Opinion ID: 223511
Heading Depth: 3
Heading Rank: 2

Heading: Coverage for the Pappas and Saltzman Suits

Text: In its last issue on appeal, Liberty Mutual argues that even if the district court correctly interpreted the Policies, it incorrectly concluded that the Pappas and Saltzman Suits alleged claims that the Policies covered. First, Liberty Mutual contends that the claims in both suits are grounded in fraud and therefore cannot be construed as alleging an occurrence. Liberty Mutual maintains that, under Iowa law, a claim alleging fraud does not allege an `occurrence' as that term is defined in the [Policies]. (Citing Yegge v. Integrity Mut. Ins. Co., 534 N.W.2d 100, 102 (Iowa 1995); Ellensohn v. Am. Family Mut. Ins. Co., 96 F.3d 1075, 1075 (8th Cir.1996)). Moreover, according to Liberty Mutual, both complaints alleged that Pella either knew or, at a minimum, should have known that there was a substantial probability that damage would result from its actions. Thus, Liberty Mutual contends that both the Pappas and Saltzman Suits alleged non-accidental conduct and damages, and, therefore, not an occurrence under the Policies. Second, Liberty Mutual contends that the Pappas Suit only alleged damage to Pella's windows and therefore did not allege covered property damage. According to Iowa law, Liberty Mutual argues, a claim for defective workmanship cannot be considered an occurrence, and the Policies specifically exclude damage to Pella's own work or product. The factual allegations in the Pappas complaint only referred to damages to the plaintiffs' windows. Liberty Mutual acknowledges that the prayer for relief sought damages to repair the plaintiffs' homes, but it asserts that a generic request for damages does not mean that the claim is potentially covered. As explained supra in Part II.A.1.a, unless otherwise stated in the policy, the duty to reimburse defense costs, like the duty to defend, is determined by the facts alleged in the complaint. The Iowa Supreme Court has explained, in the duty-to-defend context, that the duty to defend rests solely on whether the petition contains any allegations that arguably or potentially bring the action within the policy coverage. If any claim alleged against the insured can rationally be said to fall within such coverage, the insurer must defend the entire action. In case of doubt as to whether the petition alleges a claim that is covered by the policy, the doubt is resolved in favor of the insured. Emp'rs Mut. Cas. Co., 552 N.W.2d at 641 (quotation and citation omitted). Accordingly, subject to other provisions, the Policies provide coverage for suits that allege property damage caused by an occurrence. The Policies define an occurrence as an accident, including continuous or repeated exposure to substantially the same general harmful conditions. While the Policies do not define the term accident, the Iowa Supreme Court has defined an accident, when used in an insurance policy, to mean: an undesigned, sudden, and unexpected event, usually of an afflictive or unfortunate character, and often accompanied by a manifestation of force.... [G]iving to the word the meaning which a man of average understanding would, we think [accident] clearly implies a misfortune with concomitant damage to a victim, and not the negligence which eventually results in that misfortune. Pursell Constr. Inc. v. Hawkeye-Sec. Ins. Co., 596 N.W.2d 67, 70 (Iowa 1999) (alterations in Pursell ) (quoting Cent. Bearings Co. v. Wolverine Ins. Co., 179 N.W.2d 443, 448 (Iowa 1970)). In Pursell, a contractor brought a declaratory judgment action against its insurer, seeking coverage under its comprehensive general liability (CGL) policy for claims brought against the contractor by a developer. Id. at 68. The developer had sued the contractor for breach of contract and negligence, alleging that the contractor improperly constructed two houses at an elevation below a floodplain. Id. The contractor sought coverage under its CGL policy, which provided coverage for `property damage' ... caused by an `occurrence.' Id. at 69. The [CGL] policy define[d] `occurrence' as `an accident, including continuous or repeated exposure to substantially the same general harmful conditions.' Id. at 70. The Iowa Supreme Court noted that the developer's claim against the contractor was essentially one for defective workmanship. Id. To resolve the question of whether defective workmanship could constitute