Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-13-35036/USCOURTS-ca9-13-35036-0/pdf.json

Parties Involved:
Randy Kaady
Appellant
Mid-Continent Casualty Company
Appellee

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

RANDY KAADY,

Plaintiff-Appellant,

v.

MID-CONTINENT CASUALTY

COMPANY, an Ohio corporation,

Defendant-Appellee.

No. 13-35036

D.C. No.

3:11-cv-00706-

MO

OPINION

Appeal from the United States District Court

for the District of Oregon

Michael W. Mosman, District Judge, Presiding

Argued and Submitted

October 7, 2014—Portland, Oregon

Filed June 25, 2015

Before: Alex Kozinski, Ferdinand F. Fernandez

and Raymond C. Fisher, Circuit Judges.

Opinion by Judge Kozinski

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2 KAADY V. MID-CONTINENT CAS. CO.

SUMMARY*

Insurance Law

The panel reversed the district court’s summary judgment

in favor of insurer Mid-Continent CasualtyCompany because

there was a triable issue whether the insured’s claim for

property damage under Mid-Continent’s commercial general

liability insurance policy was barred by the policy’s knownloss provision, and remanded.

The insured, as part of a subcontract, affixed

manufactured stone to buildings in a multi-unit residential

project, and cracks developed in the manufactured stone. In

an underlying action, the insured settled a claim against him;

Mid-Continent denied the claim and the insured brought this

diversity action. The district court held that there was

relevant property damage prior to the insured obtaining the

policy, and that this damage was known to the insured.

First, the panel rejected Mid-Continent’s argument that so

long as the insured knew about any damage to the structure,

the known-loss provision barred coverage of any other

damage to the same structure. The panel held under Oregon

law that the insured’s knowledge of damage to his own work

did not automatically constitute knowledge of damage to the

components of the structure furnished by others; but rather

the correct inquiry was whether the claimed damage to the

structural components was a “continuation, change or

resumption” of the cracks.

* This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader. 

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KAADY V. MID-CONTINENT CAS. CO. 3

Second, the panel held that Mid-Continent did not

establish its contention that the damage for which the insured

sought coverage was in fact a “continuation, change or

resumption” of earlier cracks. The panel held that summary

judgment was inappropriate where there was no record

evidence connecting the cracks in the masonry that the

insured observed before the policy to the damage to the

wooden components for which the insured claimed coverage.

COUNSEL

Robert C. Muth and Peter J. Viteznik (argued), Kilmer,

Voorhees & Laurick, P.C., Portland, Oregon for PlaintiffAppellant.

Douglas G. Houser, Matthew E. Hedberg (argued) and Janis

C. Puracal, Bullivant Houser Bailey, P.C., Portland, Oregon,

for Defendant-Appellee.

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4 KAADY V. MID-CONTINENT CAS. CO.

OPINION

KOZINSKI, Circuit Judge:

We explore the meaning of a “known-loss” provision in

a commercial general liability insurance contract.

I. Facts

Kaady, who is a mason by profession, was awarded a

subcontract for the installation of manufactured stone1

at the

Collins Lake Resort, a multi-unit residential project. Kaady

affixed manufactured stone to the wall sheathing2

of certain

buildings, wrapped deck posts with manufactured stone and

installed masonry caps on the top of the stone that was

wrapped around the deck posts. Construction was completed

in May 2006.

In September 2006, Kaady was called back to Collins

Lake to inspect cracks in the manufactured stone and

masonry caps he installed. He told the general contractor that

the cracks “had something to do with settling, being struck,

1 Manufactured stone is molded concrete veneer that is shaped and

painted to look like stone or brick. When applied to the outer surface of

a wall or column, it produces the illusion that the surface to which it is

applied is made up of solid rocks or bricks. In his briefs and declaration,

Kaady uses the term “cultured stone,” but “Cultured Stone” is the

trademark of a manufactured stone produced by Boral (formerly Owens

Corning). Mindful of the harm caused by promiscuous use of trademarks

to describe generic products, we use the term “manufactured stone”

instead.

2 Wall sheathing consists of flat panels that are attached to the

structure’s frame. It serves as an additional layer of protection from the

outside elements and strengthens the structure by increasing its rigidity.

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KAADY V. MID-CONTINENT CAS. CO. 5

or the substrate contracting or expanding.” In December

2006, almost three months after he had inspected the cracks,

Kaady bought a one-year commercial general liability

insurance policy from Mid-Continent.

