The federal district court found there was no coverage for the insured contractor under Arkansas law when sued for construction defects by two homeowners. Auto-Owners Ins. Co. v. Hambuchen Constr., 2016 U.S. Dist. LEXIS 160364 (W.D. Ark. Nov. 18, 2016).
In one case, the Pierces hired Hambuchen, the insured contractor for the construction of a new home, which was completed in 2006. Two years after moving in, the Pierces experienced water leaks at various locations inside the home and the basement flooded. Water damage rendered the back deck unstable. In 2010 and 2011, Hambuchen made repairs to stop leaks on the decks, but in 2012 the back deck again showed signs of water damage. The Pierces sued, and Auto-Owners provided a defense under a reservation of rights.
In the second case, the Lessmanns hired Hambuchen in 2005 as general contractor to construct their new home. Following completion of the home, the Lessmanns complained about scratched windows. The Lessmanns filed suit against Hambuchen for breach of the construction contract by failing to build their home in a workmanlike manner. The Lessmanns filed suit in May 2009. Auto-Owners was not aware of the suit until 2015 when it received notice that the Lessmanns had filed an amended complaint. The Lessmans' suit went to trial and Hambuchen prevailed.
Auto-Owners filed suit against Hambuchen for a declaratory judgment regarding coverage for the two cases under the CGL policy. Both parties moved for summary judgment. Under Arkansas law, defective workmanship standing alone, resulting in damages only to the work product, was not an occurrence. The Eighth Circuit recognized that when faulty workmanship resulted in damage to the work product, there was no coverage to the work product itself, but the insurer may still be obligated to reimburse the insured for collateral damage to other property.
The Pierces alleged that defective workmanship caused damage to the exterior decks and other exterior and interior areas of their home. The Pierces hired Hambuchen to build an entire home, and the exterior decks and porches were individual parts of the entire construction project. Therefore, the Pierces sought damages for defective workmanship that resulted in damages only to the work product itself, which did not qualify as property damage caused by an "occurrence."
Similarly, the Lessmanns claimed that Hambuchen failed to build their home in a skillful and workmanlike manner, which resulted in a shifting foundation and scratched windows. There was collateral damage caused by the shifting foundation, including damage to sheet rock and sod. Although damage to sod might qualify as collateral damage to other property, damaged sheet rock resulting from a shifting foundation was classified as damage to the work product itself.
Auto Owners asserted that if there was coverage under the insuring agreement, the "Damage to Your Work" exclusion would apply. Coverage was excluded for "property damage to your work arising out of it or any part of it and included in the products-completed operations hazard." Here, Auto Owners carried its burden of showing that the property damage claimed in the underlying lawsuits fell under the "Damage to Your Work" exclusion.
Hambuchen argued that the "products-completed operations hazard" served as an exception to the "your work" exclusion. The policy defined "products-completed operations hazard" as "all . . . property damage occurring away from premises you own or rent and arising out of . . . your work except work that has not yet been completed or abandoned." The Eighth Circuit had noted that the risk intended to be insured by a products hazard and completed operations provision was the possibility that the goods products or work of the insured, once relinquished or completed, would cause bodily injury or damage to property other than to the product or completed work itself, and for which the insured may be found liable. Here, the Pierces and Lessmanns sought relief for damage to the product or completed work itself.
Therefore, the "Damage to Your Work" provision excluded coverage for all property damage claimed in the underlying lawsuits, including property damage that fell under the policy's "products-completed operations hazard" definition. Auto-Owners had no duty to defend or indemnify under the Pierces lawsuit and no duty to defend the Lessmanns' lawsuit.
Finally, Hambuchen failed to give timely notice under the policy of the Lessmanns' lawsuit. The Hambuchen's attorney gave notice of an amended complaint be filed four years after the initial lawsuit commenced.
Consequently Auto Owners motion for summary judgment was granted and Hambuchen's cross motion was denied.