Free Motion for Reconsideration - District Court of Arizona - Arizona

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Steven Plitt, Esq. (State Bar No. 007481) Joshua D. Rogers (State Bar No. 021300) KUNZ PLITT HYLAND DEMLONG & KLEIFIELD 3838 N. Central Avenue, Suite 1500 Phoenix, AZ 85012-1902 Telephone: 602-331-4600 Facsimile: 602-331-8600 Attorneys for Assurance Company of America, Zurich American Insurance Company and Maryland Casualty Company UNITED STATES DISTRICT COURT STATE OF ARIZONA General Acrylics, Inc., an Arizona corporation, Plaintiff, vs. Maryland Casualty Company, a Maryland corporation; Assurance Company Of America, a New York corporation; and Zurich American Insurance Company, et al. Defendants. DEFENDANTS' MOTION FOR RECONSIDERATION NO. CV-03-1495 PHX RGS

(Oral Argument Requested)

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And Related Counterclaim.

Defendants Assurance Company of America ("Assurance"), Zurich American Insurance Company ("Zurich") and Maryland Casualty Company ("Maryland") (collectively "Defendants"), pursuant to Rule 7.2(G), Rules of Practice of the United States District Court for the District of Arizona, hereby moves this court to reconsider

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its April 5, 2006 Order issued in this case denying Defendants' Motion for Summary Judgment and granting Plaintiff's Cross-Motion for Partial Summary Judgment. This motion is supported by the accompanying Memorandum of Points and Authorities. MEMORANDUM OF POINTS AND AUTHORITIES I. UNITED METRO DOES NOT CONSTITUTE A "SUBCONTRACTOR" Central to this Court's entire decision is the finding that United Metro Materials and San Xavier Rock & Materials (collectively "United Metro") constitute a "subcontractor" under the policy. This determination affects this Court's holding in relation to not only the application of the "your work" exclusion but also the Court's initial determination of whether the alleged damages constitute "property damage" caused by an "occurrence." This Court is correct that this term is undefined by the policy. However, the absence of a definition does not automatically render a term ambiguous. See Porter v. Continental Cas. Co., 156 Ariz. 488, 491, 753 P.2d 178, 181 (Ct. App. 1988). Instead, the Arizona courts construe the policy's provisions according to their plain and ordinary meaning. See California Cas. Ins. Co. v. American Family Mut. Ins. Co., 208 Ariz. 416, 418, 94 P.3d 616, 618 (Ct. App. 2004) (interpreting the term "connection" in accordance with the common dictionary definition); Samsel v. Allstate Ins. Co., 204 Ariz. 1, 5, 59 P.3d 281, 285 (2002) (interpreting the term "incur" in accordance with the common definition). In its decision, this Court held that United Metro was a "subcontractor" in this case because "the product involved here was custom-manufactured with an intended mixture of ingredients." It should initially be noted that this holding is based upon a faulty premise. As Defendants previously advised this Court in Defendants' Reply To General Acrylics' Response To Defendants' Motion For Summary Judgment and their Response To General Acrylics' Cross-Motion For Partial Summary Judgment , the

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concrete materials at issue were not "custom-manufactured" and General Acrylics did not even attempt to dispute this fact in their Reply. As used in this context, "custom" is defined as that which is "made specially for individual customers." Webster's New Universal Unabridged Dictionary (2003). The concrete ordered by General Acrylics was a product always available from United Metro to any customer who wanted to purchase it; it was not custom designed for General Acrylics for these projects. In his deposition, Mr. Deremo, President of General Acrylics, testified that the mix design for the concrete in the projects either came by way of specifications in General Acrylic's contract with the owner/developer or, where the contract did not make any specifications, General Acrylics then selected a standard 3,000 PSI product from United Metro. See Deposition of Jonnie R. Deremo, page 39 line 8 through page 40 line 8, attached hereto as Exhibit "A". Further, of the projects at issue in this case, Mr. Deremo testified that only one project had contractual specifications. See Exhibit "A", page 40 line 9 through page 42 line 1. See also General Acrylic Contracts and Invoices, attached hereto as Exhibits "B" though "I". However, as is shown by the invoices and other documents from General Acrylics' job file on the Four Seasons project, even that project used the same standard and generally available 3,000 PSI products from United Metro that were incorporated into every other project. See Exhibit "G". Simply put, General Acrylics ordered a standard, preformulated mixture from United Metro's list of products for every project at issue in this case. This is no different that a catalog of products available to the public for purchase. To hold that United Metro is a "subcontractor" under these circumstances is the equivalent of saying that a lumber supplier is a "subcontractor" when they sell a general contractor "2x4" boards cut by the lumber supplier for use in construction. In essence, every supplier of every material in the construction industry will now become a "subcontractor" for

