IN THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT ________________________________ No. 05-1356 ________________________________ JAMES H. FRENCH, et al., assignees of the claims of Jeffco Development Corporation, Plaintiffs - Appellants, v. ASSURANCE COMPANY OF AMERICA, et al., Defendants - Appellees. ________________________________ BRIEF OF AMICUS CURIAE NATIONAL ASSOCIATION OF HOME BUILDERS IN SUPPORT OF APPELLANTS JAMES H. FRENCH ET AL. IN SUPPORT OF REVERSAL ________________________________ APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA AT ALEXANDRIA No. 1:04CV550(JCC) ________________________________ David S. Jaffe National Association of Home Builders 1201 15th Street, N.W. Washington, DC 20005 Tel: (202) 266-8317 Fax: (202) 266-8161 Counsel for Amicus Curiae National Association of Home Builders IN THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT JAMES H. FRENCH, et al., assignees of the claims of Jeffco Development Corporation Plaintiffs - Appellants, v. ASSURANCE COMPANY OF AMERICA, et al., Defendants - Appellees. * * * * * * * * * * * * * * * * * * * * * * * No. 05-1356 NOTICE OF CORPORATE DISCLOSURE Pursuant to Fed. R. App. P. 26.1 and Local Rule 26.1, the National Association of Home Builders, as amicus curiae, makes the following disclosures: 1. Is the party a publicly held corporation or other publicly held entity? ( ) Yes (X) No 2. Is the party a parent, subsidiary, or affiliate of, or a trade association representing, a publicly held corporation, or other publicly held entity (see Local Rule 26.1(b))? ( ) Yes (X) No 3. Is there any other publicly held corporation, or other publicly held entity, that has a direct financial interest in the outcome of the litigation (see Local Rule 26.1(b)(3))? ( ) Yes (X) No Date: September 8, 2005 Respectfully submitted, ________________________________ David S. Jaffe National Association of Home Builders 1201 15th Street, N.W. Washington, DC 20005 Tel: (202) 266-8317 Fax: (202) 266-8161 Counsel for Amicus Curiae National Association of Home Builders -2- TABLE OF CONTENTS Notice of Corporate Disclosure Table of Authorities ....................................................................................... iii Introduction ..................................................................................................... 1 Statement of Interest ....................................................................................... 2 Summary of Argument.................................................................................... 3 Argument......................................................................................................... 5 I. LIABILITY INSURANCE PROTECTS HOME BUILDERS FROM THE RISK OF CLAIMS FOR PROPERTY DAMAGE CAUSED BY THE WORK OF SUBCONTRACTORS. .................... 5 BY ATTEMPTING TO EXPAND THE INSURANCE POLICY'S "OCCURRENCE" REQUIREMENT, THE INSURERS ARE ATTEMPTING EFFECTIVELY TO DELETE THE SUBCONTRACTOR EXCEPTION FROM THE POLICY'S "YOUR WORK" EXCLUSION. ............................. 9 NUMEROUS COURTS HAVE HELD THAT PROPERTY DAMAGE TO THE BUILDER'S WORK CAN BE CAUSED BY AN "OCCURRENCE." ............................................................... 13 THE MARYLAND COURT OF APPEALS WOULD HOLD THAT PROPERTY DAMAGE TO THE BUILDER'S WORK CAN BE CAUSED BY AN "OCCURRENCE."............................... 17 IN THE ALTERNATIVE, THIS COURT SHOULD CERTIFY THE "OCCURRENCE" ISSUE TO THE MARYLAND COURT OF APPEALS. ..................................................................... 20 INSURANCE PLAYS A VITAL ROLE IN THE HOME BUILDING INDUSTRY.................................................................... 22 II. III. IV. V. VI. Conclusion .................................................................................................... 24 Addendum Certificate of Compliance Certificate of Service - ii - TABLE OF AUTHORITIES Cases American Family Mut. Ins. Co. v. American Girl, Inc., 673 N.W.2d 65 (Wis. 2004) ............................................................................7, 8, 11, 12, 13, 16 Archon Investments, Inc. v. Great American Lloyds Ins. Co., 2005 WL 2037177 (Tex. App. -- Houston [1st Dist.] Aug. 25, 2005)..........................17 Bausch & Lomb, Inc. v. Utica Mut. Ins. Co., 330 Md. 758, 625 A.2d 1021 (1993)...........................................................................................................19 Century I Joint Venture v. United States Fidelity & Guaranty Co., 63 Md. App. 545, 493 A.2d 370, cert. denied, 304 Md. 297, 498 A.2d 1183 (1985)...........................................................................................................18 CU Lloyd's of Texas v. Main Street Homes, Inc., 79 S.W.3d 687 (Tex. App. -- Austin 2002, no pet.)