IN THE UNITED STATES DISTRICT COURT 

FOR THE SOUTHERN DISTRICT OF ALABAMA 

NORTHERN DIVISION 

EMPLOYERS MUTUAL CASUALTY 

COMPANY, 

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Plaintiff,

v. Civil Action No. 15-0054-CG-B 

KENNY HAYES CUSTOM HOMES, 

LLC.,

KENNY HAYES, individually, 

DAVID CHANCELLOR, individually, 

JOE NELSON, individually, 

TAMMY NELSON, individually. 

Defendants. 

MEMORANDUM OPINION AND ORDER 

 This matter is before the Court on Plaintiff’s motion for summary judgment 

(Doc. 47), Defendants’ responses in opposition (Docs. 49, 50), and Plaintiff’s replies 

(Docs. 51, 52). For the reasons explained below, the Court finds that Plaintiff has 

not shown as a matter of law that it is entitled to a declaration that it does not owe 

a duty to defend or indemnify Kenny Hayes Custom Homes, LLC, Kenny Hayes 

and/or David Chancellor in the underlying state court action. Accordingly, 

Plaintiff’s motion for summary judgment will be denied. 

FACTS 

The underpinnings of this insurance coverage declaratory judgment action lie 

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in a breach of contract and tort claim lawsuit filed on May 19, 2014, in the Circuit 

Court of Wilcox County, Alabama, Docket No. 14-900046 (the “underlying action”). 

(Doc.47-2). In the underlying action, Joe and Tammy Nelson sued Kenny Hayes 

Custom Homes, LLC, Kenny Hayes and/or David Chancellor (referred collectively 

herein as “Kenny Hayes Homes” or “builder”) for breach of contract, negligence, 

wantonness or willfulness, negligent hiring or supervision, fraud, breach of 

warranty and deceptive trade practices arising from the construction of the Nelsons’ 

home. (Doc. 47-2). According to the complaint in the underlying action, the Nelsons 

entered into a contract on March 6, 2012 for the construction of their home by 

Kenny Hayes Homes. (Doc.47-2, ¶ 18). Throughout the construction process and 

subsequent to completion, the Nelsons allege numerous failures of Kenny Hayes 

Homes to adequately supervise the construction causing the Nelsons to suffer 

“extreme mental anguish and emotional distress” and resulting in increased costs of 

construction and serious latent defects with the home, including water intrusion. 

(Doc. 47-2). Regarding the alleged water intrusion, the Nelsons testified that when 

water would come in they would mop it up with towels and sometimes leave buckets 

to catch the water. (Doc. 47-7, p. 7; Doc. 47-8, p. 5). Some of the walls hare stained 

from water, “where the water poured down and just stripped all the stain and 

everything off.” (Doc. 47-7, p. 7; Doc. 47-8, p. 5). The Nelsons also contend that the 

exterior walls are damaged because of the water pouring in, but no one has told 

them it is damaged. (Doc. 47-8, p. 6). The Nelsons did not assert any claims for 

damage to any furniture, rugs or other personal property. (Doc. 47-8, p. 6). Mr. 

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Nelson reports experiencing mental anguish because of having leaks every time it 

rains, but Mr. Nelson has not gone to a doctor for the mental anguish. (Doc. 47-7, p. 

7). Mrs. Nelson also reports suffering mental anguish and testified that she went to 

a doctor and was prescribed medicine to help her nerves. (Doc. 47-8, p. 7). Their

mental anguish also results from their breach of contract claim and began for Mrs. 

Nelson when they had to go borrow money and they could not get money to finish 

the house. (Doc. 47-7, p. 8, Doc. 47-8, p. 7). In November 2012, the Nelsons and 

Kenny Hayes Homes mutually agreed to end the construction contract and release 

each other from the obligations under the contract. (Doc. 50-6, pp. 6, 7-8). 

 Employers Mutual Casualty Company (“EMCC”) issued a commercial general 

liability insurance policy (Doc. 47-3) to Kenny Hayes Homes and has been providing 

a defense to Kenny Hayes Homes in the underlying action pursuant to a strict 

reservation of rights. EMCC filed the current action in this Court on February 2, 

2015 seeking a declaration that it has no duty to defend or indemnify Kenny Hayes 

Homes in the underlying action. (Doc. 1). 

 The insurance policy provides coverage for “sums that the insured becomes 

legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage.’ ” 

(Doc. 47-3, p. 25). The policy specifies that it applies to bodily injury and property 

damage only if: 

(1) The “bodily injury” or “property damage” is caused by an “occurrence” 

that takes place in the “coverage territory”; 

(2) The “bodily injury” or “property damage” occurs during the policy 

period; ... 

