June 3rd, 2019

Court Holds That CGL Policy Covers Cost to Replace Windows in Order to Prevent Future Property Damage

By, Mark A. Boyle, Esq.

Florida has been home to several recent decisions recognizing broad commercial general liability (CGL) coverage for general contractors and developers. Three cases, all decided in 2015, recognized commercial general liability coverage for rip and tear, access cost, and the cost to repair damage to portions of the structure which had not yet sustained damage but would sustain such damage in the future. Carithers v. Mid-Continent Cas. Co., 782 F.3d 1240 (Fla. 11th Cir. 2015); Mid-Continent Cas. Co. v. Treace, 186 So.3d 11 (Fla. 5th Cir. 2015); and Pavarini Construction Co. (Se) Inc. v. Ace American, 161 F.Supp.3d 1227 (S.D. Fla. 2015). These holdings have been expanded by the recent case Amerisure Ins. Co. v. Auchter Co., No. 3:16-CV-407-J-39JRK, 2018 WL 4293149, at *1 (M.D. Fla. Mar. 27, 2018), reconsideration denied, No. 3:16-CV-407-J-39JRK, 2019 WL 632297 (M.D. Fla. Feb. 14, 2019).

While the procedural facts of the Auchter case are byzantine, the construction fact related to the “rip and tear” coverage issue are quite simple. A significant judgment had been entered against Auchter in the underlying construction case. The judgment was primarily occasioned from water intrusion damages caused by water coming in the buildings through windows. Coverage for those damages what was being sought under Auchter’s CGL policy. Coverage was sought for both the windows themselves as well as the resulting water damage from the windows having leaked. The CGL insurers acknowledged that the resulting water damage was covered but denied that there was coverage for the windows themselves.

The court found that both the resulting damage and the cost to repair the windows themselves were covered, holding:

The issue raised by the cross Motions is much more narrow than was disputed in Amerisure’s earlier motion and addressed by the Court in its Previous Order. Rather than raising a question of allocation of “property damages,” the issue here is whether Amerisure is liable to indemnify Arch for “[t]he total damages due to RAP in connection with the defective building envelope and water intrusion” in the amount of $5,067,033.01. (See Doc. 24-1 at 46). Arch has narrowed the issue to focus on the $5 million repair and replacement of the Window System alone, arguing that the Eleventh Circuit in Carithers expanded the reach of “property damage” under a standard CGL insurance policy to include repairs and replacement necessary to prevent further ongoing damage to otherwise non-defective property.

Amerisure argues that TSG president Baker “found no evidence of damage because of the alleged water intrusion through the faulty Window System,” and that he concluded that “any and all defects were limited to the Window System.” (Doc. 168 at 5 (citing Doc. 24-1 at 15, 18 (Final Judgment ¶¶ 4, 13) ); (see also Doc. 169 at 5). Amerisure contends that Mr. Baker “did not identify any damage to non-defective work caused by the alleged water intrusion, and in fact confirmed that all water intrusion as a result of the defective Window System was limited to the Window System itself.” (Doc. 168 at 6 (citing Doc. 24-1 at 17-18, 46 (Final Judgment ¶¶ 9-12) ); see also Doc. 169 at 5). The record establishes otherwise. Judge Jay noted that RAP retained Mr. Baker “to determine the cause of the water intrusion and to evaluate the reasonable costs to repair these problems.” (Doc. 24-1 at 15-16 (Final Judgment ¶ 4) ); see also id. at 18 (Final Judgment ¶ 13 (RAP hired consultants “to determine the cause of the water intrusion” and “to perform investigation and repairs in connection with the water intrusion issue.”). Judge Jay reached his conclusion regarding RAP’s recovery in relation to the Window System, citing to the costs estimates of IBA and RAP general contractor Auld & White, and including the cost to repair the building envelope, the cost of interior repairs in connection with removing and replacing the windows, and sums paid to consultants to determine the cause of the water intrusion, for a total of $5,067,033.01 “in connection with the defective building envelope and water intrusion.” (Doc. 24-1 at 46). Judge Jay did not find affirmatively that there was no other damage caused by water intrusion through the windows. IBA was retained by RAP to determine the source of the water intrusion and the cost to fix the problem; it was not hired to search for specific property damage and to calculate the dollar amount of the damage. Mr. Baker testified that 28 percent of the windows he observed allowed water to leak into the Building beyond the window sills. (Doc. 162-6 at 33 (Trial Tr. Vol. 6 at 846). This leakage was confirmed by his own observation, photographs, and reports by building tenants.

