Free Order on Motion for Summary Judgment - District Court of Arizona - Arizona

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

) ) ) ) Plaintiff, ) ) vs. ) Maryland Casualty Company, a Maryland) ) corporation, et al., ) ) Defendants. ) General Acrylics, Inc., an Arizona corporation,

CIV-03-1495-PHX-RGS ORDER

Pending before the Court are Defendants' Motion for Summary Judgment (Doc. #33) and Plaintiff's Cross-Motion for Partial Summary Judgment (Doc. #38). After considering the arguments raised by the parties in their briefing and in oral argument, the Court now issues the following ruling. BACKGROUND This is an insurance coverage dispute. Plaintiff, General Acrylics, Inc., is a contractor that installs tennis courts, basketball courts, and other multi-purpose athletic courts. Defendants are the Assurance Company of America, Zurich American Insurance Company, and Maryland Casualty Company. Plaintiff asserts that Defendants wrongfully denied its claim for insurance coverage after a number of Plaintiff's customers notified it of problems with the structural integrity of the courts. Plaintiff states that after completing the installation of a number of tennis courts, basketball courts, and/or multi-purpose courts, its customers began notifying it that blistering
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and delamination was occurring on the surface of the courts. Plaintiff contends that the blistering and delamination manifested itself as a result of a condition known as Alkali/Silica Reaction ("ASR"). ASR is a chemical reaction that occurs between the reactive silica in aggregates to make concrete and the alkalis (sodium and/or potassium) present in the concrete mix and aggregates. The reaction causes the formation of a gel that absorbs water, swells, and then forces its way through the coating leaving behind residue and holes that then cause further coating degradation and bubbling. The presence of water can aggravate an ASR problem. The third-party supplier/subcontractor of the concrete for all of the projects at issue was United Metro Materials and San Xavier Rock & Materials, a division of United Metro Materials ("United Metro"). Plaintiff sought coverage from Defendants for the costs to repair the courts pursuant to a commercial general liability policy (the "policy"). The policy provided insurance coverage to Plaintiff subject to applicable conditions, limitations, restrictions, and exclusions. Defendants subsequently denied coverage pursuant to the language set forth in the policy. On or about May 14, 2003, Plaintiff filed a lawsuit, Maricopa County Civil Cause No. CV2003-009353, against Defendants alleging breach of the insurance policy and bad faith. Defendants removed the lawsuit to this Court pursuant to 28 U.S.C. §§ 1332 and 1441(a). The parties then filed cross-motions for summary judgment. DISCUSSION In their Motion for Summary Judgment, Defendants argue that Plaintiff is seeking coverage under the policy for the costs to repair the blistering and delamination occurring on the courts as a result of faulty workmanship. Defendants claim that pursuant to United States Fidelity & Guaranty Company v. Advance Roofing and Supply Company, 788 P.2d 1227 (Ariz. Ct. App. 1989) (hereinafter "Advance Roofing"), such faulty workmanship does not constitute an "occurrence" under the policy and, as such, is not covered. Relying on Advance Roofing, Defendants additionally assert that the costs to repair the damage to the courts due to faulty workmanship do not constitute "property damage" as -2Case 2:03-cv-01495-RGS Document 48 Filed 04/06/2006 Page 2 of 8

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defined under the policy. Lastly, Defendants contend, in the alternative, that assuming Plaintiff's claim for coverage did constitute "property damage" caused by an "occurrence," the "your work" exclusion in the policy ­ defined as "work or operations performed by you or on your behalf" and "materials, parts or equipment furnished in connection with such work or operations" ­ applies to preclude coverage because the damage claimed was to the insured's own work, rather than the work of a subcontractor, and falls within the "productcompleted operations hazard." In its response and Cross-Motion for Partial Summary Judgment, Plaintiff contends that pursuant to a reasonable expectations analysis, the policy at issue unambiguously provides coverage. Specifically, Plaintiff cites to an exception to an exclusion that provides coverage for damage caused to the completed work of the insured if such damage was not intended or expected by the insured and was the result of the defective work of a subcontractor. Alternatively, Plaintiff asserts that, under a reasonable expectations analysis, the policy is ambiguous such that it gives rise to coverage. In support of this contention, Plaintiff states that the policy contains separate coverage for completed work as set forth in the definition of "products-completed operations hazard" located in the definition section of the policy. Plaintiff contends that the lay insured has a reasonable expectation of coverage for any property damage to its completed work and claims that an exception to an exclusion provides coverage to "property damage" included in the "products-completed operations hazard" that must be restored, repaired, or replaced because the insured's work was incorrectly performed on it. Plaintiff argues that if this language does not expressly mandate coverage, it created an ambiguity that must be resolved against Defendants.

