Opinion ID: 384591
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Heading: The All Risks Policy and its Exclusion Clauses

Text: 29 Royal had issued to Butler, a general contractor, an All Risk Builder's Risk policy, with coverage up to a limit of three million dollars. The insurance contract provided, as to perils insured: This policy insures against all risks of direct physical loss of or damage to insured property from any external cause except as provided elsewhere in the policy. (Italics ours.) The policy covered buildings or structures, while in the course of construction, including additions, attachments, and all permanent machinery, equipment and fixtures, belonging to and constituting a part of said buildings or structures. 30 Clause 7 lists perils excluded, providing that the policy does not insure against (types of losses set forth by exclusion subclauses (a) through (r)). The district court held that the present loss fell within exclusions referenced by clauses 7(d) (subsidence), 7(g)(1) (defective design), 7(g)(2) (faulty workmanship), 7(g)(3) (deficiency in testing), and 7(h) (latent defects and extreme of temperature). In construing the exclusion clauses of an all risks policy so broadly, in our opinion the district court fell into error of law. Before examining clause by clause the basis of the district court's holding, we preliminarily set forth the legal principles applicable to interpretation of such a policy and its exclusions. 31 A policy of insurance insuring against all risks creates a special type of coverage that extends to risks not usually covered under other insurance; recovery under an all-risk policy will be allowed for all fortuitous losses not resulting from misconduct or fraud, unless the policy contains a specific provision expressly excluding the loss from coverage. Morrison Grain Co., Inc. v. Utica Mut. Ins. Co., 632 F.2d 424 (5th Cir. 1980); C. H. Leavell & Co. v. Firemen's Fund Insurance Co., 372 F.2d 784 (9th Cir. 1967); J. Ray McDermott v. Fidelity & Casualty Co., 466 F.Supp. 353 (E.D.La.1979) (builder's risk); 13 Couch on Insurance 2d § 48:138 (1965); 5 J. Appleman, Insurance Law and Practice, § 5092 (1970); Annot., Coverage under all risk insurance, 88 A.L.R.2d 1122 (1963). Texas jurisprudence is to similar effect: As a general rule, an 'all risk' policy creates a special type of coverage. Recovery under such a policy is generally allowed for all losses of a fortuitous nature in the absence of fraud or other intentional misconduct of the insured, unless, of course, a policy contains a provision excluding the specific loss from coverage. Miles v. Royal Indemnity Co., 589 S.W.2d 725, 729 (Tex.Civ.App.1979), writ refused n. r. e. 8 32 Texas follows the well-settled rule that insurance policies will be interpreted liberally in favor of the insured and ambiguities strictly against the insurer, especially when dealing with exceptions and words of limitation. Ramsay v. Maryland American General Insurance Company, 533 S.W.2d 344 (Tex.1976). Furthermore, when the language of the insurance policy is susceptible of more than one reasonable construction, courts should apply that construction which favors the insured and permit recovery. Glover v. National Insurance Underwriters, 545 S.W.2d 755 (Tex.1977). See, e. g., Snyder National Bank v. Westchester Fire Insurance Company, 425 F.2d 849 (5th Cir. 1970); Aetna Casualty and Surety Company v. Yates, 344 F.2d 939 (5th Cir. 1965). 33 III. The Application (or Not) of the Exclusion Clauses to the Factual Causes of the Present Loss 34 The district court held (Finding of Fact 39) that the failure and collapse of the dome was caused by the following, in accordance with the uncontradicted testimony: (a) Incomplete thermal fusion and corresponding reduced tensile capacity of the interface of the foam logs; (b) Unsymmetrical gravity loading of freshly placed concrete; (c) Restraint and displacements imposed by the presence of a scaffold support; and (d) Thermal loading and corresponding restraint of the shell form. It then held that certain specific (see below) exclusions relate directly to these causes of collapse and preclude coverage (Finding of Fact 40). The exclusion clauses relied upon by the district court as defeating coverage are 7(d) (subsidence), 7(g)(1) (defective design), 7(g) (2) (faulty workmanship), 7(g)(3) (deficiency in testing) and 7(h) (latent defects and extremes of temperature). 35 Before discussing the findings with respect to each exclusion clause, we here note that the district court primarily fell into error by interpreting clause 7(g)(2) to include faulty workmanship by a subcontractor and its employees and subcontractors, whereas in the light of the policy as a whole the exclusion applied only to faulty workmanship by employees or others in the direct service of Butler, the insured general contractor, itself. The other findings are in the main elaborations of that misapprehension, although an arguable issue nevertheless exists as to whether the exclusions provided by 7(g)(1) (defective design) or 7(g)(3) (deficiency in testing) apply. In aid of the most convenient disposition of the issues presented, the exclusion clauses will be discussed in the following order: 1. faulty workmanship; 2. subsidence; 3. defective design; 4. deficiency in testing; and 5. latent defects and extremes of temperature. 