Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-almd-2_07-cv-01041/USCOURTS-almd-2_07-cv-01041-0/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:2201 Declaratory Judgement (Insurance)

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IN THE DISTRICT COURT OF THE UNITED STATES FOR THE

MIDDLE DISTRICT OF ALABAMA, NORTHERN DIVISION

 

AUTO-OWNERS INSURANCE )

COMPANY, )

)

Plaintiff, )

) CIVIL ACTION NO.

v. ) 2:07cv1041-MHT

) (WO)

L. THOMAS DEVELOPMENT, )

INC., et al., ) 

)

Defendants. )

OPINION

Plaintiff Auto-Owners Insurance Company (“AutoOwners”) brings this suit seeking a declaratory judgment

on its rights and responsibilities under its general

liability-insurance contract. The company seeks a

declaration that it has no duty to indemnify defendants

L. Thomas Development and Lowell Thomas (“the Thomas

defendants) for damages awarded against them in

connection with the construction of a home for defendants

Brenda and Alvin McQueen (“the McQueen defendants”). 

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Jurisdiction is proper pursuant to 28 U.S.C. § 1332

(diversity jurisdiction). By agreement, this case is now

under submission for final decision, without trial, on a

record developed by the parties. For the reasons that

follow, the court finds in favor of Auto-Owners.

I. BACKGROUND

In 2004, the McQueen defendants hired the Thomas

defendants to construct a home in East Montgomery. The

house was to be built on “prairie soil” or “fat clay,” a

type of soil that “expands and contracts based upon the

moisture content, and must be taken into consideration in

the construction of a home.” Arb. Op. at 2 (doc. no. 54-

1). The Thomas defendants “had experience with this type

of soil.” Id. 

The Thomas defendants hired a geotechnical consultant

who recommended that, for the foundation, the Thomas

defendants utilize low-plasticity “engineered fill”

rather than the expandable fat clay. However, the Thomas

defendants began constructing the foundation before

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receiving the consultant’s report; they used fat clay,

rather than a low-plasticity alternative, as the fill

material.

As soon as it was completed, the house exhibited

significant problems, including extensive cracking of the

interior walls, cracking of the exterior brick, warped

structural beams, and malfunctioning of the septic

system. The Thomas defendants admitted that mistakes had

been made in designing and constructing the home. 

The McQueen defendants filed suit in an Alabama state

court. The matter was referred for arbitration, and the

arbitrator entered an award in favor of the McQueen

defendants and against the Thomas defendants. The

arbitrator found that the Thomas defendants had

“negligently used fat clay as fill in the foundation [of

the McQueens’ home], and that such fill when exposed to

fluctuations in moisture has caused extensive resulting

damage to the Plaintiffs.” Arb. Op. at 7. He determined

that the Thomas defendants should have used a lowCase 2:07-cv-01041-MHT-CSC Document 65 Filed 06/09/10 Page 3 of 17
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plasticity clay in the foundation and that they were

aware that fat clay was an inappropriate fill material.

The arbitrator awarded damages of $ 600,000. 

Auto-Owners brought this federal lawsuit seeking a

declaration that its insurance policy with the Thomas

defendants does not cover the damage suffered by the

McQueen defendants. 

II. INSURANCE AGREEMENT

The general-liability-insurance policy Auto-Owners

has with the Thomas defendants provides the following

coverage, as detailed in the insurance form’s “Bodily

Injury and Property Damage Liability” section:

“a. We will pay those sums that the

insured becomes legally obligated to pay

as damages because of ‘bodily injury’ or

‘property damage’ to which this

insurance applies....

“b. This insurance applies to ‘bodily

injury’ and ‘property damage’ only if:

(1) The ‘bodily injury’ or ‘property

damage’ is caused by an ‘occurrence’

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that takes place in the ‘coverage

territory’; and

(2) The ‘bodily injury’ or ‘property

damage’ occurs during the policy

period.”

