Parsing the CGL: For want of a soil test

Parsing the CGL: For want of a soil test

Joey and Sonya Brown hired Tibke Construction, Inc., as a general contractor to build a new house in Brandon, South Dakota. Tibke hired Jerry’s Excavating, Inc., as a subcontractor to prepare the soil and perform excavation work. In October 2012 Tibke completed the project.

On September 3, 2014, the Browns sued Tibke and Jerry’s Excavating for negligent construction and breach of contract. The Browns alleged that Jerry’s Excavating failed to conduct soil compaction testing before construction. In their complaint, the Browns averred the house was unknowingly built on highly expansive soils, resulting in damage to the house in the form of “excessive settlement, cracking, structural unsoundness, and other damages.” The Browns submitted that the damages were caused exclusively by acts or omissions of Jerry’s Excavating but that the damage existed only on portions of the house not worked on by Jerry’s Excavating. The Browns did not allege that Tibke improperly constructed any portion of the house, including the foundation and walls.

Owners Insurance Company insured Tibke under a commercial general liability policy. The policy provided coverage for claims arising out of property damage caused by an occurrence and not subject to exclusions. Tibke submitted a claim to Owners for defense and indemnification from the Browns’ lawsuit. Owners disputed coverage but agreed to defend Tibke in the suit under a reservation of rights.

On February 3, 2016, Owners filed an action for declaratory relief against Tibke, Jerry’s Excavating, and the Browns, seeking a determination of the parties’ rights and obligations under the policy. Owners alleged that it had no duty to defend or indemnify Tibke for the property damage because “faulty workmanship” cannot be an occurrence under the CGL policy and because two exclusions, j(7) and l, precluded coverage. Owners and Tibke filed cross-motions for summary judgment on the question of coverage in the declaratory judgment action. The Browns and Jerry’s Excavating joined Tibke’s motions.

On June 13, 2016, the court declined to rule on the question of whether Tibke’s claim was covered by the policy. Instead the court denied the motions, finding that there were disputed questions of material fact regarding whether there was expansive soil under the house and, if so, whether it was foreseeable.

Owners and Tibke filed petitions for an intermediate appeal, which the Supreme Court of South Dakota granted and consolidated.

On appeal, the three issues raised by the parties were:

1. Whether the damages alleged by the Browns were caused by an occurrence as defined by the policy. The court considered whether the alleged failure to test the soil was an occurrence. Owners contended that this was faulty workmanship and did not constitute an accident. The court rejected this argument, saying that failure to test the soil was not intentional but an unplanned omission and therefore was an occurrence as defined in the policy.
2. Whether exclusion j(7) precluded coverage for the Browns’ alleged property damage. Tibke claimed j(7)’s plain language “does not include repairs to correctlyperformed work.” Because the Browns alleged only a failure to test the soil, not defective construction of any portion of the house that was damaged, Tibke contended j(7) did not exclude the alleged property damage to the house. Owners resisted Tibke’s interpretation of j(7). The court noted that the exclusion applied only to property damage affected by your work, which in the policy was defined as “work or operations performed by you [Tibke] or on your [Tibke’s] behalf.” The court said that j(7) excluded only property damage to “that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” Tibke and Jerry’s Excavating allegedly performed faulty work only by failing to test the soil; therefore, the court said, j(7) did not exclude coverage for the alleged property damage to the house.
3. Whether exclusion l precluded coverage for the Browns’ alleged property damage. The exclusion precluded coverage for “property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.” Tibke argued that exclusion 1 was inapplicable because it barred coverage only for property damage that arises after the insured’s work is completed. Tibke claimed that the failure to test the soil occurred at the start of the project, so “[t]he foundation for the Browns’ home would have been exposed to the expansive soil immediately upon being poured.” Owners believed, based on the policy language, that exclusions j(7) and l operated similarly but that exclusion l excluded coverage after the project was completed, while j(7) excluded work before the project was completed. The court held that exclusion 1 did not apply to the alleged property damage because the damage began before the insured’s work was completed.

The court affirmed the judgment that denied Owners’ motion, reversed the judgment that denied Tibke’s motion, and remanded the case for further proceedings.

Owners Insurance Company vs. Tibke Construction, Inc.-Supreme Court of South Dakota-August 23, 2017- 27932, 27969, 27938, 27955.