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Drake-Williams Steel, Inc., app

and cross-appellee, v. Contin

Casualty Company, appelle

and cross-appella

Employers Mutual Casualty Company an

Insurance Company, appellees and cross-appe

v. Drake-Williams Steel, Inc., app

and cross-appelle

___ N.W.2d ___

Filed August 5, 2016. Nos. S-15-445, S-15-446.

1. Insurance: Contracts: Appeal and Error. The interpretation of an 

insurance policy presents a question of law that an appellate court 

decides independently of the trial court.

2. Summary Judgment: Appeal and Error. An appellate court will affirm 

a lower court’s grant of summary judgment if the pleadings and admitted evidence show that there is no genuine issue as to any material facts 

or as to the ultimate inferences that may be drawn from those facts and 

that the moving party is entitled to judgment as a matter of law.

3. Insurance: Contracts: Appeal and Error. The meaning of an insurance policy is a question of law, in connection with which an appellate 

court has an obligation to reach its own conclusions independently of 

the determination made by the lower court.

4. Insurance: Contracts. In construing insurance policy provisions, a 

court must determine from the clear language of the policy whether the 

insurer in fact insured against the risk involved.

5. Insurance: Contracts: Proof. In a coverage dispute between an insured 

and the insurer, the burden of proving prima facie coverage under a 

policy is upon the insured.

6. ____: ____: ____. If the insured meets the burden of establishing coverage of the claim, the burden shifts to the insurer to prove the applicability of an exclusion under the policy as an affirmative defense.

Nebraska Supreme Court Online Library

www.nebraska.gov/apps-courts-epub/

08/05/2016 09:11 AM CDT
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7. Insurance: Contracts: Damages. Standard commercial general liability 

policies provide coverage for accidents caused by faulty workmanship 

only if there is bodily injury or property damage to something other than 

the insured’s work product.

8. Insurance: Contracts. The cost to repair and replace faulty workmanship is a business risk that is not covered under a commercial general 

liability policy.

9. Insurance. Business risks are normal, frequent, and predictable and 

do not involve the kind of fortuitous events for which insurance is 

obtained.

10. Insurance: Contracts: Liability. Where a product manufacturer is 

liable as a matter of contract to make good on or replace products that 

are defective or otherwise unsuitable because they are lacking in some 

capacity, the economic loss incurred because of the product or work is 

not what was bargained for as part of general liability coverage.

11. ____: ____: ____. There is a fundamental distinction between the noncovered business risk of having to correct faulty products or work and 

the covered risk of liability when faulty products or work cause damage 

to other property that cannot be corrected through the correction of the 

faulty products or work.

Appeals from the District Court for Douglas County: Joseph

S. Troia, Judge. Affirme

Steven D. Davidson, of Baird Holm, L.L.P., and Thomas A. 

Vickers and Scott A. Ruksakiati, of Vanek, Vickers & Masini, 

P.C., for appellant.

Karen K. Bailey, of Engles, Ketcham, Olson & Keith, P.C., 

and John F. Maher, of Colliau, Carluccio, Keener, Morrow, 

Peterson & Parsons, for appellee Continental Casualty 

Company.

Marvin O. Kieckhafer, of Smith Peterson Law Firm, L.L.P., 

and Brian O’Gallagher, of Cremer, Spina, Shaughnessy, Jansen 

& Siegert, L.L.C., for appellees Employers Mutual Casualty 

Company and EMCASCO Insurance Company.

Heavican, C.J., Wright, Connolly, Cassel, and Kel
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Wright, J.