1. Clause 7(g)(2)-Faulty workmanship : 36 Provision 7(g)(2) excluded losses resulting from (f)aulty workmanship or other error, omission or deficiency in respect to the operations of construction, installation repair or erection of any insured property when attributable to or performed by the insured (Butler) or any person or persons in the employment or service of the insured. (Italics ours.) Since most of the express factual findings disclose the primary cause of the collapse was the faulty workmanship in the welding process on the part of the subcontractor Dow or its subcontractors, the primary issue for interpretation is whether the subcontractor and those performing for it are in the service of the insured  within the meaning of the policy language excluding coverage for losses resulting from faulty workmanship attributable to persons in the employment or service of the insured. 37 We first note other policy-exclusion language that, at the least, indicates the intent is ambiguous in this regard. The immediately preceding and succeeding policy exclusions, 7(g)(1) (design defect) and 7(g)(3) (faulty workmanship or deficiency in respect to testing), specify that these exclusions apply regardless of to whom attributable. The addition of this language to these clauses clearly states exclusion of coverage under these clauses of deficiencies by subcontractors (as well as by employees and employee-similar others (officers, borrowed employees, etc.) directly in the service of the insured general contractor (Butler) and subject to its direct control). The omission of similar broad language in 7(g)(2) indicates to us a differing intent. We assume this to be to exclude recovery for faulty workmanship only when attributable to the general contractor's employees or others (e. g., officers, borrowed employees) similarly under its immediate direction and control. Furthermore, the language upon which Royal relies would have no purpose if indeed the faulty workmanship of subcontractors were intended to be excluded; the provision, then, need only have provided: faulty workmanship or other error, omission or deficiency in respect to the operations of construction, installation, repair or erection of any insured property. 38 We are re-enforced in this conclusion by the general purpose of the all risks builder's policy, which is intended to insure against all fortuitous losses not caused by the insured's own misconduct or fraud. In purchasing such a policy, a general contractor would contemplate that most, if not all, of the work on the construction project would be accomplished by subcontractors. See Finding of Fact 43. As was recently stated by this court with regard to interpretation of an all risks policy: (A)s a reviewing Court we must view each contract in the light of the setting of the parties and their reasonable expectations as to risks and protection against them, and an insurance policy in such a way as to effectuate its purpose. Morrison Grain Co., Inc. v. Utica Mutual Ins. Co., 632 F.2d at 424, 429. It is reasonable to assume that a primary purpose of purchase of an all risks policy by an insured would be to protect against fortuitous loss through fault of the subcontractors through whom the work was done; if subcontractor-fault were entirely excluded as a covered peril, the all risks peril expressly insured would become perilously close to a policy insuring no risk. 39 Exclusion of coverage under 7(g)(2) because of faulty workmanship on the part of the subcontractor's employees was determined by the district court on the basis of an erroneous conclusion of law. Findings of Fact Nos. 43, 44, and 45 are to the effect that subcontractors are in the employment or service of the insured general contractor, within the meaning of the policy, and that 7(g)(2) unambiguously excludes coverage for loss caused by them. For the reasons previously stated, this is an erroneous conclusion of law, and-in the complete absence of any testimony of faulty workmanship on the part of other than the subcontractor Dow's employees or subcontractors-the exclusion clause does not apply. 40 With regard to the defective thermal fusion (welds) of the styrofoam logs, which the evidence without dispute shows to have been the primary cause of the collapse, the district court made only two express findings as to causation: The welding of the styrofoam logs by Dow was not performed in accordance with specifications 9 (Finding of Fact 50); and: Dow's failure to produce adequate welds proximately caused the failure and the collapse of the dome herein (Finding of Fact 51). (Italics ours.) The district court also found: The welds between the interfaces of the styrofoam logs were not produced and performed in a workmanlike manner (Finding of Fact 53). These findings, it seems to us, are properly legally characterized as faulty workmanship by the subcontractor Dow, a non-excluded peril for which Royal is liable under its all risks policy. 