Clear, LLC v. America and Foreign Insurance Company et al

Filing 120

Order on Motion for Partial Summary Judgment, Order on Motion for Summary Judgment

UNITED STATES DISTRICT COURT
DISTRICT OF ALASKA

CLEAR, LLC,
Plaintiff,
vs.
AMERICAN AND FOREIGN INSURANCE
COMPANY,
Defendant.

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3:07-cv-00110 JWS
ORDER AND OPINION
[Re:

Motions at dockets 32
and 46]

I. MOTIONS PRESENTED
At docket 32, defendant American and Foreign Insurance Company (“American”)
moved for summary judgment against plaintiff Clear, LLC (“Clear”). At docket 46, Clear
moved for partial summary judgment against American. The motions have been fully
briefed. Oral argument was heard on March 7, 2008.

II. BACKGROUND
This lawsuit arises from construction of the Alaska Native Heritage Center in
Anchorage, Alaska (“Center”). In May of 1998, the Anchorage Native Heritage Center
Incorporated (“Owner”) contracted with Gaston and Associates (“Gaston”) to act as the
general contractor for construction of the Center. The Center was designed by RIM
Architects (“RIM”). Gaston engaged subcontractors to construct various aspects of the
Center. For example, a sub-contractor named Four Winds was the framing
subcontractor. Its work included framing the Center’s roof. Another subcontractor was
Cottonwood Roofing which installed the exterior of the roof. Another subcontractor was

Udelhoven Oilfield Services, Inc., which was engaged to perform the mechanical,
plumbing, and electrical work on the Center. Gaston, as general contractor, was tasked
with inspecting the work of its subcontractors and was responsible to the Owner for the
adequacy of all work under its contract with the owner whether the work was performed
by Gaston or by a subcontractor.
Construction of the Center was substantially completed by mid-March 1999. By
January of 2000, it became apparent that there were serious problems with the building.
Eventually, litigation ensued in which the Owner sued Gaston and its bonding company
who joined RIM as a third-party defendant. Following a lengthy bench trial, Alaska
Superior Court Judge Sen Tan issued findings of fact and conclusions of law in August
2007. Judge Tan ruled in favor or RIM on Gaston’s third-party claim. He ruled against
Gaston on the Owner’s claims and awarded the Owner contract damages in an amount
exceeding $2,000,000. After Judge Tan’s decision was rendered, Gaston, its bonding
company, and the Owner negotiated a settlement pursuant to which Gaston and the
bonding company agreed to pay the Owner $2,400,000, and to vacate Judge Tan’s
decision as it affected the Owner, Gaston, and the bonding company. Judge Tan’s
decision absolving RIM of responsibility remains in effect.
The instant lawsuit was commenced in state court by Clear and timely removed
to this court by American. In its complaint, Clear seeks a declaration of its rights under
three insurance policies issued to Gaston by American providing certain insurance
coverages to Gaston. These are policy A SP-2006950097 covering the period from
June 1, 1997 to June 1, 1998; policy A SP-2006950098 which covered the period from
June 1, 1998 to June 1, 1999; and policy A SP-2006950099 covering the period from
June 1, 1999 to June 1, 2000. The relevant terms of each of these insurance policies
(aside from the period during which coverage was provided) are identical for all
purposes relevant to this lawsuit. For simplicity, in this order, the three insurance
policies are referred to both collectively and singularly as “the Policy.” The Policy
provided several coverages, including comprehensive general liability coverage (“CGL”),
to Gaston. In addition to seeking a declaration of its rights under the Policy, Clear