In June 2007, the Collins Lake Homeowners’ Association

sued the developer of the project, who sued the general

contractor, who in turn sued all the relevant subcontractors

including Kaady. The Homeowners’ Association alleged that

portions of the structures were damaged as a result of

defective workmanship. Kaady settled the claim against him

and tendered it to Mid-Continent for indemnification. MidContinent denied the claim and Kaady brought this lawsuit. 

He claims that the damage to the structures for which he was

sued in the underlying litigation—deterioration of the deck

posts and wall sheathing behind the manufactured

stone—was “property damage” covered by Mid-Continent’s

policy.

The district court granted summary judgment to MidContinent on the ground that Kaady’s claim was barred by the

policy’s known-loss provision. According to the district

court, “there was relevant property damage prior to [Kaady’s]

obtaining the policy,” which was “known to Mr. Kaady prior

to obtaining the policy.” Kaady appeals and we review de

novo. Assurance Co. of Am. v. Wall &Assocs. LLC, 379 F.3d

557, 560 (9th Cir. 2004). Our interpretation of MidContinent’s policy is governed by Oregon law. See MidCentury Ins. Co. v. Perkins, 149 P.3d 265, 268 (Or. Ct. App.

2006).

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6 KAADY V. MID-CONTINENT CAS. CO.

II. Discussion

Kaady claims that the damage to the deck posts and wall

sheathing under the manufactured stone he installed is

“property damage” covered by the policy. The policy defines

“property damage” as “[p]hysical injury to tangible property,

including all resulting loss of use of that property.” MidContinent does not dispute that “property damage” occurred

or that it was caused by Kaady. Rather, Mid-Continent

argues that Kaady’s claim is barred because he bought the

policy after he already knew of the loss. Mid-Continent relies

on the policy’s known-loss provision, which states that the

policy “applies to . . . ‘property damage’ only if . . . no

insured . . . knew that the . . . ‘property damage’ had

occurred, in whole or in part.”

Kaady admits that he was aware of cracks in the

manufactured stone and masonry caps he installed before he

purchased the policy, but states under oath that he didn’t

know about any of the damage for which he seeks indemnity:

the damage to the deck posts and wall sheathing behind the

masonry. Mid-Continent has proffered no evidence

contradicting Kaady’s declaration. Mid-Continent

nevertheless argues that, even if Kaady didn’t know about the

damage to the deck posts and wall sheathing before he

purchased the policy, Kaady’s knowledge of the cracks in the

manufactured stone he installed suffices to bar coverage. It

presents two arguments supporting that interpretation.

A. Mid-Continent first argues that, so long as the insured

knew about any damage to a structure, the known-loss

provision bars coverage of any other damage to the same

structure. According to Mid-Continent, Kaady’s

manufactured stone and the underlying structural components

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KAADY V. MID-CONTINENT CAS. CO. 7

are the same “property.” Thus, once Kaady noticed that the

manufactured stone was cracked, he knew that the property

was damaged and so could not recover for any damage to that

property. Mid-Continent claims that its interpretation follows

because the policy deems “‘property damage’ . . . to have

been known to have occurred at the earliest time when any

insured . . . [b]ecomes aware . . . that . . . ‘property damage’

has occurred or begun to occur.”

But the question of whether Kaady’s knowledge of the

cracks automatically precludes coverage of damage to the

structural components depends on the level of generality at

which “tangible property” and “physical injury” are defined. 

Is the “property” we must examine the structure as a whole or

only the components—the deck posts and wall

sheathing—that Kaady claims coverage for? And does prior

knowledge of one type of physical injury to property

automatically preclude coverage of all types of physical

injury to the property? Because the policy doesn’t define

“tangible property” or “physical injury,” we must examine

the policy as a whole to determine how the “ordinary

purchaser of [commercial general liability] insurance” would

understand these terms. See St. Paul Fire & Marine Ins. Co.

v. McCormick &Baxter Creosoting Co., 923 P.2d 1200, 1213

(Or. 1996) (quoting Botts v. Hartford Acc. & Indem. Co.,

585 P.2d 657, 659 (Or. 1978)); see also Hoffman Constr. Co.

v. Fred S. James & Co., 836 P.2d 703, 706–07 (Or. 1992).