Insur. Pol’y at 16 (doc. no. 25-4). The policy defines

“occurrence” as “an accident, including continuous or

repeated exposure to substantially the same general

harmful conditions.” Id. at 28. Property damage is

defined as follows: “Physical injury to tangible

property, including all resulting loss of use of that

property. All such loss of use shall be deemed to occur

at the time of the physical injury that caused it.” Id.

at 29. 

Under the so-called “work product exclusion,” United

States Fidelity and Guar. Co. v. Bonitz Insulation Co. of

Alabama, 424 So.2d 569, 573 (Ala. 1982), the policy

excludes coverage in the following circumstances:

“j. ‘Property damage’ to:

(5) That particular part of real

property on which you or any contractors

or subcontractors working directly or

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indirectly on your behalf are performing

operations, if the ‘property damage’

arises out of those operations; or

(6) That particular part of any property

that must be restored, repaired or

replaced because ‘your work’ was

incorrectly performed on it.

 ...

l. ‘Property damage’ to ‘your work’

arising out of it or any part of it and

including the ‘products-completed

operations hazard.’”

Id. at 19. “Your work” is defined as “Work or operations

performed by you or on your behalf” and “Materials, parts

or equipment furnished in connection with such work or

operations.” The exclusion also includes “Warranties or

representations made at any time with respect to the

fitness, quality, durability, performance or use of ‘your

work.’” Id. at 29. Finally, “products-completed

operations hazard” encompasses “‘property damage’

occurring away from premises you own or rent and arising

out of ... ‘your work.’” Id. at 28. 

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III. DISCUSSION

The parties dispute whether the damage the McQueen

defendants suffered was the result of the Thomas

defendants’ intentional conduct (including breach of

contract, fraud, or some other intentional tort) or

unintentional negligence. Auto-Owners contends the

former while the Thomas defendants and the McQueen

defendants contend the latter. The court need not

resolve this dispute because, whatever the mental state

of the Thomas defendants was, there is no insurance

coverage here.

Intentional conduct: It is well-established under

Alabama law that “the insured bears the burden to

establish coverage by demonstrating that a claim falls

within the policy, while the insurer bears the burden to

prove that any policy exclusion applies.” Thorn v.

American States Ins. Co., 266 F. Supp. 2d 1346, 1349

(M.D. Ala. 2002) (Thompson, J.). 

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The Auto-Owners policy is clear that, for there to be

coverage, there must have been an “occurrence,” and the

policy defines “occurrence” as “an accident” Insur.

Pol’y at 16 (doc. no. 25-4). The Alabama Supreme court

has defined an “accident” as follows: “An unintended and

unforeseen injurious occurrence; something that does not

occur in the usual course of events or that could be

reasonably anticipated. ... The term [‘accident’] has ...

been variously defined as something unforeseen,

unexpected, or unusual.” Hartford Cas. Ins. Co. v.

Merchants & Farmers Bank, 928 So.2d 1006, 1011 (Ala.

2005) (citations and internal quotations omitted). 

Therefore, in determining whether an event is an

“occurrence,” Alabama courts have generally examined

whether the challenged conduct was “expected or intended”

by the insured; in general, if the conduct at issue was

“expected or intended” then it was not an “accident” and

thus was not a covered “occurrence.” See, e.g., Alabama

Plating Co. v. U.S. Fidelity and Guar. Co., 690 So.2d

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331, 333-334 (Ala 1996) (“Accordingly, the focus of the

definition of ‘occurrence’ is whether the insured ...

expected or intended that its manufacturing operations

would cause the property damage alleged.”); U.S. Fidelity

and Guar. Co. v. Armstrong, 479 So.2d 1164, 1167 (Ala.

1985) (noting that the insured “must have possessed

specific intent to inflict the damage to activate [a]

policy exclusion.”); Moss v. Champion Ins. Co., 442 So.2d

26 (Ala. 1983) (finding that water damage, which ensued

after the insured failed to cover a roof under

construction, was not itself intended, and thus the act

did constitute an occurrence). 

That the insured was aware of the risk of harm does

not necessitate a finding of specific intent or

expectation. See Continental Cas. Co. v. Plantation Pipe

Line Co., 902 So.2d 36, 43 (Ala. 2004); Southern Guar.

