Coverage for "Rip and Tear" Costs: A Case Law Survey
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Litigation
Coverage for “Rip and Tear”
Costs: A Case Law Survey
The article was originally published by the American Bar Association in March 2013.
by Melissa C. Lesmes
You say “covered consequential loss”, I due to alleged construction defects
say “non-covered inflicted injury”: The that make the structure vulnerable
developing law of coverage for “rip to collapse. If true (the claim is
and tear” damages in construction aggressively disputed), the potential
defect litigation. loss is the estimated $279 million
investment in the property. Whether
I. Introduction insurance would be available to cover
The pace and frequency of litigation any of the claimed amounts under
Melissa C. Lesmes over allegedly defective construction these circumstances is presumably
Litigation continues unabated, and by all as aggressively disputed, but the
+1.202.663.9385 indications keeps rising. Typically, point is that “rip and tear” costs can
melissa.lesmes@pillsburylaw.com coverage does not exist under be tremendous, and the question
standard form general liability of coverage for such damages is an
Melissa Lesmes is a partner in Pillsbury’s
policies for costs to repair defective increasingly litigated issue.
Litigation practice and is located in the
work or a defective product itself.
Washington, DC office. She focuses her
A frequent point of contention This survey attempts to identify
practice on complex commercial litigation
in construction defect litigation, and briefly summarize the facts and
with an emphasis on construction claims and
however, is whether coverage exists holdings of cases in which courts
insurance coverage disputes.
for damages caused by the need to were called upon to determine
remove, or replace non-defective whether such “rip and tear” or “get to”
Coauthors work to “get to” and repair defective damages are covered under general
John C. Bonnie work or products. These costs are liability insurance policies. 1
Weinberg, Wheeler, Hudgins, Gunn & Dial, LLC generally referred to as “rip and tear”
or “get to” damages, although there II. Cases Generally Finding Coverage
Charles E. Stauber is no uniformity in the use of this for “Rip and Tear” Costs
Torus Americas terminology in the case law. In Colorado Pool Sys. Inc. v. Scottsdale
Ins. Co.,2 an insured subcontractor
H. Eric Hilton The financial consequences of errors was hired by a general contractor
H.J. Russell & Company in construction can be staggering. to build a swimming pool at a local
This is all the more so if the only community center. Construction
means of repairing the defective of the pool involved the pouring of
work also requires the demolition concrete around a rebar frame to
of other, non-defective work. There create a concrete shell. After the
may be no more extreme an example shell was poured, a building inspector
of this than the claim of MGM concluded that some of the rebar
Resorts International that the as-yet was too close to the surface, and the
completed Harmon Hotel located general contractor demanded that
at the City Center development in the pool be replaced. The subcon-
Las Vegas must be razed and rebuilt tractor consequently demolished and
Pillsbury Winthrop Shaw Pittman LLP www.pillsburylaw.comLitigation
replaced the pool, and in the process Dewitt’s insurer denied coverage were cracked, and landscaping
damaged the deck, a sidewalk, a for the losses. On appeal of the trial was damaged to repair the water
retaining wall, and electrical conduits. court’s judgment in favor of the damage. We characterize these
Despite alleged representations by the insurer, the Ninth Circuit applying costs as “damages because of
subcontractor’s insurer that the claim Washington law held that the property damage.” Further, in
was covered, it denied coverage based defective manufacture of the piles some cases, Lennar may have
upon the absence of an “accident” or constituted an “occurrence” which removed some [synthetic stucco]
“occurrence” under the CGL policy gave rise to “property damages” to access and repair underlying
at issue. under the policy. Coverage conse- water damage or determine the
quently existed for the repair and areas of underlying damage.
The trial court entered summary replacement of damage to other We characterize these costs
judgment for the insurer, and the subcontractors’ work and for the to remove [synthetic stucco]
Colorado appellate court reversed, damage to the buried mechanical solely to repair water damage
finding that a portion of the damage lines despite the lack of coverage for as “damages because of
was covered. Relying on Greystone the cost of replacing the defective property damage.”7
Constr. Inc. v. Nat’l Fire & Marine work itself.
