Employers Mutual Casualty Company v. Kenny Hayes Custom Homes, Inc. et al
ORDER denying 47 Motion for Summary Judgment. Signed by Judge Callie V. S. Granade on 2/9/2016. (Granade, Callie)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ALABAMA
EMPLOYERS MUTUAL CASUALTY
KENNY HAYES CUSTOM HOMES,
KENNY HAYES, individually,
DAVID CHANCELLOR, individually,
JOE NELSON, individually,
TAMMY NELSON, individually.
Civil Action No. 15-0054-CG-B
MEMORANDUM OPINION AND ORDER
This matter is before the Court on Plaintiff’s motion for summary judgment
(Doc. 47), Defendants’ responses in opposition (Docs. 49, 50), and Plaintiff’s replies
(Docs. 51, 52). For the reasons explained below, the Court finds that Plaintiff has
not shown as a matter of law that it is entitled to a declaration that it does not owe
a duty to defend or indemnify Kenny Hayes Custom Homes, LLC, Kenny Hayes
and/or David Chancellor in the underlying state court action. Accordingly,
Plaintiff’s motion for summary judgment will be denied.
The underpinnings of this insurance coverage declaratory judgment action lie
in a breach of contract and tort claim lawsuit filed on May 19, 2014, in the Circuit
Court of Wilcox County, Alabama, Docket No. 14-900046 (the “underlying action”).
(Doc.47-2). In the underlying action, Joe and Tammy Nelson sued Kenny Hayes
Custom Homes, LLC, Kenny Hayes and/or David Chancellor (referred collectively
herein as “Kenny Hayes Homes” or “builder”) for breach of contract, negligence,
wantonness or willfulness, negligent hiring or supervision, fraud, breach of
warranty and deceptive trade practices arising from the construction of the Nelsons’
home. (Doc. 47-2). According to the complaint in the underlying action, the Nelsons
entered into a contract on March 6, 2012 for the construction of their home by
Kenny Hayes Homes. (Doc.47-2, ¶ 18). Throughout the construction process and
subsequent to completion, the Nelsons allege numerous failures of Kenny Hayes
Homes to adequately supervise the construction causing the Nelsons to suffer
“extreme mental anguish and emotional distress” and resulting in increased costs of
construction and serious latent defects with the home, including water intrusion.
(Doc. 47-2). Regarding the alleged water intrusion, the Nelsons testified that when
water would come in they would mop it up with towels and sometimes leave buckets
to catch the water. (Doc. 47-7, p. 7; Doc. 47-8, p. 5). Some of the walls hare stained
from water, “where the water poured down and just stripped all the stain and
everything off.” (Doc. 47-7, p. 7; Doc. 47-8, p. 5). The Nelsons also contend that the
exterior walls are damaged because of the water pouring in, but no one has told
them it is damaged. (Doc. 47-8, p. 6). The Nelsons did not assert any claims for
damage to any furniture, rugs or other personal property. (Doc. 47-8, p. 6). Mr.
Nelson reports experiencing mental anguish because of having leaks every time it
rains, but Mr. Nelson has not gone to a doctor for the mental anguish. (Doc. 47-7, p.
7). Mrs. Nelson also reports suffering mental anguish and testified that she went to
a doctor and was prescribed medicine to help her nerves. (Doc. 47-8, p. 7). Their
mental anguish also results from their breach of contract claim and began for Mrs.
Nelson when they had to go borrow money and they could not get money to finish
the house. (Doc. 47-7, p. 8, Doc. 47-8, p. 7). In November 2012, the Nelsons and
Kenny Hayes Homes mutually agreed to end the construction contract and release
each other from the obligations under the contract. (Doc. 50-6, pp. 6, 7-8).
Employers Mutual Casualty Company (“EMCC”) issued a commercial general
liability insurance policy (Doc. 47-3) to Kenny Hayes Homes and has been providing
a defense to Kenny Hayes Homes in the underlying action pursuant to a strict
reservation of rights. EMCC filed the current action in this Court on February 2,
2015 seeking a declaration that it has no duty to defend or indemnify Kenny Hayes
Homes in the underlying action. (Doc. 1).