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purposes of insurance. Not even those courts which find the term "subcontractor" to be ambiguous have gone that far. See, e.g., Wanzek, 679 N.W.2d at 329. The industrywide implications are simply too detrimental. The Court's conclusion that United Metro is a subcontractor is also contrary to the interpretational approach of the Arizona courts which finds ambiguity only as a last resort. See State Farm Mut. Auto. Ins. Co. v. Wilson, 162 Ariz. 251, 257, 782 P.2d 727, 733 (Ariz. 1989). Instead, the Court should employ the ordinary, common sense understanding of the term "subcontractor," which is well-recognized and understood within the construction industry. Specifically, "[a] subcontractor is one who contracts for the performance of an act, with a person who has already contracted for its performance." Wells-Stewart Const. Co. v. Martin Marietta Corp., 103 Ariz. 375, 377, 442 P.2d 119, 121 (1968) citing Staley v. New, 56 N.M. 756, 250 P.2d 893 (1952). A subcontractor is not one who simply furnishes a contractor with materials or supplies. See Wells-Stewart, 103 Ariz. at 377, 442 P.2d at 121. In fact, the realities of

construction activities are reflected in the policy's definition of "your work" which provides that "your work" includes "[m]aterials, parts, or equipment, furnished in connection with such work or operations." It is with this frame of reference that United Metro should be evaluated based upon the specific facts at issue in this case. In order for United Metro to constitute a "subcontractor" as that term is generally understood, United Metro would have contracted "for the performance of an act, with [General Acrylics] who [had] already contracted for its performance." Id. According to General Acrylics, United Metro "designed, mixed, manufactured, and delivered" the concrete. General Acrylics did not contract with any of its clients to "design, mix, manufacture, and deliver" the concrete. United Metro simply furnished General Acrylics with the supplies or materials General Acrylics needed for the tennis court

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projects.

Therefore, United Metro cannot be a "Subcontractor" as that term is

commonly understood. See id. This is consistent with the language in the exception to the "Your work" exclusion. According to the policy, the exception to this exclusion applies where " the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor." (emphasis added). According to this Court's ruling, the damage at issue arises from the ASR condition, which is inherent in the concrete as it is manufactured. Therefore, the damage arises from the manufacturing of the concrete. Because General Acrylics had never contracted to perform the manufacturing of the concrete to be used in the tennis courts, the manufacturing of the concrete by United Metro could not have been performed on General Acrylics' behalf. This is the entire purpose of a "subcontractor"--they are performing something on behalf of the general contractor that that general contractor originally contracted to do. United Metro was not doing that in this case. II. THE ALLEGED DAMAGES DID NOT CONSTITUTE "PROPERTY DAMAGE" CAUSED BY AN "OCCURRENCE" In its order, this Court also considered whether the alleged damages at issue were "property damage" caused by an "occurrence" as defined by the policy. Contrary to this Court's assertion, the Arizona courts have in fact addressed the term "occurrence" in the context of commercial general liability policies in both Advance Roofing and Kema Steel, Inc. v. Home Ins. Co., 153 Ariz. 315, 316, 736 P.2d 798, 799 (Ct. App. 1986). In both of those cases, the Arizona Court of Appeals' analysis of whether there was an "occurrence" focused on whether the precipitating conduct was "accidental." The

Arizona courts have defined the term "accident" as meaning an "undesigned, sudden, and unexpected event, usually of an afflictive or unfortunate character, and often accompanied by a manifestation of force . . ." Century Mutual Insurance Company v.