I. NATURE OF CASE

This case concerns the meaning of coverage provisions in a 

general liability and umbrella policy insuring the fabricator of 

steel rebar under a purchase agreement with a general contractor. The rebar was improperly fabricated and had a reduced 

reinforcing capacity as a result. The defective rebar was incorporated into the construction of concrete pile caps that would 

form support for the Pinnacle Bank Arena (Arena). Several of 

the pile caps had to be modified in order to conform to the 

required specifications of the contract. The insurers refused 

to reimburse Drake-Williams Steel, Inc. (DWS), for costs 

incurred to modify these compromised pile caps. The insurers 

claimed the costs of the remedial measures did not fall under 

the coverage of the policies. The district court entered summary judgment in favor of the insurers. DWS appeals, and the 

insurers cross-appeal.

II. BACKGROUND

1. Reba

M.A. Mortenson Company (Mortenson) is a general contractor hired by the city of Lincoln to build the Arena. 

Mortenson entered into a purchase agreement with DWS to 

supply rebar for the Arena. The rebar was improperly bent 

when it was fabricated by DWS and therefore did not conform 

to the terms of the purchase agreement. The rebar was incorporated into three components of the Arena: the columns, the 

grade beams, and the pile caps. The pile caps provide support 

for the Arena’s columns, which in turn support the floor and 

the roof. The pile caps were made of concrete with reinforcing rebar and were installed below ground level on top of the 

concrete piles that extended to the bedrock. The grade beams 

were also made of concrete and rebar. The beams formed an 

oval around the Arena and connect different pile caps together 

and were also installed below ground level. DWS did not seek 

to recover any expenses for any corrections that were made to 
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the columns that contained the improperly bent rebar. No corrections were made to the grade beams.

The rebar was bent by DWS at too tight a radius and did 

not meet the specifications. This incorrect radius was determined to be the result of machine and operator error during 

the process of fabrication. Because of the incorrect radius, the 

rebar had approximately 50 percent of its normal reinforcing 

capacity. The nonconforming rebar that had not been cast in 

the concrete pile caps was removed and replaced by DWS. 

And DWS made no claim on this replacement. There were 

52 pile caps that had been cast with improperly bent rebar. 

Approximately half of these pile caps with the nonconforming rebar would nevertheless perform adequately given the 

particular pile caps’ shape or placement. But the other half 

were deemed incapable of providing the required structural 

support, because of the diminished reinforcing capacity of the 

nonconforming rebar. If these pile caps were not modified, 

they would not provide the support required. This could have 

resulted in a structural failure in part of the Arena. Engineers 

eventually determined that the most cost-effective solution 

was to install a reinforcing band around each of the compromised pile caps. This modification would provide the necessary structural support.

To modify these pile caps, new concrete was adhered to the 

sides of pile caps to make the existing pile caps wider. The 

new concrete was joined to the existing pile caps by new rebar 

that was drilled and epoxied into the existing pile caps. This 

process, once completed, made the pile caps wider and suitable for their intended purpose. The pile caps were essentially 

wrapped in a ring of concrete and rebar that would then perform as originally designed. The process required excavating 

around the pile caps, assembling a new form around the pile 

caps, placing rebar into that form, and pouring concrete into 

the form.

DWS initially refused to pay for the costs of the correction. Mortenson paid the costs and sought reimbursement from 
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DWS in the amount of $1,355,860. Eventually DWS reimbursed Mortenson. DWS sought coverage from its insurers. 

The insurers denied DWS’ claim and commenced this action 

to determine their obligations under the policies of insurance.

2. Polici

For the period of November 1, 2010, to November 1, 

2011, DWS was insured through a primary commercial general liability (CGL) policy with Employers Mutual Casualty 

Company (Employers). From November 1, 2011, to November 

1, 2012, DWS was insured through a primary CGL policy with 

EMCASCO Insurance Company (EMCASCO). DWS was also 

insured during the relevant time period through an umbrella 

policy with Continental Casualty Company (Continental). 

DWS sought coverage under its CGL policies and the umbrella 

policy. We refer to the insurance companies collectively as 

“the Insurers.”

The relevant coverage provisions of the umbrella policy 

with Continental are substantially similar to the provisions of 

the policies with Employers and EMCASCO.