The insurance policy provides coverage for “sums that the insured becomes
legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage.’ ”
(Doc. 47-3, p. 25). The policy specifies that it applies to bodily injury and property
damage only if:
(1) The “bodily injury” or “property damage” is caused by an “occurrence”
that takes place in the “coverage territory”;
(2) The “bodily injury” or “property damage” occurs during the policy
(Doc. 47-3, p. 25). The policy defines “bodily injury” as “bodily injury, sickness or
disease sustained by a person, including death resulting form any of these at any
time.” (Doc. 47-3, p. 37). “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
(Doc. 47-3, p. 39). “Occurrence” is defined as “an accident, including continuous or
repeated exposure to substantially the same general harmful conditions.” (Doc. 473, p. 38).
The policy contains several exclusions that EMCC contends apply:
contractual liability exclusion, damage to property exclusion, damage to impaired
property or property not physically injured exclusion, professional liability exclusion
and the absolute exclusion for fraud, misrepresentation, deceit or suppression or
concealment of fact.
Exclusion 2(b), “Contractual Liability” excludes the following:
“Bodily injury” or “property damage” for which the insured is obligated
to pay damages by reason of the assumption of liability in a contract or
agreement. This exclusion does not apply to liability for damages:
(1) That the insured would have in the absence of the contract or
(2) Assumed in a contract or agreement that is an “insured contract”,
provided the “bodily injury” or “property damage” occurs
subsequent to the execution of the contract or agreement. Solely for
the purposes of liability assumed in an “insured contract”,
reasonable attorney fees and necessary litigation expenses incurred
by or for a party other than an insured are deemed to be damages
because of “bodily injury or property damage”, provided:
(a) Liability to such party for, or for the cost of, that party’s defense
has also been assumed in the same “insured contract”; and
(b) Such attorney fees and litigation expenses are for defense of that
party against a civil or alternative dispute resolution proceeding
in which damages to which this insurance applies are alleged.
(Doc. 47-3, p. 26).
Exclusion 2(j), “Damage to Property” excludes the following:
“Property damage” to:
(1) Property you own, rent or occupy, including any costs or
expenses incurred by you, or any other person, organization or
entity, for repair, replacement, enhancement, restoration or
maintenance of such property for any reason, including
prevention of injury to a person or damage to another’s property;
(2) Premises you sell, given away or abandon, if the “property
damage” arises out of any part of those premises;
(3) Property loaned to you;
(4) Personal property in the care, custody or control of the insured;
(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.
Paragraphs (1), (3) and (4) of this exclusion do not apply to “property
damage” (other than damage by fire) to premises, including the
contents of such premises, rented to you for a period of 7 or fewer
consecutive days. A separate limit of insurance applies to Damage To
Premises Rented To You as described in Section III – Limits Of
Paragraph (2) of this exclusion does not apply if the premises are “your
work” and were never occupied, rented or held for rental by you.
Paragraphs (3), (4), (5) and (6) of this exclusion do not apply to liability
assumed under a sidetrack agreement.
Paragraph (6) of this exclusion does not apply to “property damage”
included in the “products completed operations hazard”.
(Doc. 47-3, pp. 28-29). Under the policy, “products-completed operations hazard”
“[i]ncludes all ‘bodily injury’ and ‘property damage’ occurring away from premises
you own or rent and arising out of ‘your product’ or ‘your work’ except:”
(1) Products that are still in your physical possession; or
(2) Work that has not yet been completed or abandoned. However,
"your work" will be deemed completed at the earliest of the
(a) When all of the work called for in your contract has been
(b) When all of the work to be done at the job site has been
completed if your contract calls for work at more than one job
(c) When that part of the work done at a job site has been put to its
intended use by any person or organization other than another
contractor or subcontractor working on the same project.
(d) Work that may need service, maintenance, correction, repair or
replacement, but which is otherwise complete, will be treated as
(Doc. 47-3, p. 39). “Products-completed operations hazard” does not include “bodily
injury" or "property damage" arising out of:
(1) The transportation of property, unless the injury or damage arises
out of a condition in or on a vehicle not owned or operated by you,
and that condition was created by the "loading or unloading" of that
vehicle by any insured;
(2) The existence of tools, uninstalled equipment or abandoned or
unused materials; or
(3) Products or operations for which the classification, listed in the
Declarations or in a policy schedule, states that products-completed
operations are subject to the General Aggregate Limit.
(Doc. 47-3, p. 39).
Exclusion 2(m), “Damage To Impaired Property Or Property Not Physically
Injured” excludes “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.