..................................................................................7 Fireguard Sprinkler Systems, Inc. v. Scottsdale Ins. Co., 864 F.2d 648 (9th Cir. 1988) ....................................................................................................7, 8 Gehan Homes, Ltd. v. Employers Mut. Cas. Co., 146 S.W.3d 833 (Tex. App. -- Dallas Oct. 26, 2004, pet. for review filed)....................................17 Goldstein v. Potomac Elec. Power Co., 578 F.2d 975 (4th Cir. 1978)....................21 Great Am. Ins. Co. v. Calli Homes, Inc., 236 F.Supp. 2d 693 (S.D. Tex. 2002)...............................................................................................................6 Harbor Court Assocs. v. Kiewit Const. Co., 6 F.Supp. 2d 449 (D. Md. 1998) ...............................................................................................................18, 19 Hoang v. Monterra Homes (Powderhorn) LLC, 2005 WL 427936 (Colo. App. Feb. 24, 2005)...................................................................................17 J.S.U.B., Inc. v. U.S. Fire Ins. Co., 906 S.2d 303 (Fla. App. 2005)........................17 JMP Assocs., Inc. v. St. Paul Fire & Marine Ins. Co., 345 Md. 630, 693 A.2d 832 (1997).......................................................................................12, 20 - iii - Kalchthaler v. Keller Const. Co., 591 N.W.2d 169 (Wis. App. 1999)................9, 13 King v. Dallas Fire Ins. Co., 85 S.W.3d 185 (Tex. 2002) ...................................6, 12 Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 825 A.2d 641 (Pa. Super. 2003), review granted, 848 A.2d 925 (Pa. 2004).......................................................................................................17 Lee Builders, Inc. v. Farm Bureau Mut. Ins. Co., 104 P.3d 997 (Kan. App. 2005) ................................................................................7, 11, 12, 13, 15, 16 Lennar Corp. v. Great American Ins. Co., 2005 WL 1324833 (Tex. App. -- Houston [14th Dist.] June 2, 2005)....................................................14, 15 Lerner Corp. v. Assurance Co. of America, 120 Md. App. 525, 707 A.2d 906 (Md. App. 1998) .............................................................................18, 19 Limbach Co. v. Zurich American Ins. Co., 396 F.3d 358 (4th Cir. 2005) ...............................................................................................................7, 8, 9 L-J, Inc. v. Bituminous Fire & Marine Ins. Co., 2004 WL 1775571 (S.C. Aug. 9, 2004)...............................................................................................17 Mid-United Contractors, Inc. v. Providence Lloyds Ins. Co., 754 S.W.2d 824 (Tex. App.-- Fort Worth 1988, writ. denied) .....................................8 O'Shaugnessy v. Smuckler Corp., 543 N.W.2d 99 (Minn. App. 1996) ..................13 Roth v. Dimensions Health Corp., 992 F.2d 36 (4th Cir. 1993)..............................21 Sheets v. Brethren Mut. Ins. Co., 342 Md. 634, 679 A.2d 540 (1996) .....................6 United Pacific Ins. Co. v. East, 250 F.3d 234 (4th Cir. 2001).................................21 Vandenberg v. Superior Court, 982 P.2d 229 (Cal. 1999) ......................................11 Welsh v. Gerber Products, Inc., 839 F.2d 1035 (4th Cir. 1988)..............................21 Woodfin Equities Corp. v. Harford Mut. Ins. Co., 110 Md. App. 616, 678 A.2d 116 (1996), rev'd, 344 Md. 399, 687 A.2d 652 (1997) ........................18 - iv - Statutes Md. Code Ann., Courts & Judicial Proceedings, §12-603 ..............................2, 4, 20 Md. Code Ann., Courts & Judicial Proceedings, §12-605 ......................................20 Md. Code Ann., Courts & Judicial Proceedings, §12-606 ......................................20 Other Authorities J. Blute, Analyzing Liability Insurance Coverage for Construction Industry Property Damage Claims, 7 Coverage 1 (May/June 1997) .....................7 P. O'Connor, Commercial General Liability Coverage, 19 The Construction Lawyer 5, 6 (April 1999) ..................................................................7 Windt, Insurance Claims and Disputes, §11.3, Supp. p. 48 (4th ed. 2001) ..................................................................................................................16 -v- Introduction The National Association of Home Builders ("NAHB"), pursuant to Fed. R. App. P. 29, respectfully submits this brief as amicus curiae in support of the appeal by appellants James and Kathleen French (the "Frenches"). NAHB represents the nation's home builders. NAHB urges the Court to reverse the trial court's order and to render judgment in favor of the Frenches on the "occurrence" issue. The trial court held that property damage to a home builder's work -- the house itself -can never be caused