Cincinnati Insurance Companies v. Collier Landholdings, LLC

Citations: 614 F. Supp. 2d 960; 2009 U.S. Dist. LEXIS 32936; 2009 WL 1034702Docket: Civ. 08-5099

Court: District Court, W.D. Arkansas; April 16, 2009; Federal District Court

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The Cincinnati Insurance Companies initiated a lawsuit seeking a declaration that it has no obligation to defend or indemnify Benchmark Construction Company of NWA, Inc. and Steven Smith in an underlying state-court case. The central issue before the United States District Court, W.D. Arkansas, is whether defective workmanship by a subcontractor qualifies as an 'occurrence' under a commercial general liability (CGL) insurance policy. The court concluded that such defective workmanship does not constitute an 'occurrence' and therefore an insured contractor cannot recover damages from a subcontractor’s defective work under a CGL policy. As a result, Cincinnati's motion for summary judgment was granted, while the motions from Collier Landholdings, LLC and Benchmark were denied. The court noted that the duty to defend is broader than the duty to indemnify and that the allegations in the state-court action dictate the insured’s duty to defend, regardless of their validity. The background facts indicate that Collier Landholdings and Herb Crumpton entered into a design agreement for the Collier Center, which Benchmark was contracted to construct. Following substantial completion, the building experienced significant water damage, leading to extensive harm, including mold growth.

Collier's state-court complaint alleges breach of contract and negligence against Benchmark due to defective construction of a building, resulting in various damages such as repair costs, loss of use, financing costs, and attorney's fees. Collier claims that Benchmark breached their Construction Agreement by failing to ensure the building was constructed free from defects, leading to significant water infiltration issues. Additionally, it alleges Benchmark did not meet the required standard of care, resulting in substantial construction defects.

Cincinnati Insurance Companies denied coverage under Benchmark's commercial general liability insurance policy, arguing that there was no "occurrence" as defined by the policy. According to the policy, "occurrence" refers to accidents or repeated exposure to harmful conditions, and "property damage" includes physical injury to tangible property or loss of use. Cincinnati determined that Collier's allegations did not satisfy the definition of coverage, as defective construction is not classified as an "occurrence" under Arkansas law.

The court is tasked with interpreting the commercial general liability insurance contract as the Arkansas Supreme Court would, considering related state court precedents and other reliable sources. Cincinnati, Collier, and Benchmark are contesting the meaning of "occurrence," with Cincinnati arguing that Benchmark's defective construction, performed by subcontractors, does not constitute an "occurrence," thus relieving it of any duty to defend or indemnify Benchmark in the underlying state-court case.

Collier argues that Arkansas case law regarding the term 'occurrence' pertains solely to defective workmanship by general contractors and is not applicable to subcontractors. He claims that the resulting damage from this defective work qualifies as an 'occurrence' under the policy. Conversely, Benchmark acknowledges that its subcontractors' defective workmanship does not constitute an 'occurrence' but argues that damage to non-defective areas of the Collier Center, caused by water intrusion, does. The court affirms that, under Arkansas law, subcontractors' defective workmanship is not considered an 'occurrence.' The interpretation of insurance policy language must adhere to its plain meaning unless ambiguous, in which case it is construed favorably for the insured. It is the insured's responsibility to prove coverage when the insurer denies a claim based on policy definitions, after which the insurer must demonstrate that the claim falls within an exclusion. In this instance, Cincinnati denied coverage, asserting there was no 'occurrence.' The court will evaluate the scope of 'occurrence' based on precedents like Essex Ins. Co. v. Holder and Nabholz Const. Corp. v. St. Paul Fire & Marine Ins. Co. The Arkansas Supreme Court has ruled that defective workmanship resulting in damage only to the work itself is not an 'occurrence' under commercial general liability policies. The court emphasizes that faulty workmanship is foreseeable and, thus, not accidental, aligning with its definition of an 'accident' as an unexpected event.

The Arkansas Supreme Court's decision heavily referenced the Nabholz case, where the U.S. District Court for the Eastern District of Arkansas concluded that defective workmanship does not qualify as an "occurrence" under Arkansas law. In Nabholz, a general contractor's subcontractor improperly installed a standing seam roof on a church, leading to leaks after the church took possession. Nabholz filed an insurance claim, but the court ruled that there was no "occurrence," emphasizing that defective workmanship, whether by the insured or a subcontractor, is non-accidental and a foreseeable risk linked to subcontracting. It distinguished between a Commercial General Liability (CGL) policy and a performance bond, stating that a CGL policy protects against unexpected damage, while a performance bond covers costs related to faulty work. Therefore, a general contractor cannot isolate defective work by subcontractors to claim it as an "occurrence" under a CGL policy. Consequently, Benchmark Construction is not entitled to recover costs for repair and remediation of defective workmanship under its CGL policy. The complaint from Collier in the related state-court action seeks more than just repair costs, claiming damages for breach of contract and negligence, including water damage throughout the building, loss of use, and attorney's fees.

Cincinnati argues that Collier's complaint against Benchmark, which is based on defective workmanship, does not qualify for coverage under the CGL policy due to the nature of the damages involved. The Court supports this view, stating that for coverage to apply, damages must arise from an 'occurrence' distinct from defective workmanship. Referencing the Arkansas Supreme Court's ruling in Unigard Sec. Ins. Co. v. Murphy Oil USA, Inc., the Court emphasizes that damages for breach of contract are not considered 'property damage' under Arkansas law. In Murphy Oil, the liability stemmed from failing to restore leased property to its original condition, categorizing the damages as contractual rather than property-related. Similarly, damages resulting from Benchmark's breach of contract with Collier cannot be classified as 'property damage,' as the failure to meet contractual obligations does not fall under this definition. The Court notes that had the landlord in Murphy Oil pursued a negligence claim, the outcome might have differed, potentially qualifying for coverage as property damage. The determination of an 'occurrence' beyond defective workmanship is crucial, with the definition of 'occurrence' as an accident per Cincinnati's policy. Benchmark claims the situation is factual rather than legal, presenting evidence from a related Arkansas state-court case that challenges the assumption that defective workmanship was solely responsible for the damage to the Collier Center, including indications that Benchmark was not accountable for certain excavation and preparation work.

Benchmark has presented evidence suggesting that damage to the Collier Center may have resulted from a rising watertable, excessive rainfall, and issues arising during the building remediation process. Benchmark argues these factors constitute an 'occurrence' under its Commercial General Liability (CGL) policy. However, the court finds Benchmark's argument misplaced for two main reasons. Firstly, Benchmark has only demonstrated facts that imply it did not breach its contract or act negligently, thereby not establishing liability for Collier's damages. Secondly, the court emphasizes that the nature of the allegations against the insured determines the duty to defend. Collier has solely alleged defective workmanship as the cause of damages. Therefore, if Benchmark's work was not defective, it cannot be held liable. As a result, the court concludes that an 'occurrence' beyond defective workmanship has not been alleged, leading to Cincinnati having no duty to defend or indemnify Benchmark. Consequently, Cincinnati's motion for summary judgment is granted, while the motions from Collier and Benchmark are denied. The court notes that while certain facts must be considered in coverage determinations, the full legal arguments related to this issue are not adequately presented in this case.