(Doc. 47-3, p. 29). Under the Policy “impaired property” means tangible property,
other than “your product” or “your work”, that cannot be used or is less useful
a. It incorporates “your product” or “your work” that is known or thought to
be defective, deficient, inadequate or dangerous; or
b. You have failed to fulfill the terms of a contract or agreement;
If such property can be restored to use by the repair, replacement,
adjustment or removal of “your product” or “your work”; or your fulfilling the
terms of the contract or agreement.
(Doc. 47-3, p. 37).
The exclusion “Contractors - Professional Liability” provides the following:
1. This insurance does not apply to “bodily injury”, “property damage”
or “personal and advertising injury” arising out of the rendering of
or failure to render any professional services by you or on your
behalf, but only with respect to either or both of the following
a. Providing engineering, architectural or surveying services to
others in your capacity as an engineer, architect or surveyor;
b. Providing, or hiring independent professionals to provide,
engineering, architectural or surveying services in connections
with construction work you perform.
2. Subject to paragraph 3. below, professional services include:
a. Preparing, approving, or failing to prepare or approve maps,
shoe drawings, opinions, reports, surveys, field orders, change
orders or drawings and specifications; and
b. Supervisory or inspection activities performed as part of any
related architectural or engineering activities.
3. Professional services do not include services within construction
means, methods, techniques, sequences and procedures employed by
you in connection with your operations in your capacity as a
(Doc. 47-3, p. 49).
Lastly, the exclusion entitled “Absolute Exclusion for Fraud,
Misrepresentation, Deceit or Suppression or Concealment of Fact” provides as
This insurance does not apply to any claim or lawsuit for damages
arising out of fraud, misrepresentation, deceit, suppression or
concealment of fact, whether intentional, unintentional, innocent,
negligent, willful, malicious, reckless or wanton, including, but not
limited to an action or lawsuit demanding or seeking damages or
recover based on direct liability, vicarious liability or agency principles.
We will not make any payment if those payments arise out of any
claim or lawsuit excluded by this endorsement. We have no duty to
defend any insured against any claim or lawsuit for damages to which
this insurance does not apply.
This exclusion applies regardless of:
1. Whether such operations are or were conducted by you or on your
2. Whether the operations are or were conducted for you or for others.
(Doc. 47-3, p. 41).
A. Summary Judgment Standard
Federal Rule of Civil Procedure 56(a) provides that summary judgment shall
be granted: “if the movant shows that there is no genuine dispute as to any material
fact and the movant is entitled to judgment as a matter of law.” The trial court’s
function is not “to weigh the evidence and determine the truth of the matter but to
determine whether there is a genuine issue for trial.” Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 249 (1986). “The mere existence of some evidence to support the
non-moving party is not sufficient for denial of summary judgment; there must be
‘sufficient evidence favoring the nonmoving party for a jury to return a verdict for
that party.’” Bailey v. Allgas, Inc., 284 F.3d 1237, 1243 (11th Cir. 2002) (quoting
Anderson, 477 U.S. at 249). "If the evidence is merely colorable, or is not
significantly probative, summary judgment may be granted." Anderson, at 249-250.
(internal citations omitted).
The basic issue before a court on a motion for summary judgment is “whether
the evidence presents a sufficient disagreement to require submission to a jury or
whether it is so one-sided that one party must prevail as a matter of law.” See
Anderson, 477 U.S. at 251-252. The moving party bears the burden of proving that
no genuine issue of material fact exists. O'Ferrell v. United States, 253 F.3d 1257,
1265 (11th Cir. 2001). In evaluating the argument of the moving party, the court
must view all evidence in the light most favorable to the non-moving party, and
resolve all reasonable doubts about the facts in its favor. Burton v. City of Belle
Glade, 178 F.3d 1175, 1187 (11th Cir. 1999). “If reasonable minds could differ on
the inferences arising from undisputed facts, then a court should deny summary
judgment.” Miranda v. B&B Cash Grocery Store, Inc., 975 F.2d 1518, 1534 (11th
Cir. 1992) (citing Mercantile Bank & Trust v. Fidelity & Deposit Co., 750 F.2d 838,
841 (11th Cir. 1985)).
