K & L Homes, Inc. v. American Family Mutual Insurance Co.

CROTHERS, Justice,

concurring specially.

[¶ 30] I concur in the majority’s result because the CGL policy issued by American Family to K & L may provide coverage, so that we must reverse summary judgment and remand for further proceedings. However, I do not join Justice Maring’s position that we overrule ACUITY v. Burd & Smith Constr., Inc., 2006 ND 187, 721 N.W.2d 33, because that case involved an insured contractor’s faulty workmanship and this case involves defective work of a subcontractor.

[¶ 31] The issue here is whether American Family’s CGL policy provides coverage for a claim based on faulty work of a construction subcontractor. I agree with the majority’s conclusion based on language of the insurance policy, industry documents describing adoption of the current version of the CGL policy and the extensive, persuasive writing of commentators and of our sister courts. The policy language and the other writings suggest either that our precedent on an occurrence is unreliable or that it cannot be properly extended to faulty work of a subcontractor. Whether our precedent is unreliable on the question of an occurrence for faulty work of an insured contractor is not before the Court and therefore is not ripe for consideration.

[¶ 32] The insurance contract here provides coverage for “those sums that [K & L] becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” Coverage exists for “property damage” if the “‘property damage’ is caused by an ‘occurrence’ that takes place in the ‘coverage territory.’ ” An “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions,” and “property damage” means “[p]hysical injury to tangible property, including all resulting loss of use of that property” and “[l]oss of use of tangible property that is not physically injured.” The policy does not define “accident.” In the context of the interpretation of an insurance policy, we have defined “accident” as “happening by chance, unexpectedly taking place, not according to the usual course of things.” Wall v. Penn. Life Ins. Co., 274 N.W.2d 208, 216 (N.D.1979) (quoting Continental Cas. Co. v. Jackson, 400 F.2d 285, 288 (8th Cir.1968)). See also Kasper v. Provident Life Ins. Co., *738285 N.W.2d 548, 553 (N.D.1979); ACUITY, 2006 ND 187, ¶ 14, 721 N.W.2d 33.

[¶ 33] Pertinent to the arguments in this case, American Family’s CGL policy contains several exclusions to coverage, including a “your work” exclusion with a “subcontractor exception”:

“The insurance does not apply to:
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“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 operations 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.”

The policy defines “your work” as “a. Work or operations performed by you or on your behalf; and b. Materials, parts or equipment furnished in connection with such work or operations.” “ Your work’ includes: a. Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of ‘your work’; and b. The providing of or failure to provide warnings or instructions.”

[¶ 34] Normal interpretation of an insurance policy calls for examination of the grant of coverage, then application of exclusions and exceptions. See Wisness v. Nodak Mut. Ins. Co., 2011 ND 197, ¶ 16, 806 N.W.2d 146. Using that method in this case leads back to the holding in ACUITY and back to a conclusion no occurrence exists to trigger coverage. I will get to that, but recognition of developments underpinning CGL insurance policies are a necessary precursor.

[¶ 35] American Family’s CGL policy is a standard form product. The majority opinion reviews post-1986 developments of standard form CGL policies. Majority Opinion at ¶¶ 14-20. Those developments need not be repeated here.

[¶ 36] The chronicle of CGL policy development since 1986 tells us several things. First, cases interpreting CGL policies written before 1986 involved dramatically different insuring agreements than post-1986 policies. Second, what might be an insured loss under a post-1986 CGL policy for faulty work of a subcontractor is different from coverage available for defective work of an insured contractor. Respected commentators have written extensively on the contractor verses subcontractor difference in CGL policy coverage. In one treatise the commentators explained:

“The ‘your work’ exclusion, usually exclusion l, is a ‘business risk’ exclusion that precludes coverage for property damage to the insured’s work that occurs after the insured’s work is complete. Specifically, the ‘your work’ exclusion precludes coverage for:
‘Property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘product-completed operations hazard.’
Your work’ 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.
“In contrast to the ongoing operations exclusion and the incorrectly performed work exclusion, the ‘your work’ exclusion does not contain a limitation to its scope through use of ‘[t]hat particular part’ language or a similar restriction. The exclusion is thus said to apply expansively to damage to any part of the insured’s work, whether defective or non-defective. The ‘your work’ exclusion may *739therefore preclude coverage for damage to the insured’s work, even though damage to non-defective components of the insured’s work may constitute property damage caused by an occurrence in many jurisdictions.
“Many insureds argue that the mere existence of the ‘your work’ exclusion confirms that the standard form insurance agreement, and the insurance industry as a whole, contemplated that defective and negligent construction could be an occurrence, and thus within the grant of coverage, contrary to the holdings of certain state courts, although aspects of liabilities resulting therefrom are excluded by this exclusion.
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“The ‘your work’ exclusion contains an exception for the work of a subcontractor. The subcontractor exception provides:
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.
“The ‘your work’ exclusion often might serve as a complete bar to coverage for damage to the insured’s work but for the subcontractor exception. The subcontractor exception reinstates coverage for damage caused by the work of a subcontractor. Thus, when a general contractor becomes liable for damage to work performed by a subcontractor— or for damage to the general contractor’s own work arising out of a subcontractor’s work — the subcontractor exception preserves coverage that the ‘your work’ exclusion would otherwise negate.
“The subcontractor exception has been found to preserve coverage for liabilities arising from property damage involving a subcontractor in at least the following situations:
• A subcontractor’s defective work causes damage to the insured’s work.
• The insured contractor’s defective work causes damage to the subcontractor’s work.
• The defective work of one or more subcontractors causes damage to a subcontractor’s work.
“The term ‘subcontractor’ is not defined in the CGL policy but courts have construed it broadly to include any vendor, even a supplier of materials, that performs services or provides materials according to a general contractor’s specifications.
“A developer that acts as its own general contractor can rely on the subcontractor exception. In Erie Insurance Exchange v. Colony Development Corp., [Nos. 02AP-1087, 02AP-1088, 2003 WL 23096010, 2003 Ohio App. LEXIS 6518 (Ohio Ct.App. Dec. 31, 2003),] a developer acting as a general contractor subcontracted out all construction for a condominium project. The condominium association sued the developer for faulty construction and the developer sought coverage under the developer’s CGL policy. The court held that the ‘your work’ exclusion did not apply because the developer’s employees ‘did not perform any of the construction’ and because the subcontractor’s work caused the damage, although the court ultimately found the developer was not entitled to coverage because of a different exclusion.
“Although the subcontractor exception to the ‘your work’ exclusion is standard in CGL policies, ISO has developed endorsements that remove the subcontractor exception to the ‘your work’ exclusion entirely. The ‘your work’ exclusion as amended by such endorsements has *740been interpreted to eliminate coverage for the insured’s work, whether performed by a contractor or a subcontractor. A policy that contains such an endorsement removing the subcontractor exception provides less insurance than one that leaves the standard form intact. Accordingly, both an insurer and an insured general contractor need to review the controlling policy carefully to ensure that the policy contains the intended coverages.
“The scope of the subcontractor exception must be read in connection with the definitions of ‘occurrence’ or ‘property damage,’ as interpreted by the courts of the relevant jurisdiction. For instance, the subcontractor exception will not restore coverage for a general contractor even if the general contractor’s liability arises from the defective work of a subcontractor if the law of the controlling jurisdiction does not consider defective work by anyone to be an occurrence in the first instance. Courts that so hold usually do so without consideration or knowledge of the drafting history of the standard CGL form and the reason that the insurance industry included the subcontractor exception to the ‘your work’ exclusion.”

Stephen N. Goldberg & James S. Carter Jr., Liability Insurance for Construction Defects in 3 New Appleman Law of Liability Insurance § 28.04[10][a]-[b] (Matthew Bender 2d ed.2012) (footnotes omitted).

[¶ 37] As noted by the authors quoted above, the subcontractor exception must be read in harmony with the definition of an occurrence. That analysis returns us to this Court’s holding in ACUITY, and discussion of how North Dakota has defined an occurrence.

[¶ 38] In ACUITY, we held as follows:

“We agree with the rationale of those courts holding that faulty workmanship causing damage to property other than the work product is an accidental occurrence for purposes of a CGL policy. That rationale is consistent with the coverage risks for a CGL policy and the plain and ordinary language of the policy. We conclude property damage caused by faulty workmanship is a covered occurrence to the extent the faulty workmanship causes bodily injury or property damage to property other than the insured’s work product.”