A.

"Property Damage" Caused by an "Occurrence" In order to determine if coverage exists under the policy and, therefore, whether any

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damage" caused by an "occurrence." See Advance Roofing, 788 P.2d at 1233. In the instant matter, Plaintiff is seeking coverage under the policy for the costs to repair the blistering and delamination occurring on the courts as a result of the ASR condition in the concrete supplied by United Metro. Provisions of insurance contracts must be construed according to their plain and ordinary meanings, see Sparks v. Republic Nat'l Life Ins. Co., 647 P.2d 1127, 1132 (Ariz. 1982), cert. denied, 459 U.S. 1070 (1982), and individual clauses must be read in the context of the policy as a whole "in order to give a reasonable and harmonious meaning and effect to all of its provisions." Federal Ins. Co. v. P.A.T. Homes, Inc., 547 P.2d 1050, 1053 (Ariz. 1976), overruled on other grounds by Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 682 P.2d 388 (Ariz. 1984). In addition, Arizona courts, in interpreting insurance contracts, employ the reasonable expectations doctrine originally set forth in Darner Motor Sales, Inc., and will refuse to apply even unambiguous insurance contract provisions in certain circumstances. See Gordinier v. Aetna Casualty and Surety Co., 742 P.2d 277 (Ariz. 1987). The policy provides coverage for claims brought against the insured 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." The policy defines an "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Further, the policy defines "property damage" as "physical injury to tangible property, including all resulting loss of use of that property" or "loss of use of tangible property that is not physically injured." As previously stated, Defendants rely on Advance Roofing and assert that faulty workmanship does not constitute "property damage" caused by an "occurrence" pursuant to the policy. In Advance Roofing, Advancing Roofing entered into a contract with Villa West IV Homeowners Association ("Villas West") to replace the roofs of 250 units in a housing complex governed by Villas West. See id. at 1228. After all of the work was not performed by Advance Roofing, Villas West filed a complaint alleging, among other things, that -4Case 2:03-cv-01495-RGS Document 48 Filed 04/06/2006 Page 4 of 8

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Advance Roofing replaced only 40 roofs. See id. at 1229. It was further alleged that the work performed by Advance Roofing was not completed in accordance with the requirements of the contract and was not performed in a good and workmanlike manner. See id. Subsequently, Advance Roofing requested that USF&G defend it against the claims asserted by Villas West. See id. USF&G denied coverage, claiming that it had no obligation to defend or indemnify Advance Roofing concerning the allegations asserted in the complaint. See id. USF&G then filed an action for declaratory judgment to resolve the coverage issue. See id. One of the primary issues before the court was whether there were property damages caused by an occurrence. The court of appeals observed that the claims alleged in the underlying case were essentially claims of faulty workmanship based upon the insured's failure to comply with the requirements of the subject contract, see id. at 1233, and held that "mere faulty workmanship, standing alone, cannot constitute an occurrence as defined in the policy, nor would the cost of repairing the defect constitute property damages." Id. The Court finds that Advance Roofing is distinguishable from the instant matter. Advance Roofing holds that faulty workmanship, by itself, does not constitute property damage caused by an occurrence where the insured's work was not performed in a workmanlike manner. In Advance Roofing, the claimant did not allege or prove property damage and there was no evidence that any damage was caused by the defective work or materials of a subcontractor. To the contrary, this case involves tennis courts, basketball courts, and/or multipurpose courts that were indisputably damaged due to ASR, an unexpected and unintended reaction of the aggregates in concrete, which was designed, mixed, and manufactured by a third-party subcontractor. Thus, the damages in this case have gone beyond mere faulty workmanship by the insured. Accordingly, the blistering and delamination occurring on the courts as a result of the ASR condition in the concrete supplied by United Metro constitutes "property damage" as defined under the plain terms of the policy.