2. Clause 7(d)-Subsidence : 41 The district court found as a fact that (t)he failure and collapse of the dome was caused by subsidence in violation of section (d) 10 of the insurance policy. (Finding of Fact 41.) Our trial brother fell into error of law in this conclusion: 42 In the first place, even if the collapse of the dome were a subsidence within the meaning of the policy, the primary or proximate cause of the collapse itself was the defective welding done by the faulty workmanship of the subcontractor's employees, a covered risk. The loss was primarily caused by the insured peril (faulty workmanship), not by its consequence, the collapse (if such could be denoted a subsidence). Further, where a loss occurs through a cause within the coverage of a policy, the coverage is not defeated because an excluded risk contributes to the loss, Fidelity Southern Fire Insurance Company v. Crow, 390 S.W.2d 788 (Tex.Civ.App.1965), writ refused n. r. e. 43 In the second place, we cannot accept-given application of the accepted principle that an exclusion cause is construed narrowly-Royal's argument that the excluded subsidence risk should cover any loss occasioned by any fall whatsoever of insured property. In the more usual sense, a subsidence or to subside connotes a gradual settling rather than an abrupt collapse. Webster's Third New International Dictionary, p. 2279 (1976); 40 Words & Phrases, verbo Subsidence, pp. 747-48 (1964), cf., Employer's Mutual Casualty Company v. Nelson, 361 S.W.2d 704 (Tex.1962). 3. Clause 7(g)(1)-Defective Design 44 In Amended Finding of Fact 42, the district court found: The failure and collapse of the dome was caused by defective design, in violation of Section (7)(g)(1). That clause excludes coverage for loss due to (e)rror, omission or deficiency in design, specifications, or in any insured property, regardless of to whom attributable. 45 The district court's finding of fact had originally held defective design because there was insufficient technology available to construct a structurally sound 221-foot thin-shelled dome. This original finding was deleted, however, in view of the uncontroverted evidence that, after the initial collapse, the dome was successfully rebuilt without change in specifications or design. The district court made no other specific finding of fact relating to the alleged deficiency in design. 46 On appeal, as we apprehend the insurer Royal's argument, it contends that the exclusion applies because of a failure to design proper thermal fusion techniques for the larger logs and wire used in the present construction. We ourselves were also initially concerned that the failure of the design or specifications to provide guidance as to the requisite tensile capacity of the welds might in itself be a defect in the design or specifications. 47 We are not now prepared to say that deficiencies in these regards might never constitute design defects. However, the evidence in the present record does not show that specifications as to tensile capacity are a customary feature of proper design; and, indeed, the trial court concluded as a fact that the anticipated tensile capacity of 27 psi was in the nature of a supplied specification (see note 9 supra), and that the collapse of the dome was due to the failure of the subcontractor Dow's employees to perform the welding in accordance with these specifications (Finding of Fact 50)-which would constitute a failure of workmanship, not of design. 48 With regard to the malfunctioning (or faulty workmanship in the use of) the fusion head, the evidence indicates that it was due to faulty adjustment of this non-insured property of the subcontractor (see note 1 supra). Again, it seems this deficiency was caused by faulty workmanship rather than by faulty design, even assuming that faulty design of a subcontractor's equipment (such as a hammer or a fusion head) that contributes to defective results could be a defect in design within the meaning of the builder's all risks insurance contract. 49 The appellee Royal also argues that the dimple appearing in the styrofoam dome in the course of its construction is evidence of an error of design. However, its own expert concluded that the cause of this malformation was the weakness of the welds (see note 3 supra). 50 We are unable to hold that a design exclusion has been proved within the meaning of the policy, considering also that any ambiguity in the exclusion language is resolved against the insurer and in favor of coverage. 4. Clause 7(g)(3)-Deficiency in Testing : 51 Clause 7(g)(3) of the insurance policy excludes from coverage loss due to (f)aulty workmanship, error, omission or deficiency in respect to the operation or testing of any insured property regardless of to whom attributable. (Italics ours.) In simply concluding the 7(g)(3) exclusion applicable, the district court made no express finding of factual default in the excluded regards. 