Once the movant satisfies his initial burden under Rule 56(c), the non-moving
party "must make a sufficient showing to establish the existence of each essential
element to that party's case, and on which that party will bear the burden of proof
at trial." Howard v. BP Oil Company, 32 F.3d 520, 524 (11th Cir. 1994)(citing
Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986)). Otherwise stated, the nonmovant must “demonstrate that there is indeed a material issue of fact that
precludes summary judgment.” See Clark v. Coats & Clark, Inc., 929 F.2d 604, 608
(11th Cir. 1991). The non-moving party “may not rely merely on allegations or
denials in its own pleading; rather, its response .... must be by affidavits or as
otherwise provided in this rule be set out specific facts showing a genuine issue for
trial.” Vega v. Invsco Group, Ltd., 2011 WL 2533755, *2 (11th Cir. 2011). “A mere
‘scintilla’ of evidence supporting the [non-moving] party’s position will not suffice;
there must be enough of a showing that the jury could reasonably find for that
party.” Walker v. Darby, 911 F.2d 1573, 1577 (11th Cir. 1990) (citation omitted).
“[T]he nonmoving party may avail itself of all facts and justifiable inferences in the
record taken as a whole.” Tipton v. Bergrohr GMBH-Siegen, 965 F.2d 994, 998 (11th
Cir. 1992). “Where the record taken as a whole could not lead a rational trier of fact
to find for the non-moving party, there is no genuine issue for trial.” Matsushita
Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574 at 587 (1986) (internal
quotation and citation omitted).
B. Policy Coverage
EMCC asserts that the policy does not cover the claims asserted in the
underlying lawsuit. “In Alabama, insurers have the right, absent statutory
provisions to the contrary, to limit their liability and write policies with narrow
coverage.” Turner v. U.S. Fidelity and Guar. Co., 440 So.2d 1026, 1027 -1028 (Ala.
1983) (citation omitted). Under Alabama law, the insured bears the burden of
establishing coverage by demonstrating that a claim falls within the policy, see
Colonial Life & Accident Ins. Co. v. Collins, 280 Ala. 373, 194 So.2d 532, 535 (1967),
while the insurer bears the burden of proving the applicability of any policy
exclusion. See U.S. Fidelity & Guar. Co. v. Armstrong, 479 So.2d 1164, 1168
(Ala.1985). If an insurance policy is ambiguous in its terms, the policy must be
construed liberally in favor of the insured, and exceptions to coverage must be
interpreted as narrowly as possible in order to provide maximum coverage to the
insured. Altiere v. Blue Cross & Blue Shield, 551 So.2d 290, 292 (Ala. 1989). The
Court notes that an “insurer's duty to defend is more extensive than its duty to
[indemnify].” Porterfield v. Audubon Indem. Co., 856 So.2d 789, 791 (Ala. 2002)
(quoting United States Fid. & Guar. Co. v. Armstrong, 479 So.2d 1164, 1168 (Ala.
1985)). Generally, an insurer’s obligations with respect to providing a defense to its
insured in an action brought by a third-party are determined by the allegations
contained in the third-party’s complaint. Ladner and Company, Inc. v. Southern
Guaranty Ins. Co., 347 So.2d 100, 102 (Ala. 1977) (citations omitted). “If the
allegations of the injured party's complaint show an accident or occurrence which
comes within the coverage of the policy, the insurer is obligated to defend regardless
of the ultimate liability of the insured.” Id. (citing Goldberg v. Lumber Mutual
Casualty Ins. Co., 297 N.Y. 148, 77 N.E.2d 131 (1948)). Thus, if there is any
potential for coverage arising out of the allegations, then EMCC would have at least
a duty to defend.
However, a court is not constrained to consider only the allegations of
the underlying complaint, but may additionally look to facts which
may be proved by admissible evidence. Tanner [v. State Farm Fire &
Cas. Co., 874 So.2d 1058, 1064 (Ala.2003)]; see also Hartford Cas. Ins.
Co. v. Merchants & Farmers Bank, 928 So.2d 1006, 1010 (Ala.2005) (in
deciding whether the allegations of the complaint show a covered
accident or occurrence, “the court is not limited to the bare allegations
of the complaint ... but may look to facts which may be proved by
admissible evidence”) (citations omitted). The test, ultimately, is this:
“The insurer owes no duty to defend only if neither does the complaint
against the insured allege a covered accident or occurrence nor does
the evidence in the litigation between insurer and insured prove a
covered accident or occurrence.” Tanner, 874 So.2d at 1065.
Essex Ins. Co. v. Foley, 2011 WL 1706214, *3 (S.D. Ala. May 5, 2011). If both
covered claims and non-covered claims are pleaded, then the insurer's duty to
defend extends at least to those covered claims. Tanner, 875 So.2d at 1065.