by an "occurrence" because the damage is necessarily "expected" by the builder and hence cannot be accidental. The trial court's order would rewrite the liability insurance policies of builders throughout Maryland and would erroneously deprive builders of insurance coverage for unexpected, inadvertent construction defects resulting in property damage that was caused, as here, by the work of subcontractors. The trial court's reasoning was based on an exclusion -- known as the "your work" exclusion -- that previously excluded coverage for property damage to the builder's own work. In 1986, however, this exclusion was amended so that it no longer applies if the damaged work or the work out of which the damage arises was performed by a subcontractor. The trial court's opinion took no account of this change in builders' liability insurance policies. The trial court's opinion would render meaningless the "subcontractor" exception to the "your work" exclusion, in violation of bedrock principles of insurance policy construction. Neither the Maryland Court of Appeals nor any lower court opinions applying Maryland law have yet considered the "occurrence" issue in light of the subcontractor exception to the "your work" exclusion. But numerous other courts around the country have recently held that property damage to the house itself can be caused by an "occurrence," as long as the home builder -- as a factual matter -did not expect or intend the damage. The Maryland Court of Appeals would follow these decisions. In the alternative, NAHB urges this Court to certify the important "occurrence" issue in this case to the Maryland Court of Appeals pursuant to Md. Code Ann., Courts & Judicial Proceedings, §12-603. Statement of Interest NAHB has a substantial interest in this matter. NAHB is a nonprofit trade association that represents 220,000 builder and associate members organized into approximately 850 affiliated state and local associations in all fifty states, the District of Columbia, and Puerto Rico. These affiliated associations include six state and local associations in Maryland, representing 2,405 members who build most of Maryland's housing. NAHB's goals are to promote home ownership; foster a healthy and efficient housing industry; and promote policies that will keep safe, decent, and affordable housing a national priority. Its members construct -2- over 80% of the housing in the United States. NAHB's website address is www.nahb.org. NAHB can offer this Court a broad view of (i) the role that liability insurance plays within the home building industry, (ii) the lack of justification for the retrenchment of coverage that appellees Assurance Company of America ("Assurance") and United States Fire Insurance Company ("U.S. Fire") (collectively "the Insurers") are seeking in this case, and (iii) the disruptive effect that the trial court's judgment would have on Maryland home builders and Maryland homeowners alike. Summary of Argument Home builders pay substantial premiums for liability insurance to protect themselves from the risk of loss resulting from property damage to the houses they build when such property damage is caused by the work of subcontractors. Such insurance has been in place since at least 1986, when an exclusion in the standard liability insurance policy for property damage to "your work" was amended to except from the exclusion property damage to the house itself (the builder's "work") caused by the work of a subcontractor. In this case, the Insurers seek to eliminate from their insurance policies the coverage they provide for such property damage. The Insurers are not doing this directly, by addressing the "your work" exclusion and its exception reinstating -3- coverage for property damage caused by the work of subcontractors, but rather indirectly, by arguing that property damage to the house resulting from a construction defect can never be caused by an "occurrence" within the meaning of the policy's insuring agreement. The insurers argue that, as a matter of law, a contractor expects or intends any property damage to its work resulting from a construction defect -- regardless of the builder's actual expectation or intent -- and hence that such damage can never result from a covered "occurrence." The Insurers' rigid interpretation of the "occurrence" requirement is not supported by any language in the insurance policies at issue. In addition, the Insurers' position on the "occurrence" issue would violate basic insurance principles by rendering meaningless the "your work" exclusion and by nullifying the exception in this exclusion for property damage caused by the work of subcontractors. Finally, the Insurers' position is contrary to the well-reasoned decisions of other courts, including recent decisions by this