Jim Barna Log Systems Midwest, Inc. v. General Casualty Insurance Co. of Wisconsin

Citations: 791 N.E.2d 816; 2003 Ind. App. LEXIS 1256; 2003 WL 21665291Docket: 91A02-0211-CV-961

Court: Indiana Court of Appeals; July 17, 2003; Indiana; State Appellate Court

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Jim Barna Log Systems Midwest, Inc. and Peter Rosi appealed the trial court's decision granting summary judgment to Hoosier Insurance Company and General Casualty Insurance Company of Wisconsin, while denying their own motion for summary judgment. The primary issue was whether the trial court erred in these rulings. The Court of Appeals of Indiana affirmed the trial court's decision.

Key facts include that Barna Log, a seller of log home packages, had a contract with Mark and Barbara Grott, facilitated by Rosi, for the purchase of a log home. Subsequently, the Grotts filed a complaint against Barna Log, Rosi, and others, alleging multiple counts of negligence and misrepresentation. 

Count I asserted that Barna Log breached its duty to the Grotts by hiring an incompetent builder, resulting in damages. Count II alleged breach of contract for failing to provide the agreed-upon materials and specifications, leading to damages. Count III charged the defendants with conversion of materials purchased by the Grotts. Count IV claimed intentional misrepresentation regarding the builder's qualifications, with Grott incurring damages based on reliance on these misrepresentations. Count V alleged violations of the Indiana Code related to false advertising and sought treble damages.

The Grotts sought compensation for damages, including attorney's fees and costs, due to the defendants' alleged wrongful acts.

Barna Log holds a commercial general liability insurance policy with Insurers and sought defense and indemnification against claims in the Grotts' Complaint. Insurers denied coverage in a letter dated May 15, 2002. In response, Barna Log and Rosi filed a complaint for declaratory relief on May 29, 2002, requesting the court to affirm Insurers' obligation to defend them regarding certain allegations. Insurers answered on July 8, 2002, denying any duty to defend or provide coverage and asserting three affirmative defenses: 1) the policy terms are clear, 2) there was no 'occurrence' to trigger coverage, and 3) there was no 'property damage' as defined by the policy.

On July 22, 2002, Barna Log and Rosi filed for summary judgment, arguing for a defense and indemnity for specific counts in the Grotts' Complaint. Insurers countered with a cross-motion on September 4, 2002, asserting they had no duty to provide coverage for any claims. After a hearing on September 17, 2002, the trial court granted Insurers' motion for summary judgment and denied that of Barna Log and Rosi on October 16, 2002. The court concluded there were no material facts in dispute and ruled that Insurers had no obligation to defend or provide coverage based on the allegations in the complaint. The court clarified that the insurance contract only covers bodily injury or property damage resulting from an 'occurrence,' which excludes negligence, intentional acts, and claims related to advice, conversion, misrepresentation, or deceptive practices. The sole issue on appeal is whether the trial court erred in granting Insurers' summary judgment while denying Barna Log's and Rosi's.

In reviewing summary judgment decisions, the standard applied is the same as that of the trial court, focusing on whether there is a genuine issue of material fact and if the moving party is entitled to judgment as a matter of law. All pleadings and evidence must be construed favorably for the nonmovant, ensuring that parties are not unjustly denied their right to a trial. When material facts are disputed or reasonable inferences from undisputed facts conflict, they are resolved in favor of the nonmovant. The appellate burden lies with the party challenging the summary judgment to demonstrate that the trial court's decision was erroneous.

In this case, Barna Log argues that the Grotts' Complaint constitutes an 'occurrence' and 'property damage' under the Commercial General Liability (CGL) Policy, and asserts that Rosi, as an agent, is entitled to defense and indemnity under the same policy. The insurers counter that the Complaint does not sufficiently allege facts that meet the definitions of 'occurrence' or 'property damage' and that the claims fall under policy exclusions. They also argue Rosi is not entitled to coverage for the same reasons as Barna Log.

The resolution of these issues necessitates an analysis of the CGL Policy's language, which is a legal question suited for summary judgment. Clear and unambiguous policy language is interpreted according to its plain meaning, while ambiguities are construed against the insurer. An insurer's duty to defend is broader than its duty to indemnify, determined by the allegations in the complaint and facts known or ascertainable post-investigation. If a claim is clearly excluded by the policy, no defense is required. However, an insurer may refuse to defend based on facts beyond the complaint, provided those facts disclose a lack of coverage. If necessary, an insurer can seek a declaratory judgment to clarify its obligations.