52 The appellee Royal's chief argument on appeal is that there was inadequate testing to assure that the styrofoam logs were adequately welded, an especially desirable precaution in this construction project, because of the use therein of larger logs and wire than had formerly been utilized. Royal points out that, when the dome was reconstructed, testing by breaking apart the logs to ascertain the strength of the welds was consistently done during the entire course of construction, as had been done during the 1960's and early 1970's while Dow was developing its dome-construction techniques. 53 We find some difficulty in ascribing to the exclusion clause an intent to provide a policy defense, after a loss has occurred, by claiming a failure of testing not previously specified 11 or known to be required. Considering its ambiguity, the clause might perhaps be interpreted as excluding only losses directly caused to the insured property by the defective testing, for instance; it would thus not exclude fortuitous losses from covered risks (faulty workmanship by the contractor) that may have been prevented by adequate testing at some point in the chain of the construction process. The clause is, at the least, ambiguous; for, under the policy, it does not indicate when someone has a duty to test, and to what extent this testing should be effected. 54 For present purposes, we will assume arguendo most favorably to Royal (though we doubt that the exclusion should be interpreted so broadly) that the testing-exclusion requires, not only such testing as is specified by the insurance or construction contracts, but also such testing as may be customary in the practice of the insured industry. In this regard, the defendant's expert testified that you normally set up a testing procedure which will give you a reasonable assurance that the product is acceptable. By that, I mean you may not test every single inch of a weld, but you set up some kind of pattern so that you're relatively well assured that the end results are what you are looking for. Tr. 190-91. 55 The plaintiff's expert testified that the degree of testing or checking would depend on several factors, with it ultimately being an engineering decision by which the engineer on the project would decide the nature and extent of the testing or checking warranted. Tr. 60, 62. On the present construction contract, during the initial stages of construction, detailed testing was made by breaking the styrofoam logs; when the welds then met the expectations developed by the subcontractor's earlier experience in using the process, thereafter in the continued construction only visual testing of the outside of the weld line on the logs was made to ascertain that the beads of the welds appeared to indicate adequate welds. Tr. 60-61. 56 The defendant's expert assumed that this testing was insufficient, because on the reconstruction of the dome after the collapse the subcontractor Dow's engineer conducted the extensive testing (by actually breaking open styrofoam logs) at every level of the construction of the dome, as had been customary with Dow during its earlier more experimental development of its dome construction techniques during the sixties and early seventies. 57 On the other hand, there is no evidence that the type of testing actually conducted by the subcontractor Dow during its construction of the (collapsed) dome did not constitute a reasonable engineering decision upon a pattern of testing that, in the words of the defendant's expert, gave reasonable assurance that the welds were adequate. Considering the ambiguity of the testing exclusion, we are unable to hold that any evidence in the record as a matter of law supports the application of this exclusion clause under the present circumstances. 58 5. Clause 7(h)-Loss from latent defect or extreme of temperature. 59 Provision 7(h) of the insurance policy excluded from coverage (l) oss or damage caused by or resulting from inherent vice, latent defect, wear and tear, gradual deterioration, rust, corrosion, dampness of atmosphere, wet or dry rot, mold, extreme of temperature, freezing, insects or vermin. 12 60 As was noted earlier, Dow experienced temperature change of 50 degrees during construction of the dome. Such changes directly affected the expansion and contraction of the styrofoam form, effecting a tensile stress somewhat greater than the tensile capacity. 61 The district court determined that the proximate cause of the dome's collapse was the ineffective welds. (Finding of Fact 51.) The temperature change may have been a contributing cause of the dome's collapse. However, in an all risks policy, the insurer provides protection against all risks, unless otherwise excluded. This policy insured against defective welds resulting from faulty workmanship by the subcontractor, the primary cause of the loss; therefore, coverage is not defeated because a merely contributing cause was an excluded risk. Fidelity Southern Fire Insurance Company v. Crow, 390 S.W.2d 788 (Tex.Civ.App.1965), writ refused, n. r. e.; General American Transp. Corp. v. Sun Ins. Office, Limited, 369 F.2d 906 (6th Cir. 1966); 5 J. Appleman, supra, § 3083.