Ins. Co.,3 the court found that In Columbia Mut. Ins. Co. v. Epstein,8
“‘injuries flowing from improper or A Texas Court of Appeal reached a the insured contractor poured a
faulty workmanship constitute an similar conclusion in Lennar Corp v. foundation using concrete that did
“occurrence” so long as the resulting Great American Ins. Co., in a coverage not meet local building code require-
damage is to nondefective property, claim by the general contractor on ments. To remove and repour the
and is caused without expectation or a construction project.6 There, the concrete, the company also had to
foresight.’”4 The court clarified that contractor/insured built more than remove and reconstruct the framing
this rule applies whether the resulting 400 homes using defective synthetic and subfloor. The contractor’s insurer
damage is to the insured’s work or to stucco, the application of which denied coverage for the cost of
the work of a third party. The court resulted in water being trapped in replacing the framing and subfloor
consequently concluded that while the substrate, causing damages in the and initiated a declaratory judgment
the CGL policy did not cover the costs form of wood rot, mold, and termite action. The trial court entered a
incurred in demolishing and replacing infestation. The contractor sought judgment in favor of the insured,
the defective pool itself, coverage was indemnification from its insurers for and the Missouri Court of Appeals
afforded for the “rip and tear” damage the costs of the stucco replacement affirmed. The court concluded that
to the non-defective third-party work, and repair, and coverage was denied. there was an “occurrence” which
which included the deck, sidewalk, After a lengthy discussion, the Court caused “property damage” under the
retaining wall, and electrical conduits. of Appeal concluded that because terms of the policy such that coverage
the damage was unintended and was afforded for the rip and tear costs
In Dewitt Constr. Co. v. Charter unexpected, the use of the defective incurred in replacing the concrete.
Oak Fire Ins. Co.,5 an insured stucco was an “occurrence” under the
subcontractor (DeWitt) negligently terms of the policy. The court held In Bundy Tubing Co. v. Royal Indem. Co.,9
installed cement piles in a building that although the costs to remove and the Sixth Circuit applied Michigan
foundation which were unusable. As replace the defective synthetic stucco law to hold that the cost of removing
a result, Dewitt had to install new by itself, without damage to other and replacing a non-defective concrete
piles, which required the removal property (i.e., as a pure preventative floor in which defective tubing had
and reinstallation of work already measure), was not covered, the costs been imbedded was covered under
completed by other subcontractors. incurred to repair the water damage the insured’s liability policy. The
In addition, heavy equipment used by (including the costs for rip and tear) court held: “In our opinion, property
Dewitt in replacing the piles damaged were covered. The court explained: was damaged by the installation of
underground mechanical lines and defective tubing in a radiant heating
a coverage claim was made for all For example, on some homes, system which caused the system to
claimed damage. windows were broken, driveways fail and become useless.”10
Pillsbury Winthrop Shaw Pittman LLPCoverage for “Rip and Tear” Costs: A Case Law Survey
The same result was reached in insurer, claiming it breached its duty damaging its own work in the
Moraine Materials Co., Inc. v. The to indemnify the insured for the loss. process. Transform’s insurer denied
Ohio Casualty Ins. Co.11 In Moraine coverage for the damages and filed a
Materials, defective concrete was Following a bench trial, the court declaratory judgment action seeking
incorporated into a retaining wall held that the policy only covered the a finding that coverage was absent.
that otherwise contained correctly cost of repairing “property damage,” Relying on Yakima Cement Products
comprised concrete, with the result i.e. the cracks and other defects. The Co. v. Great Am. Ins. Co.,15 the court
that the entire retaining wall—both court explained that even though the held that there was an “occurrence”
the part that was correct and the part school may have made a wise business given that third party property
that was defective, had to be removed. decision to rebuild, the defects damage resulted from the defective
The court held that because it was could have been repaired without workmanship. The court further
impossible to remove the defective completely rebuilding. Consequently, determined that neither the “Your
concrete without disturbing the rest only the hypothetical repair costs Product” nor the “Impaired Property”
of the structure, the incorporation were covered under the policy. Basing exclusions applied to prevent
of the defective concrete into the its decision on the sparse evidence Transform from recovering the rip
wall constituted property damage presented at trial, the court concluded and tear costs incurred in remedying
for which there was coverage. The the insurer was liable for $1,000,000 the defective work. The court held
court explained: “Moraine is not of the approximately $3,500,000 that AHM’s construction of the
seeking to recover for the defective spent reconstructing the school. The lobbies, stairs, and other common
concrete, but is seeking to recover the court held that this was a “reasonable areas was not part of Transform’s
expenses of removing the wall, which computation” of what the cost would product, and the damage to this third
became defective in its entirety by the have been had the school decided to party work was consequently covered
incorporation therein of Moraine’s repair the defects, rather the rebuild by the policy.
defective cement.”12 the entire school.