An insurance company may refuse to defend a complaint if the factual basis does not result in liability under the insurance policy, emphasizing that the nature of the claim, rather than its merits, determines the insurer's duty to defend. Commercial General Liability (CGL) policies cover potential bodily injury or property damage caused by the insured's completed work, distinguishing between business risks and insurable liabilities. Business risks arise from poor performance and are borne by the contractor, while insurable liabilities relate to tort damages to others, not contractual liabilities for economic loss. CGL coverage specifically does not extend to accidents stemming from faulty workmanship but rather to accidents that result from such faulty workmanship. The court must evaluate whether specific allegations in a complaint constitute an "occurrence" and whether they imply "property damage" under the CGL Policy, alongside considering any applicable exclusions. The CGL Policy stipulates coverage for damages resulting from bodily injury or property damage caused by an occurrence within the coverage territory, defining 'occurrence' as an accident, which is interpreted as an unexpected event without intent.

Barna Log and Rosi contend that the Grotts' Complaint alleges negligent conduct that should be covered under a commercial general liability (CGL) insurance policy, arguing that such negligence is inherently accidental. They reference case law, including Askren Hub States Pest Control Servs. Inc. v. Zurich Ins. Co. and Wayne Township Bd. of School Comm'rs v. Ind. Ins. Co., to support their position. In Askren, the court ruled that negligent inspection leading to termite infestation qualified as an occurrence under a specific pest control policy due to distinct definitions of "occurrence" and "property damage." Conversely, in Wayne Township, the court found that the alleged negligence of a school regarding a principal's misconduct did not negate the accidental nature of the event, concluding that no evidence indicated the school intended the harm caused. The analysis focused on the accidental nature of conduct rather than the intentionality of actions. The court emphasized that while negligent acts can sometimes be considered occurrences, the central issue remains whether the conduct was accidental. In prior rulings, such as Erie Ins. Co. v. Am. Painting Co. and R.N. Thompson. Assoc., the courts determined that negligence does not automatically equate to an occurrence unless it is defined as an accident under the policy terms. Overall, the distinction lies in the accidental versus intentional nature of the conduct, which is pivotal to coverage under CGL policies.

The homeowners association's lawsuit against the insured is characterized as a breach of contract due to faulty workmanship, design, and the use of defective materials. The economic losses incurred by the homeowners association are deemed natural consequences of the insured's breach. A standard Commercial General Liability (CGL) policy does not cover faulty workmanship unless it leads to an accident; thus, the homeowners association's losses do not qualify as an 'occurrence' under the policy. 

To assess whether the Grotts' Complaint alleges an occurrence, accidental conduct must be examined. In Count I, the Grotts claim that Barna Log breached its duty by negligently hiring an unqualified builder. Previous cases have established that negligent hiring, even if careless, is considered intentional conduct rather than accidental. Therefore, the actions described in Count I do not arise from an accident and do not constitute an occurrence under the CGL Policy.

Furthermore, Count I is subject to the 'damage to your product' exclusion in the CGL Policy, which denies coverage for property damage to the insured's product. The CGL Policy defines 'property damage' as physical injury to tangible property or loss of use of such property, and 'your product' refers to goods or products manufactured or sold by the insured. Thus, the allegations in Count I are excluded from coverage under the CGL Policy.

The CGL Policy defines 'your product' to include warranties and representations regarding its fitness and performance, as well as the provision or failure of warnings and instructions. Notably, it excludes items such as vending machines or property rented to others. In the case of DeZutti, the court examined an exclusion similar to the 'damage to your product' clause, where the contractor was sued for damages linked to faulty construction. The policy had exclusions that denied coverage for property damage to the insured's products and work caused by those products or work. The court concluded that such exclusions prevent coverage for damages confined to the insured's defective product or work, allowing coverage only for damages to other property resulting from the insured's product or work. The term 'product' encompasses items that are defective in themselves. The court clarified that while defective workmanship causing personal injury or property damage may be covered, coverage does not extend to repair or replacement of the insured's defective work, as this would contradict the policy's purpose. This understanding was reinforced by another case, Microvote Corp., which held that defective products are excluded from coverage under commercial general liability policies. Furthermore, the Grotts' Complaint sought damages for inadequate construction linked to negligent hiring, falling under exclusion 'k' of the CGL Policy, which also denies coverage for property damage to 'your product.'