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(Doc. 47-3, p. 25). The policy defines “bodily injury” as “bodily injury, sickness or 

disease sustained by a person, including death resulting form any of these at any 

time.” (Doc. 47-3, p. 37). “Property damage” is defined 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. 

 (Doc. 47-3, p. 39). “Occurrence” is defined as “an accident, including continuous or 

repeated exposure to substantially the same general harmful conditions.” (Doc. 47-

3, p. 38). 

 The policy contains several exclusions that EMCC contends apply: 

contractual liability exclusion, damage to property exclusion, damage to impaired 

property or property not physically injured exclusion, professional liability exclusion 

and the absolute exclusion for fraud, misrepresentation, deceit or suppression or 

concealment of fact. 

 Exclusion 2(b), “Contractual Liability” excludes the following: 

“Bodily injury” or “property damage” for which the insured is obligated 

to pay damages by reason of the assumption of liability in a contract or 

agreement. This exclusion does not apply to liability for damages: 

(1) That the insured would have in the absence of the contract or 

agreement; or 

(2) Assumed in a contract or agreement that is an “insured contract”, 

provided the “bodily injury” or “property damage” occurs 

subsequent to the execution of the contract or agreement. Solely for 

the purposes of liability assumed in an “insured contract”, 

reasonable attorney fees and necessary litigation expenses incurred 

by or for a party other than an insured are deemed to be damages 

because of “bodily injury or property damage”, provided: 

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(a) Liability to such party for, or for the cost of, that party’s defense 

has also been assumed in the same “insured contract”; and 

(b) Such attorney fees and litigation expenses are for defense of that 

party against a civil or alternative dispute resolution proceeding 

in which damages to which this insurance applies are alleged. 

(Doc. 47-3, p. 26). 

 Exclusion 2(j), “Damage to Property” excludes the following: 

“Property damage” to: 

(1) Property you own, rent or occupy, including any costs or 

expenses incurred by you, or any other person, organization or 

entity, for repair, replacement, enhancement, restoration or 

maintenance of such property for any reason, including 

prevention of injury to a person or damage to another’s property; 

(2) Premises you sell, given away or abandon, if the “property 

damage” arises out of any part of those premises; 

(3) Property loaned to you; 

(4) Personal property in the care, custody or control of the insured; 

(5) That 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 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. 

Paragraphs (1), (3) and (4) of this exclusion do not apply to “property 

damage” (other than damage by fire) to premises, including the 

contents of such premises, rented to you for a period of 7 or fewer 

consecutive days. A separate limit of insurance applies to Damage To 

Premises Rented To You as described in Section III – Limits Of 

Insurance. 

Paragraph (2) of this exclusion does not apply if the premises are “your 

work” and were never occupied, rented or held for rental by you. 

Paragraphs (3), (4), (5) and (6) of this exclusion do not apply to liability 

assumed under a sidetrack agreement. 

Paragraph (6) of this exclusion does not apply to “property damage” 

included in the “products completed operations hazard”. 

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(Doc. 47-3, pp. 28-29). Under the policy, “products-completed operations hazard” 

“[i]ncludes all ‘bodily injury’ and ‘property damage’ occurring away from premises 

you own or rent and arising out of ‘your product’ or ‘your work’ except:” 

(1) Products that are still in your physical possession; or 

(2) Work that has not yet been completed or abandoned. However, 

"your work" will be deemed completed at the earliest of the 

following times: 

(a) When all of the work called for in your contract has been 

completed. 

(b) When all of the work to be done at the job site has been 

completed if your contract calls for work at more than one job 

site. 

(c) When that part of the work done at a job site has been put to its 

intended use by any person or organization other than another 

contractor or subcontractor working on the same project. 

(d) Work that may need service, maintenance, correction, repair or 

replacement, but which is otherwise complete, will be treated as 

completed. 

(Doc. 47-3, p. 39). “Products-completed operations hazard” does not include “bodily 

injury" or "property damage" arising out of: 

(1) The transportation of property, unless the injury or damage arises 

out of a condition in or on a vehicle not owned or operated by you, 

and that condition was created by the "loading or unloading" of that 

vehicle by any insured; 

(2) The existence of tools, uninstalled equipment or abandoned or 

unused materials; or 

(3) Products or operations for which the classification, listed in the 

Declarations or in a policy schedule, states that products-completed 

operations are subject to the General Aggregate Limit. 

(Doc. 47-3, p. 39). 

 Exclusion 2(m), “Damage To Impaired Property Or Property Not Physically 

Injured” excludes “property damage” to “impaired property” or property that has not 

been physically injured, arising out of: 

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(1) A defect, deficiency, inadequacy or dangerous condition in “your 

product” or "your work"; or 

(2) A delay or failure by you or anyone acting on your behalf to perform 

a contract or agreement in accordance with its terms. 