In the instant case, EMCC asserts that coverage does not exist because 1)
there is no claim for property damage; 2) there is no claim for bodily injury; 3) there
is no occurrence; and 4) many of the claims do not constitute an accident. As stated
above, Defendants have the burden of showing coverage exists. However, as this is
EMCC’s motion for summary judgment, it is EMCC’s burden of showing that
looking at the facts in the light most favorable to the Nelsons and Kenny Hayes
Homes, there is no genuine dispute as to any material fact and that the movant is
entitled to judgment as a matter of law.
1. Property Damage
EMCC contends that there is no claim for property damage as defined by the
policy. Defendants disagree, asserting that the water damage to the house
constitutes property damage. Under the policy “property damage” includes
“[p]hysical injury to tangible property, including all resulting loss of use of that
property.” Defendants assert that the water damage to the walls constitutes
property damage, but EMCC contends that a mere change in color of the wall is not
a physical injury. Defendants also assert that they believe there is more damage on
the interior of the wall, damage that may be much greater than what is seen on the
exterior. Defendants report that they have not been able to discover the full extent
of the damages because investigating and repairing the walls would raise spoliation
issues. The Nelsons report that they intend to begin repairs, after giving notice to
the other parties, at which time they will presumably discover the full of extent of
the damage. EMCC contends that any allegation that there is damage to the
interior of the wall is merely speculation. The Court finds that while the damage to
the exterior of the walls may seem small, it is damage to physical property
nonetheless. EMCC asserts that the damage is not a physical injury because the
change in color does not alter the material substance of the wall. However, a
physical injury includes any wrong or damage done to another’s property. See Oak
Ford Owners Ass'n v. Auto-Owners Ins. Co., 510 F. Supp. 2d 812, 816 (M.D. Fla.
2007) (finding negative environmental impact to land was a physical injury). “[A]n
item need not be completely destroyed in order to render it damaged.” Id. at 817.
There is allegedly a significant change in the condition of the walls that would
require physical work on the property for it to be remedied. Thus, the Court finds
that even if only the alleged exterior damage to the walls is considered, there is a
physical injury to the property.
2. Bodily Injury
Defendants assert that their claim for mental anguish and emotional distress
constitutes bodily injury. The policy definition of “bodily injury” includes “sickness
or disease sustained by a person.” “Mental anguish” or “emotional distress” is not
expressly excluded by the policy, thus, construing the language against the insurer,
“mental anguish” and “emotional distress” are “necessarily included within the
terms ‘sickness’ or ‘disease’ ”. Morrison Assur. Co. v. N. Am. Reinsurance Corp., 588
F. Supp. 1324, 1327 (N.D. Ala. 1984) aff'd sub nom. Morrison v. N. Am., 760 F.2d
279 (11th Cir. 1985). Accordingly, the Court finds that the Nelsons’ alleged mental
anguish might be covered as a bodily injury under the policy.
EMCC contends that the water damage alleged in the underlying action does
not constitute an “occurrence” as required by the policy. The policy states that it
applies to bodily injury and property damage only if the bodily injury or property
damage is caused by an “occurrence.” The policy defines “occurrence” as “an
accident, including continuous or repeated exposure to substantially the same
general harmful conditions.” (Doc. 47-3, p. 38). What constitutes an “accident” is
not defined by the policy. Where an insurance policy defines certain words or
phrases, a court must defer to the definition provided by the policy. Twin City Fire
Ins. Co. v. Alfa Mut. Ins. Co., 817 So.2d 687 (Ala.2001). However, because the
instant policy does not define “accident,” we look outside the policy for the meaning
of the word. Black’s Law Dictionary defines “accident” as “[a]n unintended and
unforeseen injurious occurrence; something that does not occur in the usual course
of events or that could not be reasonably anticipated.” Black's Law Dictionary 15
(7th ed. 1999). “Accident” has also been defined as “an unexpected happening
rather than one occurring through intentional design or an event which takes place
without one's foresight or expectation or design.” Liberty Mut. Ins. Co. v.
Wheelwright Trucking Co., Inc., 851 So.2d 466, 480 (Ala. 2002) (citations and
internal quotations omitted). “[T]he term ‘accident’ does not necessarily exclude
human fault called negligence.” United States Fidelity and Guar. Co. v. Bonitz
Insulation Co. of Alabama, 424 So.2d 569, 571 (Ala. 1982).
