United States: KAADY V. Mid-Continent Casualty Company

(Question of Fact Precludes Application of Known Loss Provision in CGL Policy to Bar Coverage of Construction Defect Claim)

In Kaady v. Mid-Continent Cas. Co., 790 F.3d 995 (June 25, 2015), the United States Court of Appeals for the Ninth Circuit, applying Oregon law, reversed the district court's entry of summary judgment in favor of Mid-Continent Casualty Company ("Mid-Continent") in connection with application of the known loss requirement in the insuring agreement of a CGL policy issued to a subcontractor with respect to an underlying claim for defective construction of stonework affixed to multi-unit residential structures. The insured, Kaady, was a professional mason who installed manufactured stone at the Collins Lake Resort, a multi-unit residential project. Kaady affixed manufactured stone to the wall sheathing of certain buildings, wrapped deck posts with manufactured stone and installed masonry caps on the top of the stone that was wrapped around the deck posts. Construction was completed in May 2006. Subsequently, in September 2006, Kaady was called back to the project to inspect cracks in the manufactured stone and masonry caps he installed. Thereafter, in December 2006, almost 3 months after he had inspected the cracks in his stone work, Kaady bought a one (1) year commercial general liability policy from Mid-Continent.

Thereafter, the Collins Lake Homeowners' Association ("HOA") sued the developer of the project, who in turn, sued the general contractor, who in turn, sued all of the relevant subcontractors who performed work on the project, including Kaady. The HOA's action alleged defective construction of the project. Kaady settled the claims brought against him for damage caused to other parts of the structure due to his defective installation of the stone work. Essentially, the general contractor alleged that deterioration of the deck posts and wall sheathing behind the manufactured stone had sustained damage due to Kaady's defective work. The deck posts and wall sheathing were installed by other subcontractors.

Mid-Continent denied coverage of Kaady's claim for reimbursement based on the argument that the damage sustained by the structures was known by Kaady prior to the inception of the Mid-Continent policy. Mid-Continent relied on the policy's known-loss provision, which states that the policy "applies to . . . 'property damage' only if . . . no insured . . . knew that . . . 'property damage' had occurred, in whole or in part."

Kaady admitted that he was aware of cracks in his work, however, he also stated that he did not know about any damage sustained by the deck posts and underlying wall sheathing. In response, Mid-Continent argued that the cracked stone and underlying damaged posts and sheathing all constituted the same property damage such that Kaady's knowledge of cracks in the stone also applied to the damage sustained by other property and, therefore, the known loss provision in the insuring agreement for the policy barred coverage of Kaady's claim.

The district court agreed with Mid-Continent's arguments and entered summary judgment in its favor.

In reversing the district court's entry of summary judgment, the Court of Appeals stated as follows:

But the question of whether Kaady's knowledge of the cracks automatically precludes coverage of damage to the structural components depends on the level of generality at which "tangible property" and "physical injury" are defined. Is the "property" we must examine the structure as a whole or only the components — the deck posts and wall sheathing — that Kaady claims coverage for? And does prior knowledge of one type of physical injury to property automatically preclude coverage of all types of physical injury to the property? Because the policy doesn't define "tangible property" or "physical injury," we must examine the policy as a whole to determine how the "ordinary purchaser of [commercial general liability] insurance" would understand these terms.

First, we are unpersuaded by Mid-Continent's argument that we should not treat components the insured provided and components provided by others as separate "property." In the construction context, a commercial general liability insurance policy necessarily distinguishes between the components the insured provided and components furnished by others. That's because the policy is designed to cover damage to property that is installed by others, but exclude damage to property the insured provided.

Once the insured's work is complete, the policy covers damage to property provided by others, including property that the insured's work was "performed on," but it doesn't cover damage to the insured's own product or work. Mid-Continent doesn't argue on appeal that the claimed damage was to property that Kaady provided (nor could it).

Mid-Continent has offered no reason to treat the insured's work and the work of others as different property in every provision of the policy except the known-loss provision. Thus, we conclude that the known-loss provision also distinguishes between them. The insured's knowledge of damage to his own work doesn't automatically constitute knowledge of damage to the components of the structure furnished by others.

The Court of Appeals also found that the known loss provision in the Mid-Continent policy did not bar coverage because the type of damage sustained by the structure was different than the cracks in the stonework. The Court of Appeals held as follows:

Mid-Continent's position faces a second difficulty: Even if the masonry and underlying structural components were considered the same "property," the claimed damage (deterioration of the deck posts and wall sheathing) is a different type of damage than the known damage (cracks in the masonry). Mid-Continent suggests that the insured's prior knowledge of any damage to property bars coverage for any other damage to that property, regardless of its type. But the known-loss provision bars coverage of "property damage" if the insured "knew that the . . . 'property damage' had occurred, in whole or in part." (Emphasis added.) Use of the definite article "particularizes the subject which it precedes" and indicates that the claimed damage must be the same as the known damage. See Gale v. First Franklin Loan Servs., 701 F.3d 1240, 1246 (9th Cir. 2012) (internal quotation marks omitted). Such an interpretation makes sense considering that a commercial general liability insurance policy covers(as its name implies) many different types of hazards that have no relationship to one another. Thus, an insured's knowledge of one type of damage to property doesn't automatically constitute knowledge of any and all damage to the property; the claimed damage must be related to the known damage.

Mid-Continent's proffered interpretation would eviscerate the known-loss provision's "continuing property damage" language. The provision states that if the insured "knew, prior to the policy period, that the . . . 'property damage' occurred, then any continuation, change or resumption of such . . . 'property damage' during or after the policy period will be deemed to have been known prior to the policy period." (Emphasis added.) But if the insured's knowledge of any damage to any part of the structure automatically barred coverage of all damage to that structure, it wouldn't matter whether the claimed damage was a "continuation, change or resumption" of the known damage. The problem is avoided if the known-loss provision is interpreted as barring coverage only if the claimed damage is a "continuation, change or resumption" of the known damage. This interpretation permits coverage of damage unrelated to the damage known before acquisition of the policy, but prevents insurance of a loss in progress.

Because the known loss provision did not involve damage to the same property or the same type of damage, the Court of Appeals concluded as follows:

Applying our interpretation of the policy to Kaady's claim, we conclude that Kaady's knowledge of the cracks in the masonry before he bought the policy doesn't constitute knowledge of the claimed "property damage" to the structural components. Not only are the wooden deck posts and wall sheathing different "property" than the manufactured stone and masonry caps, the claimed damage is of a different type. We don't think that the ordinary purchaser of the policy would interpret the known-loss provision as broadly as Mid-Continent advocates. Rather, the correct inquiry is whether the claimed damage to the structural components was a "continuation, change or resumption" of the cracks. If it was, Kaady's knowledge of the cracks would bar coverage of the claimed damage; if not, his knowledge of the cracks wouldn't bar coverage.

Lastly, the Court of Appeals rejected Mid-Continent's argument that the damage for which Kaady seeks coverage was in fact a "continuation, change or resumption" of the earlier cracks. Essentially, Mid-Continent argued that the damage sustained by the deck posts and wall sheathing flowed from the cracks due to ongoing water intrusion. In response, Kaady disputed Mid-Continent's argument that the damage to the deck posts and sheathing was due to water intrusion through the cracks in the stonework. Rather, he suggested that the damage sustained by the other property was caused by another source. The Court of Appeals agreed and held that there was a question of fact as to whether the damage sustained by the posts and sheathing flowed from the same cause, i.e., water intrusion through the cracks of Kaady's work.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.