From dream house to nightmare
Around September 28, 2012, Tony and Stephanie Hague hired Lowery Construction & Concrete, LLC, to serve as the general contractor in the construction of their new house in Piedmont, South Dakota. The ranch-style house was built with a basement that included a walkout entrance on the north side. The walkout exited onto a concrete patio. Lowery installed drain tile along the perimeter of the house’s foundation but not along the patio and northeast corner of the house. Lowery substantially completed construction on August 13, 2013, and the Hagues immediately occupied the house.
On February 24, 2015, the Hagues sued Lowery for breach of contract, breach of implied warranty, and negligent construction. In their complaint they alleged that before moving in they noticed cracks forming in the walls, ceilings, and windows; several doors and windows would not open, and their frames were cracked; and the basement floor heaved near the walkout entrance. The Hagues also stated that the patio’s concrete slab had previously heaved and been replaced in July 2013, and Lowery ultimately removed it in November 2013 because it again heaved.
The Hagues’ theory of liability centered on Lowery’s failure to install drain tile at one corner of the foundation. According to the Hagues, Lowery and its subcontractor, Geidel Excavation LP, determined that installing the drain tile would prevent the patio slab from heaving again. Once Geidel began to excavate, however, it became concerned that the house was not level and stopped digging. The Hagues alleged that the lack of drain tile permitted water to reach expanding soil beneath the house, which caused the heaving and resulting damage.
Lowery had a commercial general liability policy with Owners Insurance Company. In response to the Hagues’ complaint, Lowery submitted a claim to Owners, which agreed to defend Lowery but reserved the right to withdraw the defense. Owners defended while Lowery and the Hagues attempted mediation, which proved unsuccessful. Owners ultimately withdrew its defense after determining that several policy exclusions applied.
On December 17, 2015, Lowery filed a declaratory judgment action against Owners, seeking a declaration that Owners had a duty to defend Lowery. Lowery also requested attorney fees, alleging that Owners’ refusal to provide coverage for Lowery’s claim was vexatious and without reasonable cause. Lowery filed a motion for summary judgment, which the court denied. The court determined that Owners had no duty to defend Lowery in the Hagues’ action. Lowery appealed.
On appeal, the court noted that the case involved two exclusions in Lowery’s CGL policy:
“[p]roperty damage” to:
(6) That particular part of real property on which any insured or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations; or
(7) That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.
Paragraph (7) of this exclusion does not apply to “property damage” included in the “products-completed operations hazard.”
With respect to the first exclusion cited, the court held that the policy plainly and unambiguously applied only to “the immediate area involved in the operations actively being performed at the time of the property damage.” The court agreed that “the exclusion should not apply to property damage to other, non-defective parts of the insured’s work.”
With respect to the second exclusion, the court noted that its language had been interpreted plainly to mean that “property damage only to parts of the property that were themselves the subject of defective work is excluded.”
The court next considered whether the facts alleged by the Hagues in their complaint against Lowery arguably fell within the above interpretations so that Owners had a duty to defend Lowery. The Hagues’ complaint alleged that Lowery’s failure to install drain tile at one corner of the foundation damaged their house. According to the complaint, Lowery’s failure permitted water to reach expanding soil below the house, which caused damage to concrete, walls, ceilings, and windows. The Hagues did not allege that the concrete, walls, ceilings, or windows were defective themselves or that Lowery was presently working on those areas when the damage occurred. Therefore, the court stated, Owners had not met its burden of establishing that the damage to the Hagues’ house clearly fell outside coverage, and Owners had a duty to defend Lowery against the Hagues’ action.
Lowery Construction & Concrete, LLC, vs. Owners Insurance Company-Supreme Court of South Dakota-August 30, 2017- 2017 WL 3746569.