Big-D Constr. Midwest, LLC v. Zurich Am. Ins. Co.

BIG-D CONSTRUCTION MIDWEST, LLC, an Alaska company, Plaintiff, v. ZURICH AMERICAN INSURANCE COMPANY, a foreign company;ALLIED WORLD NATIONAL ASSURANCE COMPANY, a foreign company, Defendant.

Civil No. 2:16-cv-00952-BSJ

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH, CENTRAL DIVISION

FILED: June 18, 2018

May 18, 2018

MEMORANDUM DECISION AND ORDER

The Honorable Bruce S. Jenkins

INTRODUCTION

Before the Court is Big-D Construction Midwest, LLC's ("Big-D") Motion for Partial Summary Judgment on its First Cause of Action (Declaratory Judgment on Property Damage) and Second Cause of Action (Breach of Contract),¹ Allied World National Assurance Company's ("Allied World") Cross-Motion for Summary Judgment on all claims,² and Zurich American Insurance Company's ("Zurich") Cross-Motion for Summary Judgment on all claims.³ The Court held oral argument on March 13, 2018. Counsel present for the hearing were: Melissa A. Beutler and Shane W. Clayton on behalf of Big-D Construction Midwest, LLC ("Big-D"), Richard A. Vazquez on behalf of Defendant Zurich American Insurance Company ("Zurich"), and Ian A. Cooper, Emily R. Steinberg, and Tyler Snow on behalf of Allied World National Assurance Company ("Allied World"), The Court reserved judgment at the close of the hearing.

BACKGROUND

The parties in this case dispute whether there is coverage under a commercial general liability ("CGL") policy provided by Zurich and an umbrella insurance policy provided by Allied World for damage to non-defective portions of a general contractor's work that are harmed as part of the process of removing and replacing non-compliant lumber installed by a sub-contractor. The following facts were stipulated to by all parties.⁴

Big-D acted as the general contractor on three construction projects: 1700 Plymouth Road in Minnetonka, Minnesota (the "Plymouth Road" Project); 3118 West Lake Street in Minneapolis, Minnesota (the "Lake Street" Project); and 9201 Golden Valley Road in Golden Valley, Minnesota (the "HELLO Apartment" Project).⁵ Insurance coverage for these projects was issued to Big-D by Zurich and Allied World, with Zurich issuing a commercial general liability policy (the "Zurich Policy")⁶ and Allied World issuing a commercial umbrella policy (the "Allied World Policy").⁷

Big-D entered into a subcontract with J.L. Schwieters ("Schwieters") to supply and install D-Blaze treated framing lumber at the Plymouth Road Project and Lake Street Project (collectively, the "Projects"). Schwieters performed its work at the Projects from March 2016 to June 2016. In performing its work, however, Schwieters installed non-compliant Chicago Flameproof Lumber treated with FlameTech fire treatment (the "CF Lumber") as opposed to D-Blaze fire treatment. Big-D was unaware that the CF Lumber installed by Schwieters on the Projects was treated with FlameTech fire treatment, not D-Blaze fire treatment.⁸

FlameTech treated lumber was not approved by the projects' architect(s) for installation on the Lake Street Project or Plymouth Road Project. The FlameTech treated lumber did not comply with provisions of the International Building Code applicable to the projects. On or about June 18, 2016, during ongoing construction of the Lake Street Project and Plymouth Road Project, a Building Official for the City of Minneapolis discovered that CF Lumber was treated with FlameTech fire treatment, not D-Blaze fire treatment. Because of Schwieters' defective work, the municipalities for the Projects issued stop work orders preventing further lumber installation on the Projects, and issued correction notices related to the CF Lumber installed by Schwieters. On July 21, 2016, the Lake Street Owner submitted a demand to Big-D to remove the FlameTech treated CF Lumber. On or about July 24, 2016, the Plymouth Road Owner submitted a demand to Big-D to remove the FlameTech treated CF Lumber.