(a) Damages and Property Damage

The policies agreed to cover “those sums that [DWS] 

becomes legally obligated to pay as damages because of . . . 

‘property damage’ to which this insurance applies.”

“Property damage” is defined by the EMCASCO policy as:

a. 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; or

b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to 

occur at the time of the “occurrence” that caused it.

(b) Occurrence

The insurance applied to “‘property damage’ only if” the 

property damage “is caused by an ‘occurrence.’”
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“Occurrence” is defined by the policy as “an accident, 

including continuous or repeated exposure to substantially the 

same general harmful conditions.”

3. Denial of Claim and 

The Insurers refused reimbursement under the coverage provisions and exclusions in their respective policies. 

Employers and EMCASCO eventually brought suit against 

DWS for declaratory judgment. DWS counterclaimed with 

actions for declaratory judgment and breach of contract. 

DWS also filed a separate complaint against Continental for 

declaratory judgment and breach of contract. The cases were 

consolidated.

The district court entered summary judgment in favor of the 

Insurers and overruled DWS’ motion for partial summary judgment. The district court reasoned:

Having now fully reviewed the exhibits, pleadings, 

arguments of counsel and the law, the Court finds that the 

pile caps with the nonconforming rebar (DWS’s product) 

were damaged as a result of the nonconforming rebar 

in that the pile caps were deficient and unable to sustain the load that they were designed for had the proper 

rebar been used. The majority of courts have found that 

faulty workmanship would not constitute an accident 

and, therefore, be an occurrence per policy. The Court 

finds that for the impaired property exclusion to apply, it 

would have been necessary for the rebar to be repaired, 

replaced, adjusted, or removed. By installing the collar/

band around the pile caps the impaired pile caps were 

restored to their intended use and there was no occurrence. The Court, therefore, finds that the “impaired 

property” exclusion applies.

DWS appeals. The Insurers cross-appeal.

III. ASSIGNMENTS OF ERROR

DWS assigns that the district court erred in (1) overruling DWS’ motions for summary judgment, (2) sustaining the 
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Insurers’ motions for summary judgment, (3) determining that 

there was no occurrence as defined in the policies, and (4) 

finding that the “impaired property” exclusion applied to preclude coverage.

The Insurers cross-appeal to the extent that the district court 

found that damages at issue consisted of “property damage” 

under the policies.

IV. STANDARD OF REVIEW

[1] The interpretation of an insurance policy presents a question of law that we decide independently of the trial court.1

[2] An appellate court will affirm a lower court’s grant of 

summary judgment if the pleadings and admitted evidence 

show that there is no genuine issue as to any material facts 

or as to the ultimate inferences that may be drawn from those 

facts and that the moving party is entitled to judgment as a 

matter of law.2

V. ANALYSIS

[3,4] The facts are not disputed; the correctness of the 

district court’s order in favor of the Insurers depends on the 

interpretation of the CGL policies. The meaning of an insurance policy is a question of law, in connection with which an 

appellate court has an obligation to reach its own conclusions 

independently of the determination made by the lower court.3

In construing insurance policy provisions, a court must determine from the clear language of the policy whether the insurer 

in fact insured against the risk involved.4

[5,6] In a coverage dispute between an insured and the 

insurer, the burden of proving prima facie coverage under a 

1 Federated Serv. Ins. Co. v. Alliance Constr., 282 Neb. 638, 805 N.W.2d 

468 (2011).

2 Phillips v. Liberty Mut. Ins. Co., 293 Neb. 123, 876 N.W.2d 361 (2016).

3 Auto-Owners Ins. Co. v. Home Pride Cos., 268 Neb. 528, 684 N.W.2d 571 

(2004).

4 Id.
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policy is upon the insured.5 If the insured meets the burden 

of establishing coverage of the claim, the burden shifts to the 

insurer to prove the applicability of an exclusion under the 

policy as an affirmative defense.6 The district court concluded 

that there was not an occurrence and also concluded, in the 

alternative, that the impaired property exclusion applied. We 

find as a matter of law that there was no “property damage.” 