Amerisure dismisses Arch’s citation to Mr. Warden’s testimony regarding evidence of water intrusion that he observed, arguing that “[n]owhere … does Mr. Warden quantify the nature and scope of the alleged damage to ceiling tiles, or, perhaps, more importantly, qualify, that any such ceiling tiles were the result of leakage from the Window System.” (Doc. 168 at 7-8). Amerisure contends that Mr. Main’s testimony about “saturated” walls pertained to the elevator equipment room and sprinkler system. (Doc. 168 at 8 (citing Doc. 168-9 at 14 (Trial Tr. Vol 11 at 1405) ). The record indicates that Mr. Main’s testimony was about his observations on different floors of the building and different locations. (Doc. 168-9 at 14 (Trial Tr. Vol. 11 at 1405-06). Amerisure also implies that water intrusion was due to an incomplete roof. (Doc. 168 at 9 (citing Doc. 168-10 at 16-17 (Trial Tr. Vol 12 at 1537-39) ). Notably, the state trial court in the Underlying RAP Lawsuit in its November 2014 Final Judgment found not credible and rejected testimony that the water intrusion in the building came from other sources such as the roof. The court noted testimony establishing the roof-related issues had all been corrected, and determined that the leaking Window System was the source of ongoing water intrusion on “multiple floors” including those not adjacent to the roof, and that “the water intrusion problem continues.” (Doc. 24-1 at 40, 42, 44-45). Amerisure cannot re-litigate the state court’s finding in the context of this lawsuit. Amerisure does not address the substance of the testimony of Ms. Flynn, or the letters by Mr. Lunetta recounting damage to property caused by water intrusion.

Finally, Amerisure argues that RAP sought no damages for loss to personal property, ceiling tiles and carpet. “RAP’s damages sought … were solely for the repair of the Window System.” (Doc. 168 at 8 (citing Lunetta testimony and Doc. 168-8 (RAP damages summary) ); (see also Doc. 169 at 6-77; Doc. 182 at 3). Amerisure’s argument would be relevant if Arch, by its Motion, were seeking specific damages to repair the carpet, ceiling tiles and drywall. Then Arch’s Motion would fail for lack of evidence in the record and failure to allocate the dollar amount of damages to these components. See J.B.D. Constr. 571 F. App’x at 928 (“Nothing on the record suggests that the settlement, including the estimated remediation costs, were to repair physical damage to property other than the fitness center itself.”). But Arch is seeking indemnity under the Amerisure Policies for the entire $5 million cost of repairing and replacing the Window System to stop ongoing damage to otherwise non-defective property, under the theory announced in Carithers, eliminating the need to quantify and allocate the damage to the other property. Unlike J.B.D., where the “engineering reports … vaguely speak of water intrusion points, not to water damage,” 571 F. App’x at 928-29, there is no genuine dispute as to any material fact that the evidence in this record establishes that water intruded through the defective Window System into the building, that water did not enter the building through any other identified source, and that water damaged ceiling tiles, drywall and carpeting.

