American Bar Association Forum on the Construction Industry ____________________________________________________________________

Defective Work, Effective Litigation, Claims, Coverage and Trends

Are Construction Defects Included in the Class of Claims Intended to be Covered by Builder’s Risk Policies And Property Owner Policies - Selected Issues

William D. Lyman Bedrava & Lyman Chicago, Illinois

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Oct 3-4, 2002 The Hilton Minneapolis 2002 American Bar Association

Are Construction Defects Included in the Class of Claims Intended to be Covered by Builder’s Risk Policies And Property Owner Policies Selected Issues I. ..................................................................Property Insurance for the Project Under Construction

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II..................................................................................................................................... Subrogation

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III......................................................................................................................... Issues of Coverage A.............................................................................................................................Generally B.................................................................................................................Insurable Interest C............................................................................................................... Term of Coverage 1................................................................. Completion of Construction/Occupancy a.................................................................................Temporary Occupancy b. ............................................................................ Elements of Completion c..... Fact Question Depending Upon Insurance and Construction Contracts ..........................................................................................................9 d. ...................................................................Ready for Use and Occupancy 2......................................................................................................... Calendar Term

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IV. ............................................................................................What Constitutes a Loss or Damage Vermont .............................................................................................................................19 Kentucky ............................................................................................................................22

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V............................................................................................................ Defective Work Exclusions Louisiana............................................................................................................................22 New York...........................................................................................................................26 Florida ................................................................................................................................28 Vermont .............................................................................................................................30 Virginia ..............................................................................................................................32 New Hampshire .................................................................................................................35 Washington ........................................................................................................................37

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VI. ................................................................................................... Natural Occurrence Exclusions A...........................................................................................Heave from Frost and Freezing Kentucky ............................................................................................................................40 Michigan ............................................................................................................................41 New York ..........................................................................................................................42

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VII .................................................................................................................. Sue and Labor Clause California ...........................................................................................................................43 Minnesota...........................................................................................................................46

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Florida ................................................................................................................................47 VII ............................................................. Loss Caused By an Insured Risk and an Excluded Risk

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VIII......................................................................................................................... Owners’ Policies A..............................................................Exclusions for Defects in Design or Construction B......Latent Defects as Excluding Coverage in Owners’ Policies for Construction Defects ................................................................................................................................57

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IX. ....................................................................................... Waiver of Exclusions By Endorsement

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Are Construction Defects Included in the Class of Claims Intended to be Covered by Builder’s Risk Policies And Property Owner Policies Selected Issues I.

Property Insurance for the Project Under Construction

The usual vehicle for insuring against accidental damage to or destruction of any structure, whether it be a commercial or residential, is a fire insurance policy. These forms are more or less standard in the United States, including extended coverage for perils other than fire, and endorsements to cover personal property on the premises.1 The forms are not, however, available for new construction, including, occasionally, remodeling of existing structures. First, structures under construction frequently represent risks inherently and substantially greater and more difficult to evaluate than the same structure would when complete. Second, construction projects involve a changing value of the risk. As the project progresses toward completion it increases in value. Third, in standard fire policies, insurers have generally required that the insured have an ownership interest (called “insurable” interest) in the structure. In a construction project, there are a variety of parties that have an interest in the facility being constructed.2 The general rule is that the risk of loss during construction rests with the builder, assuming the owner to be free from fault.3 It is a corollary to the rule that where one agrees to do, for a fixed sum, a thing possible to be performed, he will not be excused or become entitled to additional compensation because unforseen difficulties are encountered.4 Hence, contractors, although not the owner of the facility, generally have insurable interest in the facility while it is being constructed.5 As a consequence, a particular form of insurance, known as “builder’s risk” insurance has

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been developed by which to insure new construction. One of the parties is virtually always required by the contract documents to insure the physical structure as it is being constructed. Failure to provide and maintain the coverage for the duration of the project is a breach of contract, and the resulting damages likely to be the cost to restore the loss.6 AIA A201 imposes the obligation to procure insurance during construction of the project on the owner. Unless otherwise provided, the Owner shall purchase and maintain, in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located, property insurance written on a builder’s risk “all-risk” or equivalent policy form in the amount of the initial Contract Sum, plus value of subsequent Contract modifications and cost of materials supplied or installed by others, comprising total value for the entire Project at the site on a replacement cost basis without optional deductibles. Such property insurance shall be maintained, unless otherwise provided in the Contract Documents or otherwise agreed in writing by all persons and entities who are beneficiaries of such insurance, until final payment has been made as provided in paragraph 9.10 or until no person or entity other than the Owner has an insurable interest in the property required by this paragraph 11.4 to be covered, whichever is later. This insurance shall include interests of the Owner, the Contractor, Subcontractors and Sub-subcontractors in the Project.7 Which of the parties is to obtain the coverage is not a given, however. Many construction contracts require the coverage to be obtained by the contractor. If the party responsible to procure the insurance is a bonded contractor and the bonded contractor does not provide the coverage, its sureties may be liable to restore the loss.8 In any case, all parties to the project, owner, lender, contractor and subcontractors should be named as additional insureds. II.

Subrogation

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Most construction contracts provide that Owner, Contractor and Architect waive all rights against each other for damages, except such rights as they may have to the proceeds of such insurance.9 Nevertheless insurance companies that pay claims frequently seek reimbursement from other parties. There is a plethora of cases dealing with the question of whether the paying company is precluded from pursuing a subrogation claim under the contract language, inclusion of additional insureds and the facts of the case. This paper is limited to coverage issues. Subrogation issues are not covered. III.

Issues of Coverage

A.

Generally

Builder’s risk policies are generally written on proprietary forms rather than industry wide standard forms. They can be written on a “named risk” or an “all risk” basis. A named risk policy lists the risks to be covered. An example of “all risks” language is coverage against “all physical loss and/or damage from any cause whatsoever” occurring during the policy period.10 While these policies may be called “all risk” policies, as Second Circuit Judge Friendly once observed, the label is a misnomer. The policies typically contain exclusions.11 “All risk polices are not ‘all loss’ policies; ... they contain express written exclusions and implied exceptions which have been developed and applied by the courts over the years.”12 In a nutshell, ‘a policy of insurance insuring against 'all risks' is to be considered as creating a special type of insurance extending to risks not usually contemplated, and recovery will usually be allowed, at least for all losses of a fortuitous nature, in the absence of fraud or other intentional misconduct of the insured, unless the policy contains a specific provision expressly excluding loss from coverage.’13 A fortuitous event is one which occurs accidentally, as a layman, and not a technician or scientist would understand that term. ... In other words, bearing in 3

mind the Court's narrow interpretation of insurance exceptions, including those implied by public policy, and the traditionally broad view of all risk coverage, damage is fortuitous [if] neither party knew or contemplated that there was any defect at the time of the issuance of the insurance contract.14 If written on an all-risk basis, the exclusions generally define the coverage. In differing formulations, standard builder’s risk coverages exclude losses to the work itself from faulty design or workmanship.15 There are generally fewer exclusions than in CGL policies. In some cases, the exclusions are subject to negotiation. Relevant to this discussion, the following perils are generally excluded: !

Operation of building ordinances or laws;

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Design error, except resulting damage;

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Faulty workmanship or materials, except resulting damage;

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Delay, loss of use, loss of market, and other consequential loss.

B.

Insurable Interest

It is important to correlate the coverage under the policy with the parties’ respective obligations to restore damage under the terms of the construction contracts, so that the party making the claim on the policy has an insurable interest in the property. In Dolajak v. State Automobile and Casualty Underwriters,16 an hour before erection would have been completed a windstorm blew over and destroyed a used Butler grain silo owned by the owner of the property and erected by the contractor. Although the contractor was held liable to the owner to replace the silo, it was able to recover only the cost of its own materials and labor, and not the replacement cost of the silo, on the grounds that it lacked an insurable

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interest in the silo. The court reasoned that the materials not owned or furnished by him were not "usual and incidental" to his business within the meaning of the policy; even though, pursuant to the policy's reporting requirements, he had reported the value of the silo and paid premiums which had been set accordingly. The contractor had also previously paid premiums on buildings under erection for which he had not furnished all materials. The lack of knowledge by the insurer that he had not owned materials precluded the insurers being estopped to deny coverage as to the value of the silo.17 C.

Term of Coverage

“A ‘builder's risk’ policy which insures during the ‘course of construction,’ regardless of its date, becomes effective as of the time construction begins. When the clause also specifies coverage for materials being used in the “construction” of a building or vessel, coverage has been held to commence when materials for the construction are brought to the site of construction with the intention, in due course, of incorporating them into a structure.18 The insurance policy generally provides for termination upon the completion of construction,19 occupancy of the premises20 or the stated time period of the policy.21 1.

Completion of Construction/Occupancy

Completion of construction and/or occupancy of the premises being constructed generally terminates the builder’s risk policy. Courts have employed various criteria to determine when that occurs as is discussed in the following sections. a.

Temporary Occupancy

In Hendrix v. New Amsterdam Casualty Company, 22 the policy of insurance by endorsement covered the building “while in the course of construction.” It further provided: 5

'In consideration of the reduced premium for this policy for the use of the Builders' Risk Completed Value Form No. 17G which applies only during the period of construction, and notwithstanding anything to the contrary elsewhere in this policy, it is a condition of this insurance that the premises shall not be occupied without obtaining the consent of the company endorsed hereon, and rate adjusted accordingly.'23 In Hendrix, the building, without the consent of the insurer, had been rented to prospective buyers who occupied the building as their living quarters for approximately two and a half months ending some fourteen days prior to the fire. The insured emphasized that at the time of the fire the building was unoccupied, and contended that occupancy merely suspended, but did not forfeit or terminate, the policy of insurance. The trial court determined as a matter of law that the occupancy breached a condition of the policy and terminated the coverage which was not reinstated by the vacating of the premises prior to the fire. For this reason, and because the trial court was of the further view that the construction was completed prior to the fire, the court granted the insurance company’s motion for summary judgment. The circuit court of appeals affirmed. The second ground for the decision in Hendrix was that the construction of the building was completed. The appellate court found that the fact that the house had been lived in by renters for two and a half months supported, but did not conclusively establish, completion. In other words, under the policy there could be completion of construction without occupancy and there could be occupancy without completion, but the two grounds are related. Perfection of the building is not essential to its completion under the policy. The work of merely repairing defects or remedying inferior workmanship did not preclude a determination that the building had been completed for the purposes of the policy. The only item in Hendrix claimed by the insured to

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have remained unfinished that did not fall into those categories was the installation of kitchen cabinet shelves. The court held that if, technically, it could be argued that this item or any other work of similar nature, in view of the substantial completion otherwise and the prior occupancy, was not de minimus, there would still remain the breach of the condition of occupancy which terminated the risk. On the other hand, storage of a small amount of grain (about 5% of the amount the facility was being constructed to hold) while the building was still under construction was held to not constitute occupancy so as to negate coverage under the builder’s risk policy in Reliance Insurance Company v. Jones.24 The court reasoned that a building is occupied when it is put to a practical and substantial use for the purpose for which it was designed. See other cases in the sections that follow. b.

Elements of Completion

In Fireman’s Fund Insurance Company v. Miller’s Mutual Insurance Association,25 the court employed a three element test to determine that whether the builder’s risk policy terminated. The court held that coverage under the policy would extend until the three elements of (i) completion, (ii) acceptance and (iii) cessation of interest existed concurrently. In Fireman’s, Keota Mill and Elevator Company (Keota) contracted with Tandy Industries, Incorporated (Tandy), for the construction of a fertilizer blending plant. Tandy obtained a builder's risk insurance policy from Fireman's Fund for coverage of losses during construction. Construction progressed normally with Tandy removing its workers from the construction site on April 20, 1968, concluding construction of the plant. Keota obtained its insurance coverage from Millers' Mutual on April 20, 1968, with coverage for one year 7

thereafter. On April 26, 1968, two Tandy representatives came to the Keota jobsite to determine if the building was completed. It was found that certain conveyor belts were loose, a hood had not been installed, and the scales used in weighing the various ingredients to be blended were out of adjustment by ten percent. The belts were adjusted and a hood installed the next day, thus remedying these deficiencies. On April 29, 1968, the building was destroyed by fire. Millers' Mutual and Fireman's Fund each paid $15,000 under their respective policies to allow Keota immediately to rebuild the plant, and reserved the question of ultimate liability to be determined later. After trial on the question of liability, the trial court concluded Millers' Mutual was obligated for the full loss, and accordingly entered judgment in favor of Fireman's Fund for the amount it had previously paid under its policy. The trial court found expressly that on April 27, 1968, after the above mentioned conveyor belts had been adjusted, the manager of Keota advised Tandy that he would accept the building and equipment as being completed, and that Tandy had performed its contract; that ten days before that date Keota had moved fertilizer into the building and had made sales of the sacked fertilizer; on that same date, Keota unloaded bulk fertilizer from railroad cars into the bins inside the new building; and that Keota had actually been occupying and in physical control of the newly constructed building since April 20, 1968. Miller’s Mutual appealed. The court found that by the terms of the policy itself, "Coverage attaches . . . until the insured building or structure shall have been fully completed, accepted by the purchaser and the interest of the Insured shall have ceased." In Fireman’s, the court concluded that the one remaining item of correction work, adjusting the scale, was of such a de minimus nature as to deny the palpable fact of completion. 8

The trial court found oral acceptance and the fact that Keota had occupied the building and obtained property insurance from Miller’s Mutual tantamount to acceptance. The appellate court agreed. The court also found that the fact that there was a balance which remained owing to Tandy for its work was not sufficient interest to extend coverage under the builder’s risk policy. Upon completion of the construction, the contractor has a claim for payment in full, even in the event the building is destroyed before he receives payment. The destruction of the building does not likewise destroy the contractor's right to payment for the building which had been completed.26 c.