Therefore, for different reasons from those stated by the district court, we conclude there was no coverage.7

 Because there 

was no coverage under the policies, we do not determine the 

applicability of any exclusions.

In a similar case, the court in F & H Const. v. ITT Hartford 

Ins. Co.8 held that there was no property damage under the 

CGL policy. The insured was to supply pile caps fabricated 

with a certain grade of steel. The insured mistakenly supplied caps with an inferior grade of steel. Those caps were 

welded onto steel piles before the defect was discovered. As a 

result, the structural units were inadequate for their intended 

purpose. In order to avoid the prohibitive cost of removing and replacing the piles, or cutting off the pile caps, the 

insured modified the pile caps by adding stiffener ribs and 

welding them onto the piles. Doing so resulted in the necessary structural support for the building. The project was 

thereby completed on time, and there was no claim for liquidated damages.

The question presented was whether welding defective pile 

caps to the piles was property damage within the meaning of 

the policy, because the welded units were inadequate to meet 

5 See, Farm Bureau Ins. Co. v. Martinsen, 265 Neb 770, 659 N.W.2d 823 

(2003); 44A Am. Jur. 2d Insurance § 1974 (2013).

6 44A Am. Jur. 2d, supra note 5.

7 See Hamilton Cty. EMS Assn. v. Hamilton Cty., 291 Neb. 495, 866 N.W.2d 

523 (2015).

8 F & H Const. v. ITT Hartford Ins. Co., 118 Cal. App. 4th 364, 12 Cal. 

Rptr. 3d 896 (2004).
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contractual design specifications. The parties did not dispute 

that an occurrence took place within the “coverage territory” 

and during the “policy period.”

The court held that the costs of remediation were not “property damage” under the policy.9

 The court stated the prevailing 

view was that incorporation of a defective component or product into a larger structure does not constitute property damage 

unless and until the defective component causes physical injury 

to tangible property in at least some other part of the system.10

Property damage is not established by the mere failure of a 

defective product to perform as intended.11

The court explained that while the defective caps may have 

rendered the piles inadequate for their intended purpose, the 

insured was able to provide modifications to create an adequate structural unit such that the caps ultimately served their 

intended purpose.12 It found that there was no physical injury 

and that there was no “loss of use,” as that term is commonly 

understood; i.e., the rental value of similar property that the 

plaintiff can hire for use while deprived of the use of his or her 

own property.13 The court noted the costs of modifying the pile 

caps was unrelated to rental value.14

[7-9] The court’s conclusion in F & H Const. comports with 

the general principle that standard CGL policies provide coverage for accidents caused by faulty workmanship only if there 

is bodily injury or property damage to something other than 

the insured’s work product.15 The cost to repair and replace 

faulty workmanship is a business risk that is not covered 

9 Id.

10 Id. See, also, Wisconsin Pharmacal v. Nebraska Cultures, 367 Wis. 2d 

221, 876 N.W.2d 72 (2016).

11 Id.

12 F & H Const. v. ITT Hartford Ins. Co., supra note 8.

13 See id.

14 Id.

15 See id.
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under a CGL policy.16 Business risks are “normal, frequent, 

and predictable” and do not involve the kind of fortuitous 

events for which insurance is obtained.17 As one commentator 

has explained:

Replacement and repair costs are to some degree within 

the control of the insured. They can be minimized by 

careful purchasing, inspection of material, quality control and hiring policies. If replacement and repair costs 

were covered, the incentive to exercise care or to make 

repairs at the least possible cost would be lessened since 

the insurance company would be footing the bill for 

all scrap.18

[10] Where a product manufacturer is liable as a matter of 

contract to make good on or replace products that are defective or otherwise unsuitable because they are lacking in some 

capacity, the economic loss incurred because of the product or 

work is not what was bargained for as part of general liability 

coverage. It is a business risk within the insured’s control and 

generally excluded from coverage.19

[11] There is a fundamental distinction between the noncovered business risk of having to correct faulty products or 

work and the covered risk of liability when faulty products or 

work cause damage to other property that cannot be corrected 

through the correction of the faulty products or work.20 A CGL 

16 See id. See, also, e.g., LaMarche v. Shelby Mut. Ins. Co., 390 So. 2d 325 

(Fla. 1980).

