Was defective workmanship damage an occurrence?
In December 2008, the Cedar Bend Humane Society (CBHS) contracted with the Samuels Group, Inc., to design and build CBHS’s new animal adoption facility. Samuels then subcontracted various parts of the project to others. The production of the design plans for the project’s plumbing and heating, ventilation, and air-conditioning systems was subcontracted to Bracket Engineering Consulting, LLC. Samuels also subcontracted with Hudson Hardware Plumbing & Heating, Inc., to “[p]rovide engineering, labor, material and equipment to design and install” the HVAC and plumbing systems for the project. The window materials and their installation were subcontracted to Allen Glass Co., Inc.
Hudson’s subcontract with Samuels obligated Hudson to procure commercial general liability insurance to cover Hudson’s indemnity obligations under its subcontract, and Samuels was to be named as an insured. Hudson obtained the required policy from AMCO Insurance Company.
After the construction work was performed, CBHS staff members noticed mold, excess humidity, and excess odor in the building, allegedly caused by faults “with the design and installation of the HVAC system.” CBHS subsequently sued Samuels Group, Bracket Engineering, Hudson, and Allen Glass for breach of contract.
CBHS alleged that, as a direct and proximate cause of the breach, it “incurred substantial expense to renovate, rework and repair the [HVAC] system and the windows negligently installed by Defendants so as to provide adequate amounts of heating, air-conditioning and ventilation to the CBHS facility and to provide properly installed windows in the CBHS facility.” In its answer, Samuels asserted third-party claims against Bracket Engineering, Allen Glass, and Hudson.
Hudson filed a claim with AMCO, seeking coverage of Hudson and Samuels Group under the policy. AMCO denied the claim because its “investigation show[ed] that there was no occurrence as defined by [the Policy] and therefore no grant of coverage exist[ed] for this loss.” AMCO also explained that its “review showed that … the damages being claimed by [CBHS] d[id] not meet the definition of an ‘occurrence’ or ‘property damage’ as defined in [the Policy].”
In a separate action, Hudson filed a petition for declaratory judgment against AMCO, asking the court to declare that AMCO was “obligated to provide coverage to Hudson and [Samuels Group] for defense and indemnification in the [Suit], and any related causes of action, under the terms of the [Policy, and] to reimburse Hudson for expenses” incurred in its defense. AMCO answered and denied that the policy covered the claims asserted against Hudson or Samuels in the suit, and it argued it was therefore not required to defend Hudson or Samuels in the suit.
Competing motions for summary judgment were filed by the parties. The court granted AMCO’s motion, denying Hudson’s motion and dismissing Hudson’s declaratory judgment action. The court found that AMCO had no duty to defend or indemnify Hudson or Samuels Group. Hudson appealed.
The policy’s insuring agreement stated:
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for … “property damage” to which this insurance does not apply. We may, at our discretion, investigate any “occurrence” and settle any claim or “suit” that may result.
b. This insurance applies to… “property damage” only if … “property damage” is caused by an “occurrence”….
An “occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The term “accident” was not defined.
In its motion for summary judgment, AMCO asserted that the Hudson suit was not seeking damages for injuries to tangible property. AMCO also argued that there was no “occurrence” as a matter of law.
The appellate court stated: “It is clear that the claims in the Suit are not solely claims for damages by Hudson based upon Hudson’s alleged defective work product. In discovery in the Suit, CBHS’s president elaborated upon CBHS’s claims in her affidavit:
After the work was performed, [CBHS] noticed mold, excess humidity, and excess odor in the building. [CBHS] alleged that the negligence and/or breach of contract of the [Samuels Group] and/or the named subcontractors caused ventilation problems in the animal care and adoption building.
[CBHS] later hired [an expert] to review the construction and documentation associated with the completion. [The expert’s] report [found] fault with the design and installation of the HVAC system and stat[ed] that the mold, excess humidity, and excess odor were the result.
As a result of the mold, excess humidity, and excess odor [CBHS] alleges was caused by the negligence of the [Samuels Group] and/or the named subcontractors, [CBHS] has incurred expenses to remediate the mold, excess humidity and excess odor and to perform certain other repairs and/or improvements to the animal care and adoption building.”
The report of the expert estimated the cost to remediate the damage and found it to be in the hundreds of thousands of dollars.
The court stated that it was possible that Hudson’s alleged defective workmanship caused damage that Hudson neither expected nor intended, potentially constituting an accident that was an occurrence within the meaning of the policy. According to the court, the trial court erred in concluding otherwise.
The court pointed out that CBHS’s claims were not merely claims for “faulty workmanship” or for the cost to finish unfinished work. Rather, the damages alleged, as set out in the expert’s report, included damages to tangible property beyond the work product itself. Therefore the damages were covered by the policy.
The court pointed out that the policy contained a subcontractor exception to the “your work” exclusion and reasoned that the wording meant that the policy covered defective work performed by the insured’s subcontractor unless the resulting property damage was specifically excluded from coverage. In addition, the court concluded that the defective work performed by the insured’s subcontractor fell within the policy’s definition of “occurrence.”
The court noted the distinction between business risks, which ordinarily are absorbed by the business, and occurrences that give rise to insurable liability.
The court concluded that Hudson had shown that AMCO owed it and Samuels Group a defense duty in the underlying action for claims asserted by CBHS. The court added, however, that neither AMCO nor Hudson had established whether AMCO had a duty to indemnify Hudson or Samuels at that time. The court reversed the trial court’s summary judgment ruling that found AMCO had no duty to defend Hudson or Samuels, and it remanded the case to the trial court to enter summary judgment in favor of Hudson on its claim that AMCO had a duty to defend, while denying both parties’ motions concerning AMCO’s alleged duty to indemnify.
Hudson Hardware Plumbing & Heating, Inc., vs. AMCO Insurance Company-Court of Appeals of Iowa-October 12, 2016- 2016 WL 5930779.