This exclusion does not apply to the loss of use of other property 

arising out of sudden and accidental physical injury to “your product” 

or “your work” after it has been put to its intended use. 

(Doc. 47-3, p. 29). Under the Policy “impaired property” means tangible property, 

other than “your product” or “your work”, that cannot be used or is less useful 

because: 

a. It incorporates “your product” or “your work” that is known or thought to 

be defective, deficient, inadequate or dangerous; or 

b. You have failed to fulfill the terms of a contract or agreement; 

If such property can be restored to use by the repair, replacement, 

adjustment or removal of “your product” or “your work”; or your fulfilling the 

terms of the contract or agreement. 

(Doc. 47-3, p. 37). 

 The exclusion “Contractors - Professional Liability” provides the following: 

1. This insurance does not apply to “bodily injury”, “property damage” 

or “personal and advertising injury” arising out of the rendering of 

or failure to render any professional services by you or on your 

behalf, but only with respect to either or both of the following 

operations: 

a. Providing engineering, architectural or surveying services to 

others in your capacity as an engineer, architect or surveyor; 

and

b. Providing, or hiring independent professionals to provide, 

engineering, architectural or surveying services in connections 

with construction work you perform. 

2. Subject to paragraph 3. below, professional services include: 

a. Preparing, approving, or failing to prepare or approve maps, 

shoe drawings, opinions, reports, surveys, field orders, change 

orders or drawings and specifications; and 

b. Supervisory or inspection activities performed as part of any 

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related architectural or engineering activities. 

3. Professional services do not include services within construction 

means, methods, techniques, sequences and procedures employed by 

you in connection with your operations in your capacity as a 

construction contractor. 

(Doc. 47-3, p. 49). 

 Lastly, the exclusion entitled “Absolute Exclusion for Fraud, 

Misrepresentation, Deceit or Suppression or Concealment of Fact” provides as 

follows: 

This insurance does not apply to any claim or lawsuit for damages 

arising out of fraud, misrepresentation, deceit, suppression or 

concealment of fact, whether intentional, unintentional, innocent, 

negligent, willful, malicious, reckless or wanton, including, but not 

limited to an action or lawsuit demanding or seeking damages or 

recover based on direct liability, vicarious liability or agency principles. 

We will not make any payment if those payments arise out of any 

claim or lawsuit excluded by this endorsement. We have no duty to 

defend any insured against any claim or lawsuit for damages to which 

this insurance does not apply.

This exclusion applies regardless of: 

1. Whether such operations are or were conducted by you or on your 

behalf; or 

2. Whether the operations are or were conducted for you or for others. 

(Doc. 47-3, p. 41). 

DISCUSSION 

A. Summary Judgment Standard 

 Federal Rule of Civil Procedure 56(a) provides that summary judgment shall 

be granted: “if the movant shows that there is no genuine dispute as to any material 

fact and the movant is entitled to judgment as a matter of law.” The trial court’s 

function is not “to weigh the evidence and determine the truth of the matter but to 

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determine whether there is a genuine issue for trial.” Anderson v. Liberty Lobby, 

Inc., 477 U.S. 242, 249 (1986). “The mere existence of some evidence to support the 

non-moving party is not sufficient for denial of summary judgment; there must be 

‘sufficient evidence favoring the nonmoving party for a jury to return a verdict for 

that party.’” Bailey v. Allgas, Inc., 284 F.3d 1237, 1243 (11th Cir. 2002) (quoting 

Anderson, 477 U.S. at 249). "If the evidence is merely colorable, or is not 

significantly probative, summary judgment may be granted." Anderson, at 249-250. 

(internal citations omitted). 

 The basic issue before a court on a motion for summary judgment is “whether 

the evidence presents a sufficient disagreement to require submission to a jury or 

whether it is so one-sided that one party must prevail as a matter of law.” See 

Anderson, 477 U.S. at 251-252. The moving party bears the burden of proving that 

no genuine issue of material fact exists. O'Ferrell v. United States, 253 F.3d 1257, 

1265 (11th Cir. 2001). In evaluating the argument of the moving party, the court 

must view all evidence in the light most favorable to the non-moving party, and 

resolve all reasonable doubts about the facts in its favor. Burton v. City of Belle 

Glade, 178 F.3d 1175, 1187 (11th Cir. 1999). “If reasonable minds could differ on 

the inferences arising from undisputed facts, then a court should deny summary 

judgment.” Miranda v. B&B Cash Grocery Store, Inc., 975 F.2d 1518, 1534 (11th 

Cir. 1992) (citing Mercantile Bank & Trust v. Fidelity & Deposit Co., 750 F.2d 838, 

841 (11th Cir. 1985)). 