EMCC asserts that it is not required to indemnify an insured for the costs of
repairing or replacing faulty work. However, courts have found that faulty
workmanship that causes a leak can, at least in some circumstances, result in an
occurrence. The Bonitz Court, cited above, held that because Bonitz was “merely
charged with negligence in installing the roof, there is no evidence that they either
expected or intended the roof to start leaking” and therefore, the injury satisfied the
requirement of an “occurrence.” Id. Likewise, in Moss v. Champion Ins. Co, a roofer
was sued for water damage that occurred while a roof was being replaced. Moss v.
Champion Ins. Co., 442 So.2d 26 (Ala. 1983). That court stated that it is clear from
our cases that the term "accident" in such a policy does not necessarily exclude
human fault called negligence. Id. at 28 (citing Bonitz supra). The Moss Court held
that while the roof was indeed intentionally removed, the resulting water damage
was not intended, and, therefore, that there was an "occurrence" within the general
liability policy terms.
Where the alleged damage is the faulty workmanship itself, there is no
occurrence. Town & Country Prop., L.L.C. v. Amerisure Ins. Co., 111 So.3d 699, 706
(Ala. 2011) (citing United States Fid. & Guar. Co. v. Warwick Dev. Co., 446 So.2d
1021 (Ala. 1984)). A CGL policy is generally understood “to protect an insured from
bearing financial responsibility for unexpected and accidental damage to people or
property while a performance bond is intended to insure the contractor against
claims for the cost of repair or replacement of faulty work.” Id. at 707 (citations and
internal quotations omitted). However, “faulty workmanship may lead to an
occurrence if it subjects personal property or other parts of the structure to
‘continuous or repeated exposure’ to some other ‘general harmful condition’ (e.g., the
rain in Moss) and, as a result of that exposure, personal property or other parts of
the structure are damaged. Id. at 706. In the instant case, the alleged damage is to
another part of the structure and cannot be remedied merely by correcting the
faulty workmanship that caused the leaks. As such, the Court finds that the
alleged water damage was caused by an occurrence.
Likewise, to the extent the Nelsons’ alleged mental anguish is caused by
water leaking into their home, that injury is also caused by an occurrence. The
Nelsons both allege they suffered emotional distress and Mr. Nelson specifically
testified that he experienced emotional distress resulting from the water leaking
into the house (rather than solely from the monetary and other contract issues
claimed). The Court finds that Defendants have at least raised a significant issue of
fact with regard to whether their alleged injuries were caused by an occurrence.
4. Particular Claims
EMCC asserts that certain claims asserted in the underlying action clearly do
not fall under the CGL policy. The Court would agree, and Kenny Hayes Homes
has conceded, that the claims for wantonness, willfulness, deceptive trade practices
and fraud do not fall under the CGL policy. Defendants dispute that the claims for
breach of contract, breach of warranty, negligence, and negligent hiring or
supervision are not covered by the policy.
EMCC essentially makes the same arguments here as it does with regard to
whether the alleged damages were caused by an occurrence. EMCC asserts that the
claimed damages were caused by faulty workmanship and that there is no coverage
for such intended acts. However, as explained above, the Court finds that while
water was not prevented from leaking into the house because of the alleged faulty
workmanship, it was the rain and water leakage itself that ultimately caused the
damages. “When a contractor performs faulty work (that is, fails to use reasonable
skill), there is no accident or occurrence, but, when the contractor's faulty work
creates a condition that in turn damages property, under Alabama law, that
damage results from an accident.” Pennsylvania Nat. Mut. Cas. Ins. Co. v. St.
Catherine of Siena Par., 790 F.3d 1173, 1178 (11th Cir. 2015).
