While the court denied summary judgment on whether the alleged damage was due to faulty workmanship and not covered, it granted summary judgment for dismissal of several business risk exclusions the insurer asserted against the developer. United Specialty Ins. Co. v. Dorn Homes, 2020 U.S. Dist. LEXIS 138431 (D. Ariz. Aug. 4, 2020).
Dorn, a residential home developer, developed a 350 single family residential home division. Dorn did not perform the actual construction, but contracted with various subcontractors.
After completion, Dorn began to receive complaints from homeowners about interior damage to some of the homes. Inspections showed interior cracking, wall separation and foundation movement. Dorn ultimately installed an unvented foam insulated roof system to address these issues. Therefore, it did not repair the faulty workmanship of its subcontractors because it would not have been efficient or as effective. Dorn paid for the repairs to the 87 homes at issue.
Dorn sought reimbursement from its insurer, United. United notified Dorn that the costs of replacing the insulation was likely not considered as property damage under the policy.
Dorn filed for declaratory relief. Both parties moved for summary judgment. The court first considered whether there was an occurrence under the policy.
Under Arizona law, faulty workmanship that caused damage to other property could equate to property damage. Although faulty workmanship was not covered, damage to other property caused by or resulting from the defect could be covered.
Here, the court found there were genuine issues of material fact as to whether Dorn's attic remediation issues were for the purpose of repairing faulty workmanship itself, or to damage resulting from the faulty workmanship. Further, there were genuine issues of material fact regarding the extent of preventative measures. Summary judgment on these issues was denied to both parties.
Dorn also argued that the court should find that subcontractor faulty workmanship standing alone constituted an occurrence. Dorn argued that Exclusion L, the "your work" exclusion, demonstrated that subcontractor faulty workmanship was covered. The exclusion barred coverage for "property damage to 'your work' arising out of it or any part of it and included in the 'products-completed operations hazard.'" The exclusion did not apply "if the damaged work or the work out of which the damage arose was performed on your behalf by a subcontractor." The court again declined to be the first to apply Arizona law and hold that faulty subcontractor work, standing alone, constituted an occurrence.
The court next turned to the exclusions raised by United. Exclusions J(5) and J (6) provided that the policy did to apply to property damage to:
(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the "property damage" arises out of those operations; or
(6) That particular part or property that must be restored, repaired, or replaced because "your work" was incorrectly performed on it.
The parties agreed that these exclusions only applied to claims arising from ongoing operations. Dorn agued that the exclusions did not apply because all of the underlying losses or damages arose after construction on each affected residence was completed. The court agreed and granted summary judgment on these exclusions to Dorn.
Under Exclusion K, the policy did not apply to property damage to "'your product' arising out of it or any part of it." "Your product" meant "any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by You." Dorn argued it developed real property and improvements or fixtures that because part of that real property, so the exclusion did not apply, The court agreed and granted Dorn summary judgment on this issued.
Exclusion M stated the insured did not apply to:
"Property damage" to "impaired property" or property that has not been physically insured, arising out of
(1) A defect, deficiency, inadequacy or dangerous conditions in "your product" or 'your work;" or
(2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.
This exclusion does not apply to loss of use of other property arising out of sudden and accidental physical injury to "your product" or "your work" after it has been put to its intended use.
Impaired property was "tangible property, other than 'your product' or 'your work" that cannot be used or is less useful because it incorporates 'your product' or 'your work' that is . . . defective, deficient, inadequate or dangerous . . ."
This exclusion was commonly called the "impaired property" exclusion and was designed to prevent the insured from claiming economic losses resulting from the insured's work or work product. The court agreed with other courts that the exclusion was ambiguous and confusing.
Nevertheless, Exclusion M applied where the insured's work was incorporated into other property and that other property is not able to be used because of a defect in the insured's work. To apply here, Exclusion M would require property damage, caused by Dorn's work to impaired property or property that had not been physically injured. United had not presented a genuine issued of material fact that a similar circumstance exited in this case. Mere allegation and speculation did not create a factual dispute for purposes of summary judgment. Accordingly, Dorn was entitled to summary judgment on Exclusion M.