 Once the movant satisfies his initial burden under Rule 56(c), the non-moving 

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party "must make a sufficient showing to establish the existence of each essential 

element to that party's case, and on which that party will bear the burden of proof 

at trial." Howard v. BP Oil Company, 32 F.3d 520, 524 (11th Cir. 1994)(citing 

Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986)). Otherwise stated, the nonmovant must “demonstrate that there is indeed a material issue of fact that 

precludes summary judgment.” See Clark v. Coats & Clark, Inc., 929 F.2d 604, 608 

(11th Cir. 1991). The non-moving party “may not rely merely on allegations or 

denials in its own pleading; rather, its response .... must be by affidavits or as 

otherwise provided in this rule be set out specific facts showing a genuine issue for 

trial.” Vega v. Invsco Group, Ltd., 2011 WL 2533755, *2 (11th Cir. 2011). “A mere 

‘scintilla’ of evidence supporting the [non-moving] party’s position will not suffice; 

there must be enough of a showing that the jury could reasonably find for that 

party.” Walker v. Darby, 911 F.2d 1573, 1577 (11th Cir. 1990) (citation omitted). 

“[T]he nonmoving party may avail itself of all facts and justifiable inferences in the 

record taken as a whole.” Tipton v. Bergrohr GMBH-Siegen, 965 F.2d 994, 998 (11th 

Cir. 1992). “Where the record taken as a whole could not lead a rational trier of fact 

to find for the non-moving party, there is no genuine issue for trial.” Matsushita 

Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574 at 587 (1986) (internal 

quotation and citation omitted). 

B. Policy Coverage 

 EMCC asserts that the policy does not cover the claims asserted in the 

underlying lawsuit. “In Alabama, insurers have the right, absent statutory 

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provisions to the contrary, to limit their liability and write policies with narrow 

coverage.” Turner v. U.S. Fidelity and Guar. Co., 440 So.2d 1026, 1027 -1028 (Ala. 

1983) (citation omitted). Under Alabama law, the insured bears the burden of 

establishing coverage by demonstrating that a claim falls within the policy, see 

Colonial Life & Accident Ins. Co. v. Collins, 280 Ala. 373, 194 So.2d 532, 535 (1967), 

while the insurer bears the burden of proving the applicability of any policy 

exclusion. See U.S. Fidelity & Guar. Co. v. Armstrong, 479 So.2d 1164, 1168 

(Ala.1985). If an insurance policy is ambiguous in its terms, the policy must be 

construed liberally in favor of the insured, and exceptions to coverage must be 

interpreted as narrowly as possible in order to provide maximum coverage to the 

insured. Altiere v. Blue Cross & Blue Shield, 551 So.2d 290, 292 (Ala. 1989). The 

Court notes that an “insurer's duty to defend is more extensive than its duty to 

[indemnify].” Porterfield v. Audubon Indem. Co., 856 So.2d 789, 791 (Ala. 2002) 

(quoting United States Fid. & Guar. Co. v. Armstrong, 479 So.2d 1164, 1168 (Ala. 

1985)). Generally, an insurer’s obligations with respect to providing a defense to its 

insured in an action brought by a third-party are determined by the allegations 

contained in the third-party’s complaint. Ladner and Company, Inc. v. Southern 

Guaranty Ins. Co., 347 So.2d 100, 102 (Ala. 1977) (citations omitted). “If the 

allegations of the injured party's complaint show an accident or occurrence which 

comes within the coverage of the policy, the insurer is obligated to defend regardless 

of the ultimate liability of the insured.” Id. (citing Goldberg v. Lumber Mutual 

Casualty Ins. Co., 297 N.Y. 148, 77 N.E.2d 131 (1948)). Thus, if there is any 

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potential for coverage arising out of the allegations, then EMCC would have at least 

a duty to defend. 

However, a court is not constrained to consider only the allegations of 

the underlying complaint, but may additionally look to facts which 

may be proved by admissible evidence. Tanner [v. State Farm Fire & 

Cas. Co., 874 So.2d 1058, 1064 (Ala.2003)]; see also Hartford Cas. Ins. 

Co. v. Merchants & Farmers Bank, 928 So.2d 1006, 1010 (Ala.2005) (in 

deciding whether the allegations of the complaint show a covered 

accident or occurrence, “the court is not limited to the bare allegations 

of the complaint ... but may look to facts which may be proved by 

admissible evidence”) (citations omitted). The test, ultimately, is this: 

“The insurer owes no duty to defend only if neither does the complaint 

against the insured allege a covered accident or occurrence nor does 

the evidence in the litigation between insurer and insured prove a 

covered accident or occurrence.” Tanner, 874 So.2d at 1065. 