In his Final Judgment, Judge Jay thoroughly chronicled the extensive evidence of water intrusion into the Building over a period of years, as set forth above. In crediting and accepting the testimony of IBA president Mark Baker, Judge Jay isolated the cause of the water intrusion to the defective Window System, specifically rejecting testimony that attributed the water intrusion to areas such as the roof and exterior wall panels. Judge Jay also concluded that the water intrusion through the Window System extended beyond the window sills. (Doc. 24-1 at 16, 43-44); (see also Trial Tr. at 735, 743-44, 757-58, 846, 1019). Additionally, Judge Jay determined that the Window System needed to be repaired and replaced in order to stop ongoing water intrusion. (Doc 24-1 at 17, 44 (accepting Mr. Baker’s conclusion that “[w]ithout correcting the underlying defects in the window drainage systems, … RAP will experience leaking in all of the windows as the gaskets shrink and age over time.”) ); id. at 44 (“Without correction of the underlying defects in the window drainage systems, the evidence establishes that all of the windows will eventually leak.”). Judge Jay was not required to link water intrusion through the defective Window System to damage to other non-defective tangible property. Indeed, in denying intervention to insurers Amerisure and Landmark American Insurance Company, TSG’s insurer, Judge Jay acknowledged that specific insurance issues were not before the state court, and that to allow intervention in the Underlying RAP Lawsuit and permit the insurers to litigate coverage issues “would inject new issues into the lawsuit that would not otherwise be included in the Court’s analysis and evaluation of the facts during trial of this pending action.” (Doc.1 39-3).

At trial in the pending action, the Court will not determine claims, facts or legal issues that would be dispositive or common to a separate coverage action to determine the duties owed under insurance policies issued by Landmark American Insurance Company or American [sic] Mutual Insurance Company to their respective insureds.

Id.; see generally Spencer v. Assurance Co. of Am., 39 F.3d 1146, 1149 (11th Cir. 1994) (“The coverage issues which Assurance raised in the district court were not litigated in the circuit court action, nor were they necessarily determined by the circuit court judgment…. We find no authority to extend the estoppel principle to preclude the litigation of issues not necessarily determined by a judgment issued by a previous court.”). This Court finds that the state court record is sufficiently developed and establishes that there is no genuine dispute of fact that water intrusion through the defective Window System caused damage to otherwise non-defective tangible property in the form of walls, ceiling tiles and carpet, unrelated to the Window System or the work that TSG was hired to do, and that repair and replacement of the defective Window System was required to prevent ongoing property damage. Under Carithers, the cost of repairing and replacing the defective Window System constitutes “property damage,” resulting in coverage. See also Pavarini Constr. Co., 161 F. Supp. 3d at 1233-34 & n.6 ( [C]overage may exist for costs to repair defective work in order to prevent further structural damage and covered loss.”).

In Carithers, the record was configured to address coverage questions, which were decided in a bench trial before the district court. 782 F.3d at 1244. The district court determined that “the incorrect construction of the balcony, which allowed water to seep into the ceilings and walls of the garage leading to wood rot, caused property damage to the garage.” Id. The district court found that though the homeowners’ balcony standing alone was not “property damage” because it was defective work of a subcontractor, “the balcony was part of the cost of repairing the garage, which was property damage.” Id. at 1244-45. The Eleventh Circuit affirmed the district court’s awarding damages for the cost of repairing the balcony as property damage with the cost of repairing the garage. Id. at 1251. Focusing on the district court’s finding that “the balcony was defectively constructed, which caused damage to the garage,” and that “in order to repair the garage (which the parties agree[d] constituted property damage), the balcony had to be rebuilt,” the court found that “repairing the balcony was part of the cost of repairing the garage.” Id. (emphasis added). The Eleventh Circuit concluded that “the Carithers had a right to ‘the costs of repairing damage caused by defective work.’ ” 782 F.3d at 1251 (quoting J.S.U.B., 979 So. 2d at 889). Focusing on a causation analysis, the court determined that repairing and/or replacing the balcony was necessary to stop ongoing damage to the garage, and accordingly included that cost in the “property damage” coverage. Notably, the amount of damage to the garage was not a part of the court’s analysis; just the causation of the damage.

