By Georgia D. Koutouzos, J.D.
A steel rebar fabricator’s commercial general liability and umbrella insurers had no duty to indemnify the cost of the additional structural changes necessary to correct non-conforming rebar that had been incorporated into pile caps that supported the concrete columns installed in constructing a Nebraska arena, that state’s highest court held. The reinforcement of the pile caps simply was part of the insured’s contractual obligation to make good on its work and did not constitute coverage-triggering "property damage" under the terms of the insurance policies, the high court advised, affirming the lower court’s grant of summary judgment favoring the insurers albeit on different grounds (Drake-Williams Steel, Inc. v. Continental Casualty Co., August 5, 2016, Wright, J.).
Underlying dispute. The general contractor for a sports/event arena entered into a purchase agreement with a steel rebar fabricator for rebar to be incorporated into the facility’s concrete columns, pile caps (which provide support for the columns that, in turn, support the floor and roof), and grade beams. The rebar had been improperly bent when it was fabricated and, as a result, had approximately 50 percent of its normal reinforcing capacity. Because of the non-conforming rebar, about half of the previously installed pile caps had to be modified with a reinforcing band of concrete and additional rebar in order to provide the necessary structural support. The process required excavating around the pile caps, assembling a new form around them, placing rebar into that form, and pouring concrete into the form.
The rebar fabricator initially refused to pay for the costs of the remedial corrections, which exceeded $1.5 million. Eventually, the fabricator paid the general contractor and then sought reimbursement of the amount paid out from its commercial general liability and umbrella liability insurers. The insurers refused coverage and filed declaratory judgment actions seeking a determination that they owed no indemnification under the terms of their respective policies. The rebar fabricator counterclaimed for breach of contract and sought its own declaration of coverage. Both sides then moved for summary judgment.
The trial court consolidated the cases and entered summary judgment favoring the insurance companies, finding that the insured’s product had been damaged as a result of the nonconforming rebar in that the pile caps had been rendered deficient and were unable to sustain the load for which they had been designed had the proper rebar been used. Faulty workmanship did not constitute an "accident" and, therefore, was not an "occurrence" under the policies, the trial court held, adding that the policies’ "impaired property" exclusion applied because the installation of the reinforcing collars on the affected pile caps restored the caps to their intended use—again netting no "occurrence" under the policies’ terms.
The rebar fabricator appealed the decision, arguing that the trial court erred in determining that there was no occurrence as defined in the policies and in finding that the "impaired property" exclusion applied to preclude coverage. The insurers cross-appealed to the extent that the trial court determined that the damages at issue had constituted "property damage" under the policies.
Policy language. The CGL policy agreed to cover "those sums that [the insured] becomes legally obligated to pay as damages because of … ‘property damage’ to which this insurance applies, with "property damage" defined as:
a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the "occurrence" that caused it.
The insurance applied to "‘property damage’ only if" the property damage "is caused by an ‘occurrence,’" with "occurrence" defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." The umbrella policy essentially provided follow-form coverage.
Coverage-triggering property damage. The incorporation of a defective component or product into a larger structure does not constitute "property damage" under the terms of a CGL policy unless and until the defective component causes physical injury to tangible property in at least some other part of the system. In that respect, "property damage" is not established by the mere failure of a defective product to perform as intended.
In the case at bar, the concrete and the insured’s steel rebar were part of the pile caps’ integrated system; there was no "physical injury" to either the rebar itself or the pile caps into which the defective rebar had been cemented. The defective rebar still performed a structural reinforcement, but it was not as strong as it would have been. And because the pile caps could be modified (rather than destroyed and rebuilt) to meet the contractual requirements, there was no physical damage to the caps themselves and they could be modified without any physical damage to any other part of the arena. Hence, the caps’ modification did not involve "property damage" under the terms of the insurance policies because the insured’s defective work product did not damage other property.
The reinforcement of the pile caps simply was part of the insured’s contractual obligation to make good on its work. In the purchase agreement with the arena’s general contractor, the insured warranted and guaranteed to furnish the rebar free from defects. The agreement provided that the insured promised to promptly remove or replace defective material and any other work affected by such correction without costs to the general contractor or arena owner. That liability was not what CGL policies are designed to protect against; the costs of reinforcing the inadequately reinforced pile caps was a business risk and was not the kind of fortuitous event for which a CGL policy is obtained.
Accordingly, the trial court’s grant of summary judgment favoring the insurers was affirmed, but on different grounds from those stated by the lower court.
The case is Nos. S-15-445 and S-15-446.
Attorneys: Steven D. Davidson (Baird Holm, L.L.P.) and Thomas A. Vickers (Vanek, Vickers & Masini, P.C.) for Drake-Williams Steel, Inc. Karen K. Bailey (Engles, Ketcham, Olson & Keith, P.C.) and John F. Maher (Colliau, Carluccio, Keener, Morrow, Peterson & Parsons) for Continental Casualty Co. Marvin O. Kieckhafer (Smith Peterson Law Firm, L.L.P.) and Brian O’Gallagher (Cremer, Spina, Shaughnessy, Jansen & Siegert, L.L.C.) for Employers Mutual Casualty Co. and EMCASCO Insurance Co.
Companies: Drake-Williams Steel, Inc.; Continental Casualty Co.; Employers Mutual Casualty Co.; EMCASCO Insurance Co.
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