Fact Question Depending Upon Insurance and Construction Contracts

In a large, complex project, the issue of completion may depend upon a broad range of facts, making the issue unsusceptible of determination by summary judgment. An example is found in Philadelphia Facilities Management Corporation v. Saint Paul Fire and Marine.27 In that case, PGW, a predecessor of plaintiff, Philadelphia Facilities Management Corporation (PFMC), contracted with J.F. Pritchard & Company (Pritchard) to construct a liquefied natural gas (LNG) plant in Philadelphia. Among the provisions of the contract, Pritchard was to procure installation floater insurance naming PGW as an insured. Pritchard had carried this type of insurance with St. Paul continuously for some fifteen years prior. The policy provided insurance for new construction projects, such as the LNG plant, subject only to Pritchard reporting the costs of the improvements for the purpose of premium computation. By the summer of 1969, construction of the LNG plant had progressed to the stage at which the pressure and mechanical tests mandated by the contract could be conducted. The date of initial operation of the plant was August 13, 1969. Certain designated items remained to be corrected, but these corrections were completed to PGW's satisfaction by September 8, 1969. The latter date was therefore the date

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upon which the plant was submitted by Pritchard to PGW for its 'care, custody and control', within the meaning of General Provisions of the construction contract. On October 24, 1969, before commencement of the remaining performance tests, a fire occurred in the LNG plant, causing a loss alleged to total $428,002.55. PGW notified St. Paul of the loss, but St. Paul took the position that the policy had terminated prior to completion. PGW, and its carrier sued St. Paul and Pritchard under the alternative theories that either St. Paul breached the insurance contract and was responsible for the loss, or if not, then Pritchard was in breach of the insurance provisions of its construction contract. After an initial round of discovery on the sole issue of the insurance coverage, the plaintiff filed a motion for summary judgment against Pritchard and St. Paul. Pritchard joined in the motion against St. Paul. The policy in Philadelphia Facilities Management provided, in relevant part: 5. INTEREST Covering on all materials, equipment, machinery and appurtenances and other property of any nature whatsoever, shipped by or for the assured or for which the assured may have an interest or responsibility or which the assured may be liable or assumes liability prior to loss or damage including the value of labor performed in erection or installation. *** 7. COVERAGE ON LOCATION This insurance covers from the time property passes out of custody of carriers (as specified in paragraph 6) at place of erection or installation and continuously thereafter while being erected or installed, until erection or installation as contracted or agreed by the assured has been completed or tested and accept by the purchaser. Thus, the court found that the crucial clause of the policy in connection with the issue is found in paragraph 7, which called for coverage “until erection or installation as contracted or agreed by the assured has been completed or tested and accepted by the purchaser.” Resolution of the dispute among the parties turned upon a determination of the fact whether the plant was 10

completed as that term is defined under paragraph 7 of the policy at the time of the fire on October 24, 1969. The court rejected employing the cases proposing an objective standard. It reasoned *** we do not consider the cited cases, and the purported 'objective' standard of completion which they are said to embody, as relevant to the determination of coverage in the context of the present motion for summary judgment, because the term, 'completion', as used in a policy of installation floater insurance, can only be defined within the context of the construction project which it was intended to insure. 'Completion', in reference to a construction project, means whatever the parties to that particular construction contract have intended the term to mean, pursuant to the provisions of the construction contract itself.28 The construction contract contained numerous provisions regarding the contractor’s responsibilities toward performance testing various components of the new plant and completion. While the tests were not completed, the building was completed except for some insulation, painting, grading and other work. Witnesses for the plaintiff were inconclusive as to whether the painting, grading and other work were material to the operation of the facility. Also the requisite tests could not be performed because the underground storage tank for the LNG was unusable. The testimony was that Pritchard had nothing to do with the replacement of the underground storage tank. Accordingly, the court held that it could not make a determination on the motions for summary judgment. d.

Ready for Use and Occupancy

In Hartford Fire Insurance Company v. Riefolo Construction Co., Inc.,29 the Board of Education engaged the five defendant contractors to construct the Essex County Technical Careers Center in Newark, New Jersey. The General Conditions obligated each contractor to procure and maintain builder's risk insurance "during the life of (the) contract on the insurable

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portion of the project." Each contractor was also required to be bonded. The General Conditions also obligated the contractors to repair any and all damage to the building occurring to the building prior to its acceptance, unless such damage was due to the fault of the Board. In April 1972, each contractor received a written "Notice to Proceed," which stated that the scheduled completion date was October 2, 1973. Construction was still not complete on April 1, 1974, however, at which time the Board determined that it needed to assign employees to the Careers Center to prepare for the 1974-1975 school year. On May 17, 1974, the architect wrote the Board that its staff could use the executive office area but that "no educational process may be carried on until the building is 100% complete and inspected and approved by the Division of School Building Services of the State Department of Education." In June 1974 certain personnel were assigned to the building. By August 8, the day before the fire, 16 persons, including 6 teachers, had been assigned to the building, and Board employees occupied the entire first floor and the library on the second floor. Portions of the third floor were being used to store furniture .Employees were interviewing prospective students at the site but no classes had been held there. Construction continued while the Board was using the building. By August 8 the building was between 90% and 95% complete. On that date, the Board ordered casualty insurance from Hartford for the project's completed portion. Hartford supplied such coverage and a binder was issued evidencing coverage in the amount of $6,500,000 commencing that same day. On the next day, August 9, a fire of undetermined origin started on the third floor of the building, causing $250,000 in damage. Eventually, the Board notified all contractors to begin repair work. In a telegram sent to four of the builders, the Board stated that its payments for the work would 12

be reimbursed by its own insurer and the contractors' builder's risk carriers. The Board and Hartford later reached an agreement whereby Hartford advanced repair monies on condition that it be subrogated to the Board's claims against the contractors. The contractors were paid with the monies so advanced. When the Board and Hartford sought reimbursement from the contractors, they found that three had allowed their policies to lapse prior to the fire without giving the Board notices as required by the general conditions of the construction contract. Hartford brought suit to recover the monies that it had paid the contractors to repair the damage. The trial court held that the provisions requiring the contractors to repair all damage should be read together with their obligation to maintain builder's risk insurance. The trial court found that the Board was occupying the building and that construction was "substantially" complete at the time of the fire. It further found that builder's risk insurance would not have provided coverage on the occurrence of either event. The trial court held that the risk of loss had passed to the owner; thus the contractors were excused from their obligation to maintain insurance and did not bear the risk of loss. The trial court also ruled that the contractors’ failure to notify the Board of the lapse of their policies was a breach without a loss. By obtaining insurance on August 8 without the required notice, the Board did precisely what it would have done with notice. Judgment was accordingly entered for defendants. The Appellate Division reversed and remanded30 The appellate court concluded that the risk of loss during construction is borne by the builder absent contrary contractual language. Holding that the insurance requirement did not alter this general rule, the appellate court found the provision imposing the obligation to repair separately enforceable without reference to insurance availability. 13

The New Jersey Supreme Court agreed with the appellate court that inclusion of a provision requiring a builder to maintain insurance does not implicitly modify the contractual allocation of risk. There is no contract language conditioning the contractors' risk of loss on the availability of builder's risk insurance to the contractors. It also agreed with the appellate court that the contractor’s performance bonds provided for liability of the sureties for the contractors’ failure to repair the fire damage. That, of course, was enough to impose liability; however, the Supreme Court went further. It opined in dicta that Although the building might have been ‘substantially complete’ so as to permit recovery of the price on a construction contract, the use of that term to interpret the phrase ‘in the course of construction’ in an insurance contract is inappropriate and misleading. The proper standard is that builder's risk coverage terminates when the building ‘is ready for the use or occupancy for which it was intended.’31 *** Occupancy as used in builder's risk policies is interpreted to mean putting the structure to the practical and substantial use for which it was designed.32 Although the proper standard for measuring ‘occupancy’ was employed, the trial judge misconceived the availability of builder's risk coverage for an occupied building. Builder's risk insurance is not limited to unoccupied structures. Consent of the insurer and a ‘proper rate adjustment’ would enable a builder to maintain insurance on even a fully occupied building, provided it was ‘in the course of construction.’33 Two of the New Jersey Supreme Court justices dissented and agreed with the trial judge. Such occupancy of the building by the owner created risks unrelated to construction for which the builders should not be held responsible. Hundreds of people had been using the building for Board purposes. In this situation, as the trial court found, the risk of loss had passed from the builders to the Board. The latter had recognized this by providing for its own insurance coverage. Indeed, although the cause of the fire was never determined, the stipulated facts show that the fire started among stored cartons belonging to the Board at a time when Board personnel were present in the premises. Absent a showing that one of the few construction employees in the building had caused the fire, the risk was that of the Board and was covered by the Hartford policy.34

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In Water Street Development, Ltd. v. J.W. Corr Agency, Inc.,35 the Rhode Island Supreme Court followed the decision in Riefolo. It held that the occupancy provision in the builder’s risk policy is not triggered until the building becomes occupied or to a practical and substantial use for the purpose for which the structure was intended. The fact that the building is temporarily used or occupied before the construction is completed does not necessarily justify a conclusion that the building was occupied within the meaning of the policy.36 2.

Calendar Term

In the unreported case of Clorox Company v. KPK Corporation,37 the Clorox Company acquired a building from Comerco. Comerco had originally contracted with KPK for construction of the building and an adjoining railroad siding on October 22, 1976. In July, 1980 and April, 1981 windstorms caused part of the roof to blow off the Building, necessitating repairs and causing damage to the contents. After the April, 1981 windstorm, Comerco inspected the roof and allegedly discovered that KPK had failed to comply with the contract's specifications for construction of the roof. Clorox ultimately had to replace the entire roof due to KPK's alleged failure to comply with the specifications. Clorox sought damages for breach of contract (Count I), breach of express warranties (Count II), and breach of implied warranty (Count III). In response to Clorox’s claims, KPK filed a third-party complaint against National Union, from which it had purchased an “all risk” builder’s risk policy. National Union denied coverage. The court found that with respect to coverage, the insurance contract designated the term of the policy at paragraph 5 as: TERM: The term of this insurance is as stated in Item C of the Declarations 15

attached hereto. Item C of the 'Builders Risk Declarations' provides: Clause 5 TERM From 8-11-76 until (a) the interest of the insured in the property covered ceases, or (b) until the construction is completed and accepted, or (c) 30 days following final completion of the project, whichever first occurs as to (a) or (b) or (c). In no event, however, the above provisions notwithstanding, shall this policy cover beyond 1/11/77, which is the expiration date of this policy.38 The court found that the losses for which KPK had been sued and for which it was seeking coverage from National Union were construction defects and not covered. More importantly, the court concluded, the policy had expired by its very terms at the time the loss had occurred. The only losses covered by the policy were losses occurring during its term, and the losses at issue in the case did not occur during that period. Turning to builders risk policies in particular, the general rule is that where a builders risk policy is issued to insure a building during the course of construction, the insured risk terminates upon the completion of the construction.[Citation omitted.] This rule is in keeping with the underlying concept that a builders risk policy is a property loss insurance contract by which a builder seeks to insulate himself from losses which he might suffer because of damage to or loss of that which the builder has contracted to produce for a fee. [Citation omitted.] Such a policy can insure against any risk which the parties agree upon and state in the policy. However, such policies generally impose no obligation upon an insurer to defend an insured.39 KPK argued that the policy was ambiguous because it did not state that a claim for coverage under the policy must be made within the term nor did the policy state that the loss must occur within the term. The court held that the argument was without merit because the policy clearly covered only losses occurring during the term, which ended January 1, 1977. IV.

What Constitutes a Loss or Damage

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Where defective design or workmanship causes an accident, with physical injury to property, courts will generally find coverage and then determine whether an exclusion applies. Where the result of the defect of design or workmanship is a defective or malfunctioning component or structure, the court may find that there has been no covered loss. In other words, in some jurisdictions, defective work is not an occurrence to trigger coverage. Defective work which causes an accident is an occurrence under the terms of the policy. Thus, even absent the exclusions, an “all risk” policy has been held to not be an “all loss” policy. The question then becomes one of whether or not the exclusion applies. (1) The loss must be fortuitous ... (2) The loss must not result wholly from an inherent quality or defect in the subject matter ... [it] must result from at least one extraneous cause ... (3) The loss or damage must not result from the intentional misconduct or fraud of the insured ... [and] (4) The risk must be lawful.40 This four-pronged Avis test reflects a deeply-rooted public policy that, regardless of the parties’ contractual agreement, insurance should only cover losses resulting from a casualty.41 Damage which is certain and inevitable and which either (1) proceeds from an inherent vice or infirmity present at the time that the policy was issued as a veritable time-bomb, already set and ticking, as demonstrated in [citations omitted] or (2) is the natural, expected result of normal wear and tear or deterioration, [citation omitted] is not the result of a casualty and cannot be covered. Thus, the requirements of a fortuitous or accidental event, [citation omitted] and of an external, rather than an internal or inherent cause work together to guarantee that no loss may be insured against unless it arises from a sudden, accidental and unexpected source. [Citations omitted.] Courts have viewed the close cooperation between the fortuitousness and the external, or extraneous cause requirements in such a manner as to present the two requirements as a sort of partnership [citations omitted] for examples of fortuitousness being used interchangeably or in close connection with external or extraneous causation. As such, an all risk policy covers only losses caused by "fortuitous and extraneous" events. Compagnie des Bauxites III, includes as part of its fortuitous 17

requirement, a further requirement that the cause of harm be an "extraneous force" emanating "from without" and teaches that cases in which "external causes intervened" satisfied the fortuitousness requirement for coverage. Thus, every all-risk policy includes, as part of its fortuitousness requirement, an implicit requirement of external cause.[Citation omitted.]42 An example of defective design or workmanship causes an accident, with physical injury to property is found in the case of Standard Structural Steel Co. v. Bethlehem Steel Corporation.43 In that case, Standard Structural Steel Co., plaintiff, a contractor, was using a complex barge and derrick system to remove a 360 ton bridge section, which, in part collapsed causing physical damage to other components of the project. Standard alleged that the accident was caused by a windstorm, an external force. The court found that it was not a windstorm that caused the accident, but Standard’s own miscalculations in the design of the cable guides (too small) that caused two accidents: 1. The 150 pound cable guide on the northeast shear leg broke completely free from the shear leg at the weld, fell to the barge deck, and then bounced into the water. As a result, the approximately 2500 to 3000 pound free end of the cable cascaded violently into the channel bars below, striking and severely bending them just above the gripper system. This event also caused substantial damage to the A-1 terminal box which housed critical components of the electrical, air and hydraulic systems, as well as a loss of electrical power. *** Due to the loss of electrical power, the lowering operation ceased. Shortly thereafter, Standard discovered that the cable guide on the southwest shear leg, identical to that on the northeast shear leg, had begun to twist and was significantly bent. Damage, however, was limited to the northeast and the southwest cable guides. 2. Approximately forty minutes after the fall of the northeast cable guide, and when the remedial work was almost completed, one or more of the positioning cables holding the barges, which supported the entire lifting apparatus in place on the river, broke. The barge assembly drifted, and the derricks, still holding the suspended center span, or the suspended center span itself, made slight contact with the cantilever section of the remaining bridge. Tugboats were called in to secure the derricks. This accident, hereinafter referred to as the "second accident," applied some force to the bridge strand lifting cable, as that cable was already supporting a 360 ton center span, when the contact occurred 18

