The South Dakota Supreme Court found coverage in favor of the general contractor who was sued for alleged faulty workmanship. Owners Ins. Co. v. Tibke Constr., Inc., 2017 S.D. LEXIS 106 (S.D. Aug. 23, 2017).
The homeowners hired Tibke Construction Inc. as general contractor to build a new house. Tibke hired Jerry's Excavating Inc. as a subcontractor to prepare the soil and perform excavation work. After the project was completed, the homeowners sued Tibke and Jerry's Excavating for negligent construction and breach of contract. The homeowners alleged that Jerry's Excavating failed to conduct soil-compaction testing before construction. They alleged that the home was built upon highly expansive soils, resulting in damage to the home by "excessive settlement, cracking, structural unsoundness and other damages." The complaint further alleged that damages existed only on portions of the home not worked on by Jerry's Excavating.
Owners Insurance Company, Tibke's insurer, disputed coverage but agreed to defend under a reservation of rights. Owners filed an action for declaratory relief against Tibke, Jerry's Excavating and the homeowners. Owners alleged that it had no duty to defend or indemnify Tibke for property damage because "faulty workmanship" was not an occurrence under the CGL policy. Further, exclulsions j (7) and l precluded coverage.
The trial court denied cross motions for summary judgment, finding there were disputed questions of material fact regarding whether there was expansive soil under the home and, if so, whether it was foreseeable.
On appeal, the court noted it was undisputed that the homeowners suffered property damage. The key question was whether the alleged failure to test soil was an occurrence. The court ruled that the alleged failure to test soil was an accident and thus an occurrence under the policy. The failure to test the soil was not an intentional or deliberate action but an unplanned omission, which caused an unexpected result. Therefore, Tibke established that coverage existed under the insuring agreement of the policy.
The court turned to the exclusions. Exclusion j (7) barred coverage for,
"Property damage" to:
. . .
(7) That particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.
. . .
Exclusion j(7) only applied to property damage affected by your work. The definitions of "your work" in the policy included "work or operations performed by [Tibke] or on [Tibke's] behalf." Jerry's Excavating was a subcontractor working on Tibke's behalf.
However, j (7) only excluded property to "that particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it." The plain language of j (7) was concerned with the repair, restoration, or replacement of a specific part of the property, not the damage to a property as a whole. The house that was not that particular part of the property on which Jerry's Excavating's failure to test the soil was incorrectly performed. Therefore, j (7) did not exclude coverage for the alleged property damage to the home.
Next, the court looked at exclusion (l), which precluded coverage for:
"Property damage" to "your work" arising out of it or any part of it and included in the "products-completed operations hazard."
"Products-completed operations hazard" was defined to:
includes all . . . "property damage" occurring away from premises you own or rent and arising out of "your product" or "your work" except:
. . .
(2) Work that has not yet been completed or abandoned.
Tibke argued that exclusion l was inapplicable because it only barred coverage for property damage arising after the insured's work was completed. Tibke claimed that the failure to test to soil occurred at the start of the project, so the foundation for the home would have been exposed to the expansive soil immediately upon being poured.
The court determined that exclusion l did not apply. The property damage did not meet the definition of products-completed operations hazard because the construction of the house had not yet been completed or abandoned. In other words, exclusion l did not apply to property damage which first began before the insured's work was completed. Tibke asserted the house suffered damage throughout construction from ongoing soil expansion and contraction before the work was finished. Accordingly, the alleged damage to the house was not included in the products-completed operations hazard and exclusion l did not exclude coverage.
The court affirmed the judgment denying Owners' motion for summary judgment, but reversed the judgment denying Tibke's motion, and remanded for further proceedings.