The Court stated above that the term “accident” could include allegations of
negligence. United States Fidelity and Guar. Co. v. Bonitz Insulation Co. of
Alabama, 424 So.2d 569, 571 (Ala. 1982). While Kenny Hayes Homes intentionally
performed certain duties pursuant to its agreement with the Nelsons, there has
been no evidence presented that Kenny Hayes Homes intended for water to leak
into the house when it rained or for the walls to be damaged or for the Nelsons to be
harmed in any way. The CGL policy applies to the claims for breach of contract,
breach of warranty, negligence, and negligent hiring or supervision to the extent the
covered damages arose from the conduct alleged in those claims
As explained above, the insurer bears the burden of demonstrating that
exclusions apply. Acceptance Ins. Co. v. Brown, 832 So.2d 1, 12 (Ala. 2001) (citing
Fleming v. Alabama Farm Bureau Mut. Cas. Ins. Co., 293 Ala. 719, 310 So.2d 200,
202 (1975)). EMCC contends that the claims are excluded under 1) subsections 5
and 6 of the Damage to Property Exclusion, 2) the Contractual Liability Exclusion,
3) the Damage to Impaired Property or Property Not physically Injured Exclusion,
4) the Contractors-Professional Liability Exclusion and 5) the Absolute Exclusion
for Fraud, Misrepresentation, Deceit or Suppression or Concealment of Fact.
1. Damage to Property Exclusion
Subsection 5 of the Damage to Property Exclusion excludes property damage
to “[t]hat 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.” The alleged
property damage here arose from operations performed by Kenney Hayes Homes or
its contractors and subcontractors. However, EMCC has not offered any cases that
excluded coverage under similar language where, as here, an occurrence was found
to have occurred and the alleged damage did not occur on the portion of the
property where the alleged defective work was performed. The alleged damage in
this case did not arise from work being performed on the property that was
damaged. Instead, the alleged faulty construction caused damage to an otherwise
non-defective portion of the property. Accordingly, the Court finds that subsection 5
of the Damage to Property Exclusion does not apply in this case.
The Damage to Property Exclusion also excludes “[t]hat particular part of
any property that must be restored, repaired or replaced because ‘your work’ was
incorrectly performed on it.” The policy also provides that “this exclusion does not
apply to ‘property damage’ included in the “products completed operations hazard”,
which is defined in the policy.
“The purpose of the ‘your work’ exclusion is to prevent coverage for the
insured's own faulty workmanship, a normal risk associated with operating a
business.” Mid-Continent Cas. Co. v. Advantage Med. Elecs., LLC, 2015 WL
6828722, at *7 (Ala. Nov. 6, 2015). However, in the instant case, the damaged
property does not need to be restored because of work incorrectly performed on it,
but because of work that was allegedly incorrectly performed on other portions of
the property. Thus, under the language of the policy the exclusion does not apply.
As further explained by the Alabama Supreme Court:
Further, we note that exclusion j(6) does not exclude coverage for all
property damage caused by an insured's faulty workmanship. Rather,
the meaning of exclusion j(6) is plain that property damage is excluded
from coverage under that provision only as to the “particular part[s]” of
the property that were themselves the subject of the defective work. In
interpreting this exclusion, the United States Court of Appeals for the
Fifth Circuit has stated: “[E]xclusion j(6) bars coverage only for
property damage to parts of a property that were themselves the
subject of defective work by the insured; the exclusion does not bar
coverage for damage to parts of a property that were the subject of only
nondefective work by the insured and were damaged as a result of
defective work by the insured on other parts of the property.” Mid–
Continent Cas. Co. v. JHP Dev., Inc., 557 F.3d 207, 215 (5th Cir.2009).
Mid-Continent Cas. Co. v. Advantage Med. Elecs., LLC,
So.3d , 2015 WL
6828722, at *9. Because the alleged property damage here was not to the particular
parts of the property that were themselves the subject of the defective work, the
exclusion does not apply.
2) Contractual Liability Exclusion
EMCC contends that the claims in the underlying action are excluded by the
“Contractual Liability” exclusion in the policy. The Contractual Liability clause
excludes “ ‘[b]odily injury’ or ‘property damage’ for which the insured is obligated to
pay damages by reason of the assumption of liability in a contract or agreement.”
The Eleventh Circuit recently found that, under Alabama law, such language “was
intended to exclude claims arising out of indemnity agreements only.”
Pennsylvania St. Catherine of Siena Parish, 790 F.3d 1173, 1182 (citing Townsend
Ford, Inc. v. Auto-Owners Ins. Co., 656 So.2d 360, 364 (1995)). That court further
found that this meaning applies regardless of whether the injured party brings a
breach of contract claim based on the breach of an express or implied warranty. Id.
EMCC cites cases, including cases from this Court, which held that such contractual
liability exclusions bar coverage for all claims sounding in contract. See e.g.