between the lifting system, the suspended center span, and the still-standing bridge section. ***As a result of the second accident, further damage was sustained by the electrical, hydraulic and air systems. An electrical conductor was sheared and the hydraulic and air hoses and parts, which had previously been secured to the derrick, became unsecured and dangled loose and damaged. 44 The court, however, found that Standard had, nevertheless, proven its prima facia case. The loss suffered was fortuitous. The precipitating forces here, the falling of the northeast cable guide and twisting of the southwest cable guide were accidents as a layman would understand that term. This particular jacking system had never before been employed using this special kind of bridge strand cable in this unique method of lifting operation and the resulting damage was not certain or inevitable. Although Taylor, the iron erection superintendent had warned [Standard] about the possibility of deleterious consequences of such a small diameter of cable guide, a short time prior to the lift, neither contracting party knew of and recognized the seriousness of the problem at the significant and controlling time, namely, at the time of the issuance of the insurance policy, *** In brief, a loss caused by ‘an unknown design defect is one caused by a fortuitous event.’45 Liberty Mutual had issued Standard a Contractor’s Equipment Form (all risk) policy which provided coverage for the subject loss and which did not contain a defective design or construction exclusion. The court held that the cost to repair the damage caused by the accident was covered by the policy. Vermont In City of Burlington v. Hartford Steam Boiler Inspection and Insurance Company,46 on the other hand, the City of Burlington, Vermont, brought a breach of contract claim against various insurance companies which failed to reimburse the City for repair costs and consequential damages resulting from physical damage experienced in the boiler unit of a Cityowned electric energy generating facility. In 1982, the City contracted with Zurn Industries, Inc. ("Zurn"), to design, engineer, and construct a wood-fired steam electric energy generator. The 19

boiler portion of the generator included an economizer which consists of metal tubes welded together. The welds are appropriately called "shop welds" since they are performed at a shop prior to the unit being shipped and installed. The completed economizers were then delivered and installed at the facility and tested and accepted by the City. The boilers became operational in 1983. Eventually, some of the welds developed leaks and the City sued the various carriers , seeking reimbursement for: (1) costs incurred during 1995 to 1999 to repair 34 weld leaks in the lower section of the economizer; (2) costs incurred to hire Bremco to remove and replace all the welds in the lower section of the economizer; (3) consequential damages associated with the extended mandatory shutdown of the plant for repairs by Bremco, including costs to secure replacement power and lost opportunity sales of electric energy; (4) costs to re-fire the boiler after each repair job; (5) expected damages to remove and replace all allegedly defective welds in the upper and middle portions of the economizer; and (5) prejudgment interest. The carriers each sought summary judgment denying coverage. Allianz, one of the insurance carriers, issued an “‘all risks builder’s risk’ insurance policy covering the City ‘against all physical loss and/or damage from any cause whatsoever.’”47 The policy was in effect at the time the defective welds were made, but terminated before the boilers were put into service. Allianz argued that although the defective welds were made during the policy period, because none of the damages manifested themselves until long after the termination of the policy, no loss had occurred during the policy period to trigger coverage. The City argued that the defective welds, themselves were the damage. The issue is whether the “exposure” to loss or the “manifestation” of the loss that is the trigger. The court held that case law does not support the argument that a design defect in and of 20

itself constitutes physical injury or damage to property from an external cause. We are mindful of the many cases that have found defective workmanship to be a risk covered by all risk policies. These cases, however, have dealt with an accident caused by defective workmanship, not with the cost of repairing or replacing defective workmanship. In our case, the faulty workmanship, the twist, has not led to any such accident. In fact, in all of the cases cited by plaintiff, and that we have found on this issue, faulty workmanship or design led to a discrete event that a reasonable person would call an accident. And, in each case, the court faced the question of whether an all risks policy covered the damage from the resulting accident.... That it should cover accidents caused by the negligence of the insured does not justify reading such a policy to cover the costs of replacing or repairing crooked window frames or crooked door frames, even though the crookedness of the frame was undoubtedly the result of the insured's negligence.... Thus, when an insured has made claims for the collapse of the insured subject matter because of faulty design, district courts have awarded as damages the cost to rebuild the structure in its defective state. They have not awarded as damages the cost to redesign or rebuild the structure so as to eliminate the defect. This reflects an interpretation of the all risks policy to cover accidents resulting from defective design or workmanship, but not the cost of repairing the defect itself.48 The court then distinguished its holding that defective work is not a loss from the defective work exclusion. This construction of the scope of coverage of the Allianz policy does not supercede and render superfluous the policy's ‘faulty workmanship’ exclusion. As explained in VELCO49 and Trinity50, the damage caused to a product as a direct result of initial defects in the product are encompassed by the terms "loss" and "damage." Like the ‘faulty workmanship’ exclusions in the Protection Mutual and Arkwright policies, the Allianz "faulty workmanship" exclusion in the Allianz policy is meant to preclude coverage for costs to repair damage to the product directly resulting from the defective welds. Nor does the phrase "any cause whatsoever" save the City; the defective welds may be a "cause" of physical damage to the welds and the economizers, but the welds are not by themselves a ‘loss’ or ‘damage.’51 Another insurance company, the Home Insurance Company issued an all-risks policy which covered the period of time in which the boilers were placed into operation but terminated before the defects manifested themselves. “Under the heading ‘Coverage A, Loss To Property of 21

Insured,’ Home agreed [t]o PAY for loss to the property of the Insured directly damaged by ... Accident (or, if [Home] so elects, to repair or replace such damaged property), excluding ... (f) loss from delay or interruption of business or manufacturing or process ... and (h) loss from any other indirect result of an Accident. The Boiler Policy also provided, under the heading ‘Coverage B, Repair or Replacement,’ that Home would pay to the extent of any indemnity remaining after payment of all loss as may be required under Coverage A, that amount actually expended by the Insured to repair or replace property of the Insured directly damaged by such Accident, which is in excess of the actual cash value of said property at the time of the Accident. The Boiler Policy defined ‘Accident’ as ‘a sudden and accidental breakdown of the Object or part thereof, which manifests itself at the time of its occurrence by physical damage to the Object that necessitates repair or replacement of the Object or part thereof....’ *** The Policy also explains that ‘Accident’ does not encompass ‘depletion, deterioration, corrosion, or erosion of material ... wear and tear ... leakage at any valve, fitting, shaft seal, gland packing, joint or connection ... the breakdown of any vacuum tube, gas tube or brush.’52 The court held that there was no coverage under the boiler policy because there had been no accident when the policy was in effect. There was no breakdown of the boiler welds which manifested itself at the time of its occurrence by physical damage to the welds that necessitated their repair.

Kentucky Applying Kentucky law, the Sixth Circuit Court of Appeals declined to find a duty to defend on the part of the builder’s CGL carrier in response to an underlying complaint filed by the home purchaser that the builder breached the contract by negligently constructing the house which was not in conformity with the contract and applicable plans and specifications.53 The court held that the underlying complaint did not allege an “occurrence” under the policy. The 22

underlying complaint did not allege any damage to or destruction of, or loss of use of property. The buyer of the home did not allege bodily injury. He merely alleged that he was forced at tremendous expense to complete the construction job that the insured contractor had left unfinished. Furthermore, the court held, relevant to a duty to defend, there would be no duty on the part of the insurance company to defend if the home buyer were to have alleged defective or faulty craftsmanship.54 In distinguishing its decision with respect to what is encompassed in the term “occurrence” from that of the Kentucky Supreme Court in a case involving a comprehensive general liability policy, the Sixth Circuit stated that a builder’s risk policy is not entitled to as broad a protection as that afforded by the CGL policy. V.

Defective Work Exclusions

Louisiana In November 1991, construction was begun on an Atrium Tower on Ochsner's Jefferson Parish (Louisiana) campus. The Tower was planned as a fifteen-story building, but the initial phase of construction called for only five stories to be built. The Tower's foundation, designed to support the entire fifteen-story building, was completed in July 1992. It consisted of 70 groups of pre-cast concrete piles with each group covered by a reinforced pile cap. In January 1994, prior to completion of the Tower's initial, five-story phase of construction, Ochsner's general contractor, Broadmoor Construction Co. ("Broadmoor") informed Ochsner of cracking in three of the pile caps. Various experts were employed by Ochsner and Broadmoor to investigate. The studies revealed that nine of the caps exhibited cracking, but concluded that the damage was minor and presented no major structural implications. Meanwhile, Ochsner authorized the 23

completion of the initial five floors. Thereafter, in late 1994 and early 1995, based on the recommendations of the various contractors and consultants, Ochsner spent $130,000 out-ofpocket for repairs consisting of injecting epoxy grout into the cracks and placing a concrete jacket around one group of the piles. Ochsner did not notify it builder’s risk carrier, Allendale, about the initial cracking or about the investigations and repairs it unilaterally commissioned at its own expense. In April 1996, Ochsner discovered additional cracking in the pile caps, including renewed cracking in one of the previously repaired caps. Ochsner hired yet another engineering firm, Wiss, Janney, Elstner Associates, Inc. ("Wiss, Janney") to investigate the problem. For the first time, by letter dated August 22, 1996, Ochsner notified Allendale of the cracking. In April 1997, Wiss, Janney completed a report indicating that the cracking was more severe than observed in 1994 and that the capacity of the pile caps to bear the weight of the building had been reduced. According to Wiss, Janney, the cracking resulted from "thermal stresses that developed during early hydration," exacerbated by "time-dependent drying shrinking" and, with respect to at least one cap, "[d]isplacement of the formwork while the concrete was in a plastic or semi-rigid state." Wiss, Janney recommended structural reinforcement of the caps. Allendale investigated Ochsner's claim, including review of the expert reports and denied coverage on the basis of policy exclusions for (1) "faulty workmanship" and (2) "cracking.” Ochsner filed a Complaint for Declaratory Judgment in June 1998, alleging that the cracking in the pile caps "was caused by design error and faulty construction methods occurring during the original construction of the pile caps" and seeking indemnification for "all costs and expenses associated with the repair of the pile caps" supporting the Tower. 24

Meanwhile, Wiss, Janney returned to the Tower in November 1998 and observed new cracking in ten previously intact pile caps and significant widening of the cracks in the original nine caps. Wiss, Janney concluded that "under existing conditions there exists a material impairment of structural integrity" of the Tower and that "construction of additional floors could pose substantial risks." Ochsner remained in regular contact with Allendale about the deterioration of the foundation. Ochsner maintains that its intention has always been to build the ten additional stories of the Tower. The parties filed cross motions for summary judgment based upon stipulated facts. The district court granted Allendale’s based upon the timing of notice. It also held that the two exclusions in the all-risks policy applied. Ochsner and Broadmoor appealed.55 The Allendale policy provided that it did not insure against: 3. faulty workmanship, material, construction, or design from any cause, unless physical damage not excluded by this Policy results, in which event, this Policy will cover only such resulting damage [and] 7. settling, cracking, shrinking, bulging, or expansion of pavements, foundations, walls, floors, or ceilings; unless physical damage not excluded by this Policy results, in which event, this Policy will cover only such resulting damage (emphasis added to both)56. Ochsner did not dispute that the damage to the Tower foundation was the result of faulty workmanship, material, construction, or design or that the conditions complained of implicate cracking of foundations and that both conditions are expressly excluded. Rather Ochsner contended that the more severe cracking described in the 1997 Wiss Janney report as “material impairment of structural integrity” constituted “resulting damage” not excluded. Ochsner argued that the parties intended to exclude routine or minor damage, but to include major or extensive

25

physical damage. Allendale, on the other hand, argued that faulty workmanship or cracking were meant to be excluded, no mater what the severity, because no distinct or separate damage has occurred. The court observed that under Louisiana law, a “policy of insurance insuring against ‘all risks’ creates a special type of coverage that extends to risks not usually covered under other insurance; recovery under an all-risk policy will be allowed for all fortuitous losses not resulting from misconduct or fraud, unless the policy contains a specific provision expressly excluding the loss from coverage.”57 Ochsner argued that the loss was covered under the italicized wording of the exclusions. The court disagreed, holding that the language means that to be covered by the policy, the damage suffered must be different from the damage excluded. Allendale's interpretation is the more logical. To fall back within coverage as "resulting physical damage," the policy contemplates damage that is different in kind, not merely different in degree. Ochsner accepts that cracking or defective construction, i.e., minor or "immaterial impairment," of the foundation is excluded from coverage, but then suggests that "material impairment of structural integrity" is covered. We perceive no basis in the policy for this proffered dichotomy. Rather, we conclude that direct harm from cracking or faulty design or construction is excluded (no matter how severe it is) "unless physical damage not excluded by this Policy results," that is, unless damage of a different kind--a kind that is not excluded--results. The word "results" supports this interpretation: "Impairment of structural integrity" does not "result" from cracking or faulty construction of the foundation; the cracked foundation is the impaired structural integrity, i.e., the inability of the faulty foundation to support the structure. To put it another way, the minor damage to the foundation does not "cause" the more severe structural impairment. The cracking is the impairment; they are synonymous.58 As a matter of perspective we must remain mindful that the policy does not cover the costs of "making good" defective construction. [Citations omitted.] For example, if shoddy plumbing work caused pipes to break and a building to flood, damaging the carpet, the policy would cover the cost of replacing the carpet but 26

not the cost of repairing or replacing the shoddy plumbing job.[F.N. to citations omitted.] This is consistent with U.S. Industries,59 in which the insured sought indemnity solely for the costs of re-doing the faulty construction--dismantling and rebuilding the metal tower--which we held was excluded. In like manner, the only costs for which Ochsner seeks indemnity is the cost of correcting the faulty construction of the Tower's foundation: In its declaratory judgment complaint, Ochsner sought only the ‘costs and expenses associated with the repair of the pile caps.’ The policy specifically excludes such costs from coverage. The proof of this logic lies in the observation that the only cost that would be associated with restoration of the structural integrity of the Tower is the cost of repairing the design and construction deficiencies of the foundation. Therefore, we conclude that Ochsner has failed to identify any ‘resulting damage’ ‘not excluded by this Policy’ that would allow it to avoid the express exclusions for ‘cracking" and "faulty workmanship ... or design.’ We affirm the district court's conclusion that the claim is not covered.60 See also, U.S. Industries v. Aetna Casualty & Surety Co.61 New York Lequila Construction, Inc. and Pinnacle Concrete Corp, a joint venture commenced the suit in Laquila Construction, Inc. v Travelers Indemnity Company of Illinois,62 seeking coverage under a builder’s risk policy issued by the defendant. Travelers moved for summary judgment. Laquila had a contract to provide concrete for the construction of a new building on the Upper West Side of Manhattan. The specifications required Laquila to use concrete having a certain minimum strength. Soon after Laquila began pouring the concrete for the fifth floor of the structure it was discovered that the strength of the concrete was below specification, and Laquila was directed to Tests done on the concrete seven and twenty-eight days later confirmed that the concrete was indeed below specification. The defective concrete was later replaced with materials that met the specifications. This involved "shoring" or reinforcing the building while the corrective work on the fifth floor took place. Additionally, other subcontractors were required to remove--and later re- install--work on 27

the fifth floor, such as heating, ventilating and air conditioning ductwork, electrical fixtures, and plumbing units. Laquila sought coverage for the cost of repairing the fifth floor slab under an approved corrective plan. The policy contained the following exclusion and exception: THIS POLICY SHALL NOT PAY FOR: 1. PERILS EXCLUDED (a) Any loss of use or occupancy or consequential loss of any nature howsoever caused, including penalties for non-completion or delay in completion of or delay in completion of contract or non-compliance with contract conditions; (b) Cost of making good faulty or defective workmanship or material, but this exclusion shall not apply to physical damage resulting from such faulty or defective workmanship or material. Laquila asserted that the cost of removing and replacing the defective concrete slab and the costs of shoring the full height of the building while the corrective work on the fifth floor took place and the removal and reinstallation of other trade contractors’ work was covered under the “ensuing loss exception” to the defective work exclusion. Its argument was that “‘the installation of concrete that proved to be defective ... physically damaged the insured property (the structural slab and/or the building as a whole) because it was physically incorporated into the larger entity and could only be removed at a cost.’”63 The court disagreed. In addition to finding that were it to accept plaintiff’s argument, the exception would swallow the rule, the court reasoned that While the plaintiff's ‘incorporation’ theory is creative, it cannot withstand inspection. Were I to accept the plaintiff's interpretation, it would result in coverage for nearly every instance of defective workmanship--be it the installation of cracked pipes, faulty electrical wiring, or a defective ventilation system-whether or not there was any actual ensuing loss or if such loss stemmed directly from a risk expressly and unquestionably excluded by the policy. Such coverage would wrongfully insulate contractors from liability when their negligent or shoddy workmanship results in structural or other failings.64 In reaching its decision, the court in Laquila relied on the New York decision in Narob