Court (applying Pennsylvania law), the Wisconsin Supreme Court, and courts of appeal in Texas, Kansas, Colorado, Florida, and Pennsylvania. The Maryland Court of Appeals would follow these well-reasoned decisions. If this Court harbored any doubt about this, NAHB urges this Court to certify the "occurrence" issue to the Maryland Court of Appeals pursuant to Md. Code Ann., Courts & and Judicial Proceedings, §12-603. -4- The attempt by the Insurers to avoid insurance coverage in all construction defect cases by expanding the policy's "occurrence" requirement would disrupt the long-settled allocation of loss as between builders and their insurers and deprive builders of valuable insurance for which they have paid substantial premiums. Depriving builders of insurance for such losses would also disrupt the Maryland home building industry, with its ripple effects throughout the Maryland economy, and increase housing prices for Maryland homeowners. Finally, the loss of insurance coverage would leave many Maryland homeowners without an effective remedy for property damage caused by construction defects. Argument I. LIABILITY INSURANCE PROTECTS HOME BUILDERS FROM THE RISK OF CLAIMS FOR PROPERTY DAMAGE CAUSED BY THE WORK OF SUBCONTRACTORS. One of the risks faced by a residential builder is that, following completion of construction, the homeowner may assert a claim against the builder for damage to the home caused by an alleged construction defect. One of the ways a builder tries to manage the risk of such construction defect claims is by purchasing comprehensive general liability ("CGL") insurance. The last major revision of the standard, pre-printed CGL insurance form took place in 1986. The policies at issue in this case are typical of post-1986 CGL insurance policies. -5- The insuring agreement in a builder's CGL policy provides a broad grant of insurance coverage, which is then trimmed by the policy's exclusions, several of which apply specifically to the construction industry. See, e.g., Great Am. Ins. Co. v. Calli Homes, Inc., 236 F.Supp.2d 693,700 (S.D. Tex. 2002) (construction defect claims allege an "occurrence," leaving coverage to be determined by constructionspecific exclusions in the policy). The policy's insuring agreement imposes three main requirements for coverage: (i) the claim against the builder must be for damages because of "property damage"; (ii) the property damage must take place while the policy is in effect; and (iii) the property damage must be caused by an "occurrence," which is defined to mean "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." To be caused by an "occurrence," the property damage must be fortuitous, that is, neither expected nor intended from the standpoint of the insured. See, e.g., Sheets v. Brethren Mut. Ins. Co., 342 Md. 634, 652-53, 679 A.2d 540, 548-49 (1996). Accord King v. Dallas Fire Ins. Co., 85 S.W.3d 185, 191-92 (Tex. 2002). Several construction-specific exclusions in a standard CGL policy exclude from coverage certain types of property damage. The principal such exclusion is the "your work" exclusion, which provides: "This insurance does not apply to: . . . `[p]roperty damage' to `your work' arising out of it or any part of it and included in the `products-6- completed operations hazard.' This exclusion does not apply if the damaged work or the work out of which the damage arises was 1 performed on your behalf by a subcontractor." (Emphasis added.) Where no subcontractor is involved, the "your work" exclusion requires the builder, rather than the builder's insurer, to pay for the cost of repairing the builder's work where the work does not cause bodily injury or cause damage to other property. But the "your work" exclusion does not apply and the CGL policy does provide coverage if the damaged work or the work out of which the damage arises was performed on behalf of the builder by a subcontractor. Limbach Co. v. Zurich American Ins. Co., 396 F.3d 358, 361-63 (4th Cir. 2005) (Pennsylvania law). Accord Lee Builders, Inc. v. Farm Bureau Mut. Ins. Co., 104 P.3d 997, 1001-03 (Kan. App. 2005); American Family Mut. Ins. Co. v. American Girl, Inc., 673 N.W.2d 65, 82 (Wis. 2004); Fireguard Sprinkler Systems, Inc. v. Scottsdale Ins. Co., 864 F.2d 648, 653-54 (9th Cir. 1988); P. O'Connor, Commercial General Liability Coverage, 19 The Construction Lawyer 5, 6 (April 1999); J. Blute, Analyzing Liability Insurance Coverage for Construction Industry Property Damage Claims, 7 Coverage 1, 17-18 (May/June 1997). It is important to understand the evolution of the "subcontractor" exception to the "your work" exclusion. Prior to 1986, most CGL policies excluded property The "your product" exclusion does not apply because "product" is defined in the policy to exclude real property. See, e.g., CU Lloyd's of Texas v. Main Street Homes, Inc., 79 S.W.3d 687, 697 (Tex. App. -- Austin 2002, no pet.).
