Lexstar Construction, LLC v. AGCS Marine Insurance Company

Filing 30

ORDER by Magistrate Judge Charles S. Miller, Jr. granting 19 Motion for Summary Judgment. (BG)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NORTH DAKOTA
Lexstar Construction, LLC,
Plaintiff,
vs.
AGCS Marine Insurance Company, a
foreign insurance company,
Defendant.

I.

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ORDER GRANTING MOTION
FOR SUMMARY JUDGMENT

Case No. 1:16-cv-423

BACKGROUND
A.

The Dispute

This case involves a dispute over insurance coverage for damage to an office building
located at 43rd Avenue and Normandy Street in Bismarck, North Dakota. The damage occurred
while plaintiff Lexstar Corporation, LLC (“Lexstar”) was constructing the building. While the
building was under construction, Lexstar had in place an inland marine insurance policy (“Policy”)
issued by defendant AGCS Marine Insurance Company (“Allianz”) that provided builder’s risk
coverage.
The building is built into a hill with the ground sloping from north to south. Originally, the
entire building was going to be four complete stories with the first floor extending into the side of
the hill on the north side. At site, there was a couple feet of topsoil overlying a layer of glacial till
below which was a claystone formation. The firm that did the geotechnical work on the project
concluded that the layer of glacial till would not support the load of the foundations but that the
underlying claystone formation was suitable. Because the original design called for the first floor
to extend into the hill, the excavation for the foundation below most of the first floor would reach
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the claystone formation. The exception was in the area of the southeast portion of the building.
There, the geotechnical firm recommended the glacial till be removed and replaced with engineered
fill and compacted.
Later the design of the building changed so that the first floor would not extend into the hill
for the whole footprint of the building. The net result was that the foundations supporting the
building where there was no first floor were going to placed at a higher elevation that did not reach
the claystone. The geotechnical firm that provided the original recommendations states it was
consulted by Lexstar about the change in design and that it recommended to Lexstar that, for the
foundations that originally were going to rest on the claystone, the glacial till be replaced to a
recommended depth with engineered fill and compacted.
While the building was under construction, one of Lexstar’s subcontractors reported
deflection in certain structural steel members. An investigation revealed that at least five of nine
column pad footings on the north side below the second floor experienced downward movement
during construction, which, in turn, caused the partially-erected building to shift, resulting in damage
to its superstructure. The investigation further revealed that six of the nine column pad footings had
been placed directly on the glacial till and underlying three others was some loose fill that appeared
not to have been compacted. Further, all of the footings were undersized and at least one was not
in its proper location.
Before construction could proceed further, the situation needed to repaired. According to
Lexstar, the total costs for the repair (which included new foundation installations and lifting the
building to the proper elevation) and for the delay in completion of the building was close to a
million dollars.

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Lexstar made a demand upon Allianz for coverage. After an investigation, Allianz denied
coverage, contending that any possible cause of the claimed damages was excluded under the Policy
by an exclusion for earth movement (“Earth Movement Exclusion”) as well as an exclusion for
faulty or defective design and workmanship. Allianz also claimed that Lexstar failed to abide by
certain Policy provisions that Allianz contends are a condition precedent to payment under the
Policy, i.e., the failure to give timely notice of the loss and failure to submit an appropriate sworn
proof of loss.
While there were several issues with the construction, e.g., the column pad footings being
placed on soil that was not capable of supporting the load, undersized footings, and at least one
footing not located in its proper location, Lexstar takes the position that the overriding problem was
the column pad footings not being located on suitable soil. Hence, this will be assumed to be true
for purposes of Allianz’s motion for summary judgment that is now before the court.
Further, Lexstar agrees with Allianz that there are no material facts in dispute in terms of
application of the two policy exclusions invoked by Allianz. In its brief in opposition to Allianz’s
motion, Lexstar states in relevant part:
There really isn’t much disagreement about what happened to this building and its
superstructure during construction. Marc Shannon, Lexstar’s expert, describes a shear failure
in the underlying native soils on which the support column pads had been placed. (Shannon
Expert Report dated January 23, 2018.) Notably, Shannon describes a “load induced
movement” of the soils under the foundation, as opposed to some type of natural “earth
movement,” as the proximate cause of the damage to the foundation and superstructure.
(Shannon Affidavit, Exhibit B, pp.1-2). He specifically notes “The damage was not caused
by soil settlement, but was caused by a load induced movement due to a shear failure in the
foundation soils.” Id. at p.2. In short, the weight of the building structure placed on top of
native soil caused the earth to shear (and therefore move). This was NOT a situation where
there was first some underground shifting or movement of the earth, such as due to
underground water or some other earth-induced movement, which caused damage to the
building’s superstructure; instead it was weight pushing on the ground that caused the earth
to “move.” It wasn’t a natural changing of the soil conditions, but an externally placed force
(weight) pressing on the soil which caused the steel superstructure to deflect.