Essex Ins. Co. v. Foley, 2011 WL 1706214, *3 (S.D. Ala. May 5, 2011). If both 

covered claims and non-covered claims are pleaded, then the insurer's duty to 

defend extends at least to those covered claims. Tanner, 875 So.2d at 1065. 

 In the instant case, EMCC asserts that coverage does not exist because 1) 

there is no claim for property damage; 2) there is no claim for bodily injury; 3) there 

is no occurrence; and 4) many of the claims do not constitute an accident. As stated 

above, Defendants have the burden of showing coverage exists. However, as this is 

EMCC’s motion for summary judgment, it is EMCC’s burden of showing that 

looking at the facts in the light most favorable to the Nelsons and Kenny Hayes 

Homes, there is no genuine dispute as to any material fact and that the movant is 

entitled to judgment as a matter of law. 

1. Property Damage 

 EMCC contends that there is no claim for property damage as defined by the 

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policy. Defendants disagree, asserting that the water damage to the house 

constitutes property damage. Under the policy “property damage” includes 

“[p]hysical injury to tangible property, including all resulting loss of use of that 

property.” Defendants assert that the water damage to the walls constitutes 

property damage, but EMCC contends that a mere change in color of the wall is not 

a physical injury. Defendants also assert that they believe there is more damage on 

the interior of the wall, damage that may be much greater than what is seen on the 

exterior. Defendants report that they have not been able to discover the full extent 

of the damages because investigating and repairing the walls would raise spoliation 

issues. The Nelsons report that they intend to begin repairs, after giving notice to 

the other parties, at which time they will presumably discover the full of extent of 

the damage. EMCC contends that any allegation that there is damage to the 

interior of the wall is merely speculation. The Court finds that while the damage to 

the exterior of the walls may seem small, it is damage to physical property 

nonetheless. EMCC asserts that the damage is not a physical injury because the 

change in color does not alter the material substance of the wall. However, a 

physical injury includes any wrong or damage done to another’s property. See Oak 

Ford Owners Ass'n v. Auto-Owners Ins. Co., 510 F. Supp. 2d 812, 816 (M.D. Fla. 

2007) (finding negative environmental impact to land was a physical injury). “[A]n 

item need not be completely destroyed in order to render it damaged.” Id. at 817. 

There is allegedly a significant change in the condition of the walls that would 

require physical work on the property for it to be remedied. Thus, the Court finds 

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that even if only the alleged exterior damage to the walls is considered, there is a

physical injury to the property. 

2. Bodily Injury 

 Defendants assert that their claim for mental anguish and emotional distress 

constitutes bodily injury. The policy definition of “bodily injury” includes “sickness 

or disease sustained by a person.” “Mental anguish” or “emotional distress” is not 

expressly excluded by the policy, thus, construing the language against the insurer, 

“mental anguish” and “emotional distress” are “necessarily included within the 

terms ‘sickness’ or ‘disease’ ”. Morrison Assur. Co. v. N. Am. Reinsurance Corp., 588 

F. Supp. 1324, 1327 (N.D. Ala. 1984) aff'd sub nom. Morrison v. N. Am., 760 F.2d 

279 (11th Cir. 1985). Accordingly, the Court finds that the Nelsons’ alleged mental 

anguish might be covered as a bodily injury under the policy. 

3. Occurrence 

EMCC contends that the water damage alleged in the underlying action does 

not constitute an “occurrence” as required by the policy. The policy states that it 

applies to bodily injury and property damage only if the bodily injury or property 

damage is caused by an “occurrence.” The policy defines “occurrence” as “an 

accident, including continuous or repeated exposure to substantially the same 

general harmful conditions.” (Doc. 47-3, p. 38). What constitutes an “accident” is 

not defined by the policy. Where an insurance policy defines certain words or 

phrases, a court must defer to the definition provided by the policy. Twin City Fire 

Ins. Co. v. Alfa Mut. Ins. Co., 817 So.2d 687 (Ala.2001). However, because the 

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instant policy does not define “accident,” we look outside the policy for the meaning 

of the word. Black’s Law Dictionary defines “accident” as “[a]n unintended and 

unforeseen injurious occurrence; something that does not occur in the usual course 

of events or that could not be reasonably anticipated.” Black's Law Dictionary 15 

(7th ed. 1999). “Accident” has also been defined as “an unexpected happening 

rather than one occurring through intentional design or an event which takes place 

without one's foresight or expectation or design.” Liberty Mut. Ins. Co. v. 