1 -7- damage to the builder's work, regardless of whether the damage was caused by work done by the builder or by a subcontractor. In response to builder demand, in 1976 insurers began to offer an endorsement, known as the Broad Form Property Damage ("BFPD") endorsement, that had the effect of providing coverage for damage to the builder's work if it was caused by a subcontractor. See, e.g., MidUnited Contractors, Inc. v. Providence Lloyds Ins. Co., 754 S.W.2d 824, 827 (Tex. App. -- Fort Worth 1988, writ. denied) (construction defect claims against builder based on faulty workmanship are covered by builder's CGL policy with BFPD endorsement because the faulty work was done by a subcontractor); Fireguard Sprinkler Systems, 864 F.2d at 651-54 (explaining rationale for the development of the BFPD endorsement, which provides coverage for losses caused by the work of subcontractors). In 1986, the insurance industry incorporated this aspect of the BFPD endorsement directly into the standard CGL policy by inserting the subcontractor exception into the "your work" exclusion. See Limbach, 396 F.3d at 361-63; American Family, 673 N.W. 2d at 82-83. In examining the case law regarding the "your work" exclusion, it is important to bear in mind that the cases dealing with older versions of the "your work" exclusion are no longer applicable to policies containing the modern "your work" exclusion and its exception for work done by subcontractors. American Family, 673 N.W. 2d at 83. -8- By incorporating the subcontractor exception into the "your work" exclusion, the insurance industry specifically contemplated coverage for property damage caused by a subcontractor's defective performance. Limbach, 396 F.3d at 362-63 (discussing history of the addition of the "subcontractor" exception to the "your work" exclusion); Kalchthaler v. Keller Const. Co., 591 N.W.2d 169, 173-74 (Wis. App. 1999) (reviewing insurance industry publications stating that the subcontractor exception results in coverage if the work out of which the damage arose was performed by the insured's subcontractor). II. BY ATTEMPTING TO EXPAND THE INSURANCE POLICY'S "OCCURRENCE" REQUIREMENT, THE INSURERS ARE ATTEMPTING EFFECTIVELY TO DELETE THE SUBCONTRACTOR EXCEPTION FROM THE POLICY'S "YOUR WORK" EXCLUSION. The facts of this appeal present a straightforward case of property damage that was caused by the work of the builder's subcontractor and is covered by the builder's CGL insurance policy. The requirements of the insuring agreement in the insurance policies at issue have been met. The builder incurred damages because of property damage to the work at issue, and the property damage was caused by an occurrence, i.e. the damage was not expected or intended from the standpoint of the builder. The "your work" exclusion, which might apply if the builder itself had installed the defective EIFS system, does not apply because the system was furnished and installed by the builder's subcontractor. -9- The Insurers' principal argument for denying coverage is that the property damage caused by the EIFS system did not result from an "occurrence." Although the undisputed evidence is that the builder did not intend or expect the EIFS system to result in property damage, J.A. 172, the Insurers argue that property damage to a builder's work caused by a construction defect can never be caused by an "occurrence" within the meaning of its insurance policy. As discussed below, the Insurers' argument contravenes the terms of their policies, is not supported by the case law, and would violate fundamental contract interpretation principles by rendering the "your work" exclusion superfluous and effectively deleting from the policy the subcontractor exception to the "your work" exclusion. The underlying complaint against the builder alleged that the EIFS system caused property damage to other parts of the house. The complaint included multiple counts, including a count for breach of contract. The district court's opinion emphasizes that the breach of contract count was the only remaining count at the time of the settlement. But there is no reason why a breach of contract claim -- for damage to the builder's work -- cannot assert property damage caused by an "occurrence" within the meaning of the builder's policy. First and foremost, there is no language in the insurance policy that limits an "occurrence" to non-contract claims. An "occurrence" means an "accident, including the continuous or repeated exposure to substantially the same general - 10 - harmful conditions." "Occurrence" is not defined by reference to the legal category of the resulting claim against the policyholder, and no reasonable policyholder would