An Oklahoma federal court similarly
A Kansas federal court faced a III. Cases Finding Coverage For concluded that rip and tear costs were
difficult issue in Fidelity & Deposit “Rip and Tear” Costs and Finding not excluded by the “Your Product” or
Co. of Maryland v. Hartford Cas. Ins. Inapplicable The “Your Product” the “Impaired Property” exclusions in
Co.,13 ultimately concluding that and “Impaired Property” Exclusions Employers Mut. Cas. Co. v. Grayson.16
some of the cost of demolishing In Indian Harbor Ins. Co. v. Transform, In Grayson, Ready Mix supplied
and rebuilding a defectively LLC,14 Transform contracted concrete for the construction of a
constructed school was covered with East AHM LLC and Hansell bridge in Oklahoma. The concrete
under an umbrella policy, but not the Mitzel LLC (AHM) to construct did not harden properly, causing the
entire sum. In Fidelity, the insured modular condominium units. AHM rebar to loosen and the bridge to
contractor negligently constructed a purchased and supplied all the crack. In removing and replacing the
middle school in Kansas. The faulty materials Transform used to build concrete, the deck, rails and rebar
workmanship resulted in cracked the modules. Once the modules all had to be repaired as well. Ready
walls, mortar joints and lintels, among were constructed, AHM “knitted” Mix sought coverage from its insurer
other defects. Instead of repairing them together into the existing for the damages, and coverage was
the defects, the school determined structure. AHM also constructed denied. The insurer subsequently
that it would be more cost effective to the surrounding lobbies, stairs, filed a declaratory judgment action
completely demolish the school and elevator shafts, and other common seeking a determination of no
rebuild. The school subsequently filed areas. When the building was almost coverage. Ready Mix conceded in the
suit against the insured and its surety complete, AHM discovered that the litigation that the cost of replacing
to recover the cost of rebuilding. modules Transform constructed were the concrete itself was not covered,
Eventually the parties settled, and the defective, causing systemic electrical, but sought coverage for the costs of
insured assigned its rights to coverage structural, and plumbing problems. repairing the damage to other, third
under an umbrella policy to its surety. As a result, AHM had to tear out and party work. The Oklahoma federal
The surety then filed suit against the replace much of the existing structure, court agreed. As in Indian Harbor,
www.pillsburylaw.comLitigation
the court concluded that neither the judgment that it owed no coverage to judgment, the court held that not
“Your Product” or “Impaired Property” a building contractor for the negligent only was the insurer not “obligated
exclusions applied. Addressing the installation of hardwood flooring. The to indemnify [the insured] for the
“Impaired Property” exclusion, the hardwood floor had to be replaced costs of repairing and replacing the
court held that “merely replacing because it began “cupping” or walls,” but was also not obligated
the concrete would not have made “warping” a few weeks after it had to indemnify the insured for “any
the bridge usable, other component been installed. The insured sought incidental demolition or reconstruc-
property had to be replaced as well. coverage for the costs of removing tion necessitated by the repair,” as
Thus, the bridge was not ‘impaired and replacing the hardwood flooring, such incidental repairs did not qualify
property’ because it could not be and for the costs of restoring the as “property damage.”
restored to use by only replacing the home to the condition it was in prior
defective concrete.”17 to removing and replacing the floor. In Gentry Machine Works Inc. v.