17 Scott C. Turner, Insurance Coverage of Construction Disputes § 27:1 

(2002). See, also, American Family Mut. v. American Girl, Inc., 268 Wis. 

2d 16, 673 N.W.2d 65 (2004).

18 Stewart Macaulay, Justice Traynor and the Law of Contracts, 13 Stan. L. 

Rev. 812, 825-26 (1961).

19 See Michael J. Brady, The Impaired Property Exclusion: Finding a Path 

Through the Morass. Exclusion M of the ISO CGL Policy Is a Complex 

and Intricate Provision, With Little and Disparate Case Law to Guide the 

Way, 63 Def. Couns. J. 380 (1996).

20 See Zurich American Ins. Co. v. Nokia, Inc., 268 S.W.3d 487 (Tex. 2008).
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policy is intended to cover an insured’s tort liability for physical injury or property damages, not economic losses due to 

business risks.21 As another commentator has noted:

The risk intended to be insured is the possibility that 

the goods, products or work of the insured, once relinquished or completed, will cause bodily injury or damage to property other than to the product or completed 

work itself, and for which the insured may be found 

liable. The insured, as a source of goods or services, may 

be liable as a matter of contract law to make good on 

products or work which is defective or otherwise unsuitable because it is lacking in some capacity. This may 

even extend to an obligation to completely replace or 

rebuild the deficient product or work. This liability, however, is not what the coverages in question are designed 

to protect against. The coverage is for tort liability for 

physical damages to others and not for contractual liability of the insured for economic loss because the product 

or completed work is not that for which the damaged 

person bargained.22

Again, “Property damage” is defined by the policies at 

issue as:

a. 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; or

b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to 

occur at the time of the “occurrence” that caused it.

Concrete and the rebar were part of the integrated system 

of the pile caps. There was no “physical injury” to the rebar 

21 Federated Serv. Ins. Co. v. Alliance Constr., supra note 1.

22 Roger C. Henderson, Insurance Protection for Products Liability and 

Completed Operations—What Every Lawyer Should Know, 50 Neb. L. 

Rev. 415, 441 (1971).
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or the pile caps in which the rebar was cemented. The improperly bent rebar still performed a structural reinforcement but 

was not as strong as it would have been if bent correctly. 

Because the defective rebar was discovered before the arena 

was further constructed, there was no damage to other parts of 

the system.23 And because the pile caps could be modified to 

meet the contractual requirements, rather than destroying and 

rebuilding the pile caps, there was no physical damage to the 

pile caps themselves. The pile caps could be modified without 

any physical damage to any other part of the Arena.

Furthermore, there was no claim by DWS for damages due 

to the temporary loss of use of the Arena during the period of 

remediation. Therefore, there was no “loss of use,”24 as that 

phrase is understood in the context of “property damage.”

The reinforcement of the pile caps was simply part of 

DWS’ contractual obligation to make good on its work. In 

the purchase agreement, DWS warranted and guaranteed to 

furnish the rebar free from defects and in compliance with 

the contract documents. The agreement provided that without 

costs to the contractor or owner, DWS shall promptly remove 

or replace defective material and any other work affected 

by such correction. This liability is not what CGL policies 

are designed to protect against.25 The costs of reinforcing 

the inadequately reinforced pile caps was a business risk 

and not the kind of fortuitous event for which a CGL policy 

is obtained.26

We do not say that any and all damage arising out of completed work performed by an insured and its subcontractors 

23 See Regional Steel v. Liberty Surplus Ins., 226 Cal. App. 4th 1377, 173 

Cal. Rptr. 3d 91 (2014).

