Free Motion for Certificate of Appealability - District Court of Arizona - Arizona

1 2 3 4 5 6 7 8 9 10 11 12 Maryland Casualty Company, et al., 13 Defendants. 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 The court has before it Plaintiff's Motion for Partial Summary Judgment (doc. 37), Defendants' Motion for Summary Judgment (doc. 43), Defendants' Response (doc. 53), Plaintiff's Response and Reply (doc. 56) and Defendants' Reply (doc. 73). Based on the following, we deny Plaintiff's Motion for Partial Summary Judgment and grant Defendants' Motion for Summary Judgment. I. On September 18, 1997, plaintiff, U.S. Home of Arizona Construction Corporation ("U.S. Home"), a general contractor, entered into a subcontract agreement with Red Mountain Development Company ("Red Mountain"), wherein Red Mountain would perform stucco work on homes in the Superstition Foothills housing development (the "Agreement"). As required by the Agreement, Red Mountain obtained a commercial general liability ("CGL") insurance policy (the "Policy") from defendant, Maryland Casualty Company
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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

U.S. Home Corporation, Plaintiff, vs.

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No. CV-04-1150-PHX-FJM ORDER

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("Maryland Casualty"), naming U.S. Home as an additional insured. As a developer/seller, U.S. Home performed no construction work on the homes in Superstition Foothills; all work was performed by subcontractors on U.S. Home's behalf. U.S. Home subsequently discovered that the stucco on at least fifty homes had excessive cracks and soft spots and had to be repaired or replaced. U.S. Home claims it has incurred at least $1,601,948.49 in costs to repair and replace the defective stucco, including costs to repair the work of other subcontractors damaged during the stucco repair. U.S. Home expects to incur additional costs as corrective work continues. On June 3, 2003, U.S. Home provided Maryland Casualty with notice of its claim as an additional insured under the Policy. Maryland Casualty denied coverage, concluding that the claim was related to the "repair of Red Mountain Development's stucco work" and not for "any alleged 'property damages' as consequential or resulting from Red Mountain Development's work on the homes." DSOF, Exhibit U at 1. U.S. Home then filed this action, alleging breach of contract, bad faith, and seeking a declaratory judgment and punitive damages against Maryland Casualty. The bad faith and punitive damages claims have since been settled by the parties (doc. 107). II. Insurance policy language must be construed in accordance with its ordinary and plain meaning. Keggi v. Northbrook Prop. & Cas. Ins. Co., 199 Ariz. 43, 46, 13 P.3d 785, 788 (Ct. App. 2000). Ambiguous language will be construed against the insurer. Id. The insured bears the burden to prove that coverage exists. Id. The Policy at issue provides coverage for "those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage'" that is caused by an "occurrence." PSOF, Exhibit B at 2. The Policy defines "property damage" as (1) "[p]hysical injury to tangible property, including all resulting loss of use of that property" or (2) "[l]oss of use of tangible property that is not physically injured." Id. at 16. An "occurrence" is "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Id. -2Document 51-2 Filed 07/07/2006 Page 2 of 7

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U.S. Home contends that Red Mountain either improperly mixed or applied the stucco to the exterior walls of the homes, causing the stucco to crack, and resulting in damage to the homes. Therefore, according to U.S. Home, Red Mountain's faulty workmanship is an "occurrence" causing "property damage," thereby triggering coverage under the Policy. Accordingly, U.S. Home seeks reimbursement for the costs of repairing or replacing the faulty stucco, including the cost of repairing any other property damaged during the repair and replacement work, such as damage to landscaping and surrounding structures on the homes. In contrast, Maryland Casualty argues that clear Arizona precedent has established that coverage is not available under the Policy because the cost of correcting the defective stucco is solely related to faulty workmanship, which is not an "occurrence" resulting in "property damage" as those terms are defined in the Policy. III. The broad issue presented is whether damage caused by faulty workmanship is covered under Maryland Casualty's CGL insurance policy. In order to determine if coverage exists, we must first determine if there was "property damage" caused by an "occurrence." The vast majority of jurisdictions, including Arizona, have concluded that faulty workmanship, standing alone, is not an "occurrence" resulting in "property damage" sufficient to trigger coverage under a CGL policy. See, e.g., Auto-Owners Ins. Co. v. Home Pride Cos., 684 N.W.2d 571, 576-77 (Neb. 2004). In U.S. Fid. & Guar. Corp. v. Advance Roofing & Supply Co., 163 Ariz. 476, 788 P.2d 1227 (Ct. App. 1989) ("Advance Roofing"), it was alleged that Advance Roofing failed to fully perform under a contract, and the work that was completed was not performed in a good and workmanlike manner. The Arizona Court of Appeals considered whether "faulty work" can amount to an "occurrence" resulting in "property damage" so as to trigger an insurer's coverage obligation. Examining a CGL policy with language that mirrors the relevant policy language here, the court held that "mere faulty workmanship, standing alone, cannot constitute an occurrence as defined in the policy, nor would the cost of repairing the -3Document 51-2 Filed 07/07/2006 Page 3 of 7