The insurer denied coverage, alleging Harleysville Mutual Insurance Co.22
The court reached a similar that the “business risk” exclusions a Georgia federal court determined
conclusion in Clear, LLC v. American prohibited the insured from that the “business risk” exclusions
& Foreign Ins. Co.,18 but on a different recovering under the terms of the precluded coverage except to the
basis. In Clear, the successor in policy. The Georgia Court of Appeals extent that the insured’s defective
interest to a general contractor which agreed, holding that the “business product caused damage to other
negligently constructed a roof sought risk” exclusions were unambiguous property. There, the insured manufac-
indemnification for the costs of and excluded coverage for defective tured parts for boilers, including a
replacing the damage caused by the workmanship causing damage only part known as the “pedestal.” The
defective roof. The insurer denied to the construction project itself. The pedestal was welded to the top of
coverage. The Alaska federal court court reasoned that “[a]ny damages to the boiler and served as the main rear
found coverage on the basis of an the house during the removal of the hinge for the rear boiler doors. After
exception to the “Impaired Property” hardwood floor and the restoration receiving numerous complaints from
exclusion providing coverage for the of the house to the condition it was customers, the insured replaced the
“loss of use of property that result[ed] prior to [insured’s] work were pedestals and repaired other damage
from a sudden or accidental physical merely incidental to [the home associated with the failure of the
injury to work done by [the general owner’s] claimed damages that pedestals. When the insured sought
contractor] or its subcontractors.” [the insured] negligently performed coverage for the cost of the repairs,
The court reasoned that because the the services for which [the home the insurer denied coverage. Applying
exception was ambiguous, it had to be owner] contracted.”20 Georgia law, the court cited Sapp
interpreted broadly pursuant to the and held that the policy’s business
customary rules of insurance policy A South Carolina federal court risk exclusions precluded coverage
interpretation. Because the exception reached the same conclusion in for almost all of the costs associated
made the “Impaired Property” Builders Mut. Ins. Co. v. Lacey with the repair of the pedestals
exclusion inapplicable, the court Constr. Co., Inc.21 There, the insured including property damage to the
determined that the costs of removing was alleged to have negligently pedestals themselves, the cost of
and replacing the undamaged constructed two retaining walls in inspecting the potentially defective
portions of the building were covered the common area of a development in pedestals, and damages to the boiler
under the policy to the extent they South Carolina. The retaining walls or its parts directly caused by the
were necessary to repair the water failed to adequately retain the soil repair of the pedestals, among other
damage caused by the defective roof. behind the walls, causing cracks in things. However, the court found
the foundation. The insured sought that the business risk exclusions did
IV. Cases Generally Finding An coverage for the cost of correcting not preclude coverage for property
Absence of Coverage For Rip and the defects, but its insurer denied damage to the boilers caused by the
Tear Costs coverage and initiated a declaratory pedestal failure but unrelated to the
In Sapp v. State Farm Fire & Cas. Co.,19 judgment action. In granting the pedestal repair.
the insurer sought a declaratory insurer’s motion for summary
Pillsbury Winthrop Shaw Pittman LLPCoverage for “Rip and Tear” Costs: A Case Law Survey
In Desert Mountain Prop. Ltd. P’ship requiring the general contractor to plumbing were not covered because
v. Liberty Mut. Fire Ins. Co.,23 plaintiff completely demolish the concrete they were foreseeable consequences
contracted for the construction of a pilings and install new pilings with of the replacement of defective work.
number of homes in Arizona. Shortly the proper strength grout. After the Thus, there was not an accidental
after the homeowners moved in, the concrete manufacturer was sued “occurrence” as required to trigger
insured builder received complaints for breach of contract and warranty coverage under the policy.
about cracks in the interior walls of claims, its liability insurer filed a
the homes, outdoor patio slabs, and declaratory judgment action seeking In Bright Wood Corp. v. Bankers
retaining walls. After an investigation, to determine its obligations under Standard Ins. Co.,26 the insured
the insured determined that the soil the policy. The Maryland federal manufacturer supplied wood window
beneath the homes had not been court granted the insurer’s motion sashes that rotted due to a lack of
properly compacted prior to the for summary judgment, holding that preservatives. To remedy the defect,
construction. In order to rectify the the cost of demolishing and recon- the entire window had to be replaced.
problem, plaintiff had to remove and structing the concrete pilings was not After its general liability insurer
damage the flooring within many covered by the policy because there denied coverage for the cost of the
of the homes to “get to” and repair was not an “occurrence.” The court repairs, the manufacturer brought
the soil. On a motion for summary defined an occurrence as “an event a declaratory judgment action. The
judgment, the superior court that takes place without expectation district court entered summary
concluded that the insured could not or foresight.” As such, the court held judgment in favor of the insurer.
recover from its liability insurance that there was no occurrence because On appeal, the Minnesota Court of
carrier for either the cost of repairing the manufacturer “clearly” could Appeals affirmed, noting that all of the
the defective soil or the associated have expected that pilings supported damages incurred were based solely
“get to” damages of cutting open by defective grout would have to be on repairing the defective product.