Wheelwright Trucking Co., Inc., 851 So.2d 466, 480 (Ala. 2002) (citations and 

internal quotations omitted). “[T]he term ‘accident’ does not necessarily exclude 

human fault called negligence.” United States Fidelity and Guar. Co. v. Bonitz 

Insulation Co. of Alabama, 424 So.2d 569, 571 (Ala. 1982). 

 EMCC asserts that it is not required to indemnify an insured for the costs of 

repairing or replacing faulty work. However, courts have found that faulty 

workmanship that causes a leak can, at least in some circumstances, result in an 

occurrence. The Bonitz Court, cited above, held that because Bonitz was “merely 

charged with negligence in installing the roof, there is no evidence that they either 

expected or intended the roof to start leaking” and therefore, the injury satisfied the 

requirement of an “occurrence.” Id. Likewise, in Moss v. Champion Ins. Co, a roofer 

was sued for water damage that occurred while a roof was being replaced. Moss v. 

Champion Ins. Co., 442 So.2d 26 (Ala. 1983). That court stated that it is clear from 

our cases that the term "accident" in such a policy does not necessarily exclude 

human fault called negligence. Id. at 28 (citing Bonitz supra). The Moss Court held 

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that while the roof was indeed intentionally removed, the resulting water damage 

was not intended, and, therefore, that there was an "occurrence" within the general 

liability policy terms. 

 Where the alleged damage is the faulty workmanship itself, there is no 

occurrence. Town & Country Prop., L.L.C. v. Amerisure Ins. Co., 111 So.3d 699, 706 

(Ala. 2011) (citing United States Fid. & Guar. Co. v. Warwick Dev. Co., 446 So.2d 

1021 (Ala. 1984)). A CGL policy is generally understood “to protect an insured from 

bearing financial responsibility for unexpected and accidental damage to people or 

property while a performance bond is intended to insure the contractor against 

claims for the cost of repair or replacement of faulty work.” Id. at 707 (citations and 

internal quotations omitted). However, “faulty workmanship may lead to an 

occurrence if it subjects personal property or other parts of the structure to 

‘continuous or repeated exposure’ to some other ‘general harmful condition’ (e.g., the 

rain in Moss) and, as a result of that exposure, personal property or other parts of 

the structure are damaged. Id. at 706. In the instant case, the alleged damage is to 

another part of the structure and cannot be remedied merely by correcting the 

faulty workmanship that caused the leaks. As such, the Court finds that the 

alleged water damage was caused by an occurrence. 

 Likewise, to the extent the Nelsons’ alleged mental anguish is caused by 

water leaking into their home, that injury is also caused by an occurrence. The 

Nelsons both allege they suffered emotional distress and Mr. Nelson specifically 

testified that he experienced emotional distress resulting from the water leaking 

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into the house (rather than solely from the monetary and other contract issues 

claimed). The Court finds that Defendants have at least raised a significant issue of 

fact with regard to whether their alleged injuries were caused by an occurrence. 

4. Particular Claims 

 EMCC asserts that certain claims asserted in the underlying action clearly do 

not fall under the CGL policy. The Court would agree, and Kenny Hayes Homes 

has conceded, that the claims for wantonness, willfulness, deceptive trade practices 

and fraud do not fall under the CGL policy. Defendants dispute that the claims for 

breach of contract, breach of warranty, negligence, and negligent hiring or 

supervision are not covered by the policy. 

 EMCC essentially makes the same arguments here as it does with regard to 

whether the alleged damages were caused by an occurrence. EMCC asserts that the 

claimed damages were caused by faulty workmanship and that there is no coverage 

for such intended acts. However, as explained above, the Court finds that while 

water was not prevented from leaking into the house because of the alleged faulty 

workmanship, it was the rain and water leakage itself that ultimately caused the 

damages. “When a contractor performs faulty work (that is, fails to use reasonable 

skill), there is no accident or occurrence, but, when the contractor's faulty work 

creates a condition that in turn damages property, under Alabama law, that 

damage results from an accident.” Pennsylvania Nat. Mut. Cas. Ins. Co. v. St. 

Catherine of Siena Par., 790 F.3d 1173, 1178 (11th Cir. 2015). 

