perform as intended.11
The court explained that while the defective caps may have
rendered the piles inadequate for their intended purpose, the
insured was able to provide modifications to create an ade-
quate structural unit such that the caps ultimately served their
intended purpose.12 It found that there was no physical injury
and that there was no “loss of use,” as that term is commonly
understood; i.e., the rental value of similar property that the
plaintiff can hire for use while deprived of the use of his or her
own property.13 The court noted the costs of modifying the pile
caps was unrelated to rental value.14
[7-9] The court’s conclusion in F & H Const. comports with
the general principle that standard CGL policies provide cover-
age for accidents caused by faulty workmanship only if there
is bodily injury or property damage to something other than
the insured’s work product.15 The cost to repair and replace
faulty workmanship is a business risk that is not covered

 9
Id.
10
Id. See, also, Wisconsin Pharmacal v. Nebraska Cultures, 367 Wis. 2d
221, 876 N.W.2d 72 (2016).
11
Id.
12
F & H Const. v. ITT Hartford Ins. Co., supra note 8.
13
See id.
14
Id.
15
See id.
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DRAKE-WILLIAMS STEEL v. CONTINENTAL CAS. CO.
Cite as 294 Neb. 386

under a CGL policy.16 Business risks are “normal, frequent,
and predictable” and do not involve the kind of fortuitous
events for which insurance is obtained.17 As one commentator
has explained:
Replacement and repair costs are to some degree within
the control of the insured. They can be minimized by
careful purchasing, inspection of material, quality con-
trol and hiring policies. If replacement and repair costs
were covered, the incentive to exercise care or to make
repairs at the least possible cost would be lessened since
the insurance company would be footing the bill for
all scrap.18
[10] Where a product manufacturer is liable as a matter of
contract to make good on or replace products that are defec-
tive or otherwise unsuitable because they are lacking in some
capacity, the economic loss incurred because of the product or
work is not what was bargained for as part of general liability
coverage. It is a business risk within the insured’s control and
generally excluded from coverage.19
[11] There is a fundamental distinction between the non-
covered business risk of having to correct faulty products or
work and the covered risk of liability when faulty products or
work cause damage to other property that cannot be corrected
through the correction of the faulty products or work.20 A CGL

16
See id. See, also, e.g., LaMarche v. Shelby Mut. Ins. Co., 390 So. 2d 325
(Fla. 1980).
17
Scott C. Turner, Insurance Coverage of Construction Disputes § 27:1
(2002). See, also, American Family Mut. v. American Girl, Inc., 268 Wis.
2d 16, 673 N.W.2d 65 (2004).
18
Stewart Macaulay, Justice Traynor and the Law of Contracts, 13 Stan. L.
Rev. 812, 825-26 (1961).
19
See Michael J. Brady, The Impaired Property Exclusion: Finding a Path
Through the Morass. Exclusion M of the ISO CGL Policy Is a Complex
and Intricate Provision, With Little and Disparate Case Law to Guide the
Way, 63 Def. Couns. J. 380 (1996).
20
See Zurich American Ins. Co. v. Nokia, Inc., 268 S.W.3d 487 (Tex. 2008).
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DRAKE-WILLIAMS STEEL v. CONTINENTAL CAS. CO.
Cite as 294 Neb. 386

policy is intended to cover an insured’s tort liability for physi-
cal injury or property damages, not economic losses due to
business risks.21 As another commentator has noted:
The risk intended to be insured is the possibility that
the goods, products or work of the insured, once relin-
quished or completed, will cause bodily injury or dam-
age to property other than to the product or completed
work itself, and for which the insured may be found
liable. The insured, as a source of goods or services, may
be liable as a matter of contract law to make good on
products or work which is defective or otherwise unsuit-
able because it is lacking in some capacity. This may
even extend to an obligation to completely replace or
rebuild the deficient product or work. This liability, how-
ever, is not what the coverages in question are designed
to protect against. The coverage is for tort liability for
physical damages to others and not for contractual liabil-
ity of the insured for economic loss because the product
or completed work is not that for which the damaged
person bargained.22
Again, “Property damage” is defined by the policies at
issue as:
a. 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; or
b. Loss of use of tangible property that is not physi-
cally injured. All such loss of use shall be deemed to
occur at the time of the “occurrence” that caused it.
Concrete and the rebar were part of the integrated system
of the pile caps. There was no “physical injury” to the rebar