Beginning in August 2016, Big-D removed and replaced the non-conforming FlameTech treated lumber. In order to remove and replace the non-conforming lumber, non-defective components on the project were removed and replaced, including framing system components, sheathing, weather proofing, electrical equipment, mechanical equipment, sill plates, subfloor, roof components, and windows. Big-D incurred costs to remove and replace the non-defective property, and the removal and replacement caused delays in the completion of the Projects.

The removal and replacement of non-conforming CF Lumber happened during the course of ongoing construction on the Projects. CF Lumber was removed and replaced on the Lake Street Project from August 2016 to November 2016. The Lake Street Project was substantiallycomplete on April 28, 2017. A temporary certificate of occupancy for the Lake Street Project was issued on April 28, 2017. CF Lumber was removed and replaced on the Plymouth Road Project from August 2016 to September 2016. A Certificate of Substantial Completion was issued for the Plymouth Road Project on April 1, 2017. The Lake Street Project and Plymouth Road Project were completed after the contractual deadline for substantial completion of each construction project.

On July 7, 2016, Big-D notified Zurich of potential claims related to installation of FlameTech treated CF Lumber installed on the Plymouth Road Project, Lake Street Project, and HELLO Project. Big-D likewise notified Allied on July 22, 2016. Both Zurich and Allied subsequently denied any coverage under their respective policies. Big-D commenced the present action on September 12, 2016, to determine the parties' rights and obligations with respect to costs incurred from the Lake Street and Plymouth Projects and indemnity for any damages assessed against Big-D stemming from the HELLO project.

Big-D acknowledges that costs to remove and replace the defective lumber itself do not fall within the scope of the policy. Thus, the only costs at issue are those to repair and replace the non-defective work damaged as part of the process of removing and replacing the non-conforming lumber. Defendants' assert that these damages are not covered by their respective policies. Big-D disagrees, contending that there is coverage under both policies and that there are no applicable exclusions. The two policies are identical in all respects that are material for this claim, other than one exclusionary provision contained in the Allied World Policy alone.

The Zurich and Allied World Policies

The Zurich and Allied World Policies each provide that the insurer will pay amounts Big-D becomes legally obligated to pay as damages for "property damage" caused by an "occurrence," with Allied obligated to pay only those sums in excess of the retained limit specified in the policy. "Occurrence" is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." "Property damage" is 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.

(Zurich Policy, Dkt. No 131, Ex. 1, p. 15.)⁹

This broad grant of coverage is limited in scope by numerous exclusions. Defendants assert that a number of these exclude the damages at issue. The Zurich and Allied Policies both exclude the following types of damages from coverage:

j. Damage to Property

"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 of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.

(Zurich Policy, Dkt. No 131, Ex. 1, pp. 4-5.)¹⁰

n. Recall Of Products, Work Or Impaired PropertyDamages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of:

(1) "Your product";

(2) "Your work"; or

(3) "Impaired property";

if such product, work, or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.

(Id., p. 5.)¹¹

m. Damage To Impaired Property Or Property Not Physically Injured

"Property damage" to "impaired property" or property that has not been physically injured, arising out of:

(1) A defect, deficiency, inadequacy or dangerous condition 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 the 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.

(Id., p. 5.)¹²

Both Policies contain the following definition:

22. "Your work":

a. Means:

(1) Work or operations performed by you or on your behalf; and

(2) Materials, parts or equipment furnished in connection with such work or operations.

b. Includes:

(1) Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of "your work"; and

(2) The providing of or failure to provide warnings or instructions.

(Id., p. 16.)¹³

The Allied World Policy alone contains the following endorsement:

Contractors

This policy does not provide coverage for:

2. Property Damage to property being installed, erected or worked upon by the Insured or by any agents or subcontractors of the Insured;

4. any professional services performed by or on behalf of the Insured, including but not limited to the preparation or approval of maps, shop drawings, plans, opinions, reports,

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