Applying Iowa law, the federal district court found that the insurer had to defend and indemnify construction defect claims for damage to property caused by the insured's subcontractors. Van Der Weide v. Cincinnati Ins., 2017 U.S. Dist. LEXIS 4469 (N.D. Iowa Jan. 12, 2017).
Van Der Weide contracted with Bouma & Company, Inc. to construct a house in 1996. Before construction began, Bouma purchased a CGL policy and a separate umbrella policy from Cincinnati, which were in effect from January 30, 1996 to January 30, 1999.
Bouma used various subcontractors to build the home, including Elkato Masonry, which did the brick veneer and masonry work. The house was completed in February 1998 and Van Der Weide moved in during August 1998.
After moving into the house, Van Der Weide observed a small amount of water ponding in the basement. This recurred periodically after rains. In 2010, Van Deer Weide noted the dry wall was peeling. He asked Bouma to remove the drywall between the windows. Doing so revealed significant water damages to the insulation, studs and sheeting. Experts were retained and found that defective masonry installation allowed water infiltration without any mechanism for the water to escape. As the investigation continued, it was discovered that the walls around the entire house had serious damage, requiring their removal and replacement. Van Der Weide contended that because of the construction defects, moisture infiltrated the masonry and started to cause damage soon after the masonry veneer was installed.
In March 2011, Van Der Weide sued Bouma, Elkato and others. Cincinnati rejected Bouma's tender, contending that the alleged defects were discovered after Cincinnati's policy period ended. Van Der Weide and Bouma entered an agreement for covenant not to execute and stipulation for entry of judgment. Bouma confessed judgment in Van Der Weide's favor in the amount of $2,000,000. Bouma assigned to Van Der Weide all claims against Cincinnati.
Van Der Weide then filed this coverage action against Cincinnati. Cincinnati argued there was no "occurrence" during its policy period and that various policy exclusions applied.
The court first found that Cincinnati was on notice of an "occurrence." The time of occurrence was when the claimant sustained damage, not when the act or omission causing the damage took place. The allegations in Van Der Weide's pleadings in the underlying case did not put Cincinnati on notice of an alleged occurrence during the policy period. The underlying complaint alleged that minor water leakage started to occur prior to 2010. But in email messages in April and May 2014, Bouma's counsel notified Cincinnati that experts would testify that the damage began shortly after substantial completion, during the policy period. Even after receiving this information Cincinnati refused to defend.
The court found that by no later than May 5, 2014, Cincinnati was on notice: (a) that Van Der Weide alleged defective performance by Bouman's subcontractor which caused damage during the policy period and (b) that expert testimony would be presented at trial to support the allegation. Therefore, Cincinnati became aware, while the underlying case was pending, of a potential occurrence that would trigger an obligation to indemnify Bouma.
The court next considered the "your work" exclusion. The exclusion did not apply if the "damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor." Thus, to the extent defective masonry work done by Bouma's subcontractor, Elkato, caused damage during the policy period, the "your work" exclusion was not applicable.
Nor did the exclusion for "damage to impaired property" apply here. This exclusion applied to the extent that the claim related to damages resulting from Bouma's work, but not to any damages related to subcontractor work. Because the property was physically injured and because the work Bouma performed could not be "impaired property," this exclusion did not apply. The exclusion addressed property that was not "your work" but incorporated "your work." Here, the record did not suggest that Elkato's masonry work incorporated Bouma's work. Therefore, this exclusion did not preclude the possibility that Cincinnati's policy provided coverage for Van Der Weide's claims against Bouma.
Finally, Cincinnati had an obligation to indemnify Bouma for any covered damages that resulted from defective work performed by Bouma's subcontractors. Cincinnati did not, however, have a duty to indemnify Bouma for damages that resulted from work performed by Bouma itself. The summary judgment record was not sufficient to allow findings as to the extent of Cincinnati's indemnification obligations.