an occurrence covered by a CGL policy, the court surveyed cases from other jurisdictions and quoted approvingly from an Arizona appellate court decision which explained: If the [CGL] policy is construed as protecting a contractor against mere faulty or defective workmanship, the insurer becomes a guarantor of the insured's performance of the contract, and the policy takes on the attributes of a performance bond. We find these authorities unpersuasive. Id. at 71 (quoting U.S. Fid. & Guar. Corp. v. Advance Roofing & Supply Co., 163 Ariz. 476, 788 P.2d 1227, 1233 (App.1989)). As a result, the Iowa Supreme Court adopted the majority rule and held that defective workmanship standing alone, that is, resulting in damages only to the work product itself, is not an occurrence under a CGL policy. Id. The court explained that the damages [the developer] seeks are limited to the very property upon which Pursell performed work and were not the result of an `occurrence' as defined in the policy. Id. Nearly ten years after Pursell, the Iowa Court of Appeals addressed a similar issue in W.C. Stewart Construction, Inc. v. Cincinnati Insurance Co., 770 N.W.2d 850, 2009 WL 928871, at  (Iowa Ct.App. Apr. 8, 2009) (table opinion, publication decision pending), rev. denied (Iowa June 5, 2009). There, the insured, a subcontractor, sought coverage under a CGL policy for claims asserted against the subcontractor by a developer. Id. The developer alleged that the subcontractor's defective grading of a construction site caused building movement and cracks in walls erected (presumably by other subcontractors) on the ground graded. Id. The CGL policy, like the policy in Pursell, limited coverage to an occurrence, which it, like the policy in Pursell, defined as an accident, including continuous or repeated exposure to substantially the same general harmful conditions. Id. The subcontractor attempted to distinguish Pursell on the grounds that the developer's claim asserted damages to property other than [the subcontractor's] work product. Id. at . The court of appeals rejected this argument, stating that the subcontractor had read[] Pursell too narrowly because [t]he faulty workmanship in Pursell required reinstallation of plumbing and duct work with which Pursell had not been involved, just as the faulty workmanship by [the subcontractor] required reconstruction of walls [the subcontractor] had not built. Id. Because the damages [the developer] sought were to the very property upon which [the subcontractor] performed work, the court held that the damages were not the result of an occurrence. Id. at . To hold otherwise, the court explained, would improperly make the insurer a guarantor of the insured's work. Id. In light of Pursell and W.C. Stewart, we conclude that the plaintiffs in the Pappas and Saltzman Suits did not allege property damage caused by an occurrence. Here, as in Pursell, the Policies provide coverage for `property damage' ... caused by an `occurrence,' which the Policies, as in Pursell, define as an accident, including continuous or repeated exposure to substantially the same general harmful conditions. Further, the Pappas and Saltzman plaintiffs alleged that Pella, much like the contractors in Pursell and W.C. Stewart, defectively designed and constructed its windows. Specifically, the Pappas complaint alleged that Pella knew that its windows had a defect that allowed water to leak through the window frame. Similarly, all of the claims in the Saltzman complaint derived from the allegation that Pella knew that its windows contained an inherent defect that permitted [water] leakage. In both cases, the property damage  whether to the windows themselves or the structure of the building near the windows  was caused by a defect that Pella was alleged to have known about. Under Iowa law, such defective workmanship, as alleged in the Pappas and Saltzman Suits, cannot be considered an occurrence, i.e., an undesigned, sudden, and unexpected event. Pursell, 596 N.W.2d at 70 (quotation and citation omitted). Because the Pappas and Saltzman Suits did not allege an occurrence, Liberty Mutual did not owe Pella a duty to reimburse its costs in defending either action. See McCuen, 946 F.2d at 1407; Emp'rs Mut. Cas. Co., 552 N.W.2d at 641. As a result, we need not address Liberty Mutual's alternative argument that the Pappas Suit did not allege property damage apart from the damage to the windows themselves.