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Faulty rebar spurs coverage dispute

Faulty rebar spurs coverage dispute

April 25
07:35 2017

Faulty rebar spurs coverage dispute

M.A. Mortenson Company was a general contractor hired by the city of Lincoln, Nebraska, to build the Pinnacle Bank Arena. Mortenson entered into a purchase agreement with Drake-Williams Steel, Inc. (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 bent at too tight a radius and did not meet the specifications. This incorrect radius was determined to be the result of machine and operator error during the process of fabrication.

The rebar was incorporated into three components of the arena: the columns, the grade beams, and the pile caps. The pile caps provided support for the arena’s columns, which in turn supported the floor and the roof. The pile caps were made of concrete with reinforcing rebar and were installed below ground level on top of the concrete piles that extended to the bedrock. The grade beams also were made of concrete and rebar. The beams formed an oval around the arena and connected different pile caps together and were also installed below ground level.

Because of the incorrect radius, the rebar had approximately 50% of its normal reinforcing capacity. The nonconforming rebar that had not been cast in the concrete pile caps was removed and replaced by DWS. DWS made no claim on this replacement.

DWS did not seek to recover expenses for any corrections that were made to the columns that contained the improperly bent rebar. No corrections were made to the grade beams.

DWS initially refused to pay for the costs of the correction. Mortenson paid the costs and sought reimbursement from DWS in the amount of $1,355,860. Eventually DWS reimbursed Mortenson. DWS sought coverage from its insurers: Continental Casualty Company, Employers Mutual Casualty Company, and EMCASCO Insurance Company. The insurers denied DWS’s claim and filed an action to ascertain their obligations under the policies.

Between November 1, 2010, and November 1, 2011, DWS was insured through a primary commercial general liability policy with Employers Mutual Casualty Company. From November 1, 2011, to November 1, 2012, DWS was insured through a primary CGL policy with EMCASCO Insurance Company. DWS also was insured during the relevant time period through an umbrella policy with Continental Casualty Company. The relevant coverage provisions of the umbrella policy were substantially similar to the provisions of the CGL policies. DWS sought coverage under all three policies.

The insurers refused reimbursement under the 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 court entered summary judgment in favor of the insurers and overruled DWS’s motion for partial summary judgment. DWS appealed, and the insurers cross-appealed.

On appeal, DWS asserted that the district court erred in (1) overruling DWS’s motions for summary judgment, (2) sustaining the 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 preclude coverage. The insurers cross-appealed to the extent that the district court found that the damages at issue consisted of “property damage” under the policies.

The court pointed to the general principle that standard CGL 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. The cost to repair and replace faulty workmanship is a business risk that is not covered under a CGL policy. A CGL policy is intended to cover an insured’s tort liability for physical injury or property damage, not economic losses that result from business risks.

The court said that because the defective rebar was discovered before the arena was further constructed, there was no damage to other parts of the system. 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.

The reinforcement of the pile caps was simply part of DWS’s 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, the court said, is not what CGL policies are designed to protect against.

The court affirmed the order of summary judgment in favor of the insurers, but for different reasons from those stated by the trial court. 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.

Drake-Williams Steel, Inc., vs. Continental Casualty Company-Supreme Court of Nebraska-2016 WL 4163826-August 5, 2016.

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