24 See James Duffy O’Connor, Construction Defects: “Property Damage” 

and the Commercial General Liability Policy, 24-SPG Construction Law 

11 (2004).

25 See Henderson, supra note 22.

26 See Turner, supra note 17.
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is never “property damage” covered under a CGL policy. 

Depending upon the facts and the method used to correct the 

defect, there may or may not be coverage under the policy. 

For example, one method of correcting the existing problem 

in this case would have been to demolish and replace the 

pile caps. This would have resulted in damage to other property—the pile caps. But this option was rejected because of 

the significant cost of $5 to $6 million and its impact on the 

project schedule.

Other options were actually considered and rejected on the 

basis of viability, costs, or actual effectiveness of the proposed 

fix to the problem. Eventually, the solution agreed to by the 

parties was the installation of a concrete collar around the pile 

caps. This solution was the most cost effective and most likely 

to accomplish the goal of the modification. It was understood 

that the rebar itself was not repaired or replaced, but that 

instead, the pile caps were modified by way of a retrofit in 

order to provide the required structural support. We hold that 

this solution did not involve “property damage.”

DWS argues that Auto-Owners Ins. Co. v. Home Pride 

Cos.

27 supports coverage under the policies. We disagree. In 

Auto-Owners Ins. Co., the owner of an apartment complex contracted with the builder to install new shingles on a number of 

the buildings. The work was subcontracted. The owner noticed 

problems with the roof and brought suit against the subcontractor alleging faulty workmanship that had caused substantial 

damage to the roof structure and the buildings. The insurer 

filed a declaratory judgment, and the court entered summary 

judgment, concluding the insured was not covered under the 

general liability policy. On appeal, we reversed, concluding 

that the insurer had a duty to defend and that, to the extent the 

insured may be found liable for the resulting damage to the 

roof structures and the buildings, the insurer was obligated to 

provide coverage.

27 Auto-Owners Ins. Co. v. Home Pride Cos., supra note 3.
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In Auto-Owners Ins. Co., we reasoned that damages to the 

roof structures and buildings represented an unintended and 

unexpected consequence of the contractor’s faulty workmanship and went beyond damages to the contractor’s own work 

product; therefore, the petition properly alleged an occurrence 

and stated a cause for physical injury to tangible property and, 

therefore, “property damage” under the policy. Once coverage 

was established, we then examined the policy’s exclusions; and 

because the damages could not be repaired or restored by simply reshingling, they were not excluded by the policy.

The facts in the case at bar are distinguishable. Here, the 

insured’s defective work product did not damage other property. And the inadequacies of the product could be remedied 

through modification of the integrated pile caps, so as to conform to the required specifications.

Unlike in Auto-Owners Ins. Co., the amount that DWS seeks 

to recover is the costs incurred to make the pile caps conform 

to the work that DWS contracted to provide. To construe the 

CGL policies’ definition of property damage to include the 

modification to the pile caps, which were inadequate due 

solely to DWS’ failure to fulfill its duties under its contract 

with the general contractor, would convert the CGL policies 

into performance bonds insuring DWS’ business risks. That is 

not the intent of the CGL policies in question.

VI. CONCLUSION

We affirm the order of summary judgment in favor of the 

Insurers, but on different grounds from those stated by the 

court below. Insofar as the court found there was “property 

damage,” we find merit to the Insurers’ cross-appeals. Because 

the costs for which DWS sought reimbursement were not 

derived from any physical damage to the pile caps or their 

temporary loss of use, there was no property damage, and thus 

no coverage, under the CGL policies.

Affirmed

Miller-Lerman and Stacy, JJ., not participa