28

Development Corp. v. Insurance Company of North America,65 in which the insured brought an action against its insurer for the cost of replacing a collapsed retaining wall under the ensuing damage exception. The court held that “inasmuch as there was no collateral or subsequent damage or loss as a result of the collapse of the free-standing retaining wall, the exception should not have been at issue.” Florida In Swire Pacific Holdings Inc. v. Zurich Insurance Co.66 the Plaintiff purchased from Zurich a builder's risk policy, effective February 24, 1997 through February 24, 1999, which was drafted in relevant part by Zurich. The policy insured the Two Tequesta Point Condominium Project, located in Miami, Florida. Swire is one of the insureds under the policy. In March, 1998, the City of Miami's Building Department informed Swire that Richard Klein, the structural engineer on the condominium project, was being investigated in connection with certain design projects for failure to comply with appropriate governmental building codes and ordinances. Swire's agent, CHM Consulting Engineers, performed a peer review of Klein's structural work on the project and the potential claim of damage arising from that structural work. While the peer review was underway, the City of Miami stopped issuing certificates of occupancy. The peer review revealed numerous errors and omissions in the project that had to be corrected. As a result of the design defects, Swire spent approximately $4.5 million in costs to correct the structural deficiencies. It filed a claim with Zurich under its builder's risk policy seeking coverage for those costs. Zurich denied coverage on the ground that Swire's claim dealt "with the cost of correcting a design defect and not any physical loss or damage resulting from the defect.” At issue in Swire were the (i) insuring provisions, (ii) the design defect exclusion and (iii) 29

the sue and labor clause. The Insuring Agreement, provided: Subject to the limitations, exclusions, terms and conditions contained herein, this Policy insures, in respect of occurrences happening during the term of this Policy, against: Physical loss or damage to the property insured, except as excluded hereunder. The Design Defect Exclusion Clause, set forth in the "Exclusions and Limitations" section of the policy, excluded: Loss or damage caused by fault, defect, error or omission in design, plan or specification, but this exclusion shall not apply to physical loss or damage resulting from such fault, defect, error or omission in design, plan or specification. The Sue and Labor Clause, set forth in the policy's "Conditions" section, provided: In case of loss or damage, it shall be lawful and necessary for the INSURED ... to sue, labor and travel for, in and about the defense, safeguard and recovery of the insured property hereunder or any part thereof without prejudice to this insurance, nor shall the acts of the INSURED or the Company, in recovering, saving, and preserving the property INSURED in case of loss or damage be considered a waiver or an acceptance of abandonment. The expenses so incurred shall be borne by the INSURED and the Company, proportionately to the extent of their respective interests. Swire argued that the costs it incurred in, inter alia demolishing non-defective portions of the building in its efforts to correct the defective design constituted physical loss or damage resulting from such fault, defect, error or omission in design plan or specification, and, therefore, fell within the exception to the defective work or design exclusion. Neither the District Court nor the Appellate Court addressed the threshold issue of whether the defective work was an occurrence covered by the policy. Relying on Laquila Construction, Inc. v. Travelers Indemnity Co.67 the district court disagreed with Swire’s contention that the loss was an ensuing loss. The court repeated the 30

axiom that an exception cannot be construed so broadly as to swallow up the exclusion. The Eleventh Circuit Court of Appeals agreed, holding that the Design Defect Exclusion Clause is not ambiguous and that the loss at issue -- the cost of correcting design defects -- cannot constitute “physical loss” under the ensuing loss provision because it was incurred to correct an excluded peril.68 Swire also contended that the expenditure to correct the defects was covered under the “Sue and Labor Clause.” The district and appellate courts’ treatment of that issue are discussed below. Vermont Compare the results in City of Barre v. New Hampshire Insurance Company,69 in which faulty workmanship caused an accident with those in Vermont Electric Power Company, Inc. v. Hartford Steam Boiler Inspection and Insurance Company,70 in which faulty workmanship caused a faulty product. In City of Barre v. New Hampshire Insurance Company,71 ten (of twelve) laminated wooden arches, then in place, were blown down by a wind of some twelve knots, gusting to thirty. These velocities were well within the anticipated wind range. The collapse was found to have occurred because only two guy cables were in use instead of the six called for by the erection plans, an inadequate support, and because the cables used had only about one-third of their original tensile strength. The City and the general contractor filed suit against the builder’s risk insurer which denied coverage. The policy in question insured the structure during construction, together with materials, equipment and supplies to be used therein, against "all risks of direct physical loss or damage 31

from any external cause (except as hereinafter provided)." The exclusion in question was as to "any loss caused directly or indirectly by faulty materials or faulty workmanship or error in design or latent defect. . . ." The trial court found in favor of the insurer finding that the general contractor was negligent in the course of construction, having failed to observe contract and recommended erection standards, and having failed to secure architect approval of the methods and materials used in the course of construction. The trial court concluded that the contractor/plaintiff’s procedures were "faulty workmanship" and the cable used by it "faulty material," and that the occurrence, therefore, fell within the policy exclusion. The Vermont Supreme Court found that it was the process of constructing the structure that was defective, not the workmanship of the building itself. Fairly read, the policy in question excludes coverage for damage resulting from defective materials incorporated into the structure itself, or from weaknesses in the product caused by faults in the construction process, but it does not exclude coverage for damage caused, at least in part, by negligent practices of the contractor during the construction process. It is the quality of the product which is excluded from coverage, and not damage to the product caused by negligence during the construction period.72 In Vermont Electric Power Company, Inc. v. Hartford Steam Boiler Inspection and Insurance Company,73 on the other hand, faulty workmanship only caused a faulty product. In that case, Vermont Electric Power Company (VELCO) purchased three electrical transformers of identical design which were installed in August, 1985. The first transformer stopped working on August 15, 1996, due to a short circuit problem caused by overheating. In April 1997, after the return of the first transformer, VELCO sent the second transformer for inspection and repair, and it was found to have identical problems to the first. The same was done with the third (spare) transformer in October of 1997. These problems were found to have been progressively caused 32

by continuous damage, which were allegedly the consequence of defective design. VELCO sued various of its carriers. The policy relevant to this discussion contained the following language: 4. This policy does not insure against loss caused by any of the following. However, any ensuing loss not excluded or excepted in this policy is covered. C. Faulty, inadequate, or defective: (2) design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction ... of part of all of any property, on or off the described premises.74 VELCO argued that the damage suffered by the transformers was an “ensuing loss,” the result of defective design. The court disagreed, holding that the loss was the damage to the transformers, not the defective design. The court found that an “ensuing loss” would be one which occurred subsequent to the overheating of the transformers, for example, fire destruction of the building which housed the transformers. Furthermore, to characterize the design defect as the loss from which the damage to the transformers ensued simply defies logic. If the transformers had never malfunctioned and the design defect had gone unnoticed indefinitely, VELCO would have suffered no loss. Therefore, the design defect alone cannot qualify as the initial loss from which the damage from the transformers ensued. If the damage to the transformers is considered an ensuing loss, then the exception swallows the exclusion. ‘Where a property insurance policy contains an exclusion with an exception for ensuing loss, courts have sought to assure that the exception does not supersede the exclusion by disallowing coverage for ensuing loss directly related to the original excluded risk.’75 Virginia On December 21, 1969, part of an Arlington, Virginia office and shopping plaza, on which stood a large metal sculpture of the ancient Egyptian phoenix, collapsed into a shopping and garage area below, causing damages to the plaza and to the sculpture in the alleged amount of $187,770.74. The structural damage was later repaired and the plaza restored, but the phoenix, 33

untrue to form,76 never stood again on the plaza. Plaintiffs, owners of the plaza (known as Jefferson Plaza), sued to recover the damages under two “all risk” insurance policies, a builder’s risk policy issued by defendant Aetna Casualty and Surety Company and a property owner’s policy issued by Employers' Liability Assurance Corporation, Ltd.77 The original plans for the complex of which the plaza was a part called for the construction of a skylight in the plaza level, to be located between two office buildings and a motel. In the summer or early fall of 1969, however, plaintiffs decided to erect the sculpture of the phoenix over the skylight. This sculpture was approximately 34 feet high, 12 feet wide at its base, and weighed approximately 7,000 pounds. The plans and specifications for the plaza level were modified to accommodate the phoenix, which was installed over the opening in the plaza level that had been intended for the skylight on December 10, 1969. On December 21, 1969, the concrete of the plaza level around the skylight gave way and the phoenix collapsed into the commercial level, which in turn collapsed into the highest garage level, causing the loss sued upon here. There were no personal injuries. There was evidence that the cause of the collapse was the lack of sufficient structural underpinnings to support the weight of the phoenix. The plaza level was originally designed for the passage of people in and out of the office buildings and the motel, not to support a heavy object such as the phoenix. The evidence also disclosed that while plaintiffs modified the original plans and specifications in order to accommodate the phoenix, the plans were not submitted to the county building authorities nor was a certificate of occupancy obtained for the plaza as modified. Pictures taken of the plaza and commercial levels after the collapse show that there were no supporting columns under the area where the phoenix was placed. 34

Aetna asserted that the loss was attributable to a deficiency in design of the supporting structure for the phoenix or to deficiency in workmanship and is therefore not covered by its builders’ risk policy. The court found that plaintiffs' misjudgment in preparing the modified plans constitutes an error or deficiency in design and specifications within the meaning of the exclusion clause and that its policy did not cover the loss.78 Employers contended that the property owner’s policy did not apply due to exclusions for (i) walks and paved areas; (ii) buildings in the process of construction; (iii) earth movement (withdrawn for lack of evidence) (iv) hazards increased by the insured; and (v) latent defects. The court found that none applied and that the loss was covered by its policy. The latent defects exclusion is discussed below. In Whitaker v. Nationwide Mutual Fire Insurance,79 the plaintiffs entered into a contract with a general contractor for the construction of a dwelling. They also obtained an “all risks” homeowner’s insurance policy from defendant Nationwide upon which they made a claim for the cost of repairing the general contractor’s poor workmanship. The insurer argued that such repair costs constitute only economic, not direct physical loss. It argued that damage caused by faulty workmanship would be covered under the Policy's direct physical loss limitation, but that the costs of repairing the defective work itself is not, because such defects do not constitute a “direct physical loss.” The plaintiffs contended that “direct physical loss” is not defined, that construction defects are often found to be covered under an "all risks" policy, and that the Policy thus covers all loss that is not specifically excluded. They argue that an all risks policy covers "fortuitous loss," which includes losses that were unknown and unexpected by the parties at the time they entered into the contract. The court held that an “all risks" policy's coverage of 35

fortuitous losses does not mandate coverage for the repair of construction defects as part of a direct physical loss. Thus, the fact that the defective construction was unanticipated by either party does not automatically imply that such defects are covered by the Policy. The “direct physical loss” language provides a further limitation on the types of fortuitous loss covered under the Policy. The court held that construction defects are not covered. New Hampshire In Bergeron v. State Farm Fire and Casualty Company,80 plaintiffs purchased property in 1992, which consisted of a barn foundation, septic system, thirty-three acre pond, and a dam that impounded the pond. After the purchase they purchased a builder's risk policy from the defendant that was later converted into a homeowner’s policy upon the substantial completion of their home. Apparently among other improvements to the property, plaintiffs also reconstructed the dam. In March, 1996, the Bergerons' dam collapsed. Several engineering firms investigated the dam's failure and concluded that it failed because of "piping." Piping is the migration of the materials of which the dam is constructed, which creates an open flow, or pipe, within the dam. The dam's design and construction caused it to be susceptible to piping. They brought a petition for declaratory judgment to determine whether their policy covered the dam’s failure. The policy provided in relevant part: Dwelling Extension. We cover other structures on the residence premises, separated from the dwelling by clear space. Structures connected to the dwelling by only a fence, utility line, or similar connection are considered to be other structures. The parties agreed that the dam constitutes an "other structure" under the policy. Under the losses insured, Coverage A, Dwelling, section of the policy, the insurance