Assurance Co. of America v. Admiral Ins. Co., 2011 WL 1897589 (S.D. Ala. May 18,
2011) (citing U.S. Fid. & Guar. Co. v. Nat’l Tank and Mach. Works, Inc., 402 So.2d
925 (Ala. 1981) & Carter v. Cincinnati Ins. Co., 435 So.2d 42 (Ala 1983)).1 However,
as stated in Penn. St. Catherine of Siena Parish, “we are bound to follow the latest
statement of state law by the state supreme court.” Penn. St. Catherine of Siena
Parish, 790 F.3d at 1182. EMCC has offered no authority that persuades this Court
that the holding of the Supreme Court of Alabama in Townsend Ford should not
apply here. In the instant case, the parties did not enter into an indemnity
agreement. The parties entered into an agreement for the construction of the
Nelsons’ home and there has been no suggestion that Kenny Hayes Homes assumed
any more or different liability than is standard for residential construction
contracts. Accordingly, the Court finds that the Contractual Liability exclusion
does not apply.
3) Damage to Impaired Property or Property Not physically Injured
EMCC contends that the “Damage To Impaired Property Or Property Not
Physically Injured” provision excludes coverage here because the damages sought
are for a defect or deficiency or inadequacy in the builder’s work. The clause
excludes “property damage” to “impaired property” or property that has not been
In Assurance Co. of America, this Court did not address the Alabama Supreme
Court’s 1995 case, Townsend Ford.
physically injured, arising out of either:
(1) A defect, deficiency, inadequacy or dangerous condition in “your
product” or "your work"; or
A delay or failure by you or anyone acting on your behalf to
perform a contract or agreement in accordance with its terms.
Under a plain reading of this language, the exclusion only applies where the
damaged property has not been physically injured. As this Court has already found
that the alleged injury to the walls constitutes a physical injury, the exclusion does
not apply. Additionally, the exclusion would not bar the Nelsons’ claim that they
have suffered bodily injury in the form of mental and emotional distress.
4) Contractors-Professional Liability Exclusion
EMCC contends that the Nelsons’ claims are barred by the “Contractors Professional Liability” exclusion because they arise out of the builder’s rendering or
the builder’s failure to render professional services. However, the exclusion states
that “[p]rofessional services do not include services within construction means,
methods, techniques, sequences and procedures employed by you in connection with
your operations in your capacity as a construction contractor.” EMCC has not
shown that the actions complained of in the underlying case fall outside the above
language. EMCC points to Ms. Nelson’s testimony at her deposition wherein she
answered “Yes” when asked if she was seeking damages arising out of Kenny Hayes
Homes’ rendering or failure to render professional services. (Doc. 47-8, p. 5).
However, there has been no suggestion that Ms. Nelson has a legal background or
education and understood the legal conclusion she was being asked to make.
Moreover, even if the Nelsons are seeking damages for the rendering or failure to
render professional services, that does not preclude them from seeking other
damages as well. Ms. Nelson did not state that all of the damages they seek are for
the rendering or failure to render professional services. Nor did she specify that the
emotional distress damages or the water damages they seek arise from Kenny
Hayes Homes’ rendering or failure to render professional services. The Court finds
that EMCC has not shown that the covered damages are excluded by the
Professional Liability exclusion.
5) Absolute Exclusion for Fraud, Misrepresentation, Deceit or
Suppression or Concealment of Fact
The “Absolute Exclusion for Fraud, Misrepresentation, Deceit or Suppression
or Concealment of Fact” provides that the CGL policy does not apply to:
any claim or lawsuit for damages arising out of fraud,
misrepresentation, deceit, suppression or concealment of fact, whether
intentional, unintentional, innocent, negligent, willful, malicious,
reckless or wanton, including, but not limited to an action or lawsuit
demanding or seeking damages or recover based on direct liability,
vicarious liability or agency principles.
Kenny Hayes Homes has conceded that the claims for wantonness, willfulness,
fraud and deceptive trade practices are not covered by the policy. EMCC has not
shown that this exclusion would apply to any other claims asserted in the
For the reasons stated above, the Court finds that Plaintiff has not shown as
a matter of law that it is entitled to a declaration that it does not owe a duty to
defend or indemnify Kenny Hayes Custom Homes, LLC, Kenny Hayes and/or David
Chancellor in the underlying state court action. Accordingly, Plaintiff’s motion for
summary judgment (Doc. 47) is DENIED.
DONE and ORDERED this 9th day of Febuary, 2016.
/s/ Callie V. S. Granade
UNITED STATES DISTRICT JUDGE
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