Damage to Property Exclusions
October 27, 2014
This case concerns a dispute over insurance coverage for construction defects. The case is Western Heritage Ins. Co. v. Cannon, No. 13–CV–0204–TOR2014, WL 3697806 (July 24, 2014, E.D. Wash.).
The Cannons own a home built by Cook Custom Homes. Cook used a subcontractor, Hattenberg Excavating, to excavate the lot and add several hundred yards of fill soil to extend the building pad. The Cannons began to move into the residence while construction was still in progress, and they noticed cracks throughout the foundation, basement slab, ceilings, and driveway. An inspection attributed the cracks to defects in the settlement and soil subsidence.
The Cannons sued Cook. Cook agreed to a confession of judgment and assigned its rights against its insurer, Western Heritage, to the Cannons. Western Heritage filed for a declaratory judgment that it owed no duty to pay any amount to the Cannons. The insurer contended that six exclusions apply to preclude the Cannons from recovering under the policies issued to Cook.
Western Heritage argued that the subsidence exclusion bars its obligations. The Cannons countered that the exclusion does not apply because it contains the undefined term “operations” and this requires construal in favor of coverage. The Cannons contended that they reasonably understood “operations” to mean ongoing operations, and the exclusion would apply if Cook dug a hole near the house during construction and the digging caused a wall of the house to collapse during construction. The Cannons argued that because the damages occurred after the operation of bringing in the defective fill had been completed, the exclusion is not applicable. The district court did not find this argument persuasive.
The U.S. District Court for the Eastern District of Washington noted that the subsidence exclusion states that it applies to subsidence resulting from operations. Such language in its plain and unadorned common use indicates that it excludes damage incurred as a result of subsidence for a variety of reasons, including from the operations of the insured. There is no indication that the policy intended to exclude subsidence caused only by the ongoing operations of the insured. The subsidence exclusion applied.
The insurer also maintained that the damage to property exclusions applied. The court agreed. The court said that the damage caused by Cook or its subcontractors is precisely the type of damage excluded by exclusions j(5) and j(6) in the standard commercial general liability policy. The exclusions bar coverage to that particular part of real property on which the named insured or subcontractors are performing operations if the damage arises out of those operations and to that particular part of any property that must be restored or repaired because the insured's work was incorrectly performed on it. Thus, said the court, by the exclusions' plain terms, the insurance is not applicable to damage to the insured's work caused by the insured in the course of the insured's work. The negligence of Cook and its subcontractors in placing the improper fill soil and placement of the foundation on that improper fill soil resulted in subsidence that caused severe damage to the house. The house and fill soil comprised the “particular part” of property damaged because Cook's work was incorrectly performed on it and the damage occurred while Cook was performing operations.
Western Heritage also argued that the completed operations exclusion applied. The Cannons said that the damage began prior to and continued after the home's completion and as such, is not subject to the completed operations exclusion. They said that since the damages occurred and were known before completion, the damages cannot be regarded as a completed operation. The court disagreed with the Cannons.
The court found that the plain language of the completed operations exclusion applies to exclude coverage of damages occurring after completion of the project. The court could not find any reason why damages should not be subject to the completed operations exclusion simply because they were observed before completion.
The court ruled that Western Heritage's request for a declaratory judgment that there is no coverage under the policies for the claims asserted by the Cannons is granted.
Editor's Note: The U.S. District Court offered an informative discussion of the damage to property exclusions in this case and ruled that the plain language of the exclusions clearly applied to the facts of the loss. The insurer was not obligated to provide coverage for the damages.