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****
Notably, no fill was discovered underneath six of the nine footings. As described by
AGCS’s expert Behrens in his report of March 6, 2014;
The logs indicated that six of the nine footings (E3.9, D2, C2, A2.1, B2.9,
and B4.1) were placed directly on the native glacial till. The remaining
three (E5.8, E2.6, and B6.2) were placed on a layer of loose fill above the
glacial till.” (Waldeck Affidavit, Exhibit M, Doc. No. 21-13, p.7.)
Braun Intertec, a completely neutral engineering firm that was involved in the
construction project both before and after the damages were discovered, also concluded that
the cause of the structural deflection was a “combination of consolidation and localized shear
failures within the glacial till because of stress overload … .” (Waldeck Affidavit, Exhibit
E at p.4, ¶2., Doc. No. 21-5, p.4) Of significance is that Braun’s conclusion is also that both
consolidation and shear failures are due to the weight, ie. “load induced.” This overload
caused, in Braun’s opinion, “racking of the building’s superstructure . . .” because of
“unintended load paths” due to the consolidation and shear failures in the soil. This racking
was “. . . negatively impacting the structure’s framing system”. Id.
So the question before the Court is whether or not losses or damages caused by shear
failure of the native (not compacted fill) soils, either separately or in combination with
consolidation of the soils, because of an artificial weight load placed on native soil, which
causes damage to the structure of the building placed on top of the soils, is or is not within
the language of the exclusions in the Builders Risk Policy. Lexstar’s position is, at the very
least, that the shear failure and consolidation in the underlying native soil was caused by an
external force (i.e., the weight of the building), which caused damage to the building’s
superstructure, and that such losses are not within the language of the Builders Risk policy
exclusions cited by Defendant, and therefore there is coverage.

(Doc. No. 26, pp. 8-9).
B.

The Allianz Policy
1.

Coverage and exclusions under the Policy’s builder’s risk form

The relevant provisions of the Policy’s standard builder’s risk form that extend and exclude
coverage are the following:
A.

Coverage
1.

Covered Property
a.

Covered Property means:
Property used in or incidental to construction or installation at
Construction Site(s) described and identified in the Declarations
which are a part of this policy.

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****
3.

Covered Causes of Loss
Covered Causes of Loss means Risks of Direct Physical Loss or Damage
to Covered Property from any external cause except those causes of loss
listed in the Exclusions.

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B.

Exclusions
1.

We will not pay for loss or damage caused directly or indirectly by any of
the following. Such loss or damage is excluded regardless of any other
cause or event that contributes concurrently or in any sequence to the loss
or damage.
****
b.

Earth Movement
(1)

Earthquake, including any earth sinking, rising or shifting
related to such event;

(2)

Landslide, including any earth sinking, rising or shifting
related to such event;

(3)

Mine subsidence, meaning subsidence of a man-made
mine, whether or not mining activity has ceased;

(4)

Earth sinking (other than sinkhole collapse), rising or
shifting including soil conditions which cause settling,
cracking or other disarrangement of foundations or other
parts of realty. Soil conditions include contraction,
expansion, freezing, thawing, erosion, improperly
compacted soil and the action of water under the ground
surface.

But if Earth Movement, as described in b.(1) through (4) above,
results in fire, explosion or theft we will pay for the loss or damage
caused by that fire or explosion. We will also pay for losses to
Covered Property from the preceding perils while being
transported.
****
Exclusions B.1.a. through B.1.h. apply whether or not the loss event results
in widespread damage or affects a substantial area.
2.