read the policy to make coverage dependent on the claimant's selection of a cause of action, i.e., contract versus tort. See Lee Builders, 104 P.3d at 1002-03 (rejecting argument that breach of contract claims cannot be based on an occurrence); American Family, 673 N.W. 2d at 77 (contract claims are often not covered by a builder's liability policy, but this is only because of the possible application of policy exclusions, not because a loss actionable by contact can never result from an "occurrence"; such a rule is not supported by the language of the policy and would render the policy's "business risk" exclusions unnecessary); Vandenberg v. Superior Court, 982 P.2d 229, 245 (Cal. 1999) (reviewing history of case law and concluding that no provision in the policy limits an "occurrence" to non-contract claims, and that no reasonable policyholder would believe that coverage was limited to non-contract claims). In addition, if a claim for breach of contract -- for damage to the builder's work -- could never assert property damage caused by an "occurrence," the "your work" exclusion in the policies at issue would be rendered meaningless. This would violate the venerable principle that insurance policies are to be construed to give effect to all their provisions so that none will be rendered meaningless. See JMP Assocs., Inc. v. St. Paul Fire & Marine Ins. Co., 345 Md. 630, 636, 693 A.2d - 11 - 832, 834 (1997) (citations omitted). In particular, the term "occurrence" may not be interpreted so broadly as to obviate the need for one or more of the policy's exclusions. King v. Dallas Fire Ins. Co., 85 S.W.3d 185 (Tex. 2002). But that is exactly what the district court's opinion would do. If a property owner can only assert claims of breach of contract or breach of warranty for construction defects involving property damage to the builder's work itself, and if such claims can never give rise to an "occurrence" in the first place, the "your work" exclusion in the policy would be rendered superfluous. There would be no need for the "your work" exclusion, because any construction defect claim for property damage to the work itself, to which the exclusion would apply, would never be covered in the first place because it would not satisfy the policy's "occurrence" requirement. Lee Builders, 104 P.3d at 1002-03; American Family, 673 N.W. 2d at 78. In this way, insurers would eliminate the coverage for construction defects that they added to their policies through the subcontractor exception to the "your work" exclusion. This result does not "create coverage" based on an exception to an exclusion. Rather, there is coverage under the insuring agreement's initial grant of coverage, because the complaint alleges property damage caused by an occurrence. Coverage would be excluded by the "your work" exclusion, except that the subcontractor exception to that exclusion makes the exclusion inapplicable to this - 12 - case, thereby restoring coverage. See, e.g., American Family, 673 N.W.2d at 8384. The district court's concern that coverage for property damage to the builder's work would turn the builder's insurance policy into a performance bond is also unfounded. A performance bond is quite different from liability insurance. The bond protects the owner from the builder's failure to perform. The bond does not protect the builder. The surety on the bond will seek indemnity from the builder if the owner makes a claim under the bond. Lee Builders, 104 P.3d at 1003. In addition, a bond is much broader than liability insurance. For example, it is not restricted to claims for property damage, and the builder's intent or expectation to cause damage is irrelevant. See, e.g., O'Shaugnessy v. Smuckler Corp., 543 N.W.2d 99, 105 (Minn. App. 1996). Finally, the extent to which a builder's liability insurance policy coincides with a builder's performance bond is irrelevant. The terms of the insurance policy control. As one court put it in explaining its duty to interpret the policy as written: "We have not made the policy closer to a performance bond for general contractors, the insurance industry has." Kalchthaler, 591 N.W.2d at 174. III. NUMEROUS COURTS HAVE HELD THAT PROPERTY DAMAGE TO THE BUILDER'S WORK CAN BE CAUSED BY AN "OCCURRENCE." - 13 - The Maryland Court of Appeals has not yet had occasion to decide the issue of whether property damage to the builder's own work, e.g. the house itself, can be caused by an "occurrence" within the meaning of the builder's CGL insurance policy. Although courts of other jurisdictions have reached differing results on this issue, numerous courts in the last few years have held that property damage caused by inadvertent construction defects can be caused by an occurrence -- even if the damage is limited to the house itself. These