Under Carithers, the Court need not ascertain the value of the damage to “other property” – here, the damage to the tenants’ carpet, walls and ceilings caused by water intrusion through the defective windows. Rather, it is the fact of damage to otherwise non-defective property and the cause of that damage which compels a finding that coverage exists. It is not speculative to conclude on this record that the water dripping into the building through the defective Window System, caused the Building tenants’ carpets, drywall and ceiling tiles to become saturated. Compare Amerisure v. Auchter, 673 F.3d at 1300 (“Amelia never alleged that the defective installation [of the roof] caused damage to any other component of the project but the roof (emphasis added) ); Palm Beach Grading, 434 F. App’x at 831 (finding that “the defective pipe did not cause damage independent of the repair and replacement of the pipe. For example, the pipes never burst, caused sinkholes, or cause back-ups.” (emphasis added) ); Pozzi Window Co., 984 So. 2d at 1248 (“[t]he mere inclusion of a defective component, such as a defective window or the defective installation of a window, does not constitute property damage unless that defective component results in physical injury to some other tangible component.” (emphasis added) ).

Moreover, unlike the facts in Amerisure v. Auchter, 673 F.3d at 1300, where “Amelia never alleged that the defective installation [of the roof] caused damage to any other component of the project but the roof,” damage to tenants’ improvements caused by water intrusion through the Window System was noted during the construction phase of the Project and in the pleadings filed in the Underlying RAP Lawsuit. Payment for the cost of the water damage was also discussed and made.15 Where the evidence and the Final Judgment establish that the defective work caused other “property damage” to otherwise non-defective property, and the record establishes that the property damage caused by the defective work would continue into the future if left unrepaired, Carithers teaches that the cost of that repair and/or replacement of the defective work to stop future covered property damage, is subject to indemnification by the insurer of a CGL policy. Such a result makes sense; to find that only the damaged “other” property such as the garage was covered by the CGL policy, would mean that the insured, such as the Carithers, would either be forced to repeatedly file claims with the insurer for the continued and renewed property damage caused by defective leaking balcony, or be foreclosed from recovering the full consequences of the defective work, and recovering the benefit or coverage bargained and paid for with the CGL insurer. Likewise, to exclude payment for the cost of repairing and replacing the leaking Window System would result in continued water intrusion damage to the Building, and resultant damage to non-defective property in the future.

The Court recognizes the apparent disparity and even the arguable inequities when the occurrence of wet carpet, stained ceiling tiles and soggy drywall results in a $5 million liability to indemnify the insured for the repair and replacement of the entire defective Window System, a liability that would otherwise not exist absent damage from the undisputed water intrusion. But the Court is bound by the precedent set forth in Carithers, which in this Court’s view, represents a logical interpretation of the law of “property damage” in the context of standard CGL insurance policies. Carithers teaches that property damage includes the cost of repairing a defect in order to stop the continuing ongoing property damage, whether or not that defective work falls within the previous definition of the insured’s “work” or not. As noted by the Tennessee Supreme Court, “water damage is a natural consequence of an improperly installed window.” Moore. 216 S.W.3d at 309 (cited in Amerisure, 673 F.3d at 1303-04, 1306; J.S.U.B., 979 So. 2d at 877, 882, 883-84, 885, 888, 890).

Under Carithers, the qualitative and quantitative disparity and the balance of possible inequities are not the determinative factors. Rather it is the fact that the damage to otherwise non-defective property is caused by the defective work, and is ongoing unless the defective work is corrected that dictates this result. While it is unclear whether the various business risk exclusions cited by Amerisure, are equally modified by the decision in Carithers, the Court determines that at this point in time, and pending further development of the law, the Court is required to interpret and apply the Carithers definition of “property damage” to include the cost of repairing any defect to stop ongoing property damage, to the facts of this case.

Auchter Co., 2018 WL 4293149, at *17-21.

The Auchter holding has significant real-world affects for developers, contractors and their CGL insurers. Many construction defect claims involve fact patterns syllogistic to the Auchter decision. Perhaps the most common insurance coverage issue in the eastern part of the United States involve stucco-based water intrusion claims. Under the Auchter decision developers and contractors would have coverage for both the resulting water damage from stucco claims and the repair and replacement of the stucco itself in order to avoid future damage. This result was likely preceded by the Pavarrini decision in 2015.







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