We will not pay for loss or damage caused by or resulting from any of the

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following:
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j.

All costs and expenses incurred in the reengineering, redesign or
reworking of any faulty or defective workmanship, materials or
design of property we cover. We will pay for physical damage to
other covered property resulting from such faulty or defective
workmanship, material or design if discovered as a result of, or
aggravated by, a peril or occurrence not otherwise excluded in this
policy.

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3.

We will not pay for loss or damage caused by or resulting from any of the
following. But if loss or damage to Covered Property by a Covered Cause
of Loss results, we will pay for the loss or damage to Covered Property
caused by that Covered Cause of Loss.
****
c.

Faulty, inadequate or defective:
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(2) Design, specifications, workmanship, repair, construction,
renovation, remodeling, grading, compaction; of part or all of any
property wherever located.
****

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2.

The “Builder’s Risk Plus Endorsement”

In addition to the standard builder’s risk form, the Policy also included a "Builder's Risk
Plus Endorsement” pursuant to which Lexstar had the option to cover some of the causes of loss
excluded under the standard builder’s risk form by paying an additional premium. While Lexstar
elected to purchase coverage for some of the excluded causes under the standard form (i.e.,
coverages for “Water,” “Earthquake,” and “Testing/Mechanical Breakdown”), it did not purchase
additional coverage for “Earth Movement.”

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II.

DISCUSSION
A.

Governing Law
1.

Motions for summary judgment

The law governing summary judgment is well known to the court and need not be repeated
here. E.g., Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Lonesome Dove Petroleum,
Inc. v. Holt, 889 F.3d 510, 514 (8th Cir. 2018).
2.

North Dakota law governing interpretation of insurance contracts

In Forsman v. Blues, Brews and Bar-B-Ques, Inc., the North Dakota Supreme Court
summarized North Dakota law governing the interpretation of insurance contracts:
[¶10] Insurance policy interpretation is a question of law, which is fully reviewable on
appeal. K & L Homes, 2013 ND 57, ¶ 8, 829 N.W.2d 724. This Court independently
examines and construes the insurance contract to decide whether coverage exists. Id.; see
also Grinnell Mut. Rein. v. Thies, 2008 ND 164, ¶ 7, 755 N.W.2d 852. As with other
contracts, this Court construes insurance policy language to give effect to the parties’ mutual
intention at the time of contracting:
“We look first to the language of the insurance contract, and if the policy language
is clear on its face, there is no room for construction. If coverage hinges on an
undefined term, we apply the plain, ordinary meaning of the term in interpreting the
contract. While we regard insurance policies as adhesion contracts and resolve
ambiguities in favor of the insured, we will not rewrite a contract to impose liability
on an insurer if the policy unambiguously precludes coverage. We will not strain the
definition of an undefined term to provide coverage for the insured. We construe
insurance contracts as a whole to give meaning and effect to each clause, if possible.
The whole of a contract is to be taken together to give effect to every part, and each
clause is to help interpret the others.”
K & L Homes, at ¶ 8 (quoting State v. N.D. State Univ., 2005 ND 75, ¶ 12, 694 N.W.2d 225)
(emphasis omitted). “Exclusions from coverage ... must be clear and explicit and are strictly
construed against the insurer.” Schleuter v. N. Plains Ins., 2009 ND 171, ¶ 8, 772 N.W.2d
879 (quoting Nationwide Mut. Ins. Cos. v. Lagodinski, 2004 ND 147, ¶ 9, 683 N.W.2d 903).
While exclusionary clauses are strictly construed, a contract will not be rewritten to impose
liability when the policy unambiguously precludes coverage. K & L Homes, at ¶ 8;
Schleuter, at ¶ 8.
[¶11] In interpreting the insurance policy, this Court first examines the policy’s coverages
before examining its exclusions. K & L Homes, 2013 ND 57, ¶ 9, 829 N.W.2d 724. “If and
only if a coverage provision applies to the harm at issue will the court then examine the

