The court granted the insured's motion for summary judgment despite the insurer's denial based upon faulty workmanship. Engineered Structures, Inc. v. Travelers Prop Cas. Co. of Am., 2018 U.S. Dist. LEXIS 102822 (D Idaho June 18, 2018).
Engineered Structures, Inc. (ESI) contracted with Fred Meyer Stores, Inc. to build a fuel center. The contract called for the installation of two underground storage tanks (USTs) for storage and sale of fuel. ESI contracted with 3 Kings Environmental, Inc. (3 Kings) to install the Liquid Fuel Distribution and Electrical systems.
The installation manual for the USTs called for the tank to be ballasted to keep the tank protected against flotation until the tank was fully backfilled and the top slab was in place. Ballast was a temporary element of the installation much like roofers use a tarp to cover an unfinished roof as the work progresses. When the work was complete, no water (ballast) was present in the tank.
Between December 15 and 17, 2015, the USTs were lowered into the ground, seated into bedding material, strapped down via anchor straps and partially backfilled with gravel. On December 23, 2014, it rained. On the morning of December 24, 2014, ESI and 3 Kings discovered that the larger UST had displaced the surrounding soils and emerged from the excavation. At that time the backfill was at least up to the top of the tank. By floating out of the backfill that surrounded it, the UST sustained damage, which required repair before the UST could be reinstalled, and delayed the project schedule. At the time of the loss, the UST had been lowered into the excavation and partially backfilled, but it had not yet successfully undergone post-installation testing required by the manual.
ESI incurred costs to re-excavate the hole and reinstall the UST. Further costs were incurred for having the UST inspected and repaired before it was reinstalled. All of the damage to the UST occurred because it floated.
On January 6, 2015, EST submitted a claim to Travelers under its builders' risk policy. Travelers had the site inspected. It was determined that the UST should have been filled with ballast, to a level of not more than 12-inches above the groundwater level in the excavation, following installation and partial backfilling. Travelers denied the claim based upon the policy's exclusion for faulty workmanship.
ESI sued for breach of contract and the parties moved for summary judgment. Travelers contended that the faulty workmanship provision precluded the claim because had it not been for the failure to properly ballast the UST, it would not have floated out of the ground. Travelers argued that, under either under a "flawed product" or "flawed process" analysis, the faulty workmanship exclusion was applicable. ESI responded that the faulty workmanship provision did not apply to a work in progress because the provision applies to a finished work product.
There was no dispute that the work was in complete because ESI had not completed ballasting the tank, nor had it completed the subcontract for installation of the Liquid Fuel Distribution & Electrical Systems, or the fueling station as a whole. Therefore, the faulty workmanship exclusion did not apply.
The policy covered resulting loss or damage, which may have been caused in part by the negligent practices of ESI. If Traveler's intent was to exclude liability from all losses caused by negligence by ESI, it was not clearly express in the policy. Instead, the policy excluded coverage for damage resulting from defective materials incorporated into the structure itself, or from defects in the produce caused by faults in the construction process.
Therefore, the court found the term s faulty workmanship ambiguous, and applied the construction most favorable to the insured. The UST sat in the ground without incident from the time it was filled with ballast on December 17, until December 24, when it rained. Under the flawed product interpretation, the exclusion did not apply because ESI's losses were not caused by a flawed product, but by failure to adequately protect against flotation during the installation of the USTs. This installation was a component part of he completion of the fuel center. ESI's motion for summary judgment on the breach of contract claim was granted.
