CGL is a Third Party Liability Policy

Judgment Damages Needed for CGL Coverage

Hausmann Construction, Inc. (Hausmann) appeals the district court's grant of summary judgment to Nationwide Mutual Insurance Company (Nationwide) on Hausmann's breach-of-contract claim. In Hausmann Construction, Inc. v. Nationwide Mutual Insurance Company, f/k/a Allied Property And Casualty Insurance Company, No. 21-1430, Court of Appeals of Iowa (February 22, 2023) resolved the dispute.

FACTS

In 2017, Iowa Western Community College entered into a contract with Hausmann for the construction of a new wellness facility on the college's campus. The contract provided Hausmann would be responsible for property damage arising during the construction process.  Hausmann entered into a subcontract with Advanced Trenching &Utilities, LLC, (Advanced Trenching) for utility and excavation work on the project. The subcontractor agreement provided that Advanced Trenching would be responsible for property damage arising from its work. Additionally, Advanced Trenching was required to include Hausmann as an additional insured under its insurance policy, which it did.

Advanced Trenching entered into a subcontract with Torco Enterprises, Inc. (Torco). Torco's employee struck a water main while performing work on the project, rupturing the water main and causing flooding of the work site. Hausmann paid $199,509.54, the costs and expenses for repairing the water main and replacing a damaged retaining wall.

Hausmann asked Advanced Trenching to submit a claim to Nationwide for the damages, but Advanced Trenching refused. Hausmann then submitted a claim to Nationwide, claiming it was covered by Advanced Trenching's policy with Nationwide as an additional insured, and Nationwide refused. Hausmann sued Nationwide, claiming there was a breach of contract.

SUMMARY JUDGMENT

Nationwide filed a motion for summary judgment. It argued that the lawsuit was a direct action against an insurer, which is prohibited by Iowa Code section 516.1 (2021). Nationwide pointed out that Hausmann had not obtained a judgment against Advanced Trenching or Torco and it would be premature to permit Hausmann to collect from Nationwide the costs and expenses of repairs due to the water main break. Nationwide also stated that although Hausmann was an additional insured, it did not allege that Nationwide breached any duty to defend or indemnify Hausmann as an additional insured.

The district court granted Nationwide's motion for summary judgment. The court determined the phrase, "legally obligated to pay as damages" meant "sums resulting from legal action by a third party on the additional insured." The court noted the college did not make a claim against Hausmann and there were no damages proven against Hausmann by a third party in a lawsuit. The court also concluded Hausmann's claims against Nationwide were barred by Iowa Code section 516.1.

INTERLOCUTORY APPEAL

Hausmann's claims against Nationwide are distinct and severable from its claims against Advanced Trenching and Torco. Hausmann claimed Advanced Trenching and Torco were negligent in performing their work. Additionally, Hausmann claimed Advanced Trenching abandoned its work, failed to act in a good and workmanlike manner, breached the subcontract agreement, and breached implied warranties.

Hausmann's claims against Advanced Trenching and Torco arose from their work on the construction site for the wellness facility. Hausmann's claims against Nationwide arose from the terms of the insurance policy and are distinct and severable from the claims against Advanced Trenching and Torco.

The district court ruled: “If Hausmann wants to seek remedy for its expenses in relation to the water main break, it still has the opportunity to prove recovery against [Advanced Trenching] or Torco since the incident itself lies in tort action. This would put Hausmann in the position that Nationwide presumed it would be in when, as the insurer of [Advanced Trenching], Nationwide sought to have the action dismissed as a violation of Iowa Code [section] 516.1. Because a third-party's direct action against an insurer is barred by this statute, Hausmann is effectively prevented from bringing claims against Nationwide at this time.”

To the extent Hausmann's claim against Nationwide is an attempt to circumvent its claims against Advanced Trenching as a tortfeasor and proceed directly against Advanced Trenching's insurance company instead, the district court correctly ruled that the claim is barred by state statute until such time as Hausmann obtains a judgment against Advanced Trenching and the judgment remains unsatisfied.

Coverage Under the Policy

Hausmann has the initial burden of showing that its claim falls within the policy's coverage. Hausmann claims that it was legally obligated to pay the amount it did to fix the damages caused by the water main break. Nationwide counters that no one asserted any claims against Hausmann, so Hausmann's voluntary decision to pay for the repairs does not make the payment a sum that Hausmann was legally obligated to pay as damages.

Based on the arguments of the parties, the case hinged on what "becomes legally obligated to pay as damages" means. In common usage, the plural noun "damages" has a specific meaning in a legal context, such as here, where a "legal obligation" is involved. The phrase "legally obligated to pay as damages" in the CGL policy is not ambiguous.

A contractual duty to incur the repair costs without more, is not sufficient to bring the repair costs within the scope of the CGL policy's insuring agreement. No one demanded Hausmann pay the costs of repairing the damage from the water main break, and there was no claim, order, or adjudication requiring them to do so. As such, there was no coercive legal obligation for Hausmann to pay. Therefore, there is no coverage for the repair costs Hausmann incurred and the district court got it right in granting summary judgment on this basis.

As the district court properly granted summary judgment in favor of Nationwide, the trial court’s decision was affirmed.

ZALMA OPINION

A CGL policy, whether to a named insured or an additional insured like Hausmann, is a third party liability policy and can only respond to a claim or a judgment made against the person or entity insured. No one made a claim against Hausmann. It paid to keep its customer happy. It could only obtain coverage for defense or indemnity if a claim was made against Hausmann, a suit filed against Hausmann or a judgment entered against Hausmann. Since no claims were made, no judgment was entered, Hausmann had no claim against the CGL and the trial court was correct. Had Housmann sued the subcontractors for their negligence Nationwide would have defended and if they were negligent would have negotiated a settlement with Hausmann. This suit and appeal were a waste of the time of Hausmann, Nationwide and the courts of Iowa.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com

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