36

company agreed to provide coverage “for accidental direct physical loss to the property described in Coverage A, except as provided in Section I --losses Not Insured.” Therefore, the dam is covered by the policy unless coverage is withdrawn by the "losses not insured" section. Section I--Losses Not Insured, stated, in pertinent part, that the insurance carrier do[es] not insure for any loss to the property described in Coverage A which consists of, or is directly and immediately caused by, one or more of the perils listed in items a. through m. below, regardless of whether the loss occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these: a. collapse, except as specifically provided in Section I--additional Coverages, Collapse *** The parties also agreed that the dam Collapsed. Section I-- Additional Coverages, Collapse, provided that the carrier insure[s] for direct physical loss to covered property involving collapse of a building or any part of a building caused only by one or more of the following: a. perils described in Section I--losses Insured, Coverage B--personal Property. These perils apply to covered building and personal property for loss insured by this Additional Coverage; b. hidden decay; *** Section I--losses Insured, Coverage B--personal Property provided that the defendant will insure "for accidental direct physical loss to property described in Coverage B caused by the following perils, except as provided in Section I--losses Not Insured: *** Explosion.81 The plaintiffs argued that the combination of these sections provided coverage for the dam's collapse because the dam is a "building," and its "collapse" was caused either by an "explosion" or by "hidden decay." The court held that while “‘if the language of a policy is reasonably susceptible to more than one interpretation and one interpretation favors coverage, the policy will be construed in favor of the insured and against the insurer,’ [citation omitted] ‘we will not, however, perform 37

amazing feats of linguistic gymnastics to find a term ambiguous.’”82 The court found that a dam was not a building and, therefore, there was no coverage under the policy for the collapse of the dam. The plaintiff in Bergeron,83 further argued that the loss was covered as a resulting loss exception to the defective design and workmanship exclusion to Coverage. Section I, of the Policy, Losses Not Insured, stated, in pertinent part, that the company did not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events. *** Earth Movement, meaning the sinking, rising, shifting, expanding or contracting of earth, all whether combined with water or not. Earth movement includes but is not limited to earthquake, landslide, mudflow, sinkhole, subsidence and erosion. *** c. Water Damage, meaning: (1) flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, all whether driven by wind or not; *** Accordingly, the court held that the “trial court's failure to find coverage under the ‘any b.

resulting loss’ language, ... was not erroneous.”84 Washington In Allianz Insurance Company v. Impero85 there was no disagreement among the parties that the contractor had the duty to perform the contract in accordance with the plans and specifications and did not do so. The concrete walls, when completed, contained deficiencies not in accord with the specifications, and the contractor was required to make appropriate repairs. It was the cost of these repairs for which the insured seeks recovery under the all-risk policy. The insurer declined the claim, arguing that the claim was not covered as a result of the following

38

exclusion: This policy does not cover: *** (c) Cost of making good faulty or defective workmanship, material, construction or design, but this exclusion shall not apply to the damage resulting from such faulty or defective workmanship, material, construction or design.... The deficiencies in the concrete resulted from the following factors: (i) it was delivered to the site in concrete trucks and pumped to the forms over a distance of approximately 120 feet; (ii) an inspector had the duty of testing the concrete by the use of "slump" tests to determine that the mix was proper; (iii) the inspector performed the slump tests as the mixed concrete came out of the trucks and prior to the time it was pumped to the forms; (iv) as a result, the water content in the poured concrete was inadequate; (v) this resulted in the voids in the walls as the concrete cured. For purposes of the motion before the court it is conceded that the walls were defective and the contractor had the duty to the owner to make repairs. The contractor argued that the deficiencies in the walls resulted from faulty workmanship, to-wit: the mistake of the inspector and therefore constitute "damage resulting" within the meaning of the above cited exclusion. The insurer on the other hand argued that the cost incurred was for "making good faulty or defective workmanship, material, construction or design" and is excluded from coverage. The court held that the repair to the defective work was not covered by the policy. VI.

Natural Occurrence Exclusions

A.

Heave from Frost and Freezing

Delaware The problem of where to draw the line with ensuing loss is seen in the Delaware case of Philips Home Builders v. Travelers Insurance Company.86 In that case, after being awarded a 39

contract to build a mini-mall in New Jersey, the plaintiff, Phillips, purchased a builder's risk insurance policy from The Travelers Insurance Company. Phillips poured a concrete slab that was to serve as the floor in one section of the mini-mall. During the first few months of 1994, Phillips discovered that the concrete slab had settled and cracked. The damaged slab, in turn, damaged walls and studs built on or around the slab. Phillips filed a claim under its Travelers policy. Travelers denied the claim on the ground that Phillips' damages were the result of specifically excluded "causes of loss." Phillips responded by filing this action seeking a declaratory judgment, damages and attorneys fees. The policy provided in relevant part. A. COVERAGE We will pay for "loss" to Covered Property from any of the Covered Causes of Loss. * * * 5. Covered Causes of Loss Covered Causes of Loss means RISKS OF DIRECT PHYSICAL "LOSS" to Covered Property except those causes of "loss" listed in the Exclusions. * * * B. EXCLUSIONS * * * 3. We will not pay for a "loss" caused by or resulting from any of the following. But if "loss" by a Covered Cause of Loss results, we will pay for that resulting "loss." * * * c. Faulty, inadequate or defective: * * * (2) Workmanship, repair, construction, renovation, remodeling, grading, compaction; * * * e. Settling, cracking, shrinking, bulging or expansion. The trial court found Traveler’s language “circuitous.” The appellate court found it ambiguous. The critical language is the second sentence of the quoted exclusion paragraph. The first sentence says that Travelers will not pay for losses caused by or resulting 40

from the events and conditions listed in the subsections. Those include "settling, cracking, shrinking, bulging or expansion." The next sentence provides an exception to the exclusion. It says that Travelers will pay, "if 'loss' by a Covered Cause of Loss results...." What does that mean?87 The Supreme Court of Delaware concluded that the policy language was ambiguous and following the principle of contra proferentum held that the policy afforded coverage for losses caused by settling if the settling was caused by a covered cause of loss. That left the question of what caused the settling. Philips maintained that the cause was water seepage and frost heave following heavy rain and severe winter storms. Travelers contended that the cause was faulty workmanship. Applying the principle of contra proferentum to what it considered to be ambiguous contract language, the court held that the policy affords coverage for losses from settling if the settling was caused by a covered cause of loss. If found that the factual question as to the actual cause of the damage to the concrete slab remained unanswered. Phillips maintained that the cause was water seepage and frost heave following heavy rain and severe winter storms. Travelers argued that the cause was faulty workmanship. The Court held that this factual issue must be decided by the trial court on a complete record, not at the motion stage. In Carlozzi v. Fidelity and Casualty Company,88 the Delaware Superior Court held that settlement caused by water escaping from a broken drainpipe was excluded from coverage under a homeowner’s policy containing language similar to the builder’s risk policy in Philips Home Builders v. Travelers Insurance Company.89 Kentucky On an extremely cold night in January, 1982, snow and ice accumulated on the roof of the Warren home exerting a pressure which caused the gutters to separate from the side of the

41

house90. As a result, water ran down the side of the house into the ground next to the block foundation. With the drop in temperature, the liquid turned to ice creating a thermal expansion process which cracked the foundation. The carrier denied coverage of the damage based upon two exclusions in the policy, the first of which provided in part: THIS POLICY DOES NOT INSURE UNDER EITHER PART I OR PART II, AGAINST LOSS RESULTING from: 8. Any of the following perils ... (d) water below the surface of the ground, including that which exerts pressure on or flows, seeps or leaks through sidewalks, driveways, foundations, walk, basement or other floors .... and Section 9 which stated: 9. Any of the following, except direct loss by fire, smoke, explosion, collapse of buildings, water damage, or glass breakage constituting a part of the building, resulting therefrom: (a) birds, domestic animals, termites and other insects, or vermin: (b) wear and tear, deterioration, inherent vice, rust or mechanical breakdown; (c) wet or dry rot, or mould; (d) settling, cracking, shrinkage, bulging, or expansion of pavements, patios, foundations, walls, floors, ceilings or roofs. The court noted, however, that Section 10 provided coverage for: “[w]eight of Ice, Snow or Sleet.”91 The trial court concluded its findings of fact with: If the weight of ice or snow caused the roof drainage to break down which set off a chain effect to damage the basement wall, then it would be covered. If the water ran down the side of the building and the weight of the water freezing caused the wall to collapse, it would be covered under section 9. Apparently, ice brought about the damage to the building. As everyone knows, ice is water which is frozen and which expands and exerts pressure. This is apparently what happened in the case before the Court. The report from Poage Engineering Company states that the damage was caused by the water which became ice which expanded and put pressure on the basement wall...,92 and the single conclusion of law: In cases of interpretation of insurance coverage, the Court should consider all possible facts and resolve any question of coverage in favor of the insured where 42

there is ambiguity as to the interpretation of coverage.93 The appellate court agreed. It found that “Nationwide sold the Warrens and ‘Elite Homeowners Policy’ affording ‘all risk coverage.’ This is what the [Warrens] thought they were getting and the trial court so found.”94 It concluded that In the case at bar, we believe it more logical to consider "water below the surface of the ground" as meaning such things as underground streams, springs or natural deposits of liquid which are undetectable and any damage that they may cause as unforeseeable. Section 8 avails nothing to appellant.95 Michigan Frost heave was held to be excluded by the policy in the case of Oak Tree, Inc. v. Commercial Union Insurance Company.96 In that case, the plaintiff, a building construction contractor, began construction of a building in Michigan. “Early in 1988 a county building inspector noted ‘numerous cracks in the basement walls and garage walls’ and that ‘footings for [the garage] at jumps have settled.’”97 Plaintiff corrected the defects and sued its builder’s risk carrier to recover its losses. The court held that frost heave was excluded from coverage. New York The Commercial Union policy in Loretto-Utica Properties Corporation v. Douglas Company,98 read, in relevant part as follows: V. EXCLUSIONS ‘We’ do not insure against ‘loss’ caused by or resulting from ... 15. Subsidence, settling, cracking, shrinkage or expansion of walls, pavements, foundations, floors, roofs or ceilings, unless "loss" by peril not otherwise excluded results and then "we" will only pay for such resulting "loss" ... 19. Earthquake, volcanic action, mudflow, earth sinking, earth rising or shifting, landslide or other earth movement unless fire or explosion results, and then "we" will only pay for the "loss" caused by such fire or explosion. This exclusion does not apply to property in transit ... 20. C. Water below the surface of the ground including that which exerts 43

pressure on or flows, seeps or leaks through sidewalks, foundations, walls, basement or other floors, doors, windows or any other openings. Plaintiff filed a motion for declaratory judgment that damage caused by frost heave was covered by the builder’s risk policy. The court found that frost heave was included in the exclusions. A frost heave, by definition, consists of freezing moist soil which exerts an upward thrust. This displacement of soil (earth) caused the floor to move upward, compressing the surrounding walls, resulting in damage. The policy clearly and unequivocally excludes damage to walls and floors due to earth movements of all types and/or underground water which places pressure on said structures. The fact that the moist soil froze is of no moment. Without water being present in the soil in the first instance, the damage would not have been caused. Once being frozen, the water in the soil causes an expansion of the substrata which results in the upheaval.99

VII

Sue and Labor Clause

California “A consortium consisting of six utility corporations and a political subdivision of the State of Arizona, headed by Southern California Edison Company, joined together to construct a coal-fired steam generating plant located near Farmington, New Mexico. The plant comprised units Nos. 4 and 5 of a larger complex called the Four Corners Project. A number of insurance companies, each assuming a specific percentage of risk, combined to issue to Edison two insurance policies. The policies provided successive periods of coverage. The first, a builder's risk policy, provided coverage during the course of construction of the units. The builder's risk policy became effective on April 4, 1966, and continued in effect (with an exception not relevant here) until the commercial operating dates of units 4 and 5, July 1, 1969, and July 1, 1970,

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respectively. 100 Among the exclusions to the builder’s risk policy was: “(G) Cost of making good faulty workmanship, construction or design; but this exclusion shall not apply to damage resulting from such faulty workmenship, [sic] construction or design.” The second policy, designated by the parties as the all property policy was at risk from the commercial operating date of each unit. Among its exclusions were “(O) Property while in the course of construction or installation to the extent that such properties are otherwise insured. ... [¶] (X) Cost of excavations, grading, filling, dredging, sidewalks, fences, paving and/or blacktopping, and foundations and footings. ... [¶] (Z) Loss or damage caused by or resulting from, contributed to or aggravated by any of the following: ... 3. Water below the surface of the ground including that which exerts pressure on or flows, seeps or leaks through sidewalks, driveways, foundations, walls, basement or other floors, or through doors, windows, or any other openings in such sidewalks, driveways, foundations, walls or floors; ...” Each policy contained similar sue and labor clauses, which required that the insured, without prejudice to their claims under the basic insurance policy, “sue, labor and travel for, in and about the defense, safeguard and recovery” of property insured. Under the sue and labor clauses, the insurers were made expressly liable for expenses so incurred. Bechtel was the design builder for the project which began in 1966. Before the commercial operating dates of units 4 and 5, the foundations underlying the units began to settle differentially. In certain areas, the settling amounted to more than one and one-half inches. Commencing in 1969, mudjacking operations were instituted by Edison to lift the foundations of units 4 and 5. By this method, the foundations were successfully raised to an elevation close to that originally intended. 45

Edison filed a proof of loss form in the amount of $1,855,000, representing costs expended by it as of the date of the form and the present worth of estimated future costs. The claimed losses were for costs of mudjacking and ancillary expenses (surveying, drilling, monitoring, etc.). The insurers under both policies denied coverage. After the conclusion of trial, the court found 3. 'The foundations underlying Units 4 and 5 were spread footings and turbine mats, bottomed at shallow elevations in a strata of weathered sandstone containing lenses of gypsum and other salts, and belled caissons bottomed in and on a deep strata of hard, unweathered sandstone or bedrock. 4. 'That part of Units 4 and 5 supported on the belled caissons experienced no significant settlement whereas that part of Units 4 and 5 supported on the spread footings and turbine mats settled more than one and one-half inches in certain areas. *** 7. 'The increase in elevation of the water table and the rise in temperature of the subsurface water beneath Units 4 and 5 [which caused the settlement] directly resulted from faulty design and construction of said Units 4 and 5 ***101 and concluded that the costs of mudjacking claimed by Edison were not covered in either policy. The court held that the costs were excluded from coverage under the builder’s risk policy pursuant to provision (G). With regard to the all property policy, the court concluded that the events or occurrences causing the claimed costs happened prior to the time when the policy was at risk. Moreover, the court concluded that, in any event, coverage of costs was excluded under the all property policy by provisions (O), (X), and (Z)(3). The appellate court found that A sue and labor clause makes express the implied correlative duties between insured and insurer regarding losses compensable under an insurance policy.[Citation omitted.] Under penalty of possible forfeiture of policy rights, the insured has the duty of preventing a threatened insurable loss and mitigating such loss when it does occur. [Citation omitted.] An insured who avoids or minimizes 46

insurable loss acts for the benefit of the insurer. It is the benefit conferred which creates the duty on the part of the insurer to reimburse the insured for prevention and mitigation expenses. [Citation omitted.] Although the duty of reimbursement is said to be separate and supplementary to the basic insurance policy, a sue and labor clause does not extend or create coverage; the recovery under a sue and labor clause is tied irrevocably to the obligations undertaken by the insurer in the basic insurance policy.102 It held that exclusion (G) of the builder’s risk policy excluding recovery for making good design defects stands as a specific provision taking precedence over the general clause contained in the sue and labor clause permitting reimbursement. The duty of an insured to prevent and mitigate insurable loss and the obligation of the insurer to reimburse for expenses so incurred are separate questions. The fulfillment of the duty to mitigate does not necessarily give rise to the obligation of reimbursement; only mitigation expenses which are for the primary benefit of the insurer are recoverable under a sue and labor clause. Edison was under a duty to prevent and mitigate insurable loss. The effect of the sue and labor clause in that regard was only to make express that implied duty. Edison was required to take all reasonable and necessary steps to prevent or mitigate damage to the superstructure. However, it must be remembered that the only reason the superstructure was threatened was because of defects in the design of the underlying foundations. Only by correcting the design defects was Edison able to prevent or mitigate loss to the superstructure. While loss to the superstructure was compensable under the policy, the correction of design defects was not. Mudjacking may have prevented or mitigated loss to the superstructure, but at the same time it was the means by which Edison corrected the design defects. Under this loss allocation contained in the policy, it must be said that the costs of mudjacking were not primarily for the benefit of the insurers. The benefit inuring to the insurers was only incidental.[Citation omitted.] The insured's duty of reimbursement, accordingly, never matured.103 Similarly, the court found that exclusions (O), (X) and (Z)(3) to independently exclude Edison’s claim for reimbursement from the property policy. Minnesota In Witcher Construction Company v. Saint Paul Fire and Marine Insurance Company,104 47