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seeks to recover damages for American’s alleged failure to honor its obligations to
indemnify Gaston under the Policy.
In its complaint Clear alleges that it is the successor in interest to Gaston and
also holds some rights obtained from the Owner in connection with the “Concrete
Claim.”1 In its Answer, American did not admit Clear’s allegations regarding its standing
to pursue the claims pled in the complaint, but for purposes of the pending motions,
Clear’s standing is not challenged by American.2
American’s motion was filed prior to the time it learned of the settlement between
the Owner and Gaston. As part of that settlement, the Superior Court decision as
between the Owner, Gaston, and the bonding company was vacated.3 To the extent
that American’s motion depends on that decision, its foundation has disappeared. That
is not to say that the motion necessarily is without any merit. American’s motion asks
the court to rule as a matter of law that American owes no duty to Clear under the
Policy. American’s briefing focuses on the following six legal questions:

1) Must [American] indemnify Clear for the damages awarded to [the
Owner] for defective workmanship? * * *
2) Must [American] indemnify Clear for damages to non-defective work
which had to be removed and replaced to repair the defective work? * * *
3) Must [American] indemnify Clear for damages to [the Center] which
arose from [Gaston’s] defective workmanship.
4) Must [American] indemnify Clear for defective work [Gaston’s]
subcontractors performed? * * *

1

In addition to the third-party claim against RIM, Gaston pled a third-party claim against
Klondike Concrete Company with respect to certain concrete work done on the Center.
According to Clear’s briefing, that claim was severed from the other claims and tried separately
before Judge Tan. Prior to a decision by Judge Tan, Gaston funded a settlement with the
Owner respecting the concrete work at issue. See doc. 47 at p. 11.
2

This point was established on the record during oral argument.

3

Doc. 47, Ex. 1.

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5) Must [American] indemnify Clear for damages to the Owner which
arose from defective workmanship by [framing subcontractor] Four Winds
Framing & Finish? * * *
6) Must [American] indemnify Clear for any property damage which
occurred after [American’s] policy period.4
In its motion for partial summary judgment, Clear asks the court to rule as a
matter of law that the following propositions are correct:
1. That the claim asserted against [Gaston] by [the Owner] (“the Claim”)
was the result of an “occurrence” as that word is defined in the [“Policy.”]
2. That the Claim included a demand for compensation for “property
damage” as that phrase is defined in the Policy.
3. That the property damage for which compensation was demanded by
[the Owner] occurred during the policy period of the Policy.
4. That exclusions 2(j)(5) and (6) of the Policy do not apply because the
property damage for which compensation was demanded was within the
“products completed operations hazard” as that phrase is defined in the
Policy.
5. That exclusion 2[L] of the Policy does not apply because the damaged
work or the work out of which the damage arises was performed on
Gaston’s behalf by a subcontractor.
6. That the payments made pursuant to the [Gaston-Owner] settlement
agreement included sums that the insured becomes legally obligated to
pay as damages because of property damage to which the Policy applies.5
This court has jurisdiction pursuant to 28 U.S.C. § 1332, because the parties are
diverse and the amount in controversy exceeds $75,000. The substantive law which
controls resolution of this case is the law of the State of Alaska.

4

Doc. 33 at p. 12.

5

Doc. 46 at p. 2.

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III. STANDARD OF REVIEW
Federal Rule of Civil Procedure 56(c) provides that summary judgment should be
granted when there is no genuine dispute about material facts and when the moving
party is entitled to judgment as a matter of law. The moving party has the burden to
show that material facts are not genuinely disputed.6 To meet this burden, the moving
party must point out the lack of evidence supporting the nonmoving party’s claim, but
need not produce evidence negating that claim.7 Once the moving party meets its
burden, the nonmoving party must demonstrate that a genuine issue exists by
presenting evidence indicating that certain facts are so disputed that a fact-finder must
resolve the dispute at trial.8 The court must view this evidence in the light most
favorable to the nonmoving party, must not assess its credibility, and must draw all
justifiable inferences from it in favor of the nonmoving party.9

IV. DISCUSSION
A. The Policy Provisions
The coverage at issue is the Policy’s CGL coverage for “property damage.” That
coverage is set out in pertinent part as follows:
1. Insuring Agreement
a. We will pay those sums that the insured becomes legally obligated to
pay as damages because of . . . “property damage” to which this
insurance applies.
b. This insurance applies to . . . “property damage” only if
(1) The . . . “property damage” is caused by an “occurrence” . . . and;
(2) The . . . “property damage” occurs during the policy period.10

6

Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).