2006 ND 187, ¶ 16, 721 N.W.2d 33. This holding must be read with the discussion preceding it:

“In Auto-Owners [Ins. Co. v. Home Pride Cos., Inc.], 268 Neb. 528, 684 N.W.2d [571, 578 (2004) ], the Nebraska Supreme Court said that a CGL policy does not provide coverage for faulty workmanship that damages only the insured’s work product, but ‘if faulty workmanship causes bodily injury or property damage to something other than the insured’s work product, an unintended and unexpected event has occurred and coverage exists.’ See also [J.Z.G. Res., Inc. v.] King, 987 F.2d [98, 101-03 (2d Cir.1993)] (distinguishing cases that allege faulty workmanship alone and cases that allege damage to property other than the work product); Pursell [Constr., Inc. v. Hawkeye-Security Ins., Co.], 596 N.W.2d [67, 71 (Iowa 1999) ] (claimed damages limited to contractor’s work product and were not accidental occurrence); McAllister [v. Peerless Ins. Co.], 124 N.H. 676, 474 A.2d 1033, 1036-37 (1984)] (claimed damages were for cost of correcting defective landscaping work with no claim that defects had caused damage to property other than the work product); Heile [v. Herrmann], 136 Ohio App.3d 351, 736 N.E.2d [566, 568 (1999)] (claimed damages all related to contrae-*741tors own work, not to consequential damages stemming from that work); L-J, Inc. [v. Bituminous Fire & Marine Ins. Co.], 350 S.C. 549, 567 S.E.2d [489, 493 (Ct.App.2002)] (faulty workmanship that causes damage to property other than work product is covered accidental occurrence).”

ACUITY, at ¶ 15.

[¶ 39] Courts and commentators have criticized the approach taken by North Dakota, Nebraska and other states, arguing we have utilized an unduly restrictive reading of the term “occurrence.” See, e.g., 3 New Appleman Law of Liability Insurance, supra, § 28.03[l][b] (“The effect of this categorical rule is to eliminate any possibility of coverage for claims alleging construction defects that caused damage to the insured’s work only, even if the faulty work was performed by a subcontractor.”). Another court addressed the concern that, by looking at the scope of coverage by examining the “your work” exclusion, policy coverage was created by language other than the insuring agreement’s grant of coverage. Stanley Martin Cos., Inc. v. Ohio Casualty Group, 313 Fed.Appx. 609, 2009 WL 367589, at *3 n. 2 (4th Cir. Feb. 12, 2009). The court in Stanley Martin continued:

“Although this is a valid point, it misses the mark slightly. The import of the ‘your work’ exclusion and its subcontractor exception is not that the exclusion ‘creates’ coverage. Rather, the import is that the exception lends insight into the baseline definition of ‘occurrence’ from which parties and courts interpreting CGL policies should operate. If the definition of ‘occurrence’ cannot be understood to include an insured’s faulty workmanship, an exclusion that exempts from coverage any damage the insured’s faulty workmanship causes to its own work is nugatory. If, on the other hand, the definition of ‘occurrence’ does include an insured’s faulty workmanship, such an exclusion functions as a meaningful ‘limitation or restriction on the insuring clause.’ Nationwide Mut. Ins. Co. v. Wenger, 222 Va. 263, 278 S.E.2d 874, 876 (1981) (quoting Haugan v. Home Indem. Co., 86 S.D. 406, 197 N.W.2d 18, 22 (1972)).”

Stanley Martin, at *3 n. 2.

[¶40] To reconcile that criticism and yet preserve the subcontractor exception to the “your work” exclusion, an exception has been created for defective work performed by subcontractors:

“The tension between deeming defective construction not to constitute an ‘occurrence’ and the subcontractor exception to the ‘your work’ exclusion has convinced some courts to carve out an exception for defective construction performed by a subcontractor. As one of these courts explained, ‘it is undeniable that excluding faulty subcontractor work from the definition of “occurrence” would reduce the operation of the subcontractor exception so drastically that the language would virtually cease to be of any meaningful effect.’ Thus, while a court will not interpret the occurrence definition of a CGL policy to include a general contractor’s self-performed defective construction, it will reach the opposite interpretation if its subcontractor’s defective construction was the cause. In the view of these courts, the exception harmonizes the occurrence definition with the ‘subcontractor exception’ in the your work exclusion.”

3 New Appleman Lato of Liability Insurance, supra, § 28.03[1][b] (quoting Great American Ins. Co. v. Woodside Homes Corp., 448 F.Supp.2d 1275, 1283 (D.Utah 2006) and citing Stanley Martin, 313 Fed.Appx. 609, 2009 WL 367589 (4th Cir. Feb. 12, 2009)).

*742[¶ 41] Justice Maring would reverse ACUITY. That holding would make a broad proclamation that faulty workmanship can be an accidental occurrence under a CGL policy. I remain uncertain whether that broad conclusion is correct. I therefore would defer considering whether to overrule ACUITY to a case involving a contractor’s defective work where we are specifically asked to revisit the holding in ACUITY} For purposes of the present case, it is sufficient for us to hold defective work by a subcontractor causing damage to the contractor’s work can be an accidental occurrence. Upon that ruling, I join the majority remanding this case to the district court for determination whether coverage exists under American Family’s letter declining coverage under the CGL policy and under the facts of this case.

[¶ 42] DANIEL J. CROTHERS