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policy’s exclusions and limitations of coverage.” Wisness v. Nodak Mut. Ins. Co., 2011 ND
197, ¶ 16, 806 N.W.2d 146 (quoting 1 Robert D. Goodman, John C. Dockery & Matthew
S. Hackell, New Appleman Law of Liab. Ins. § 1.04[1] (2d ed. 2011) (citations omitted).
“An exclusionary provision, or the absence of one, cannot be read to provide coverage that
does not otherwise exist.” Id. Similarly, while an exception to an exclusion results in
coverage, “an exception to an exclusion is incapable of initially providing coverage; rather,
an exception may become applicable if, and only if, there is an initial grant of coverage
under the policy and the relevant exclusion containing the exception operates to preclude
coverage.” K & L Homes, at ¶ 9 (citations omitted).
[¶12] “It is axiomatic that the burden of proof rests upon the party claiming coverage under
an insurance policy.” Grzadzielewski v. Walsh Cty. Mut. Ins. Co., 297 N.W.2d 780, 784
(N.D. 1980) (quoting Boedigheimer v. Taylor, 287 Minn. 323, 178 N.W.2d 610, 614
(1970)); “While the insured bears the initial burden of demonstrating coverage, the insurer
carries the burden of establishing the applicability of exclusions.” Travelers Indem. Co. v.
Bloomington Steel & Supply Co., 718 N.W.2d 888, 894 (Minn. 2006).

2017 ND 266, ¶¶ 10–12, 903 N.W.2d 524.
B.

Coverage is precluded by the Earth Movement exclusion

Based upon the undisputed facts and plain meaning of the Policy, the court concludes the
following:
C

The Policy provides coverage for damage to the building under construction that
results from an “external cause,” except those causes that are excluded by the Policy.
Settlement of the earth is an excluded cause of damage under the Earth Movement
Exclusion set forth in paragraph B.1.(4).

C

In this case, the earth shifted (here because the soil was not capable of supporting the
load placed on the column pad footings in question) and this shifting of the earth
resulted in foundation failure and, with a settling of a portion of the building, damage
to the building’s superstructure.

C

None of the damages suffered by Lexstar are compensable given the breadth of
exclusions that fall withing paragraph B.1, including the Earth Movement exclusion.
This is because paragraph B.1 states there is no coverage for loss or damages “caused
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directly or indirectly” by causes excluded under that paragraph, “regardless of any other
cause or event that contributes concurrently or in any sequence to the loss or damage.”

In reaching these conclusions, the court rejects Lexstar’s arguments to the contrary. One of
Lexstar’s arguments is that the Earth Movement Exclusion does not apply because the initiating
force causing the soil to shift was the weight of the building and not the soil subsiding from a cause
independent of the work. There is nothing in the Earth Movement Exclusion, however, which states
that the soil must move independently of the work to be excluded. Rather, as discussed in more
detail in a moment, it is clear from the breadth of the language of the Earth Movement Exclusion that
any earth movement, no matter how initiated, is an excluded cause. This includes the Exclusion’s
reference to “improperly compacted soil.” Obviously, one of the principal reasons why soil is
compacted is so that it can bear weight of the work. Further, as already observed, the exclusion
applies even if there is some other cause or event that contributes concurrently or in sequence with
it.1
Another argument offered by Lexstar is that the Earth Movement Exclusion applies only to
earth movement that is naturally caused with “improperly compacted soil” being the only exception.
Lexstar then goes on to argue that improperly compacted soil was not a cause in this instance because
most of the foundational pads that failed were placed on native glacial till that was not compacted
(hence, according to Lexstar, there was no improper compaction) and the others were placed on fill
that was described by one or more experts as being “loose” and this is not the equivalent of improper
compaction.

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Even if the court accepted Lexstar’s argument that the weight of the building, and not earth movement as
defined by the Earth Movement exclusion, is the cause of the damages being claimed, this likely does not get Lexstar
anyplace. Under the Policy, there is only coverage for “external causes” and it is doubtful that the weight of the building
is such a cause.