concrete floors. The Arizona Court demolished and replaced. The court reasoned that, because the
of Appeals affirmed, reasoning that repairs were deliberately undertaken,
the costs of removing and repairing In NAS Surety Grp. v. Precision Wood the resulting damage was not
the non-defective property necessary Prod., Inc.,25 the insured subcon- accidental occurrence. Accordingly,
to repair the soil was damage caused tractor provided defective cabinets there was no coverage under the
by the repair of the soil, not damage and millwork in connection with terms of the policy.
caused by the poorly compacted soil the construction of a new medical
itself. The court did find, however, center. In the process of replacing the
that the insured could recover the defective cabinets with nondefective
cost of repairing the damages that materials, the subcontractor damaged
resulted from the poorly compacted and was required to repair drywall,
soil, such as cracks in the floors repaint the walls, and reinstall sinks,
and walls of homes caused by the wiring and plumbing. The subcon-
defectively compacted soil. tractor’s surety sued the subcontrac-
tor’s general liability insurer seeking
V. Cases Finding An Absence of indemnification for the amount paid
Coverage For “Rip and Tear” Costs pursuant its performance bond. Both
Based On The Absence Of An parties filed motions for summary
“Occurrence” judgment. In ruling on the motions,
In OneBeacon Insurance v. Metro the North Carolina federal court
Ready-Mix, Inc.,24 a concrete held that none of the repair and
manufacturer provided defective replacement costs were covered
grout for use on a construction project under the policy. The court explained
in Baltimore. The grout supplied that the costs incurred in repairing
had a strength significantly lower the drywall, repainting the walls, and
than that specified in the contract, reinstalling the sinks, wiring and
www.pillsburylaw.comLitigation Coverage for “Rip and Tear” Costs: A Case Law Survey
Endnotes
1 This survey does not 3 661 F.3d 1272 (10th 8 239 S.W.3d 667 (Mo. 13 215 F. Supp.2d 1171 20 Id. at 205.
attempt to identify Cir. 2011). App. 2007). (D. Kan. 2002).
21 C.A. No. 3:11-cv-
cases decided in
4 Id. at *6 (citing 9 298 F.2d 151 (6th 14 2010 WL 3584412 400-CMC, 2012
the context of other
Greystone, at 1284). Cir. 1962). (W.D. Wash. 2010). WL 1032539 (D.S.C.
insurance lines, which
March 27, 2012).
may exist for the 5 307 F.3d 1127 (9th 10 Id. at 153. 15 93 Wash.2d 210, 217
benefit of contractors Cir. 2002). (1980). 22 621 F.Supp.2d 1288
11 1979 WL 208510 (Ohio
such as builder’s risk (M.D. Ga. 2008).
6 200 S.W.3d 651 (Tex. App. Dec. 12, 1979). 16 2008 WL 2278593
insurance, permanent App. 2006), abrogated (W.D. Okla. May 23 236 P.3d 421 (Ariz.
property insurance 12 Id. at *4. Similar
on other grounds by 30, 2008) App. 2010).
or professional “incorporation” cases
Gilbert Texas Constr.,
liability insurance. decided in product 17 Id. at *6. 24 427 F. Supp.2d 574 (D.
L.P. V. Underwriters
cases but outside Md. 2006).
2 No. 10CA2638, 2012 at Lloyd’s London, 18 2008 WL 818978
the construction
WL 52 65981 (Col. 327 S.W.3d 118 (D. Alaska March 25 271 F. Supp.2d 776
context exist but are
Ct. App. October (Tex. 2010). 24, 2008). (M.D.N.C. 2003).
outside the scope of
25, 2012). 7 Id. at 678 n.33. this survey. 19 226 Ga. App. 200 26 665 N.W.2d 544
(1997). (Minn. Ct. App. 2003).
Pillsbury Winthrop Shaw Pittman LLP | 1540 Broadway | New York, NY 10036 | +1.877.323.4171
ATTORNEY ADVERTISING. Results depend on a number of factors unique to each matter. Prior results do not guarantee a similar outcome.
© 2015 Pillsbury Winthrop Shaw Pittman LLP. All rights reserved.
Pillsbury Winthrop Shaw Pittman LLP www.pillsburylaw.comYou can also read
