‘Known-Loss’ Clause Doesn’t Negate Coverage for Property Damage to Work of Others Despite Insured’s Prior Knowledge of Damage to Own Work
Richard B. Wolf | Claims Journal
July 9, 2015
The Ninth Circuit U.S. Court of Appeals, applying Oregon law, held on June 25, 2015 that a commercial general liability policy purchased three months after the subcontractor-insured inspected property damage to his own work still provided coverage for property damage he had caused to work of others on the same structure, despite a “known-loss” provision in the policy. (Kaady v. Mid-Continent Casualty Company, 2015 U.S. App.LEXIS10754.)
The facts were that Randy Kaady, a mason by profession, was a subcontractor who installed manufactured stone at a multi-unit residential complex. (Manufactured stone is molded concrete veneer made to look like solid stone or brick.) In doing his work, Kaady affixed manufactured stone onto building wall sheathing, wrapped deck posts with manufactured stone and installed masonry caps on top of the stone so wrapped. Kaady’s masonry was performed on parts of the structure consisting of work of others.
The work was completed in May, 2006, and in September of the same year Kaady was called back to the building site and inspected cracks in the manufactured stone and masonry caps he had installed. In December 2006, almost three months after he had inspected the cracks in his own work, Kaady purchased a one-year commercial general liability policy from Mid-Continent Casualty Company. In June, 2007, the homeowner’s association for the complex started litigation for damage due to defective workmanship, eventually involving the developer, contractor and subcontractors, including Kaady. Kaady settled the claim against him and asked Mid-Continent to indemnify him under its policy. Mid-Continent denied the claim and Kaady sued it, contending that the property damage was covered by his policy.
The trial court granted summary judgment to Mid-Continent on the ground that Kaady’s claim was barred by the policy’s known-loss provision, which stated that the policy “applies to . . . ‘property damage’ only if . . . no insured . . . knew that the . . .‘property damage’ had occurred, in whole or in part.” On appeal, the summary judgment was reversed, and the court held that the known-loss provision did not overcome coverage for damage to property consisting of work of others. Kaady admitted he was aware of damage to his own work before purchasing the policy, but swore that before that time he had not known about any damage to the deck posts and wall sheathing installed by others.
The Court of Appeals rejected Mid-Continent’s two arguments to support its judgment on appeal: First, that the known-loss provision bars coverage for property damage if the insured knew about any damage to the structure; second, that the damage for which Kaady sought coverage was in fact a “continuation, change or resumption” of the cracks Kaady found in his own masonry work.
The Court of Appeals based its rejection of the first argument on the concept that in the construction context the liability policy was designed to cover damage to property installed by others, but to exclude damage to property installed by the insured himself, so the known-loss provision also distinguishes between the two categories of property damage. Accordingly, the insured’s knowledge of damage to his own work does not automatically constitute knowledge of damage to work furnished by others. The court pointed out, too, that the damage to the posts and sheathing was of a different type (deterioration) than the known damage (cracks in the masonry). To treat both as the same damage would ignore that the known-loss provision used the definite article “the” as the modifier of the term “property damage”.
Also, the insurer’s proposed policy interpretation would nullify the known-loss provision’s “continuing property damage” language, which said that if the insured “knew, prior to the policy period, that the . . . ‘property damage’ occurred, then any continuation, change or resumption of such . . . ‘property damage’ during or after the policy period will be deemed to have been known prior to the policy period.” (Emphasis added by court.) The court reasoned that, if the insured’s knowledge of any damage to any part of the structure barred coverage for all damage to that structure, it would not matter whether the claimed damage was a “continuation, change or resumption” of the known damage. That disconnect, the court said, was avoided if the known- loss provision is interpreted as barring coverage only if the claimed damage is a continuation, change, or resumption of the known damage. This interpretation the court found, permits coverage of damage unrelated to the damage known before the acquisition of the policy, but prevents insurance of a loss in progress.
The court further discussed the “continuation, change, or resumption” clause of the policy, noting that in order to invoke it, the claimed damage, in order to be a continuation, change, or resumption of known damage the two must share the same cause. Since the insurance company submitted no evidence that the cracks in the known damage were the source, cause, or basis of the damage to the third party construction, on a on a motion for summary judgment, the insured had no burden to present evidence to dispute any connection, when there was no evidence introduced by the moving party on the motion for summary judgment. As a result, the summary judgment was reversed and remanded.
The court’s rejection of the insurer’s second argument, dealing with the continuation, change, or resumption clause of the known-loss provision, is not as satisfying – or as important – as precedent as the first. The court said that Kaady’s admission that the damage to the deck posts and wall sheathing arose from his defective workmanship was “not an admission that the damage was caused by the cracks.” (Emphasis in original.) The reversal was justified, however, by the nature of summary judgment procedures, since, contrary to the insurer’s contention, Kaady had disputed that the cracks in his masonry permitted water intrusion to the work of others. The court said, “it was not Kaady’s burden to present evidence disputing the connection between the cracks in the manufactured stone and the damage to the underlying structure. On summary judgment, the moving party [the insurer here] has the initial burden of ‘identifying those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, which it believes demonstrates the absence of a genuine issue of material fact.”
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