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defect constitute property damage." Id. at 482, 788 P.2d at 1233. The court rejected the reasoning of a minority-line of cases that have determined that faulty work is a covered claim, reasoning that "these authorities disregard the fundamental nature of a comprehensive general liability policy." Id. "If the policy is construed as protecting a contractor against mere faulty or defective workmanship, the insurer becomes a guarantor of the insured's performance of the contract, and the policy takes on the attributes of a performance bond." Id. We agree with the sound reasoning of the Arizona court. Unlike a performance bond which is designed to guarantee the contractual performance of the contractor, a commercial liability policy is not intended to serve as a warranty of a contractors' work product. U.S. Home makes several attempts to distinguish the holding of Advance Roofing. First, it argues that the statement by the court that "faulty workmanship, standing alone, cannot constitute an occurrence" is not controlling because it is mere dicta used by the court to distinguish other cases. This argument is wholly without merit. The central issue discussed in Advance Roofing was whether coverage exists for faulty workmanship. The court carefully considered and rejected the rationale applied by other courts in reaching a contrary conclusion. Id. at 482, 788 P.2d at 1233. In doing so, the court concluded, "the better reasoned authorities hold that mere faulty workmanship, standing alone, cannot constitute an occurrence." Id. We consider this the holding of the court on the ultimate issue in the case. U.S. Home also attempts to distinguish Advance Roofing because the underlying claims in that case were related to contractual performance. But that is equally true here where the claims arose out of Red Mountain's failure to adequately perform under the terms of the Agreement with U.S. Home. A principle underlying Advance Roofing, as well as other decisions rejecting CGL coverage for faulty workmanship, is that claims arising out of faulty work and damages related thereto, are merely contract claims. These decisions recognize that the purpose of commercial general liability insurance is to provide coverage for "tort liability for physical damages to others and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged -4Document 51-2 Filed 07/07/2006 Page 4 of 7

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person bargained." Adams Tree Serv., Inc. v. Hawaiian Ins. & Guar. Co., 117 Ariz. 385, 388, 573 P.2d 76, 79 (Ct. App. 1977); accord Erie Ins. Prop. & Cas. Co. v. Pioneer Home Improvement, Inc., 526 S.E.2d 28, 33 (W. Va. 1999); Vogel v. Russo, 613 N.W.2d 177, 182 (Wis. 2000). Finally, U.S. Home seeks to distinguish Advance Roofing because the complaint filed in that case did not expressly allege property damage, whereas in the present case, U.S. Home has shown physical damage, namely the defective stucco on the homes. The Advance Roofing court, however, considered and rejected the argument that the faulty work product is "property damage," even where no further damage from the faulty work is alleged. Advance Roofing, 163 Ariz. at 482, 788 P.2d at 1233. Similarly, in the present case, U.S. Home contends that the "property damage" is the defectively applied stucco--the faulty work product itself. There is no allegation that the faulty work itself caused further damage to other property. Although a portion of its claim is the cost to "repair and/or replace work of other subcontractors," U.S. Home acknowledges that these damages arose "as a result of having to replace the defectively mixed or applied stucco." Plaintiff's Motion for Partial Summary Judgment at 3. These costs were not caused by the faulty work itself, but instead are a component of the "cost of repairing the defect." Under Advance Roofing it is clear that such costs do not constitute property damages. 163 Ariz. at 482, 788 P.2d at 1233. Cases cited by U.S. Home are distinguishable because they involve coverage of damage to property beyond the faulty work product. See, e.g., Lee Builders, Inc. v. Farm Bureau Mut. Ins., 104 P.3d 997, 1002 (Kan. Ct. App. 2005) (distinguishing cases that involve claims to replace or repair defective material only, where defect itself caused no further property damage); Fejes v. Alaska Ins. Co., 984 P.2d 519, 524 (Alaska 1999) (defective work (faulty installation of curtain drain) caused damage to other property (destruction of septic system)); Ohio Cas. Ins. Co. v. Terrace Enters., Inc., 260 N.W.2d 450, 453 (Minn. 1978) (the settling of a building as a result of faulty workmanship was the occurrence, not the faulty work itself).

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Further, U.S. Home's reliance on Univ. Mech. Contractors of Ariz., Inc. v. Puritan Ins. Co., 150 Ariz. 299, 723 P.2d 648 (1986) is misplaced. In University Mechanical, the court held that the installation of a defective product in a facility constituted a physical injury to the facility and that coverage was available under a CGL policy issued to the manufacturer of the defective product. Id. at 302-03, 723 P.2d at 651-52. The holding in University Mechanical is inapplicable for several reasons. First, the court's analysis focused solely on whether the damage occurred during the policy period, and did not address whether the costs to repair faulty work would constitute property damage or an occurrence under a CGL policy. Id. at 301-02, 723 P.2d at 650-51. Second, the finding of property damage was related to damage caused by a defective product, and not faulty workmanship. Finally, damages beyond the faulty work product itself were incurred. For these reasons, we conclude that University Mechanical does not apply to this case. Finally U.S. Home contends that it had a reasonable expectation of coverage under the policy for these claims based on an indemnity provision in its subcontract with Red Mountain. DSOF, Exhibit A-1 at 2. However, an indemnity agreement between U.S. Home and Red Mountain is solely between those two parties and cannot be reasonably attributed to Maryland Casualty. Based on our conclusion with respect to the threshold issue that coverage is not available because there is no occurrence resulting in property damage, we need not address other issues relating to exclusions to coverage contained in the Policy.

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IV. Accordingly, IT IS ORDERED GRANTING Defendants' Motion for Summary Judgment (doc. 43) and DENYING Plaintiff's Motion for Partial Summary Judgment (doc. 37). Because the parties have agreed to withdraw the Motion for Summary Judgment regarding bad faith and punitive damages (doc. 96), this Order concludes all claims against all parties and the clerk is directed to enter final judgment in favor of Defendants. DATED this 20th day of December, 2005.

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