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Moreover, the blistering and delamination occurring on the courts as a result of the ASR condition constitutes an "occurrence." The term "accident" is not defined in the policy and Arizona courts have not addressed the term "occurrence" in the context of a commercial general liability policy. However, other jurisdictions have explained that an accident, when it is a source and cause of property damage, within the terms of a liability policy is an "unexpected, unforeseen, or undesigned happening or consequence from either a known or unknown cause." Geddes & Smith, Inc. v. Saint Paul-Mercury Indem. Co., 334 P.2d 881, 884 (Cal. 1959) (quoting Hauenstein v. Saint Paul-Mercury Indem. Co., 65 N.W.2d 122, 126 (Minn. 1954)). Additionally, the Alaska Supreme Court has determined that an "occurrence" includes faulty workmanship performed by a subcontractor because the resulting damage is "neither expected nor intended." Fejes v. Alaska Ins. Co., Inc., 984 P.2d 519, 523 (Ala. 1999). Therefore, the Court finds that the damage to the courts was the result of the unexpected, unintended, and continuous exposure to the ASR condition in the concrete constituting an "occurrence." The Court, thus, concludes that there was "property damage" caused by an "occurrence" pursuant to the policy. The Court now addresses whether any of the policy's exclusionary provisions apply. B. Policy Exclusion l ­ Damage to Your Work Exclusion l of the policy excludes coverage for: "'Property damage' to 'your work' arising out of it or any part of it and included in the 'products-completed operations hazard.'" Exclusion l contains an exception that states the following: "This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor." "Your work" is defined by the policy as "[w]ork or operations performed by you or on your behalf" and "[m]aterials, parts or equipment furnished in connection with such work or operations." The "products-completed operations hazard" includes "all 'bodily injury' and 'property damage' occurring away from premises you own or rent and arising out of 'your product' or 'your work'" unless the work has not yet been completed. Pursuant to the -6Case 2:03-cv-01495-RGS Document 48 Filed 04/06/2006 Page 6 of 8

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definition, work is deemed completed "[w]hen all of the work called for in your contract has been completed." Further, "[w]ork that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed." It is undisputed that damages alleged in the instant matter fall within the "products-completed operations hazard." Defendants contend that the Exclusion l applies to preclude coverage because the damage claimed was to the insured's own work. Defendants argue that the exception to the exclusion does not apply in that United Metro was not a subcontractor, but simply acted as a materialman. Initially, the Court notes that the term "subcontractor" is not defined in the policy. As such, the issue is certainly less clear than it would have been had Defendants defined "subcontractor." In addition, unlike a pure material supplier, the product involved here was custom-manufactured with an intended mixture of ingredients. Accordingly, the Court finds that this tends to remove such an entity from being classified as a materialman to one of a subcontractor. Therefore, since "the damaged work or the work out of which the damage arises was performed" by a subcontractor, the exception to Exclusion l applies in this case. The Court, having found that there was "property damage" caused by an "occurrence" pursuant to the policy, and that none of policy's exclusionary provisions apply, will deny Defendants' Motion for Summary Judgment and will grant Plaintiff's Cross-Motion for Partial Summary Judgment. /// ///

CONCLUSION For the reasons stated in the foregoing discussion, IT IS ORDERED that Defendants' Motion for Summary Judgment (Doc. #33) is DENIED;

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IT IS FURTHER ORDERED that Plaintiff's Cross-Motion for Partial Summary Judgment (Doc. #38) is GRANTED. DATED this 5th day of April, 2006.

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