NEBRASKA AFFIRMS RULE OF LAW:
A POLICYHOLDER’S DEFECTIVE WORK PRODUCT
IS NOT A COVERED PROPERTY LOSS UNLESS ACTUAL DAMAGE OCCURS
Okay. What in tarnation do you mean by that Anne Marie? (For my Dear East & West Coast Readers, “Tar-Nation” is a distinctly Midwestern place where idiots not only live, but thrive.)
Here is what I mean: Damages arising out of completed work performed by the insured and its subcontractors is generally not considered to be property damage unless something is actually, physically harmed, not just altered or improved. This is so, even if there is financial harm from the change to the property. Let’s break it down into digestible bites. You will understand. If residents of Tarnation can figure it out, you can too.
The recent case of of Drake-Williams Steel, Inc. v. Continental Casualty Co., et al., 294 Neb. 386, ___ N.W.@d.___(Neb. S. Ct., August 5, 2016) sets out this rule. There, steel fabricator Drake-Williams sold improperly fabricated rebar to a general contractor. The contractor built the defective rebar into the new Pinnacle Bank Arena in Lincoln, Nebraska.
Now pay attention. You should care about this part. Recent concerts at that Arena have included REO Speedwagon, Pink, Maroon 5, Lil’ Wayne, Kenny Chesney, Keith Urban, Stevie Nicks, Red Hot Chili Peppers, and need I say more? The last thing we want when standing there with beer in hand, temporary teeth grills and washable tattoos in place while rapping to Lil’ Wayne, is for a load bearing wall to come crashing down on us. Talk about a mood killer.
Fortunately, someone also took note of this potential for catastrophe. The contractor caught the defect, but it had already installed most of the rebar. It removed what it could. The contractor also modified the rest where it could not take it out. This included placing a concrete reinforcing band around certain pile caps which contained the defective rebar to increase its strength to meet the design specifications. Like you could care about this part; but reinforced pile caps on the ends of certain columns are good in concert halls. Trust me.
Drake-Williams paid for its mistakes with the rebar. It then turned in a claim for this loss to its insurers, Continental et al., for coverage. If you were sidelined in this article by fantasies of falling concrete during rock and rap concerts, here is what I just said: the manufacturer of the defective rebar submitted the loss to its own insurer. The insurers denied coverage. A lawsuit ensued.
This is what happened next. The trial court looked at the words of the CGL policy to determine whether the clear language in fact insured against the very risk involved in the loss. The trial court concluded that there was no “occurrence” as that term is defined in the policy. It also concluded that the “impaired property” exclusion applied. The Nebraska Supreme Court affirmed on other grounds. It disagreed with the trial court’s analysis, but concluded that there was no coverage because there was no “property damage.”
We are only concerned with the Supremes. The High Priests and Priestesses held as a general rule that CGL policies are intended to cover a policyholder’s tort liability for physical injury or property damages, not economic losses due to business risks. Id., 294 Neb. at 396. The concrete and rebar were part of the whole integrated pile cap system. The Court found that there was no physical injury to the rebar, or to the pile caps in which the rebar was cemented. And because the defective rebar was discovered before the arena was further built, “there was no damage to other parts of the system.” Id., at 398.
Also the pile caps with the defective rebar were modified by adding to them, not damaging or destroying them, the Court held. Therefore there was no physical damage that was actually caused by the defective rebar. Id. If the problem of the defective rebar could have been corrected by demolishing and replacing the pile caps, then there would have been damage and coverage. But by adding a concrete reinforcing band around certain pile caps, neither the policyholder Drake-Williams nor the contractor, caused property damage as defined in policy. End result: No coverage.
TAKE AWAY RULE
Hmmmm. I am not sure what to say. This is an interesting way to look at a common insurance rule, which generally denies coverage for economic losses caused by the insured’s own work product. For example, an insured cannot collect on a CGL policy for damages it incurs when it manufactures defective widgets – unless and until there is some third party liability. However, the Nebraska Supreme Court made it clear in its holding that it was not announcing a hard and fast rule that all damages arising out of completed work performed by an insured is never “property damage’ covered by a CGL policy. Id. at 397.
But what it is saying, and we Dear Readers should take note of this, is that if a policyholder’s defective work did not create “damage” to other property, and the defective product can be remedied by adding something – as opposed to taking something away – then there is no coverage. This might be a slightly different rule. Let’s stay tuned to see if it is more refined in the future.