7

Id. at 325.

8

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986).

9

Id. at 255; Soldano v. United States, 453 F.3d 1140, 1143 (9th Cir. 2006) (citation
omitted).
10

Doc. 33, Exhibit C at p. 3 of 30.

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Like most insurance contracts, the Policy contains coverage exclusions. Those which
appear pertinent to the instant motions are the following:
2. Exclusions
This insurance does not apply to:11
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.
[Excepted from this exclusion (6) is] “property damage” included in the
“products-completed operations hazard.”12
l. Damage to Your Work
“Property damage” to “your work” arising out of it or any part of it and
included in the “products-completed operations hazard”.
This exclusion does not apply if the damaged work or the work out of
which the damage arises was performed on your behalf by a
subcontractor.13
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.

11

Id.

12

Id. at pp. 5-6 of 30.

13

Id. at p. 6 of 30.

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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.14
The Policy defines several of the terms used in the preceding sections of the
Policy as follows:
7. “Impaired property” means tangible property other than “your product”
or “your work”, that cannot be used or is less useful because:
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:
a. The repair, replacement, adjustment or removal of “your
product” or “your work”; or
b. Your fulfilling the terms of the contract or agreement.15
12. “Occurrence” means an accident including continuous or repeated
exposure to substantially the same harmful conditions.16
14. “Products-completed operations hazard”
a. Includes all . . . . “property damage’ . . . arising out of
“your product” or “your work” [with exceptions not pertinent
here].17
15. “Property damage” means:
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.18
14

Id.

15

Id., at p. 13 of 30.

16

Id., at p. 14 of 30.

17

Id.

18

Id., at p. 15 of 30.

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19. “Your work” means:
a. Work or operations performed by you or on your behalf;
and
b. Materials, parts or equipment furnished in connection with
such work or operations.
“Your work” includes:
a. Warranties or representations made at any time with
respect to the fitness, quality, durability, performance or use
of “your work, and
b. The providing of or failure to provide warnings or
instructions.19
It will facilitate understanding the court’s analysis of the Policy’s coverage and
exclusions set out in subsection C, below, to bear in mind that “your work” includes both
Gaston’s work and the work of its subcontractors (work done “on behalf” of Gaston).
B. Facts
Undisputed Facts
Upon review of the parties’ motion papers and attachments, the court concludes
that the material facts outlined in this subsection, as well as those set out previously in
the Background section of this order, are not disputed for purposes of the pending
motions. The Center was substantially completed by mid March 1999. By early 2000
problems including heat loss, ice forming on the roof, and water dripping from the
ceilings had been discovered. Water dripping from the ceiling continued through the
winter. The observed problems were initially investigated by RIM which found that they
resulted from warm, moist interior air moving into the roof cavity through the vapor
retarder, condensing there, and leaking back into the building in the form of water.
Later, similar problems with moisture penetration were also discovered in the walls.
Further investigations, including test cuts at various locations in the roof,
established that the problems with the roof were due to inadequate vapor retarder,
undersized ventilation holes, blocked ventilation, missing insulation, defective blocking,
torn vapor retarder, unsealed penetrations in the vapor retarder, lapped but unsealed

19

Id.