The CGL Policy defines 'your product' as all goods sold or distributed by the insured, including any warranties or representations regarding their fitness or quality. It excludes insurance coverage for damages confined to the insured's product or work, limiting coverage to damage to other property arising from the insured's product. Count I of the Grotts' Complaint, which claims damages from inadequate construction of a log home, falls under this exclusion. Therefore, the trial court correctly determined that Insurers had no obligation to defend or indemnify Barna Log or Rosi regarding Count I, leading to summary judgment in favor of the Insurers.

In Count III, the Grotts allege that Barna Log and Rosi converted materials purchased by them. The defendants suggest the possibility of a negligent conversion claim and argue that Insurers should defend Count III until a determination of intentional conduct is made. However, to prove conversion, a plaintiff must show appropriation of personal property for the defendant's benefit, excluding the owner's rights, along with an immediate right to possession based on superior title. A precedent case indicated that an intentional act, even if based on erroneous information, does not qualify as an 'accident' under the CGL Policy. Thus, the alleged conversion in this case is deemed intentional, and even if negligent, it does not constitute an 'accident' or 'occurrence' under the policy.

Count III of the Grotts' Complaint does not qualify as an 'accident' or 'occurrence' under the Commercial General Liability (CGL) Policy, as it pertains to an alleged act of conversion, which requires intentional or knowing conduct. Consequently, damages claimed in Count III fall under the 'expected or intended injury' exclusion, meaning the Insurers have no duty to defend or indemnify Barna Log or Rosi regarding these allegations. The trial court's decision to grant summary judgment in favor of the Insurers on Count III is upheld, as there are no material factual disputes.

In Count IV, the Grotts allege that Barna Log and Rosi made fraudulent misrepresentations about Myers's qualifications as a log home builder. Barna Log and Rosi contend that if Count IV implies negligence or unintentional conduct, the Insurers would owe a duty to defend. However, fraud claims require the demonstration of intentional or reckless conduct, and Indiana does not recognize negligent misrepresentation as a tort. The definition of 'accident' within the CGL context indicates that Count IV's allegations also do not arise from an 'accident' or 'occurrence.' Furthermore, this count is subject to the 'damage to your product' exclusion in the CGL Policy, as it pertains to property damage due to inadequate construction linked to Barna Log's and Rosi's alleged misrepresentations.

The CGL Policy defines "your product" as all goods sold or handled by the insured, including any warranties regarding their performance. The policy excludes coverage for damages to the insured's product caused by that product itself, allowing coverage only for damage to other property. Count IV of the Grotts' Complaint, which seeks damages for inadequate construction of a log home, is subject to this exclusion, justifying the trial court's ruling that Insurers have no duty to defend or indemnify Barna Log or Rosi regarding this count. Similarly, Count V alleges violations of the Indiana Deceptive Consumer Sales Act based on misrepresentations. However, this count does not change the nature of the underlying acts from intentional to accidental, and thus also falls under the "damage to your product" exclusion. Count V's request for damages related to the log home construction is likewise barred under the CGL Policy. The trial court’s determination that Insurers had no duty to defend or indemnify Barna Log or Rosi concerning Count V is also upheld, leading to summary judgment in favor of the Insurers for both counts.

Barna Log and Rosi failed to demonstrate that Counts I, III, and IV of their claims constituted an "occurrence" as defined by the Commercial General Liability (CGL) Policy, and each count is excluded under the policy. Therefore, the trial court's decision to grant the Insurers' motion for summary judgment and deny Barna Log's and Rosi's motion was upheld. Judge Kirsch concurs, while Judge Sullivan expresses partial agreement, noting confusion regarding the inconsistent terminology in Indiana insurance law. Sullivan emphasizes the lack of clear guidance on what constitutes an "occurrence" and critiques the oversimplification of distinguishing between intentional and negligent conduct. He references case law, including R. N. Thompson, which differentiates between accidental conduct and faulty workmanship, and Erie, which classified negligent hiring as intentional, thereby not qualifying as an occurrence. Sullivan concludes that the actions of Barna Log do not fall under the CGL coverage. Additionally, Barna Log’s argument that it is not a contractor but a seller/distributor is countered by the principle of business risk applicable to the materials involved in the claims.