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Southern Arizona Aviation, 8 Ariz. App. 384, 386, 446 P.2d 490, 492 (1968) quoting Albuquerque Gravel Production Company v. American Empire Insurance Company, 282 F.2d 218, 220 (10th Cir. 1960). See also Outdoor World v. Continental Casualty Company, 122 Ariz. 292, 594 P.2d 546 (Ct. App. 1979). The reasoning used by this Court in concluding that faulty workmanship performed by a subcontractor constitutes an occurrence under a general contractor's policy "because the resulting damage is `neither expected nor intended'" is erroneous and directly contrary to the law of Arizona. A primary example of this is this Court's sole citation to Fejes v. Alaska Ins. Co., Inc., 984 P.2d 519, 523 (Alaska 1999) in support of the above proposition. Use of Fejes and its reasoning in support of the Court's decision in this case is erroneous for several very important reasons. First, Fejes specifically rejects the principle that faulty workmanship cannot constitute an occurrence. This is contrary to the well-settled case law of Arizona, which this Court acknowledges. Further, the court in Fejes employed a view of the term "occurrence" which was contrary to the settled law of Arizona. Specifically, the court in Fejes accepted the insured's assertion that "the normal meaning of the term `accident' focuses not on the negligence of the actor but on the result." Id. at 523.1 This erroneous view expressed in Fejes was the precise reason that the term "occurrence" and its definition were created in the first place. See Burroughs Wellcome Co. v. Commercial Union Ins. Co., 632 F.Supp. 1213, 1216-1217 (S.D.N.Y. 1986) (observing that "[i]t was precisely because of recurring disputes as to whether the word `accident' referred to the act or the injury
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The court's conclusion in this regard may have also been due to the definition of "occurrence" in that policy. Specifically, the policy at issue in Fejes defined an "occurrence" as an accident, including repeated and continuous exposure to conditions "which results in property damage that is `neither expected or intended from the standpoint of the insured.'" Id. at 522-23. In contrast, the policy in the present case does not include the language "which results in property damage that is `neither expected or intended from the standpoint of the insured.'" Id. at 523. This is significant because whereas the former contains language regarding the resulting damage, the later definition only refers to the injury causing conduct.

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resulting from the act that the new definition was adopted."). The policy at issue in this case only provides coverage for "bodily injury" or "property damage" which is caused by an "occurrence." Accordingly, under Arizona law, an "occurrence" for purposes of the policy is the causative act of the injury alleged. See Arizona Property and Cas. Ins. Guar. Fund v. Helme, 153 Ariz. 129, 134, 735 P.2d 451, 456 (1987) (observing that if an insurance policy uses the term "occurrence" without defining the term, the courts inquire whether "`there was but one proximate, uninterrupted, and continuing cause which resulted in all of the injuries and damages.'"). Therefore, the reasoning of Fejes in focusing on the resulting damage in determining whether there is an "accident" under the policy is directly contrary to the law of Arizona. Finally, the conclusion of this Court, and the court in Fejes, that faulty workmanship performed by a subcontractor constitutes an occurrence under a general contractor's policy "because the resulting damage is `neither expected nor intended'" is contrary to the majority of jurisdictions which have addressed this issue. See, e.g., Nabholz Const. Corp. v. St. Paul Fire and Marine Ins. Co., 354 F.Supp.2d 917, 921 (E.D.Ark. 2005) (holding that "a contractor's obligation to repair or replace its subcontractor's defective wo rkmanship should not be deemed `unexpected' on the part of the contractor, and therefore, fails to constitute an `event' for which coverage exists" where "event" was defined in policy to mean an accident, including continuous or repeated exposure to substantially the same general harmful conditions.); ACS Const. Co., Inc. of Mississippi v. CGU, 332 F.3d 885, 891-92 (5th Cir. 2003) (holding that the installation of a waterproofing membrane by a subcontractor which resulted in water leaks did not constitute an "occurrence" under a general contractor's policy); Heile v. Herrmann, 136 Ohio App.3d 351, 354, 736 N.E.2d 566, 568 (Ohio Ct. App. 1999); Wm. C. Vick Const. Co. v. Pennsylvania Nat. Mut. Cas. Ins. Co., 52 F.Supp.2d 569, 585-86 (E.D.N.C. 1999); Harbor Court Associates v. Kiewit Const. Co., 6 F.Supp.2d

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449, 457 (D.Md. 1998) (holding that any defects in any part of a building, including defects in the masonry, steel erection system, water drainage system, and the expansion joints of the complex resulting in the building's brick veneer cracking, distress, buckling, and failure in several locations, were expected by general contractor and thus not caused by an occurrence within the meaning of a comprehensive general liability insurance policy, whether it or its subcontractors actually performed the physical work). This Court's holding that the alleged damages constitute "property damage" caused by an "occurrence" appears to turn on the conclusion that United Metro was a subcontractor. As was previously discussed, United Metro clearly does not constitute a subcontractor under the policy. However, assuming arguendo that United Metro

constitutes a subcontractor, then any damage that arose to General Acrylics' work (as the general contractor to the project) was foreseeable and not an "occurrence." As one court has observed:
[The general contractor] contracted with [the owner] to build [the project]. ... The entire project was thus [the general contractor's] responsibility. ... The scope of [the general contractor's] construction contract with [the owner] was to erect a complete, non-defective building. All of the work done to construct [the project] was either done by [the general contractor] or by a subcontractor for [the general contractor]. ... any defects in any part of the building would thus be "expected" by [the general contractor], irrespective of whether the actual physical work was performed by [the general contractor] or one of [the general contractor's] subcontractors.