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The problem with these arguments is that the Earth Movement Exclusion does not state that
it is limited to earth movement that is naturally caused except for improper compaction. Rather, part
of what is excluded under B.1.(4) is any sinking, rising, or shifting of the earth “including soil
conditions which cause settling, cracking, or other disarrangement of foundations other parts of
realty.” The sentence that follows makes clear these soil conditions include several specifically listed
conditions, one of which is “improperly compacted soil, but does not limit the generality of what is
excluded in the prior sentences.
In other words, given the generality of the language of the Earth Movement Exclusion, any
movement or shifting of the earth is an excluded cause not matter what precipitates it and Lexstar’s
parsing of the meaning of “improperly compacted soil” is beside the point. But, even putting that
aside, Lexstar’s contention that “loose” fill material is not the equivalent of improper compaction
is facially without merit. Further, a straightforward reading of “improperly compacted soil” in the
context in which it is used would include any soil that does not have sufficient compaction to carry
the necessary load regardless of the reason. But, to be clear, this does not make difference since any
shifting of the earth that causes damages is excluded.
Finally, Lexstar argues that, even if the exclusion applies, it is limited to damage to the
foundation and not the superstructure, pointing to the references in paragraph B.1.(4) to “foundations”
and “realty.” However, the sentence in which these words appear does nothing more than further
describe the kinds of earth movement that are covered by the Earth Movement Exclusion. It does not
purport to limit the scope of the Exclusion to foundations or what Lexstar deems only to be included
within the term “realty.”
In summary, earth movement was a cause of the damage to the covered property’s
foundations and superstructure. Coverage for earth movement was excluded under the Policy’s

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standard builder’s risk form and Lexstar did not buy back coverage for this excluded cause in the
Policy’s Builder's Risk Plus Endorsement.
C.

Allianz’s other arguments

Allianz argues that the exclusion for defective workmanship in paragraph B.2.j also applies.
While that appears to be the case (as well as it likely being an independent basis for summary
judgment given the absence of any non-excluded “external” cause providing coverage), the court
need not decide this point now given its conclusion that the Earth Movement Exclusion forecloses
coverage for all of the damages being claimed.
Allianz also argues that coverage is foreclosed by Lexstar’s failure to give prompt notice and
submit an appropriate proof of loss. The court likewise does not need to reach these issues given its
conclusion that the Earth Movement Exclusion applies. However, there may be issues of waiver
and/or lack of prejudice that would foreclose summary judgment on these grounds.
D.

Lexstar’s argument for coverage based on language appearing in two of the
policy exclusions

Lexstar argues that language in two of the Policy exclusions, which constitute exceptions or
limitations upon the scope of the exclusions, provides coverage. One of the provisions that Lexstar
points to is in paragraph B.2.j, which excludes costs and expenses incurred in reengineering,

redesign or reworking of faulty defective workmanship, materials, or design of property. After
excluding these costs and expenses, paragraph B.2.j goes on to state:
We will pay for physical damage to other covered property resulting from such faulty or
defective workmanship, material or design if discovered as a result of, or aggravated by, a
peril or occurrence not otherwise excluded in this policy.

The other provision that Lexstar points to is at the beginning of paragraph B.3, which lists a number
of additional policy exclusions, including faulty or defective design and workmanship under

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B.3.c.(2). More specifically, the language that Lexstar points is that set forth in italics below:
3.

We will not pay for loss or damage caused by or resulting from any of the following.
But if loss or damage to Covered Property by a Covered Cause of Loss results, we
will pay for the loss or damage to Covered Property caused by that Covered Cause
of Loss.

As noted above, the North Dakota Supreme Court has held that, while language in an
exclusion amounting to an exception can result in coverage, it cannot provide coverage where none
otherwise exists. And here, the court has concluded that the Earth Movement Exclusion precludes
coverage even if the weight of the building was an external cause, which is a dubious proposition.
III.

ORDER
Based on the foregoing, Allianz’s motion for summary judgment (Doc. No. 19) is

GRANTED and Lexstar’s complaint is DISMISSED WITH PREJUDICE.
IT IS ORDERED.

Dated this 16th day of August, 2019.
/s/ Charles S. Miller, Jr.
Charles S. Miller, Jr., Magistrate Judge
United States District Court

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