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vapor retarder, vapor retarder not adequately anchored to the structure, and missing
insulation. Test cuts in the roof also revealed scattered wet plywood sheets in the roof
decking. Test cuts in the walls also revealed extensive failures in the vapor retarder
system. There was damage to interior dry-wall which was water stained and damage to
the exterior wall finish which was also water stained. Window frames were damaged.
The bollards installed by a Gaston subcontractor failed after the Center was occupied
due to water problems.
The problems found in the roof and the walls were caused by defective work
done by Gaston and defective work done by its subcontractors. Fixing the Center
required removal of undamaged materials in order to access the areas where repairs
were needed. In the course of the repair work in addition to some wet plywood, some
wet insulation was found. Portions of these wet materials had begun to mold, and rot
was discovered in a portion of the wet plywood.
Disputed Facts
Although one or the other of the parties may contend otherwise with respect to
any individual item, the court finds the following on the basis of the available record.
Which items of property damage were caused by Gaston’s own faulty work and which
resulted from faulty subcontractor work is disputed. The extent to which portions of the
Center were damaged by faulty subcontractor work is disputed. The extent to which
undamaged portions of the Center had to be removed and replaced so that repairs of
property damaged by subcontractors could be made is disputed (as distinguished from
removal and replacement to repair damages caused by Gaston). The extent to which
particular items of property damage to the Center occurred while the Policy was in effect
is disputed.
The following passage from Clear’s briefing is Illustrative of the tangled nature of
the facts relating to the damage to and repair of the Center:
The costs of removing and replacing water damaged plywood sheathing
and insulation is not specifically identified [in the repair contractor’s bid].
Rather, it is included in a lump sum $422,637 damage item. Affidavit of
Calvin Myrick. There was nothing “defective” about the shingles. Similarly
not all of the plywood sheathing was wet and moldy only some of it was.
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Nevertheless, the only way to know for sure what was or was not
damaged was to investigate by removing the entire roof.20
In a more general way, the complexity of the factual situation is reflected in the positions
taken by the parties. For its part, American has paid for some of the repairs because it
acknowledges there is coverage, has paid for some other repairs because the coverage
question is close, and has refused to pay for other repairs on the grounds that there is
no coverage or an exclusion applies. For its part, Clear acknowledges that not all of the
money paid in the settlement between Gaston and the owner relates to repair work
which falls within the coverage and outside all pertinent exclusions, but takes the
position that much more falls within the coverage and outside the pertinent exclusions
than has been acknowledged by American.
Relying on Washington law,21 Clear contends that American cannot segregate
damages arising from covered events from those arising from non-covered events when
both stem from the same factual core and the damages cannot be allocated. Assuming
that is the law in Alaska, the record is inadequate to permit the court to rule as a matter
of law exactly how much of the damages for which Clear is entitled to recompense
arose from the same core of facts as those for which it is not entitled to be paid. Neither
can the court rule as a matter of law that such damages cannot be allocated. These are
matters which must be reserved for the trier-of-fact.
C. Legal Issues
Coverage
Only those portions of the settlement between Gaston and the Owner which
pertain to property damage caused by an occurrence fall within the CGL coverage. It is
appropriate to consider the coverage dispute in light of the Alaska Supreme Court’s
decision in Fejes v. Alaska Ins. Co., Inc.22 That case involved interpretation of CGL

20

Doc. 47 at p. 9.

21

Clear cites Public Untility District No. 1 v. Int’l Ins. Co., 881 P.2d 1020, 1033
(Washington 1994).
22

984 P. 2d 519 (Alaska 1999).

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coverage under an insurance policy sufficiently similar to the CGL coverage under
examination here to make the Fejes court’s analysis highly instructive. Although
American relies on cases from other jurisdictions, to the extent that the Fejes court has
provided an analytical framework for the dispute at bar, this court must agree with Clear
when it says: “Fejas controls and is well reasoned. Whether it represents the minority
view or not is irrelevant. It is the law in Alaska.”23 There, a building contractor (“Fejes”)
was sued by a homeowner when a curtain drain–a device constructed to protect the
home’s septic system leach field from ground water penetration–failed causing such
severe damage to the septic system that it had to be replaced with a large holding tank.
The curtain drain had been constructed by a sub-contractor and the septic system by
the contractor.
Fejes tendered defense of the homeowner’s suit to his insurer pursuant to the
CGL coverage. The insurer rejected the tender. The homeowner prevailed in the suit
against the contractor. Fejes then sued his insurance company. The trial court ruled in
favor of the insurer finding that there was neither an occurrence nor property damage
within the meaning of the CGL coverage. The Alaska Supreme Court reversed. The
appellate court explained that the defective work of the subcontractor was an
occurrence, because the damage it caused to the leach field was properly construed as
an accident. In holding that the destruction of the leach field was property damage
within the meaning of the insurance policy, the Alaska court firmly rejected the insurer’s
arguments that loss of the septic system represented “loss-of-bargain” damages and
that CGL coverage is limited to coverage for “tort liability for physical damages to others
and not for contractual liability of the insured for economic loss because the product or
completed work is not that for which the damaged person bargained.”24
This court reads Fejes to establish that CGL coverage of the type American
provided here extends to property damage resulting from a subcontractor’s defective
23