Harbor Court Associates v. Kiewit Const. Co., 6 F.Supp.2d 449, 457 (D.Md. 1998). Applying that reasoning to the present case, General Acrylics contracted to build the tennis courts. Thus, the entire project was General Acrylics' responsibility. The scope of General Acrylics' construction contracts was to construct complete, non-defective tennis courts. All of the work done to construct the tennis courts was either done by General Acrylics or, in this Court's opinion, by a subcontractor. Any defects in any part of the courts would thus be "expected" by General Acrylics, irrespective of whether the
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actual physical work was performed by General Acrylics or one of General Acrylics' subcontractors. Accordingly, irregardless of whether or not United Metro is considered a subcontractor, the defective work of such a subcontractor is considered the work of General Acrylics and would not constitute an occurrence under the policy issued to General Acrylics. It is also important to note that ASR is not "unintended or unexpected" as this court states in its opinion. The reactivity of aggregates in concrete are well-known in the construction community. More specifically, it was well-known to General Acrylics. In almost all of General Acrylics proposal's, General Ac rylics specifically includes the following provision:
GUARANTEE: All materials and work performed by Contractor is guaranteed for a pe riod of one (1) year from the time construction is completed. In the construction of concrete courts, shrinkage cracks and/or spalls may appear in the slab, but do not cause any structural damage or displacement. In order to minimize the possibility of shrinkage cracks and/or spalls, Contractor uses the least reactive aggregate available . However, neither Contractor or the concrete readymix companies guarantee against Shrinkage cracks and/or spalls that may occur in the concrete slab, and the terms of our guarantee do not extend to such shrinkage cracks and/or spalls.

See Exhibits "B" through "I". Accordingly, based upon their own language, General Acrylics recognized the fact that reactive aggregate can/will result in cracks and/or spalls. Further, United Metro specifically informed General Acrylics of alkali reactivity on its invoices. In documents provided to Defendants by general Acrylics, United Metro stated:
WARNINGS ... Purchaser acknowledges that under certain conditions the aggregate used in producing this concrete can be alkali reactive. This reaction can have a detrimental effect of the concrete. Purchaser accepts responsibility for the results of any such reaction.

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See Exhibit "J", attached hereto.

Based upon the above, General Acrylics, by

incorporation of these concrete materials in the tennis courts, clearly expected that ASR could result from their work. occurrence under the policy. IV. CONCLUSION The focus of this Court's order rests on the incorrect assumption that United Metro is a subcontractor. However, the facts in this case are clear that United Metro cannot constitute a "subcontractor". Nevertheless, under any circumstances, this Therefore, the ASR condition cannot constitute an

Court's order turns the entire purpose of a commercial general liability policy on its head. Put simply, "policies are intended to ins ure the risks of an insured causing

damage to other persons and their property, but that the policies are not intended to insure the risks of an insured causing damage to the insured's own work." Heile v. Herrmann, 136 Ohio App.3d 351, 353, 736 N.E.2d 566, 568 (Ohio Ct. App. 1999). The only damages alleged in this case are for the insured's own work. Therefore, this Court's order operates to require Defendants to act not as an insurer but as a guarantor of the contractual obligations of the insured and changes this liability policy to a performance bond. Based upon the foregoing, Defendants respectfully request this Court reconsider its April 5, 2006 Order denying Defendants' Cross-Motion for Partial Summary Judgment and granting Plaintiff's Cross-Motion for Partial Summary Judgment. ... ... ... ... ... ...

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DATED this 20th day of April, 2006. KUNZ PLITT HYLAND DEMLONG & KLEIFIELD A Professional Corporation s/Joshua D. Rogers By: ______________________________ Steven Plitt Joshua D. Rogers 3838 N. Central Avenue, Suite 1500 Phoenix, AZ 85012-1902 Attorneys for Defendant Assurance Company of America, Zurich American Insurance Company and Maryland Casualty Company

ORIGINAL filed electronically and a copy hand-delivered to Judge Strand: ... and a COPY served electronically/mailed this 20th day of April, 2006 to: Sid A. Horwitz, Esq. Carmichael & Powell, P.C. 7301 N. 16th Street, Suite 103 Phoenix, AZ 85020-5297 Attorneys for Plaintiff s/Adriana Garcia ________________________________

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