Summary Judgment for Insurer on Construction Defect Claim Reversed
The Fifth Circuit reversed the district court's granting of summary judgment to the insurer on a construction defect claim asserted against the insured. TIG Ins. Co. v. Woodsboro Farmers Cooperative, 2024 U.S. App. LEXIS 24003 (5th Cir. Sept. 20, 2024).
In March 2013, Woodsboro Farmers Cooperative contracted with E.F. Erwin, Inc. to construct two Brock 105' diameter grain silos. Erwin hired subcontract AJ Constructors, Inc. (AJC) to construct the silos. Erwin was responsible for supervising the work.
Brock silos were kits shipped by the manufacturer and then assembled according to the manufacturer's manuals and specifications. The silos are constructed section by section. AJC began erecting the silos in May 2013 and completed its work in June or early July. Erwin occasionally inspected the work and found the silos were structurally sound and not defective. AJC left the job site after completing the assembly.
Before Woodsboro tendered its final payment, it noticed several defects that caused the silos to leak. Erwin attempted to repair the defects but was unable to make them watertight.
Woodsboro hired Pitcock Supply, Inc., to inspect the silos. Pitcock observed numerous faults with the silos' assembly, including missing or loose bolts; gaps in the tank walls and ceiling; incorrectly installed tank stiffeners; improper sealing; and unsecured roofing. As the overall condition of the silos deteriorated, damage from wind and weather accelerated. Pitcock attributed the damage to AJC's "poor workmanship." The silos had to be deconstructed in their entirety to fix the damage and then reconstructed.
In March 2015, Woodsboro hired Pitcock to repair the silos. New Brock kits were purchased because certain parts were so damaged they could not be re-used. When Pitcock finished its work in June, Woodsboro's total cost was $805,642.74.
Woodsboro sued Erwin for breach of contract. The case went to arbitration where the panel found that AJC had negligently constructed the silos; the silos were defective and did not conform to the construction contract; and Erwin was unwilling or unable to repair them. The arbitration award was confirmed.
TIG then sued Woodsboro and Erwin seeking declaratory relief on its duty to defend and indemnify as Erwin's insurer. The district court granted TIG's motion for summary judgment as to its duty to defend, finding that the underlying pleadings failed to show that Erwin's breaches resulted in "property damage," and even if such damage existed, several exclusions would apply. The court subsequently granted the remainder of TIG's motion concluding there was no "physical injury to tangible property" because of Erwin's breach apart from defective construction, nor was there any "loss of use" of the silos because the arbitration panel found that Woodsboro had lost profits on account of Erwin's late delivery of the project.
On appeal, the parties disputed whether the problems with the silos were defective assembly, or whether Erwin caused tangible, manifest harm to the silos. The district court determined that Erwin's role was "more akin to 'defective installation' requiring repair than defective work which caused physical damage to other property." Woodsboro argued that although AJC's faulty workmanship exposed the silos' metal parts to harm, repair and reconstruction work was necessary because the wind and weather damaged the parts to such an extent they became unusable. The arbitration panel found that the silo bins as originally constructed by AJC were defective.
The Fifth Circuit noted that although the degraded state of the metal parts was not observed until Pitcock's May 2014 inspection, there was evidence that damage to the silos occurred, at least partially, during the policy period. As a matter of law, it was irrelevant that the damage to the metal parts was first observed after the policy period expired. Under decisions from the Texas Supreme Court, when analyzing property damage which occurred during the policy period, "occurred" meant when damage occurred, not when discovery occurred. This was the "actual injury" rule.
Viewing the evidence in the light most favorable to Woodbsoro, the court found support for the determination that "property damage" occurred.
The court then turned to the exclusions. Exclusion j (5) excluded from coverage "property damage" to "[t]hat particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the 'property damage' arises out of these operations." There was evidence to support the view that AJC's operations concluded in June or early July 2013. At that point, Erwin only noticed some cosmetic defects, but the silos otherwise appeared structurally sound, There was evidence suggesting that sometime between AJC's exit from the project and Pitcock's assessment in May 2014, wind and weather damaged the silos. Thus, damage from the wind and weather could have occurred after AJC's active performance of work. Therefore, when viewed in the light most favorable to Woodsboro, the evidence suggested Exclusion j (5) did naot apply because the property damage occurred after AJC completed its operations.
Exclusion j (6) excluded from coverage "property damage" to "[t]hat particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it." Like with Exclusion j (5), the district court determined the entirety of the project was Erwin's and AJC's defective work, and therefore Exclusion j (6) applied because the entirety of the silos had to be "restored, repaired or replaced." Woodsboro argued this was error because AJC's defective work was limited to improper installation, tightening, and securing of the silos' bolts and roof vent covers.
Without deciding whether Exclusion j (6) would apply, the court noted an exception to the exclusion negated it. Exclusion j (6) did not apply to "'property damage' included in the 'products-completed operations hazard.'" "Products-completed operations hazard" included all "'property damage' occurring away from premises you own or rent and arising out of 'your product' or 'your work' except . . . [w]ork that has not yet been complete or abandoned." The district court correctly decided this exclusion did not apply due to the exception. The damage to the silos did not occur on Erwin's rented or owned property, arise from its work away from its property, and occurred after the project was "completed" because the need for repair or replacement did affect the project's completed status.
Therefore, granting summary judgment to TIG was improper. Additional factual development was needed.