First, we are unpersuaded by Mid-Continent’s argument

that we should not treat components the insured provided and

components provided by others as separate “property.” In the

construction context, a commercial general liabilityinsurance

policy necessarily distinguishes between the components the

insured provided and components furnished by others. That’s

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8 KAADY V. MID-CONTINENT CAS. CO.

because the policy is designed to cover damage to property

that is installed by others, but exclude damage to property the

insured provided. See 9A Steven Plitt et al., Couch on

Insurance §§ 129:1, 129:17 (3d ed. 2014); see also Gregory

G. Schultz,Commercial GeneralLiabilityCoverage of Faulty

Construction Claims, 33 Tort & Ins. L.J. 257, 261 (1997). 

Once the insured’s work is complete, the policy covers

damage to property provided by others, including property

that the insured’s work was “performed on,”3

but it doesn’t

cover damage to the insured’s own product or work. MidContinent doesn’t argue on appeal that the claimed damage

was to property that Kaady provided (nor could it). See St.

Paul Fire & Marine Ins. Co. v. Sears, Roebuck & Co.,

603 F.2d 780, 783–84 (9th Cir. 1979); Wilshire Ins. Co. v.

RJT Constr., LLC, 581 F.3d 222, 226–27 (5th Cir. 2009); see

also Schultz, Commercial General Liability Coverage of

Faulty Construction Claims, 33 Tort & Ins. L.J. at 272. MidContinent has offered no reason to treat the insured’s work

and the work of others as different property in every

provision of the policy except the known-loss provision. 

Thus, we conclude that the known-loss provision also

distinguishes between them. The insured’s knowledge of

damage to his own work doesn’t automatically constitute

3 Pursuant to the “[p]roducts-completed operations hazard” provision,

once the insured completes his work, the policy provides coverage for

“‘property damage’ occurring away from premises [the insured] own[s]

or rent[s] and arising out of ‘[the insured’s] product’ or ‘[the insured’s]

work.’” For example, if a roof installed by the insured leaks, resulting in

water damage to another part of the house, that water damage would be

covered but any damage to the roof itself would not be. See Robert J.

Franco, Insurance Coverage for Faulty Workmanship Claims Under

Commercial General Liability Policies, 30 Tort & Ins. L.J. 785, 796–97

(1995); see also St. Paul Fire &Marine Ins. Co. v. Sears, Roebuck &Co.,

603 F.2d 780, 783–84 (9th Cir. 1979).

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KAADY V. MID-CONTINENT CAS. CO. 9

knowledge of damage to the components of the structure

furnished by others.4

Mid-Continent’s position faces a second difficulty: Even

if the masonry and underlying structural components were

considered the same “property,” the claimed damage

(deterioration of the deck posts and wall sheathing) is a

different type of damage than the known damage (cracks in

the masonry). Mid-Continent suggests that the insured’s

prior knowledge of any damage to property bars coverage for

any other damage to that property, regardless of its type. But

the known-loss provision bars coverage of “propertydamage”

if the insured “knew that the . . . ‘property damage’ had

occurred, in whole or in part.” (Emphasis added.) Use of the

definite article “particularizes the subject which it precedes”

and indicates that the claimed damage must be the same as

the known damage. See Gale v. First Franklin Loan Servs.,

701 F.3d 1240, 1246 (9th Cir. 2012) (internal quotation marks

omitted). Such an interpretation makes sense considering that

a commercial general liability insurance policy covers (as its

name implies) many different types of hazards that have no

relationship to one another. Thus, an insured’s knowledge of

one type of damage to property doesn’t automatically

4 Kaady argues that the cracks in the masonry aren’t “property damage”

at all because they were damage to Kaady’s own work. But nothing in the

policy says that the insured’s work isn’t “tangible property,” or that

physical injury to the insured’s own work isn’t “property damage.” 

Rather, damage to the insured’s own work isn’t “‘property damage’ to

which this insurance applies,” because damage to the insured’s own work

is excluded under the “your product” and “your work” exclusions. Thus,

while we agree with Kaady that the components the insured provided and

the components provided by others should be considered separate

“property,” we reject his argument that damage to the insured’s own work

isn’t “property damage.”

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10 KAADY V. MID-CONTINENT CAS. CO.

constitute knowledge of any and all damage to the property;

the claimed damage must be related to the known damage.

