Insurer Granted Summary Judgment in Defective Construction Coverage Case

Jim Johnson Homes, Inc. (“Jim Johnson Homes”) entered into a contract to construct a house on real property owned by the Jeters. During the construction, the Jeters noticed various problems with the work. For example, they noticed that the foundation was being constructed in a manner contrary to the plans and specifications. The type of interior beams called for in the plans was changed by Jim Johnson Homes without the Jeters’ consent. The roof overhang and ceiling areas were not constructed as per specifications. Additionally, the Jeters noticed that there was cracking in the foundation of the house. Due to these various problems, the Jeters exercised their right to terminate their contract with Jim Johnson Homes. They also initiated an arbitration proceeding to recover their damages, as required by the parties’ contract. In their arbitration demand, the Jeters sought to recover from Jim Johnson Homes the amounts they had paid toward the construction of the house, plus what was required to remove Jim Johnson Homes’ defective construction work from the property, as well as various engineering, attorneys’ and arbitration fees.

Jim Johnson Homes was insured under a CGL policy by Mid-Continent. Mid-Continent refused to furnish Jim Johnson Homes with a defense in connection with the Jeters’ arbitration proceeding. Jim Johnson Homes filed a lawsuit against Mid-Continent seeking a declaration that Mid-Continent was obligated to furnish a defense. While the lawsuit was pending, the arbitrator issued an arbitration award against Jim Johnson Homes. The arbitration award essentially gave the Jeters the relief requested in their arbitration filings. Mid-Continent asked for a determination that not only was there no obligation to furnish Jim Johnson Homes with a defense in the arbitration, but there was no duty to indemnify Jim Johnson Homes for any resulting arbitration award.

The federal district court granted summary judgment to Mid-Continent. The court first held that the amounts awarded in the arbitration against Jim Johnson Homes were not damages because of an “occurrence.” Noting that the purpose of general liability insurance is to protect the insured from liability resulting from damage caused by the insured’s product, but not for the repair or replacement of the product itself, the court concluded that Jim Johnson Homes was, in effect, asking the insurer to provide the sort of coverage ordinarily furnished by a performance bond. Because the only damage complained of by the Jeters was damage to the very house Jim Johnson Homes was supposed to have constructed, the Jeters’ claim was not the type of claim intended to be covered by the CGL policy’s basic insuring agreement. Jim Johnson Homes’ failure to perform as it was required to perform under its contract was not the sort of fortuitous accident, and therefore, was not an “occurrence,” covered by general liability insurance.

The court then reasoned that exclusions j(5) and j(6) precluded coverage for the Jeters’ claims in any event. Exclusion j(5) precludes coverage for “property damage” to real property on which the insured is performing operations if the damage arises out of those operations. Exclusion j(6) precludes coverage for damage to property that must be restored, repaired or replaced because the insured’s work was incorrectly performed on it. Because Jim Johnson Homes’ work under its contract to construct the house was not completed at the time the Jeters brought their claims, the completed operations exception to exclusion j(6) was inapplicable.

The court concluded that Mid-Continent was under no duty to furnish Jim Johnson Homes a defense in the arbitration proceeding. Additionally, because the Jeters did not state any potentially covered claims, Mid-Continent was under no duty to indemnify Jim Johnson Homes for the resulting arbitration award. Finally, because Mid-Continent owed no contractual duties of defense and indemnity to Jim Johnson Homes for the Jeters’ claims, Jim Johnson Homes’ extra-contractual claims against Mid-Continent based on its refusal to defend also failed as a matter of law.