21
Federated Serv. Ins. Co. v. Alliance Constr., supra note 1.
22
Roger C. Henderson, Insurance Protection for Products Liability and
Completed Operations—What Every Lawyer Should Know, 50 Neb. L.
Rev. 415, 441 (1971).
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DRAKE-WILLIAMS STEEL v. CONTINENTAL CAS. CO.
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or the pile caps in which the rebar was cemented. The improp-
erly bent rebar still performed a structural reinforcement but
was not as strong as it would have been if bent correctly.
Because the defective rebar was discovered before the arena
was further constructed, there was no damage to other parts of
the system.23 And because the pile caps could be modified to
meet the contractual requirements, rather than destroying and
rebuilding the pile caps, there was no physical damage to the
pile caps themselves. The pile caps could be modified without
any physical damage to any other part of the Arena.
Furthermore, there was no claim by DWS for damages due
to the temporary loss of use of the Arena during the period of
remediation. Therefore, there was no “loss of use,”24 as that
phrase is understood in the context of “property damage.”
The reinforcement of the pile caps was simply part of
DWS’ contractual obligation to make good on its work. In
the purchase agreement, DWS warranted and guaranteed to
furnish the rebar free from defects and in compliance with
the contract documents. The agreement provided that without
costs to the contractor or owner, DWS shall promptly remove
or replace defective material and any other work affected
by such correction. This liability is not what CGL policies
are designed to protect against.25 The costs of reinforcing
the inadequately reinforced pile caps was a business risk
and not the kind of fortuitous event for which a CGL policy
is obtained.26
We do not say that any and all damage arising out of com-
pleted work performed by an insured and its subcontractors

23
See Regional Steel v. Liberty Surplus Ins., 226 Cal. App. 4th 1377, 173
Cal. Rptr. 3d 91 (2014).
24
See James Duffy O’Connor, Construction Defects: “Property Damage”
and the Commercial General Liability Policy, 24-SPG Construction Law
11 (2004).
25
See Henderson, supra note 22.
26
See Turner, supra note 17.
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is never “property damage” covered under a CGL policy.
Depending upon the facts and the method used to correct the
defect, there may or may not be coverage under the policy.
For example, one method of correcting the existing problem
in this case would have been to demolish and replace the
pile caps. This would have resulted in damage to other prop-
erty—the pile caps. But this option was rejected because of
the significant cost of $5 to $6 million and its impact on the
project schedule.
Other options were actually considered and rejected on the
basis of viability, costs, or actual effectiveness of the proposed
fix to the problem. Eventually, the solution agreed to by the
parties was the installation of a concrete collar around the pile
caps. This solution was the most cost effective and most likely
to accomplish the goal of the modification. It was understood
that the rebar itself was not repaired or replaced, but that
instead, the pile caps were modified by way of a retrofit in
order to provide the required structural support. We hold that
this solution did not involve “property damage.”
DWS argues that Auto-Owners Ins. Co. v. Home Pride
Cos.27 supports coverage under the policies. We disagree. In
Auto-Owners Ins. Co., the owner of an apartment complex con-
tracted with the builder to install new shingles on a number of
the buildings. The work was subcontracted. The owner noticed
problems with the roof and brought suit against the subcontrac-
tor alleging faulty workmanship that had caused substantial
damage to the roof structure and the buildings. The insurer
filed a declaratory judgment, and the court entered summary
judgment, concluding the insured was not covered under the
general liability policy. On appeal, we reversed, concluding
that the insurer had a duty to defend and that, to the extent the
insured may be found liable for the resulting damage to the
roof structures and the buildings, the insurer was obligated to
provide coverage.

27
Auto-Owners Ins. Co. v. Home Pride Cos., supra note 3.
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In Auto-Owners Ins. Co., we reasoned that damages to the
roof structures and buildings represented an unintended and
unexpected consequence of the contractor’s faulty workman-
ship and went beyond damages to the contractor’s own work
product; therefore, the petition properly alleged an occurrence
and stated a cause for physical injury to tangible property and,
therefore, “property damage” under the policy. Once coverage
was established, we then examined the policy’s exclusions; and
because the damages could not be repaired or restored by sim-
ply reshingling, they were not excluded by the policy.
The facts in the case at bar are distinguishable. Here, the
insured’s defective work product did not damage other prop-
erty. And the inadequacies of the product could be remedied
through modification of the integrated pile caps, so as to con-
form to the required specifications.
Unlike in Auto-Owners Ins. Co., the amount that DWS seeks
to recover is the costs incurred to make the pile caps conform
to the work that DWS contracted to provide. To construe the
CGL policies’ definition of property damage to include the
modification to the pile caps, which were inadequate due
solely to DWS’ failure to fulfill its duties under its contract
with the general contractor, would convert the CGL policies
into performance bonds insuring DWS’ business risks. That is
not the intent of the CGL policies in question.
VI. CONCLUSION
We affirm the order of summary judgment in favor of the
Insurers, but on different grounds from those stated by the
court below. Insofar as the court found there was “property
damage,” we find merit to the Insurers’ cross-appeals. Because
the costs for which DWS sought reimbursement were not
derived from any physical damage to the pile caps or their
temporary loss of use, there was no property damage, and thus
no coverage, under the CGL policies.
A ffirmed.
Miller-Lerman and Stacy, JJ., not participating.