A natural gas explosion occurred several blocks from a construction site, prompting Witcher Construction Company to suspend operations for nearly a month while experts tested the structure for harm. Although the building sustained no physical damage, Witcher filed a claim under its all-risk property insurance policy for the costs associated with the temporary interruption of construction. Citing the absence of physical loss to the insured property and an exclusion for delay and loss of use, Saint Paul Fire and Marine Insurance Company denied Witcher's request for coverage. Suit followed. The trial court concluded the policy generally required indemnification of Witcher's mitigation costs, but the exclusion bars recovery of those expenses related to the consequences of delay. Thus, the court determined Witcher could recover out-of-pocket contributions for examination of the site, but not the lost construction opportunities. Witcher’s policy required it to do everything possible to protect the property from further damage and upon the occurrence of a covered loss and promised to reimburse Witcher for the insurer’s share of such expenses. The Minnesota Appellate Court found the language similar to the sue and labor clauses. It differed from typical sue and labor clauses, however, in that it required no action until a covered loss occurred. Saint Paul argued that because no covered loss had occurred Witcher had no obligation to take any action or incur any expense, and Saint Paul, as a consequence, had no obligation to reimburse Witcher for that which it did. The appellate court disagreed finding that the clause did not alter Witcher’s common law duty to prevent harm to the insured property or the insurer’s corresponding obligation to reimburse Witcher for those efforts. It held that the trial court properly held the insurer accountable for its share of any reasonable and necessary costs of preventing imminent covered 48

loss to the insured property. But, the court held, only direct costs of evaluating and preventing injury were recoverable from the insurer. Indirect and consequential damages would not be. We conclude the ‘costs’ of Witcher’s idle work force and equipment, as well as the added ‘expense’ of winter construction, do not bear a sufficiently direct relation to the preservation of insured property to justify reimbursement under the common law right to indemnity for mitigation expenses. Because we decline to convert this equitable principle into a latent business interruption policy, we affirm the grant of summary judgment.105 Florida The facts in the case of Swire Pacific Holdings Inc. v. Zurich Insurance Co.106 are discussed above (Florida). It is the case in which the developer of a condominium project was informed by the City of Miami that Richard Klein the structural engineer, was under investigation. A peer review resulted in Swire spending some $4.5 million to correct the structural deficiencies. Swire filed a claim with Zurich under its builder's risk policy seeking coverage for those costs. Zurich denied coverage on the ground that Swire's claim dealt “with the cost of correcting a design defect and not any physical loss or damage resulting from the defect.” At issue in Swire were the (i) insuring provisions, (ii) the design defect exclusion and (iii) the sue and labor clause. The relevant provisions of the policy at issue are the Insuring Agreement, the Design Defect Exclusion Clause, and the Sue and Labor Clause. The court held that the cost to correct were not covered under the ensuing loss exception to the design defect clause. Swire, then, argued that coverage was provided under the sue and labor clause which provided: In case of loss or damage, it shall be lawful and necessary for the INSURED ... to sue, labor and travel for, in and about the defense, safeguard and recovery of the insured property hereunder or any part thereof without prejudice to this insurance, nor shall the acts of the INSURED or the Company, in recovering, saving, and 49

preserving the property INSURED in case of loss or damage be considered a waiver or an acceptance of abandonment. The expenses so incurred shall be borne by the INSURED and the Company, proportionately to the extent of their respective interests. The district court found that the sue and labor clause is “an ancient clause that addresses the mutual duties owed by and insured and an insurer.107 *** It has been explained as follows:” A sue and labor clause makes express the implied correlative duties between insured and insurer regarding losses compensable under an insurance policy.... [T]he insured has the duty of preventing a threatened insurable loss and mitigating such loss when it does occur. An insured who avoids or minimizes insurable loss acts for the benefit of the insurer. It is the benefit conferred which creates the duty on the part of the insurer to reimburse the insured for prevention and mitigation expenses. 108 The district court dismissed Swire’s first argument that the sue and labor clause is a separate insuring agreement, holding that *** it is separate only in the sense that the insured's losses are not subject to deductibles or to the limits of liability set forth in the policy. [Citation omitted.] Whether sue and labor expenses are covered at all, however, is tied directly to the policy's insuring provisions [citation omitted] (sue and labor clause ‘is tied irrevocably to the insured perils coverage. Because the purpose of the clause is to reimburse the assured for expenses incurred in satisfying his duty to the underwriter, there is no such duty where the policy, for one reason or another, does not afford coverage. The 'sue and labor' clause does not operate as enlargement of the perils underwritten against.’); [citation omitted] (expenses incurred in mitigating damages not covered under policy are not recoverable under sue and labor clause); [citation omitted] (‘although the duty of reimbursement is said to be separate and supplementary to the basic insurance policy, a sue and labor clause does not extend or create coverage; the recovery under a sue and labor clause is tied irrevocably to the obligations undertaken by the insurer in the basic insurance policy’).109 Swire argued that (1) in demolishing portions of the building in order to correct the detective design, Swire was suing and laboring to prevent the entire building from collapsing; (2) had the entire building collapsed, it would have been a covered loss under the policy; (3) thus,

50

Swire's actions constituted suing and laboring to prevent a covered loss; (4) accordingly, Swire's losses are covered under the sue and loss provision. Therefore, according to Swire, even if the means of correcting the design defect are excluded under the policy, the expenses incurred in preventing a covered loss (the collapse of the building) should be covered. The district court disagreed. Relying on the decision in Southern California Edison Co. v. Harbor Insurance Company,110 the district court held that When determining whether the insured's actions are benefitting the insurer (and thus should be covered under the Sue and Labor Clause), a court looks not to whether the insured's actions may potentially benefit the insurer in some way, but rather, whether the actions correlate to an excluded loss (in which case the sue and labor expenses do not benefit the insurer because the loss would not be covered) or correlate to a covered loss (in which case the actions benefit the insurer by reducing or eliminating the loss for which the insurer would be liable). The actions taken by Swire included demolishing portions of the finished building in order to access and then repair the defectively designed portions of the building. Although such repairs may have helped prevent a possible collapse of the building. Swire cannot recover simply by attempting to characterize its work as for the purpose of preventing a collapse of the building. Rather, there must be a close relationship between the actions undertaken by the insured and the loss that the insured is laboring to prevent. The direct purpose of Swire's work was to repair those portions of the building that had been constructed according to a defective design. As in Edison, the expenditures that Swire made in remedying the design defect may have had an incidental benefit to Zurich by possibly preventing a collapse of the building at some unknown point in the future. Under Swire's theory, as long as any work done on the building may have the effect of preventing any type of covered loss, then such work would have to be covered under the sue and labor clause, regardless of whether the work would otherwise be excluded under the terms of the Policy. Swire's actions, however, were made directly and primarily to correct design defects in the building, expenses which are excluded under the terms of the policy. Therefore, Swire's expenses are not recoverable under the Sue and Labor Clause.111 The Eleventh Circuit Court of Appeals found no Florida cases on point and certified the following three questions to the Florida Supreme Court to determine Florida law:

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1.

Whether the policy's Design Defect Exclusion Clause bars coverage for the cost of repairing the structural deficiencies in the condominium building;

2.

If the first question is answered in the affirmative, whether the policy's Sue and Labor Clause applies only in the case of an actual, covered loss;

3.

If the second question is answered in the negative, whether the policy's Sue and Labor Clause covers the cost of repairing the structural deficiencies in the condominium building.112

VII

Loss Caused By an Insured Risk and an Excluded Risk

There is case law to the effect that when a policy expressly insures against loss caused by one risk but excludes loss caused by another risk, coverage is extended to a loss caused by the insured risk even though the excluded risk is a contributory cause.113 The insured cause and the excluded cause of damage or loss may occur concurrently or sequentially. Various jurisdictions treat the coverage differently with some finding the resulting loss not covered. An example of the cases holding that an insured loss preempts an excluded loss is found in Cavalier Group v. Strescon Industries, Inc.114 involved precast hollow core concrete balconies in a residential apartment complex that were deteriorating. The precast balconies were manufactured by Strescon. The work was accomplished in stages and the last active participation by Strescon in the project was in 1978. Generally, the Strescon planks used at the Cavalier Apartments served an interior application and were not exposed to exterior elements. Some planks, however, were exposed serving as balconies for second and third floor apartments. In three of the buildings Strescon planks were “slung” parallel to the exterior walls and rested upon two masonry bearing walls which were perpendicular to the apartments. These balconies were

52

referred to in the case as “slung balconies. The majority of the buildings, however, had balconies which consisted of Strescon planks cantilevered out approximately five feet beyond the outside wall. These were referred to as “cantilevered” balconies. Some years after the buildings were completed, it was noticed that the slung balconies were deteriorating in that the bottoms were crumbling and falling off. Ultimately it was noticed that the cantilevered balconies were experiencing freezing and thaw damage. The expert’s report concluded that the deterioration of both the slung and the cantilevered balconies resulted from two moisture related mechanisms: (i) improper "air content" in the cantilevered balconies, making them subject to rapid freeze/thaw damage(ii) the placement of metal reinforcement bars in the planks too close to the surface leading to corrosion of the metal which expanded and caused cracking and spalling of the concrete. Both these conditions allowed moisture to permeate the concrete, causing increased damage due to the freeze/thaw action ultimately leading to the premature failure of the balconies. The balconies were covered by an “all risk” policy with Travelers which specifically contained an exclusion for losses caused by deterioration. Specifically, This form does not insure against loss ... (6) by deterioration, inherent vice, latent defect, wear and tear; rust or corrosion; mold, mildew, wet or dry rot; contamination; insects or vermin; smog; smoke vapor or gas from agricultural or industrial operations....115 The project owner argued that the exclusion did not apply for two reasons: (i) the term “deterioration” is ambiguous, and (ii) the ultimate loss was not caused by deterioration, but by the freeze-thaw cycle. Deterioration was only an incidental effect. The court agreed that the word deterioration was not a clearly understood term. The court also found that since neither negligent construction nor the freeze-thaw cycle were specifically excluded from the all risk policy, they

53

were included. The court relied upon a treaty by Appleman116 to conclude that ‘*** where the insured risk was the last step in the chain of causation set in motion by an uninsured peril, or where the insured risk itself set into operation a chain of causation in which the last step may have been an excepted risk," recovery may be allowed. Couch is likewise in accord.117 Indeed, the Appleman rule appears to be the majority rule in those courts addressing the specific issue.118 ("This established insurance law principle of proximate cause is the rule in a majority of jurisdictions.");119 Among those states adopting the Appleman rule is New Jersey.120 Although New Jersey law is not precedent for the state of Delaware, Delaware courts have in the past relied on New Jersey opinions to help establish insurance law in Delaware. See Hallowell, 443 A.2d at 926- 27 (following New Jersey's lead in recognizing the reasonable expectations doctrine). On the other side of the coverage issue there are jurisdictions rejecting the causation approach as being one of tort (proximate cause) and inappropriate for interpretation of insurance policies which are to be interpreted under contract law.121 Furthermore, insurance policies themselves provide that coverage will be denied if one of the causes of the loss is excluded regardless of whether an insured cause also contributes to the loss. An example is found in Assurance Company of America v. Jay-Mar, Inc.,122 decided under New Jersey law, the same law relied upon by the court in the Cavalier Group case just discussed. In the Jay-Mar case, Jay-Mar, Inc., d/b/a Absecon Home Center, purchased premises and opened a True Value Hardware Store. Due to heavy rains, classified by one expert as twice the magnitude of a “one in a hundred year” event, water entered the Jay-Mar premises from the ground level, causing substantial damage. Jay-Mar believed that the damage its property sustained was due to the backup or overflow of rainwater from nearby storm sewers, a cause of loss covered by its insurance policy. Believing that the damage was caused by surface water flooding, a cause of loss not covered by Jay-Mar’s insurance policy, Assurance denied Jay-Mar’s claim for coverage. Jay-Mar argued that the policy provided coverage if water entered the store 54

as a result of both causes. The court disagreed. The insurance policy at issue in this case contained the following exclusion provisions: II. COVERED CAUSES OF LOSS RISKS OF DIRECT PHYSICAL LOSS OR DAMAGE unless the loss or damage is excluded or limited as described below: A. EXCLUSIONS 1. We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss. *** g. Water (1) (a) Flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not; *** (d) Water that backs up or overflows from a sewer, drain or sump but only if Back-Up of Sewers and Drains is show as "Excluded" in the Declarations. Both parties agree that Back-Up of Sewers and Drains is not excluded in the policy’s declarations and is, therefore, a cause of loss covered by the policy. The district court found that although the New Jersey Supreme Court had not yet determined whether the occurrence of an excluded cause of loss simultaneously or sequentially with an included cause of loss bars an insured from recovery, New Jersey's lower courts have addressed both situations. In Brindley v. Firemen's Ins. Co. of Newark,123 the court determined that “‘[l]oss due to the effect of causes both within and outside the coverage, operating conjointly, is generally considered not recoverable.”124 Only when a factfinder can determine “without resort to sheer conjecture” which part of the damage was due to the included cause of loss can the insured recover. Where included and excluded causes of loss occur concurrently, it appears that New Jersey's lower courts have not been predisposed to find coverage. Therefore, the court rejected Jay-Mar's argument that the part of the insurance policy provision excluding