Doc. 47 at p. 20. Whether Fejes is as well-reasoned as the cases from other states
relied upon by American may be an interesting topic of discussion, but it is not a discussion
which may properly engage this court whose obligation is to apply the Alaska law.
24

Id. at 984 P. 2d 524.

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work whether or not the property damaged constitutes work the general contractor
performed. This court has no trouble extending the reach of Fejes to say that defective
work by the general contractor which damages other property falls within the CGL
coverage, because the same analysis by which the Alaska court concluded that the
subcontractor’s work was an accident supports the conclusion that the general
contractor’s own defective work damaging other property was an accident. Under
Alaska law and the terms of the Policy, there is CGL coverage for all property damage
to the Center arising from Gaston’s defective work and its subcontractors’ defective
work. Furthermore, because making repairs to this covered property damage
necessarily includes the costs involved in removing and replacing other materials to
gain access to the damaged property, such costs would seem to fall within the CGL
coverage when the customary cannons of insurance policy interpretation are applied.
That they do fall within the coverage is clear from the Policy language itself. Exclusion
[discussed below] would not read the way it does were the costs of dealing with
uninjured property not within the CGL coverage. That said, it is necessary to consider
the exclusions contained in the Policy.
Exclusions
In Fejes the insurance policy contained an exclusion (A)(2)(d) which eliminated
coverage for damage to “that particular part of any property . . . (ii) out of which any
property damage arises, or (iii) the restoration, repair or replacement of which has been
made or is necessary by reason of faulty workmanship thereon by or on behalf of the
insured.”25 The insurance company attempted to use the exclusion to avoid paying for
the tank which replaced the destroyed septic system on the basis that the tank was, in
effect, a repair of the septic system. The Alaska court expressly rejected that argument
in favor of Fejes’ assertion that the curtain wall was the faulty work involved, and the
home owner had not made a claim for the curtain wall. The Alaska court said:
We reject [the insurer’s] argument as an overly broad interpretation of the
exclusion. Fejes’s interpretation is reasonable; the exclusion would
exclude claims for the cost of repairing or replacing the curtain drain, but
25

Id.

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not the cost of the alternative waste disposal system made necessary by
the failure of the curtain drain.26
The Alaska Supreme Court has established Alaska law with respect to the interpretation
of such insurance policy provisions. Comparison of exclusions j (5) and (6) in the Policy
show that they are the equivalent of exclusions (d) (ii) and (iii) in the policy at issue in
Fejes. That being so, this court reads the Fejes decision to instruct that the Policy’s
exclusions j (5) and (6) should be read together to exclude any damages which
represent the cost of repairing or replacing any property constituting defective work
done by Gaston or its subcontractors, but not to exclude coverage for repairing or
replacing any damaged property which is not itself defective work.
The basic CGL policy form in Fejes contained an exclusion (o) for “property
damage to work performed by or on behalf of the named insured arising out of the work
or any portion thereof or out of materials parts or equipment furnished in connection
therewith.”27 That exclusion was narrowed by a policy endorsement which replaced it
with a series of other exclusions. The exclusion pertinent to the present discussion
was exclusion (A)(3) in Fejes’ policy which was the same as exclusion (o) in the policy
form with one critical difference. Exclusion (A)(3) omitted language excluding work
which was performed on behalf of the named insured, in other words, work performed
by a subcontractor. This distinction led the Alaska court to write: “Exclusion (A)(3)
removes coverage as to property damage or work performed by the named insured, but
not by someone on behalf of the named insured.”28 In exclusion l, the Policy contains
the equivalent of Fejes’ exclusion (A)(3). Thus, coverage for damaged property created
by Gaston and damaged by Gaston’s own defective work is eliminated, but damage to
the Center arising out of the subcontractors’ defective work is not. In reaching this
conclusion, the court has considered American’s argument based upon provisions in
Gaston’s contract with the Owner effectively making Gaston responsible to the owner
26