 The Court stated above that the term “accident” could include allegations of 

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

Alabama, 424 So.2d 569, 571 (Ala. 1982). While Kenny Hayes Homes intentionally 

performed certain duties pursuant to its agreement with the Nelsons, there has 

been no evidence presented that Kenny Hayes Homes intended for water to leak 

into the house when it rained or for the walls to be damaged or for the Nelsons to be 

harmed in any way. The CGL policy applies to the claims for breach of contract, 

breach of warranty, negligence, and negligent hiring or supervision to the extent the 

covered damages arose from the conduct alleged in those claims 

C. Exclusions 

 As explained above, the insurer bears the burden of demonstrating that 

exclusions apply. Acceptance Ins. Co. v. Brown, 832 So.2d 1, 12 (Ala. 2001) (citing 

Fleming v. Alabama Farm Bureau Mut. Cas. Ins. Co., 293 Ala. 719, 310 So.2d 200, 

202 (1975)). EMCC contends that the claims are excluded under 1) subsections 5 

and 6 of the Damage to Property Exclusion, 2) the Contractual Liability Exclusion, 

3) the Damage to Impaired Property or Property Not physically Injured Exclusion, 

4) the Contractors-Professional Liability Exclusion and 5) the Absolute Exclusion 

for Fraud, Misrepresentation, Deceit or Suppression or Concealment of Fact. 

1. Damage to Property Exclusion

 Subsection 5 of the Damage to Property Exclusion excludes 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 those operations.” The alleged 

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property damage here arose from operations performed by Kenney Hayes Homes or 

its contractors and subcontractors. However, EMCC has not offered any cases that 

excluded coverage under similar language where, as here, an occurrence was found 

to have occurred and the alleged damage did not occur on the portion of the 

property where the alleged defective work was performed. The alleged damage in 

this case did not arise from work being performed on the property that was 

damaged. Instead, the alleged faulty construction caused damage to an otherwise 

non-defective portion of the property. Accordingly, the Court finds that subsection 5 

of the Damage to Property Exclusion does not apply in this case. 

 The Damage to Property Exclusion also excludes “[t]hat particular part of 

any property that must be restored, repaired or replaced because ‘your work’ was 

incorrectly performed on it.” The policy also provides that “this exclusion does not 

apply to ‘property damage’ included in the “products completed operations hazard”, 

which is defined in the policy. 

 “The purpose of the ‘your work’ exclusion is to prevent coverage for the 

insured's own faulty workmanship, a normal risk associated with operating a 

business.” Mid-Continent Cas. Co. v. Advantage Med. Elecs., LLC, 2015 WL 

6828722, at *7 (Ala. Nov. 6, 2015). However, in the instant case, the damaged 

property does not need to be restored because of work incorrectly performed on it, 

but because of work that was allegedly incorrectly performed on other portions of 

the property. Thus, under the language of the policy the exclusion does not apply. 

As further explained by the Alabama Supreme Court: 

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Further, we note that exclusion j(6) does not exclude coverage for all 

property damage caused by an insured's faulty workmanship. Rather, 

the meaning of exclusion j(6) is plain that property damage is excluded 

from coverage under that provision only as to the “particular part[s]” of 

the property that were themselves the subject of the defective work. In 

interpreting this exclusion, the United States Court of Appeals for the 

Fifth Circuit has stated: “[E]xclusion j(6) bars coverage only for 

property damage to parts of a property that were themselves the 

subject of defective work by the insured; the exclusion does not bar 

coverage for damage to parts of a property that were the subject of only 

nondefective work by the insured and were damaged as a result of 

defective work by the insured on other parts of the property.” Mid–

Continent Cas. Co. v. JHP Dev., Inc., 557 F.3d 207, 215 (5th Cir.2009). 

Mid-Continent Cas. Co. v. Advantage Med. Elecs., LLC, So.3d , 2015 WL 

6828722, at *9. Because the alleged property damage here was not to the particular 

parts of the property that were themselves the subject of the defective work, the 

exclusion does not apply. 

 2) Contractual Liability Exclusion 

 EMCC contends that the claims in the underlying action are excluded by the 

“Contractual Liability” exclusion in the policy. The Contractual Liability clause 

excludes “ ‘[b]odily injury’ or ‘property damage’ for which the insured is obligated to 

pay damages by reason of the assumption of liability in a contract or agreement.” 

The Eleventh Circuit recently found that, under Alabama law, such language “was 

intended to exclude claims arising out of indemnity agreements only.” 

Pennsylvania St. Catherine of Siena Parish, 790 F.3d 1173, 1182 (citing Townsend 

Ford, Inc. v. Auto-Owners Ins. Co., 656 So.2d 360, 364 (1995)). That court further 

found that this meaning applies regardless of whether the injured party brings a 

breach of contract claim based on the breach of an express or implied warranty. Id. 

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EMCC cites cases, including cases from this Court, which held that such contractual 

liability exclusions bar coverage for all claims sounding in contract. See e.g. 