55

from coverage losses occasioned by simultaneously occurring included and excluded causes violates the state's public policy. The part of the insurance policy provision which refers to sequential causes of loss gave the Court more pause. As with concurrent causes of loss, the New Jersey Supreme Court had not addressed this issue. New Jersey's lower courts, however, have determined that an insured deserves coverage where the included cause of loss is either the first or last step in the chain of causation which leads to the loss.125 This is broader coverage than that provided by the courts in a number of other states. Those courts have held that where the insured risk is the first step in the chain of causation which leads to a loss, the loss is covered; this is known as the "efficient proximate cause" doctrine.126 The court in Jay-Mar found that despite the New Jersey lower courts' favorable treatment of insureds who suffer sequential causes of loss, no New Jersey court had addressed whether an exclusion provision dealing with sequential causes of loss like the one at issue in the present case violates the state's public policy. It, therefore, reviewed cases from other states and found that sequential loss provisions have been held to violate public policy-- specifically, the -“efficient proximate cause” doctrine--in both California and Washington.127 The grounds on which these courts based their decisions, however, are inapplicable to the present case. In Howell, the California appellate court found that it would violate the state Insurance Code to permit a property insurer to deny coverage when an insured peril was the "efficient proximate cause" of the loss.128 In Safeco, the Washington Supreme Court based its determination on the fact that the state's highest court had previously adopted the "efficient proximate cause" doctrine and had also previously determined that insurers could not circumvent the doctrine by including language to that effect in their policies.129 In New Jersey, there is no statutory requirement that insurers provide coverage in accordance with the "efficient proximate cause" doctrine, nor has the New Jersey Supreme Court adopted the doctrine and determined that insurers cannot contract 56

around it. These cases, therefore, do not persuade the Court that the New Jersey Supreme Court would find a violation of public policy where parties to an insurance contract agree to exclude coverage for losses occasioned by a sequence of causes, some of which are included and some of which are not. In addition, the Court recognizes that most courts which have addressed this issue have found that exclusionary language designed to avoid the "efficient proximate cause" doctrine is enforceable.130 Thus, the court denied the motions for summary judgment. It held that the discrepancy between the report of the insured’s expert and the insurance company expert as to the cause of the loss did create a genuine issue of material fact which must be decided by the fact finder in this case. VIII

Owners’ Policies

When the policy expressly excludes coverage for defective design or workmanship, the exclusion is generally honored if that is the cause of loss. When, instead, the policy excludes “latent defects” the courts were more divided. A.

Exclusions for Defects in Design or Construction.

Tzungs purchased a nine-unit apartment building located in San Diego, California. At the same time the Tzungs obtained through State Farm an “Apartment Special Form insurance policy, which insured the apartment building “against all risks of direct physical loss” that were not otherwise specifically excluded. Within a few months, the Tzungs noticed a series of cracks in the drywall, driveway, and slab of the building, and within 27 months the damage had become so serious that they filed a claim with State Farm. State Farm denied the claim, citing exclusions in the insurance policy for losses caused by, inter alia, earth movement; surface and sub-surface

57

water; settling, shrinking, cracking, bulging, or expansion of pavements, walls, or floors; inherent defects; and faulty materials or workmanship. The Tzungs filed suit in California state court, after which State Farm removed the action to federal district court based on the parties' diversity of citizenship. Neither party disputed that one cause of the Tzungs’ loss was expansion of the soil beneath the apartment building due to subsurface water. Tzungs contended there was negligence in the design and construction of the building. Expansion of the soil beneath the apartment building due to subsurface water, was expressly excluded from coverage by a provisions in the policy which stated: This policy does not insure under this form against: ... c. loss caused by, resulting from, contributed to or aggravated by any of the following: 1. Earth movement, including ... earth sinking; ... [and] 4. Water below the surface of the ground.... The Tzungs contend that they are nevertheless entitled to benefits because of the third-party negligence in the design and construction of the apartment building. State Farm, on the other hand, argued that third-party negligence was not an included peril and that, even if it were, it was not the “moving” or “efficient” cause of the Tzungs’ loss. The court found it unnecessary to determine coverage for a third party’s negligence inasmuch as there was an exclusion for faulty materials and workmanship unless a fire ensued. The court held “[w]e believe instead that an unstrained interpretation of the exclusion for "faulty workmanship" includes losses caused by defects in the design and construction of a building.”131

B.

Latent Defects as Excluding Coverage in Owners’ Policies for Construction Defects 58

The fall of the phoenix in Plaza Equities Corp. v. Aetna Casualty and Surety Company,132 was discussed above. The sculpture of the phoenix was approximately 34 feet high, 12 feet wide at its base, and weighed approximately 7,000 pounds. The plans and specifications for the plaza level on which the phoenix was erected were modified to accommodate the statute, which was installed over the opening in the plaza level that had been intended for the skylight on December 10, 1969. The modified plans and specifications were not submitted to the Arlington County authorities, however, and no certificate of occupancy was obtained with respect to the installation of the phoenix. On December 21, 1969, the concrete of the plaza level around the skylight gave way and the phoenix collapsed into the commercial level, which in turn collapsed into the highest garage level, causing the loss sued upon here. There were no personal injuries. There was evidence that the cause of the collapse was the lack of sufficient structural underpinnings to support the weight of the phoenix. The plaza level was originally designed for the passage of people in and out of the office buildings and the motel, not to support a heavy object such as the phoenix. The evidence also disclosed that while plaintiffs modified the original plans and specifications in order to accommodate the phoenix, the plans were not submitted to the county building authorities nor was a certificate of occupancy obtained for the plaza as modified. Pictures taken of the plaza and commercial levels after the collapse show that there were no supporting columns under the area where the phoenix was placed. Employers Liability Assurance Corporation, the insurer, asserted several exclusions as exempting coverage for the loss. One of the exclusions on which Employers based its defense was that the policy did not cover buildings in the process of construction. The court, however, found that a certificate of

59

occupancy had been issued for one of the office buildings, the motel, the plaza and the commercial levels where the collapse occurred. Another exclusion was that the collapse was caused by a latent defect. Employers, one of the two insurance companies sued by the owners of the plaza to recover the costs of repair defended on the basis of the exclusion for latent defects. Its policy provided under the heading ‘EXCLUSIONS:’ 'This policy does not insure under this form against: *** D. Loss caused by: 1. wear and tear, deterioration, rust or corrosion, mould, wet or dry rot; inherent or latent defect; The court held: A latent defect within the meaning of this policy exclusion is an imperfection in the materials used which could not be discovered by any known and customary test. See 239 F.Supp. 844 (E.D.Tenn.1965) and cases cited therein, aff'd per curiam, 369 F.2d 906 (6th Cir. 1966). The Court has found that here the loss was caused by the misjudgment of the plaintiffs in not installing adequate supporting structures to carry the weight of the phoenix, not by any defect in the materials used nor in their installation. In any event, Employers' has not presented any evidence that this misjudgment could not have been discovered through the use of normal weight distribution and stress calculations. Therefore, the Court finds that this exclusion does not apply in the present case.133 Illinois followed the New York district court’s lead in the case of Mattis v. State Farm Fire and Casualty Company.134 It held that the "latent defect" exclusions in policies of insurance refers to some inherent defect in the materials used in construction which could not be discovered by any known or customary test and did not include faulty design or construction within the meaning of the exclusion.135 In Carty v. American States Insurance Company136 the California appellate court rejected the idea that the words “latent defect” as used in a homeowner’s insurance policy, applied only 60

to some undetected defect in construction materials, and not to faulty workmanship. The court in Carty held that because certain defects in the construction of the foundation of a home were "neither readily observable nor apparent on reasonable inspection," those defects were latent, and therefore the loss they caused was not covered under an insurance policy which specifically excluded loss due to latent defect. The “readily observable and apparent on reasonable inspection” test was adopted by an Illinois court in Board of Education of Maine Township High School,137 to hold that a school board’s claim against its carrier for the cost of remediating asbestos related property damage was excluded from coverage. New York138, seems to have followed suit as has Rhode Island (broken trusses).139 After a series of cases struggling with the question of whether a construction defect is “latent” and, thus, excluded,140 yet another California appellate court found yet another definition that would appear to make it a question of fact in most, if not all, cases. It defined “latent defect” as one which is both not readily observable and not discoverable to any but the most searching inspection.141 IX.

Waiver of Exclusions By Endorsement

The policy exclusions may be waived by endorsement. If waived, however, the waiver must be such that it brings damage to the work itself back under coverage. For example in the unreported, but cited, case of Bethesda Place Limited Partnership v. Reliance Insurance Company142, the “All-Risk Builder’s Risk Form” insurance policy excluded “fault, defect, error, or omission in the design, plan or specification.” The insured negotiated the terms of the policy and several standard exclusions were deleted, including the exclusion 61

pertaining to losses resulting from design errors. The endorsement then, in effect read, “this exclusion shall not apply to ensuing loss or damage by a peril not otherwise excluded.” In that case, the insured was the owner-developer of a mixed-use residential and commercial development in Bethesda, Maryland. During construction of the project the insured discovered errors in the designs, plans and specifications of the architects and engineers. The insured brought suit against the carrier contending that the additional costs due to the design errors and the costs of pursuing its claim against the architects and engineers were covered under the policy. The insurer countered that the losses for which the plaintiff was seeking recovery were not perils covered because they did not constitute “physical injury to tangible property” or the “loss of use of tangible property.” The court found that the endorsement was ambiguous as to the parties intentions and refused to grant either motion.

1. Deutsch, Kerrigan & Stiles, §9.2, Construction Industry Insurance Handbook, Wiley, 1991. 2. Id. 3. Hartford Fire Insurance Company v. Riefolo Construction Co., Inc., 81 N.J. 514 at 524, 410 A.2d 658 at 663 (1980). 4. Id. The rule is subject to contractual modification; parties may therefore provide for a different allocation of the risk Id. 5. New York Board of Fire Underwriters v. Trans Urban Construction Company, Inc., 458 N.Y.S. 216 at 220-21, 91 A.D. 2d 115 at 122-123 (1983). 6. Hartford Fire Insurance Company v. Riefolo Construction Co., Inc., supra, 81 N.J. at 524-5, 410 A.2d at 663. 62

7. AIA Document A201, General Conditions of the Contract for Construction at ¶11.4.1 8. Id., 81 N.J. at 526, 410 A.2d at 664. 9. E.g., AIA A201 at ¶11.3.2. The policy shall provide for such waivers of subrogation by endorsement or otherwise. 10.

E.g., City of Burlington v. Hartford Steam Boiler Inspection and Insurance Company, 190 F. Supp.2d 663 at 674 (D.Vt. 2002).

11.

Aetna Cas. & Sur. Co. v. Yates, 344 F.2d 939 at 940 (5th Cir. 1965) (Friendly, J., sitting by designation.)

12.

Standard Structural Steel Co. v. Bethlehem Steel Corp. 597 F. Supp. 164 at 191 (D.Conn. 1984).

13.

Ariston Airline Catering Supply Company, Inc. v. Forbes, 211 N.J.Super. 472 at 479, 511 A.2d 1278 at 1282 (1986) citing Annot. 88 ALR 2d 1122, 1125 "Coverage Under 'All Risks' Insurance" (1983).

14.

Id., citing Essex House v. St. Paul Fire and Marine Ins. Co., 404 F.Supp. 978, 988-989 (S.D.Ohio 1975).

15.

Deutsch, Kerrigan & Stiles, supra, §9.7. See also Coverage under all-risk insurance, 30 A.L.R.5th 170, §3 et seq (1995)

16.

278 N.W.2d 373 (S.Ct. N.D. 1979).

17. 2002).

44 Am. Jur. 2d Insurance § 1569 (updated May,

18. 7 Couch on Insurance, 3rd, §102.29 (2002) citing Ira S. Bushey & Sons v. American Ins. Co., 237 N.Y. 24, 142 N.E. 340 (1923), reh'g denied, 237 N.Y. 536, 143 N.E. 732 (1923)("construction" has then begun, even though the materials are not put together in a definite manner). 19.

The Clorox Company v. KPK Corporation, 1984 WL 1257 (N.D. Ill. 1984), Unpublished, citing Hendrix v. New Amsterdam Casualty Co., 390 F.2d 299 at 302 (10th Cir. 1968).

20.

The Clorox Company v. KPK Corporation, 1984 63

WL 1257 (N.D. Ill. 1984), Unpublished, 21.

Id.,

22.

Supra, 390 F.2d 299

23.

Id. 390 F.2d at 302.

24.

296 F.2d 71 (10th Cir. Ok. 1961).

25.

451 F.2d 1140 (10th Cir. Okla. 1971).

26.

Id., 451 F.2d at 1142.

27.

379 F. Supp. 780 (E.D. Pa. 1974).

28.

Id., 379 F. Supp. at 784.

29.

Supra, 81 N.J. 514, 410 A.2d 658 (1980).

30. App.1978)

161 N.J.Super. 99, 390 A.2d 1210 (N.J.

31. cited therein.

81 N.J. at 527, 410 A.2d 664. See also cases

32. cited therein.

Id., 81 N.J. at 528, 410 A.2d 665. See also cases

33.

Id.

34.

Id., 81 N.J. at 530, 410 A.2d 666.

35.

539 A. 2d 967 (S.Ct. R.I., 1988).

36.

Id.

37. WL 1257 (N.D. Ill. 1984).

The Clorox Company v. KPK Corporation, 1984

38.

Id.

39.

Id. 64

40.

Standard Structural Steel Co. v. Bethlehem Steel Corporation, 597 F. Supp. 164 at 191 (D.Conn. 1984) citing Avis v. Hartford Fire Insurance Company 283 N.C. 142, 195 S.E.2d 545 (1973).

41.

Id., 597 F. Supp. 164 at 191.

42.

Id.

43.

Id., 597 F. Supp. 164.

44.

Id., 597 F. Supp. at 177. In the opinion, the court gives a detailed description of the lift system and the engineering reports concerning its failure too lengthy for this paper.

45.

Id., 597 F. Supp. at 195-96.

46.

190 F.Supp.2d 663 (D.Vt. 2002).

47.

Id., 190 F.Supp.2d at 674.

48.

Id., 190 F.Supp.2d at 676, quoting , Trinity Indus., Inc. v. Ins. Co. of N. Am., 916 F.2d 267 at 270-71 (5th Cir.1990)

49.