Id. (emphasis added).

27

Id.

28

Id. at 985 P.2d 525.

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for the work done by its subcontractors. However, exclusion l as written does not apply
to “work performed on your behalf by a subcontractor.” The contract between Gaston
and the Owner does not change the insurance contract between Gaston and American.
In summary, then, the combined effect of exclusions j (5) and (6), and exclusion l
is to foreclose claims by Clear against American arising from property damaged by
Gaston’s own work regardless of whether the damaged property is part of Gaston’s
defective work. The exclusions do not foreclose Clear’s claims arising from damage to
property caused by the work of subcontractors. There remains the question of whether
claims may be pursued for the cost of repair and replacement of undamaged property
arising from the need to make repairs to property damaged by subcontractors.
That question must be considered in light of an exclusion in the Policy which is of
a type not specifically discussed in Fejes. It is exclusion m. By its terms, exclusion m
would eliminate coverage for property that was not “physically injured” by either Gaston
or its subcontractors. Thus, exclusion m would eliminate coverage for the cost of
removing and replacing property that was itself not physically injured in order to repair
property that was physically injured. Exclusion m itself contains an exception from its
operation. Specifically, loss of use of property that results from a sudden or accidental
physical injury to work done by Gaston or its subcontractors is not excluded from
coverage.
One way to read the exception is to say that it means exclusion m will apply in all
cases excepting only those in which Gaston and the bonding company paid an Owner’s
claim for loss of use of the Center caused by a sudden or accidental physical injury.
The exception may be read more broadly. If property which is not physically injured has
to be removed to repair damaged property, then the Owner has lost the use of the
uninjured property. To get that use back, the originally uninjured property must be
replaced. Read that way, and harmonized with the other policy provisions already
discussed, exclusion m would not eliminate coverage for the cost of removing and
replacing uninjured property in order to remedy damage that is within the coverage
provided by the Policy.

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Finding the exception to exclusion m ambiguous and applying the customary and
familiar rules of insurance policy interpretation,29 this court concludes that the exception
to exclusion m must be interpreted broadly–which has the effect of interpreting
exclusion m itself narrowly–so that exclusion m does not exclude the cost of removing
and replacing undamaged materials to the extent that such was necessary to remedy
property damage caused by Gaston’s subcontractors.
One last matter must be considered in connection with exclusion m. Removing
uninjured property was necessary to repair both covered property damage and to repair
defective work whose repair is not covered by the Policy. Clear contends that where
the removal and eventual replacement is necessary in order to deal with both covered
and non-covered damages, then the Policy must be construed to cover all of the
removal and replacement costs. To support this position, Clear points to the
Commercial Property Coverage (“PC”) which was also included in the Policy. The PC
coverage includes an exclusion for loss or damages resulting from specified causes or
events and further recites that as to the excluded causes or events: “Such loss or
damage is excluded regardless of any other cause or event that contributes
concurrently or in any sequence to the loss.”30
The short response to this argument would ordinarily be that it is a new argument
raised for the first time in a reply and so will not be considered. However, the topic was
discussed at oral argument, and American raised no objection to it consideration. On
the merits, the court finds the argument unpersuasive. The problem with the argument
is that the terms, conditions, types of risk, extent of coverage, nature of exclusions, and
price of insurance varies greatly from one coverage type to another. The court would
be walking on a slippery slope indeed were it to begin interpreting one type of coverage
based on the contours of some other type of coverage. This court declines to create
CGL coverage based on the omission of an exclusion contained in PC coverage.