Assurance Co. of America v. Admiral Ins. Co., 2011 WL 1897589 (S.D. Ala. May 18, 

2011) (citing U.S. Fid. & Guar. Co. v. Nat’l Tank and Mach. Works, Inc., 402 So.2d 

925 (Ala. 1981) & Carter v. Cincinnati Ins. Co., 435 So.2d 42 (Ala 1983)).1 However, 

as stated in Penn. St. Catherine of Siena Parish, “we are bound to follow the latest 

statement of state law by the state supreme court.” Penn. St. Catherine of Siena 

Parish, 790 F.3d at 1182. EMCC has offered no authority that persuades this Court 

that the holding of the Supreme Court of Alabama in Townsend Ford should not 

apply here. In the instant case, the parties did not enter into an indemnity 

agreement. The parties entered into an agreement for the construction of the 

Nelsons’ home and there has been no suggestion that Kenny Hayes Homes assumed 

any more or different liability than is standard for residential construction 

contracts. Accordingly, the Court finds that the Contractual Liability exclusion 

does not apply. 

 3) Damage to Impaired Property or Property Not physically Injured 

 EMCC contends that the “Damage To Impaired Property Or Property Not 

Physically Injured” provision excludes coverage here because the damages sought 

are for a defect or deficiency or inadequacy in the builder’s work. The clause 

excludes “property damage” to “impaired property” or property that has not been 

 

1 In Assurance Co. of America, this Court did not address the Alabama Supreme 

Court’s 1995 case, Townsend Ford. 

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physically injured, arising out of either: 

 (1) A defect, deficiency, inadequacy or dangerous condition in “your 

product” or "your work"; or 

(2) A delay or failure by you or anyone acting on your behalf to 

perform a contract or agreement in accordance with its terms. 

Under a plain reading of this language, the exclusion only applies where the 

damaged property has not been physically injured. As this Court has already found 

that the alleged injury to the walls constitutes a physical injury, the exclusion does 

not apply. Additionally, the exclusion would not bar the Nelsons’ claim that they 

have suffered bodily injury in the form of mental and emotional distress. 

4) Contractors-Professional Liability Exclusion 

EMCC contends that the Nelsons’ claims are barred by the “Contractors - 

Professional Liability” exclusion because they arise out of the builder’s rendering or 

the builder’s failure to render professional services. However, the exclusion states 

that “[p]rofessional services do not include services within construction means, 

methods, techniques, sequences and procedures employed by you in connection with 

your operations in your capacity as a construction contractor.” EMCC has not 

shown that the actions complained of in the underlying case fall outside the above 

language. EMCC points to Ms. Nelson’s testimony at her deposition wherein she 

answered “Yes” when asked if she was seeking damages arising out of Kenny Hayes 

Homes’ rendering or failure to render professional services. (Doc. 47-8, p. 5). 

However, there has been no suggestion that Ms. Nelson has a legal background or 

education and understood the legal conclusion she was being asked to make. 

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Moreover, even if the Nelsons are seeking damages for the rendering or failure to 

render professional services, that does not preclude them from seeking other 

damages as well. Ms. Nelson did not state that all of the damages they seek are for 

the rendering or failure to render professional services. Nor did she specify that the 

emotional distress damages or the water damages they seek arise from Kenny 

Hayes Homes’ rendering or failure to render professional services. The Court finds 

that EMCC has not shown that the covered damages are excluded by the 

Professional Liability exclusion. 

5) Absolute Exclusion for Fraud, Misrepresentation, Deceit or 

Suppression or Concealment of Fact 

 The “Absolute Exclusion for Fraud, Misrepresentation, Deceit or Suppression 

or Concealment of Fact” provides that the CGL policy does not apply to: 

any claim or lawsuit for damages arising out of fraud, 

misrepresentation, deceit, suppression or concealment of fact, whether 

intentional, unintentional, innocent, negligent, willful, malicious, 

reckless or wanton, including, but not limited to an action or lawsuit 

demanding or seeking damages or recover based on direct liability, 

vicarious liability or agency principles. 

Kenny Hayes Homes has conceded that the claims for wantonness, willfulness, 

fraud and deceptive trade practices are not covered by the policy. EMCC has not 

shown that this exclusion would apply to any other claims asserted in the 

underlying action. 

CONCLUSION 

For the reasons stated above, the Court finds that Plaintiff has not shown as 

a matter of law that it is entitled to a declaration that it does not owe a duty to 

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defend or indemnify Kenny Hayes Custom Homes, LLC, Kenny Hayes and/or David 

Chancellor in the underlying state court action. Accordingly, Plaintiff’s motion for 

summary judgment (Doc. 47) is DENIED. 

DONE and ORDERED this 9th day of Febuary, 2016. 

 /s/ Callie V. S. Granade 

 UNITED STATES DISTRICT JUDGE 

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