Vermont Electric Power Company, Inc. v. Hartford Steam Boiler Inspection and Insurance Company, 72 F. Supp.2d 441 (D.Vt. 1999).

50.

Trinity Industries, Inc. v. Insurance Company of North America, 916 F. 2d 267 (5th Dist. 1990).

51.

City of Burlington v. Hartford Steam Boiler Inspection and Insurance Company, supra, 190 F. Supp.2d at 676, F.N. 11.

52.

Id., 190 F. Supp. 2d at 677.

53. Company, 260 F.2d 574 (6th Cir. 2001)

Lenning

54. 736 N.E.3d 56 at 568 (1999).

Citing Heile v. Hermann, 136 Ohio App.3d 351,

55.

Alton Ochsner Medical Foundation v. Allendale 65

v.

Commercial

Union

Insurance

Mutual Insurance Co., 219 F. 3d 501 (2000). 56. language added by the court.

Id., 219 F. 3d at 504, Emphasis to the policy

57. Id., at 504 citing U.S. Indus., Inc. v. Aetna Cas. & Sur. Co., 690 F.2d 459, 461 (5th Cir.1982) (construing Louisiana law) and citing Dow Chem. Co. v. Royal Indem. Co., 635 F.2d 379, 387 (5th Cir.1981) (construing Texas law). 58.

Id., 219 F. 3d at 506.

59.

690 F.2d 459 (5th Cir. 1982).

60.

Alton Ochsner Medical Foundation v. Allendale Mutual Insurance Co., supra, 219 F. 3d at 507-08.

61. supra, 690 F.2d 459. 62.

U.S. Industries v. Aetna Casualty & Surety Co.,

66 F. Supp.2d 543 (S.D. New York, 1999), Affirmed, 216 F.3d 1072 (2 Cir. 2000), unpublished.. nd

63.

Id., 66 F. Supp.2d at 545.

64.

Id., 66 F. Supp.2d at 546.

65.

219 A.D.2d 454, 631 N.Y.S.2d 155 (1995).

66. F.3d 1228 (11th Cir. 2002).

139 F. Supp. 2d 1374 (S.D. Fla. 2001) and 284

67.

Supra, 66 F. Supp. 2d 543 (S.D.N.Y. 1999).

68.

Swire, supra, 284 F.3d 1228 at 1231.

69.

136 Vt.484,396 A.2d 121 (1978)

70.

72 F.Supp.2d 441 (D.Vt. 1999).

71.

136 Vt.484,396 A.2d 121 (1978)

72.

Id., 136 Vt.at 487,396 A.2d at 122-23

66

73.

72 F.Supp.2d 441 (D.Vt. 1999).

74.

Id., 72 F.Supp.2d at 445.

75.

Id., 72 F.Supp.2d at 445 referring to Aetna Cas. & Sur. Co. v. Yates, 344 F.2d 939 (5th Cir.1965); 80 Broad St. Co. v. United States Fire Ins. Co., 88 Misc.2d 706, 707, 389 N.Y.S.2d 214 (N.Y.Sup.Ct.1975), affd.54 A.D.2d 888, 390 N.Y.S.2d 768 (N.Y.App.Div.1976); Acme Galvanizing Co. v. Fireman's Fund Ins. Co., 221 Cal.App.3d 170, 270 Cal.Rptr. 405 (Cal.Ct.App.1990)." Narob Dev. Corp. v. Insurance Co. of N. Am., 219 A.D.2d 454, 454, 631 N.Y.S.2d 155 (N.Y.App.Div.1995).

76.

Plaza Equities Corp. v. Aetna Casualty and Surety Company, 372 F.Supp. 1325 (S.D. N.Y. 1974). Virginia law applied.

77.

Id.

78.

Id., 372 F. Supp. at 1329.

79.

115 F. Supp.2d 612 (E.D. Va. 1999)

80.

145 N.H. 391, 766 A. 2d 256 (2000).

81.

Id., 145 N.H. at 393, 766 A.2d at 258

82.

Id., 145 N.H. at 394, 766 A.2d at 259

83.

Id., 145 N.H. 391, 766 A. 2d 256.

84.

Id., 145 N.H. at 396-97, 766 A. 2d at 260.

85.

654 F. Supp. 16 (E.D. Wash. 1986).

86.

700 A. 2d 127 (Sup. Ct. Del. 1997).

87.

Id., 700 A.2d at 129.

88.

89.

2001 WL 755385 (Superior Ct. of Del. 2001), Unpublished. Rehearing denied 2001 WL 755941 (Superior Ct. of Del. 2001), Unpublished. 700 A. 2d 127 (Sup. Ct. Del. 1997). 67

90.

Nationwide Insurance Company v. Warren, 675 S.W.2d 402 (Ky. App. 1984).

91.

Id.

92.

Id., 675 S.W.2d at 403

93.

Id.

94.

Id.

95.

Id.

96.

720 F. Supp. 92 (E.D. Mich. 1989).

97.

Id., 720 F. Supp. at 92.

98.

165 Misc. 2d 1004, 630 N.Y.S. 2d 917 (1995).

99.

Id., 165 Misc. 2d at 1007, 630 N.Y.S. 2d at 919.

100.

Southern California Edison Company v. Harbor Insurance Company, 83 Cal.App.3d 747 at 750, 148 Cal. Rptr. 106 (1978).

101.

Id., 83 Cal.App.3d at 752-55.

102.

Id., 83 Cal.App.3d at 757-58.

103.

Id., 83 Cal.App.3d at 759-60.

104.

550 N.W.2d 1 (Minn. App. 1996).

105.

Id., 550 N.W.2d at 9.

106. F.3d 1228 (11th Cir. 2002).

139 F. Supp. 2d 1374 (S.D. Fla. 2001) and 284

107.

Id., 139 F. Supp.2d 1374 at 1382, citing Reliance Insurance Co. v. The Escapade, 280 F.2d 482 at 488 n. 11 (5th Cir. 1960).

108.

Id., 139 F. Supp.2d at 1382-83, citing Southern California Edison Co. v. Harbor Ins. Co., 83 Cal.App.3d 747, 148 Cal.Rptr. 106, 111-12 (1978) (internal citations omitted). See Blasser Bros., Inc. v. Northern Pan-American 68

Line, 628 F.2d 376, 386 (5th Cir.1980); Continental Food Products, Inc. v. Insurance Co. of N. Am., 544 F.2d 834, 837 & n. 1 (5th Cir.1977); Reliance, 280 F.2d at 488 n. 11; Tillery v. Hull & Co., 717 F.Supp. 1481 (M.D.Fla.1988). [FN2] 109.

Id., 139 F. Supp.2d at 1383

110.

83 Cal. App.3d 747, 148 Cal.Rptr. 106 (1978).

111.

Swire, supra, 139 F. Supp.2d at 1385.

112.

284 F.3d 1228 at 1234.

113.

E.g., Mattis v. State Farm Fire and Casualty Company, 16 Ill. App.3d 612, 454 N.E.2d 1156, 73 Ill. Dec. 907 (5th Dist. 1983), (but seek later Illinois case below); Ariston Airline & Catering Supply Company, 211 N.J. Super 472, 511 A. 2d 1278 (1986); O’Neill v. State Farm Insurance Commpany, 1995 WL 214409 (E.D.Pa. 1995) (Unpublished); Associated Aviation Underwriters, v. George Koch Sons, Inc., 712 N.E.2d 1071 (Ind. App. 1999);

114.

782 F. Supp. 946 (D. Del. 1992).

115.

Id., 782 F. Supp. at 950.

116.

5 John Alan Appleman & Jean Appleman, Insurance Law and Practice § 3083 at 311 (1969).

117.

Cavalier Group, supra, 782 F. Supp. at 956 citing 18 Couch § 74:709-711, at 1018-22 (2d Rev. Ed.1983).

118.

Id., referring to Villella v. Pub. Employees Mut. Ins. Co., 106 Wash.2d 806, 725 P.2d 957, 962 (1986) (en banc).

119.

Id., referring to Standard Electric Supply Co., Inc. v. Norfolk & Dedham Mutual Fire Insurance Co., 1 Mass.App. 762, 307 N.E.2d 11, 13 (1973) ("well established principle"); but see Kane v. Royal Ins. Co. of Am., 768 P.2d 678 (Col.1989) (en banc).

120.

Id., Referring to Ariston Airline & Catering Supply Co., Inc. v. Forbes, 211 N.J.Super. 472, 511 A.2d 1278 (1986); see also Franklin Packaging Co. v. California Union Ins. Co., 171 N.J.Super. 188, 408 A.2d 448 (1979), cert. denied, 84 N.J. 434, 420 A.2d 340 (1980).

121.

E.g., Transamerica Insurance Company v. South, 125 F.3d 392 (7th Cir. 1997) citing Oakley Transport, Inc. v. Zurich Insurance Co., 271 69

Ill.App.3d 716, 208 Ill.Dec. 177, 648 N.E.2d 1099 (1 Dist.1995); Allstate Insurance Co. v. Smiley, 276 Ill.App.3d 971, 213 Ill.Dec. 698, 659 N.E.2d 1345 (2 Dist.1995). 122. 123.

38 F. Supp. 2d 349 (D. New Jersey 1999). Id., 38 F. Supp.2d at 353 citing Brindley v. Firemen's Ins. Co. of Newark, 35 N.J.Super. 1, 5, 113 A.2d 53, 56 (App. Div.1955); see also Newman v. Great Am. Ins. Co., 86 N.J.Super. 391, 403, 207 A.2d 167, 175 (App.Div.1965) (following Brindley ).

124.

Id.

125.

Id., 38 F. Supp.2d at 353 referring to See Franklin Packaging Co. v. Cal. Union Ins. Co., 171 N.J.Super. 188, 191, 408 A.2d 448, 449 (App.Div.1979) (quoting 5 Appleman, Insurance Law and Practice § 3083 at 309311 (1970) for the proposition that "recovery may be allowed where the insured risk was the last step in the chain of causation set in motion by an uninsured peril, or [w]here the insured risk itself set into operation a chain of causation in which the last step may have been an excepted risk."); Stone v. Royal Ins. Co., 211 N.J.Super. 246, 251, 511 A.2d 717, 720 (App.Div.1986) (following Franklin Packaging ); Ariston Airline & Catering Supply Co., Inc. v. Forbes, 211 N.J.Super. 472, 487, 511 A.2d 1278, 1286-87 (Law Div.1986) (following Franklin Packaging ).

126.

Id., 38 F. Supp.2d at 353 referring to Schroeder v. State Farm Fire and Cas. Co., 770 F.Supp. 558, 561 (D.Nev.1991) (explaining the “efficient proximate clause doctrine).

127.

Id., referring to Howell v. State Farm Fire and Cas. Co., 218 Cal.App.3d 1446, 1456, 267 Cal.Rptr. 708, 714-15 (1990); Safeco Ins. Co. of Am. v. Hirschmann, 112 Wash.2d 621, 627, 773 P.2d 413, 416 (1989).

128.

Id., 38 F. Supp.2d at 353-54 citing Howell, 218 Cal.App.3d at 1456, 267 Cal.Rptr. at 714.

129.

See Safeco, supra, 112 Wash.2d at 624, 773 P.2d at 414.

130.

Id., citing TNT Speed & Sport Center, Inc. v. Am. States Ins. Co., 114 F.3d 731, 733 (8th Cir.1997) (applying Missouri law); Front Row Theatre, Inc. v. American Mfrs. Mut. Ins. Cos., 18 F.3d 1343, 1347 (6th Cir.1994) (applying Ohio law); Schroeder, 770 F.Supp. at 561; State Farm Fire and Cas. Co. v. Bongen, 925 P.2d 1042, 1045 (Alaska 1996); Millar v. State Farm Fire and Cas. Co., 70

167 Ariz. 93, 97, 804 P.2d 822, 826 (Ariz.Ct.App.1990); Kane v. Royal Ins. Co., 768 P.2d 678, 684 (Colo.1989); Ramirez v. Am. Family Mut. Ins. Co., 652 N.E.2d 511, 516 (Ind.Ct.App.1995); Toumayan v. State Farm Gen. Ins. Co., 970 S.W.2d 822, 826 (Mo.Ct.App.1998); Kula v. State Farm Fire and Cas. Co., 212 A.D.2d 16, 20-21, 628 N.Y.S.2d 988, 991 ((1995); Alf v. State Farm Fire & Cas. Co., 850 P.2d 1272, 1277 (Utah 1993); State Farm Fire and Cas. Co. v. Paulson, 756 P.2d 764, 769 n. 2 (Wyo.1988). 131.

Id., 873 F.2d at 1341.

132.

372 F.Supp. 1325 (S.D. N.Y. 1974).

133.

Id., 372 F.Supp. at 1331.

134. Dec. 907 (5th Dist. 1983).

118 Ill. App.3d 612, 454 N.E.2d 1156, 73 Ill.

135.

Id., 118 Ill. App.3d at 620, 454 N.E.2d at 1163, 73 Ill. Dec. at 913 citing. Plaza Equities Corp. v. Aetna Cas. & Sur. Co., 372 F.Supp. 1325 (S.D.N.Y.1974); Essex House v. St. Paul Fire & Mar. Ins. Co., 404 F.Supp. 978 (S.D.Ohio 1975); General American Transp. Corp. v. Sun Ins. Office, Ltd., 239 F.Supp. 844 (E.D.Tenn.1965), aff'd per curiam, 369 F.2d 906 (6th Cir.1966).

136.

7 Cal. App.4th 399, 9 Cal. Rptr. 2d. 1 (1992).

137.

292 Ill.App.3d 14, 684 N.E.2d 978, 225 Ill.Dec.

st

987 (1 Dist. 1997). 138. 141 Misc. 2d 456, 533 N.Y.S.2d 195 (1988).

Derenzo v. State Farm Mutual Insurance Co.,

139.

Neri v. Nationwide Fire Insurance Company, 719 A.2d 1150 (1998).

140.

Tzung v. State Farm Fire and Casualty Company, 873 F. 2d 1338 (9th Cir 1989); Acme Galvanizing Co., v. Fireman’s Fund Insurance Co., 221 Cal. App. 3d 170, 270 Ca. Rptr. 405 (1990); Winans v. State Farm Fire and Casualty Company, 968 F.2d 884 (9th Cir. 1992); Chadwick v. Fire Insurance Exchange, 17 Cal. App.4th 1112, 21 Cal. Rptr.2d 871 (1993).

141.

Scott v. Continental Insurance Co. 44 Cal App. 4 24, 51 Cal. Rptr. 566 (4 Dist. 1996). th

th

71

142.

1992 WL 97342 (D.Md.)

72