29

The basic rules are set out in many Alaska Supreme Court decisions. See, e.g., Fejes
at 984 P.2d 522.
30

Exhibit 34 to Clear’s reply memo at docket 84.

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Based on Fejes, the customary cannons for interpreting insurance policies, and
the language of the Policy itself, this court concludes that Clear is entitled to recover
that portion of the settlement with the Owner which consists of the reasonable costs to
repair property damage caused by the defective work of Gaston’s subcontractors,
including the cost of removing and replacing property that was not injured when that
removal and replacement was necessary in order to fix the damage caused by a
subcontractor’s work.
Parties’ Specific Questions
The court turns first to the specific questions identified by American.31 They are
paraphrased here. [1] Must American indemnify Clear for property damage based on
defective workmanship? The answer is yes, but only to the extent the property damage
was caused by the defective workmanship of a subcontractor. [2] Must American
indemnify Clear for damages to non-defective work which had to be removed and
replaced to repair defective work? The answer is that American must indemnify Clear
for removal and replacement of non-injured property to the extent the removal was
necessary to repair property damage caused by a subcontractor. [3] Must American
indemnify Clear for damages which were caused by Gaston’s own work? The answer is
no. [4] Must American indemnify Clear for defective work subcontractors performed?
The answer is no unless that work was damaged by a different subcontractor’s
defective work. [5] Must American indemnify Clear for property damage caused by the
defective workmanship of subcontractor Four Winds? The answer is yes.
Next, the court turns to the specific questions posed by Clear.32 They are
paraphrased here. [1] Did the Owner’s claim against Gaston (“the Claim”) arise out of
an “occurrence” as that term is used in the Policy? The answer is that some of it did.
(2) Did the Claim arise from “property damage” as that term is used in the Policy? The
answer is that part of it did. [3] Did the Claim arise from property damage which
31

The questions are set out in American’s briefing at doc. 33 p. 12 and were more fully
described in Section II of this order.
32

The questions are set out in Clear’s briefing at doc. 46 p. 12 and were more fully
described in Section II of this order.

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occurred during the time the Policy was in effect? The answer for purposes of this
motion is that at least some of it did. American having asked the court to rule as a
matter of law that there were no such damages, the court must draw all reasonable
inferences on this question in favor of Clear. The record supports an inference that
property damage for which there is coverage occurred during the policy period.33 [4] Do
exclusions j (5) and (6) apply? The answer is yes, but only to the following extent: they
exclude coverage for the cost of repairing or replacing defective work done by Gaston
or its subcontractors. [5] Does exclusion l apply? The answer is that it applies to
Gaston’s own work which was damaged by Gaston’s defective work, but it does not
apply to any property damage caused by a subcontractor. [6] Did the settlement
between Gaston and the Owner involve payments which Gaston became obligated to
pay because of property damage covered by the Policy? The answer is that some of
the payments Gaston was obligated to make arose from property damage covered by
the Policy, and some of the payments did not.

V. CONCLUSION AND SUGGESTION
The motions at dockets 32 and 46 are each GRANTED in part and DENIED in
part consistent with the preceding discussion.
The court writes further to emphasize something the parties and their lawyers
surely must realize. This is a dispute that calls out for a compromise resolution. What
is at stake is money, not principle. The costs involved in pursuing this case through trial
will reduce the value of any likely favorable outcome to a point where the inherent risk of
a much less favorable outcome means the game is not worth the candle.

/s/ JOHN W. SEDWICK
UNITED STATES DISTRICT JUDGE

33

See Clear’s discussion of this topic at page 4 of its brief at doc. 47.

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