Ins. Co. of Georgia v. Saxon, 190 Ga. App. 652, 654 (Ga.

App. 1989) (“The mere knowledge and appreciation of a

risk, short of a substantial certainty, is not the

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*

Alternatively, Auto-Owners is estopped from

challenging the arbitrator’s finding that the Thomas

defendants were negligent.

“[T]he doctrines of [res judicata and collateral

estoppel] apply as well to awards in arbitration as they

do to adjudications in judicial proceedings.” Lee L.

Saad Const. Co., Inc. v. DPF Architects, P.C., 851 So. 2d

507, 516 (Ala. 2002) (citations and quotation marks

omitted) (alternation in original). Generally, for

collateral estoppel to bar re-litigation, the following

elements must be established: “(1) that an issue in a

prior action was identical to the issue litigated in the

(continued...)

10

equivalent of intent.”) (internal quotations omitted).

Furthermore, in the context of general-liability

insurance, a finding of “negligence” does not preclude a

determination that the incident was an “accident,” as

defined under the contract. See Moss, 442 So.2d at 28

(“It is clear from our cases that the term “accident” in

such a policy does not necessarily exclude human fault

called negligence.”).

Here, no one contends that, if the Thomas defendants’

conduct was intentional, as contended by Auto-Owners,

there was an “accident” or “occurrence” and thus that

there was coverage under the insurance policy.*

 

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*

(...continued)

present action; (2) that the issue was actually litigated

in the prior action; (3) that resolution of the issue was

necessary to the prior judgment; and (4) that the same

parties are involved in the two actions.” Id. at 520

(citations and quotation marks omitted). The party

asserting preclusion as a defense to litigation has the

burden of establishing the matter was appropriately

decided in a prior adjudication. Id. 

Auto-Owners provided the Thomas defendants with a

defense in the arbitration proceeding “under a

reservation of rights,” compl. at 8 (doc. no. 1), and

ostensibly had “a full and fair opportunity to litigate

the issue in [that] proceeding.” Greenblatt v. Drexel

Burnham Lambert, Inc., 763 F.2d 1352, 1360 (11th Cir.

1985). Furthermore, in the context of insurance law,

“[w]here either an indemnitor or liability insuror has

notice of a proceeding against his indemnitee or insured,

and is afforded an opportunity to appear and defend, a

judgment rendered against the indemnitee or insured ...

is conclusive against the indemnitor or insuror as to all

material matters determined therein.” Coblentz v.

American Sur. Co. of New York, 416 F.2d 1059, 1062 (5th

Cir. 1969); see also Alabama Farm Bureau Mut. Cas. Ins.

Co., Inc. v. Moore, 349 So. 2d 1113, 1115 (Ala. 1977)

(“Where an action against the insured is ostensibly

within the terms of the policy, the insurer, whether it

assumes the defense or refuses to assume it, is bound by

the result of that action as to all matters therein

decided which are material to recovery by the insured in

an action on the policy.”) (quoting Miller v. United

States Fidelity & Guaranty Co., 291 Mass. 445, 448-449

(1935)).

11

Unintentional or negligent conduct: Even if the

Thomas defendants’ conduct was negligent, as they and the

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McQueen defendants contend, and even if the Thomas

defendants’ negligent conduct, as found by the

arbitrator, was an “occurrence” within the meaning of the

Auto-Owners policy, the policy’s exclusions would still

preclude coverage. 

Courts recognize the right of an insurer to restrict

its coverage, United States Fidelity and Guar. Co. v.

Bonitz Insulation Co. of Alabama, 424 So.2d 569, 573

(Ala. 1982); though, when the scope of an exclusion is

ambiguous, “the exclusion will be construed so as to

limit it to the narrowest application reasonable under

the wording.” Porterfield v. Audubon Indem. Co., 856

So.2d 789, 800 (Ala. 2000) (quoting Guaranty v. Nat. Ins.