Mid-Continent’s proffered interpretationwould eviscerate

the known-loss provision’s “continuing property damage”

language. The provision states that if the insured “knew,

prior to the policy period, that the . . . ‘property damage’

occurred, then any continuation, change or resumption of

such . . . ‘property damage’ during or after the policy period

will be deemed to have been known prior to the policy

period.” (Emphasis added.) But if the insured’s knowledge

of any damage to any part of the structure automatically

barred coverage of all damage to that structure, it wouldn’t

matter whether the claimed damage was a “continuation,

change or resumption” of the known damage. The problem

is avoided if the known-loss provision is interpreted as

barring coverage only if the claimed damage is a

“continuation, change or resumption” of the known damage. 

This interpretation permits coverage of damage unrelated to

the damage known before acquisition of the policy, but

prevents insurance of a loss in progress.

Applying our interpretation of the policy to Kaady’s

claim, we conclude that Kaady’s knowledge of the cracks in

the masonry before he bought the policy doesn’t constitute

knowledge of the claimed “propertydamage” to the structural

components. Not only are the wooden deck posts and wall

sheathing different “property” than the manufactured stone

and masonry caps, the claimed damage is of a different type. 

We don’t think that the ordinary purchaser of the policy

would interpret the known-loss provision as broadly as MidContinent advocates. Rather, the correct inquiry is whether

the claimed damage to the structural components was a

“continuation, change or resumption” of the cracks. If it was,

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KAADY V. MID-CONTINENT CAS. CO. 11

Kaady’s knowledge of the cracks would bar coverage of the

claimed damage; if not, his knowledge of the cracks wouldn’t

bar coverage.

B. Mid-Continent also argues that the damage for which

Kaady seeks coverage was in fact a “continuation, change or

resumption” of the earlier cracks. According to MidContinent, it’s “undisputed that the cracks in the masonry

permitted water intrusion” and, therefore, that the damage to

the wooden deck posts and wall sheathing “flowed from” the

cracks. But Kaady did dispute this contention in the district

court. In his opposition to summary judgment, Kaady argued

that Mid-Continent had not “submitted any evidence [that]

the cracks in the top caps were the source, cause or basis of

the damage to the deck posts.” Kaady’s admission that the

damage to the deck posts and wall sheathing arose from his

defective workmanship is not an admission that the damage

was caused by the cracks.

In any event, it was not Kaady’s burden to present

evidence disputing the connection between the cracks in the

manufactured stone and the damage to the underlying

structure. On summary judgment, the moving party has the

initial burden of “identifying those portions of the pleadings,

depositions, answers to interrogatories, and admissions on

file, together with the affidavits, if any, which it believes

demonstrate the absence of a genuine issue of material fact.” 

Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986) (internal

quotation marks omitted); see also 10A Charles Alan Wright

et al., Federal Practice & Procedure § 2727 (3d ed. 2015). 

The parties haven’t stipulated to any facts and nothing in the

scant evidentiary record proffered by Mid-Continent—which

consists solely of Kaady’s declaration, Kaady’s deposition in

the underlying construction defect litigation and some barely

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12 KAADY V. MID-CONTINENT CAS. CO.

viewable photographs of the structures—explains the

relationship, if any, between the cracks and the underlying

structural damage. Because Mid-Continent hadn’t met its

initial burden of presenting evidence supporting its theory,

there was nothing for Kaady to dispute.

It may well be that the cracks in the masonry allowed

water to seep in and damage the wood beneath. If so, then

the claimed damage might well be considered a

“continuation, change or resumption” of the cracks.5 But

without any record evidence connecting the cracks in the

masonry that Kaady observed before he bought the policy to

the damage to the wooden components for which Kaady

claims coverage, summary judgment was inappropriate. See

St. Paul Fire & Marine Ins. Co., 603 F.2d at 785–86;

Westfield, 840 N.W.2d at 454–55.

REVERSED and REMANDED.

5

In Westfield Insurance Co. v. Wensmann, Inc., 840 N.W.2d 438 (Minn.

Ct. App. 2013), the court stated that, in order for the claimed damage to

be a “continuation, change or resumption” of the known damage, the two

must “share the same cause.” Id. at 453. Similarly, in Alkemade v.

Quanta Indemnity Co., 28 F. Supp. 3d 1125 (D. Or. 2014), the court stated

that the claimed damage is a “continuation, change or resumption” of the

known damage at least when the two are “damage of the same type, from

the same cause.” Id. at 1131. We have no occasion to decide whether

these two interpretations are correct under Oregon law.

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