Co. v. Marshall County Bd. of Educ., 540 So.2d 745, 748

(Ala. 1989)). Nevertheless, courts are required to

interpret the language of an insurance contract as

written, and therefore, “cannot defeat express provisions

in a policy, including exclusions, by judicial

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interpretation.” Commercial Union Assur. Co. v. Glass

Lined Pipe. Co., Inc., 372 So.2d 1305, 1307 (Ala. 1979).

In interpreting “work product exclusions,” Alabama

courts have upheld the denial of coverage in cases of

poor workmanship, where the insurance policy denied

indemnity for “property damage to work performed by or on

behalf of the Named Insured arising out of the work or

any portion thereof.” Bonitz, 424 So.2d at 573 (finding

the policy’s exclusionary provisions precluded coverage

for damage to a roof resulting from the insured’s faulty

installation); Berry v. South Carolina Ins. Co., 495

So.2d 511, 513 (Ala. 1985) (acknowledging that the workproduct exclusion denies coverage for damages related to

the insured’s negligent construction). Similarly here,

the Auto-Owners policy specifically excludes coverage for

“Property damage to your work arising out of it or any

part of it and including in the products-completed

operations hazard.” Insur. Pol’y at 29 (quotations

omitted). It is clear that the policy precludes

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indemnity for those negligent or careless actions

committed by the Thomas defendants within the scope of

this coverage. The Thomas defendants constructed the

McQueens’ foundation without waiting for a recommendation

from their geotechnical consultant, and they did this

knowing that fat clay was a high-plasticity material and

thus tended to expand with moisture. Their negligent

actions, which led to the construction of a house that is

virtually uninhabitable, place them squarely within the

bounds of the policy’s work-product exclusion. 

The McQueen defendants contend that the damages in

this case are not intended to remedy injury caused by the

Thomas defendants’ work, but rather the “injury to the

McQueens and their home.” Br. at 13 (doc. no. 62). They

analogize the current proceedings to a hypothetical case,

reflecting that, if the Thomas defendants had driven a

truck into the McQueens’ home, rather than constructing

a poor foundation, the subsequent damages would not be

excluded by the work-product provisions of the contract.

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This argument is defeated by the basic fact that, while

truck driving may have been incident, and even necessary,

to the Thomas defendants’ construction work, the McQueens

hired the Thomas defendants to build a house, not drive

a truck. The Thomas defendants’ expertise and work is in

house construction (as the McQueens acknowledge) and not

truck driving, and they negligently built their work

product, the McQueens’ home. Faulty workmanship is

explicitly not covered under the Auto-Owners policy, and,

thus, the insurance company has no duty to indemnify the

Thomas defendants for their negligently performed

workmanship.

This finding is in line with a pervasive legal

understanding of general-liability insurance, the purpose

of which is to protect the insured against accidents,

unforeseen disasters, and the misfeasance of others, such

as sub-contractors; it is not intended to make the

insurance company a guarantor of the insured’s work. See

Auto-Owners Ins. Co. v. Toole, 947 F. Supp. 1557, 1564

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(M.D. Ala. 1996) (Thompson, C.J.) (“To allow

indemnification under the facts presented here would have

the effect of making the insurer a sort of silent

business partner subject to great risk in the economic

venture without any prospects of sharing in the economic

benefit. The expansion of the scope of the insurer's

liability would be enormous without corresponding

compensation.”) (quotations omitted); see also Centex

Homes Corp. v. Prestressed Systems, Inc., 444 So. 2d 66,

67 (Fla. Dist. Ct. App. 1984) (“Equally repugnant on

policy grounds is the notion that the presence of

insurance obviates the obligation to perform the job

initially in a workmanlike manner.”). 

***

For the foregoing reasons, Auto-Owners retains no

obligation to indemnify the Thomas defendants for damages

awarded against them resulting from their failings in the

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construction of the McQueen defendants’ home. An

appropriate judgment will be entered.

DONE, this the 9th day of June, 2010.

 

 /s/ Myron H. Thompson 

UNITED STATES DISTRICT JUDGE 

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