courts have recognized that the insuring agreement in the CGL policy contains no requirement that the property damage be to other property, and that the exclusion for damage to the policyholder's own work (and the exception for the work of subcontractors) would be rendered meaningless if damage to the builder's own work could never be caused by an occurrence in the first place. For example, in Lennar Corp. v. Great American Ins. Co., 2005 WL 1324833, at *6-*12 (Tex. App. -- Houston [14th Dist.] June 2, 2005), a Texas Court of Appeals held that damage to the house caused by an EIFS system -- the same material as was applied to the Frenches' house -- was caused by an occurrence because it was undisputed that the builder did not intend or expect the damage. In a very thorough opinion, the court distinguished older cases, which were based on the old "your work" exclusion, and which had recited the principle that liability insurance is not meant to protect the insured for repair or replacement - 14 - of its own work. Id. at *11. The court concluded that this principle was no longer valid as a result of the subcontractor exception to the "your work" exclusion. Id. In addition, in Lee Builders, Inc. v. Farm Bureau Mut. Ins. Co., 104 P.3d 997, 1001-03 (Kan. App. 2005), another case involving damage caused by an EIFS system, the Kansas Court of Appeals held that damage to the house caused by the EIFS system was not expected or intended by the builder and hence was caused by an occurrence within the meaning of the builder's CGL policy. The court cogently discussed the interplay between the definition of "occurrence" and the "your work" exclusion: Moreover, we note that a specific exception in Farm Bureau's policy to the "your work" exclusion for subcontractor work is inconsistent with Farm Bureau's narrow interpretation of "occurrence." Although the policy expressly excludes coverage for "your work" as defined, this exclusion "does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor." Builders argues that if "occurrence" is narrowly defined as urged by Farm Bureau, the subcontractor proviso would be rendered meaningless. We agree with Builders and adopt the rationale of one authoritative commentator, who states: "If the policy's exclusion for damage to the insured's work contains a proviso stating that the exclusion is inapplicable if the work was performed on the insured's behalf by a subcontractor, it would not be justifiable to deny coverage to the insured, based upon the absence of an occurrence, for damages owed because of property damage to the insured's work caused by the subcontractor's work. Reading the policy as a whole, it is clear that the intent of the policy was to cover the risk to the insured created by the insured's use of a subcontractor. Moreover, if coverage were never available for damage to the insured's work because of a subcontractor's mistake, on the theory that there was no occurrence even under those circumstances, the - 15 - foregoing subcontractor proviso to the exclusion for damage to the insured's work would be meaningless, and if possible, policies should not be interpreted to render policy provisions meaningless." Id., quoting Windt, Insurance Claims and Disputes, §11.3, Supp. p. 48 (4th ed. 2001). The Lee Builders court also recognized that a prior Kansas holding requiring damage to other property was based on the "your work" exclusion and hence was no longer valid in light of the subcontractor exception to that exclusion. Id. at 1003. In another thorough and well-reasoned opinion, the Wisconsin Supreme Court analyzed the "occurrence" issue in American Family Mut. Ins. Co. v. American Girl, Inc., 673 N.W.2d 65, 74-79 (Wis. 2004). After surveying the case law, the occurrence requirement, and the subcontractor exception to the your work exclusion, the court concluded that property damage to the builder's work could be caused by an occurrence within the meaning of the builder's CGL policy. In the court's words: "[T]he effect of the 1986 revision of the CGL could not be defeated by reliance upon broad judicial holdings interpreting pre-1986 policies that did not contain the subcontractor exception." Id. at 83. Numerous other appellate courts have also recently engaged in the same type of analysis and have held that property damage to the house itself resulting from inadvertent construction defects was caused by an "occurrence" within the meaning of the builder's general liability insurance policy. See J.S.U.B., Inc. v. - 16 - U.S. Fire Ins. Co., 906 S.2d 303, 307-09 (Fla. App. 2005); Hoang v. Monterra Homes (Powderhorn) LLC, 2005 WL 427936, at *3-*4 (Colo. App. Feb. 24, 2005); Archon Investments, Inc. v. Great American Lloyds Ins. Co., 2005 WL 2037177, *4-*7 (Tex. App. -- Houston [1st Dist.] Aug. 25, 2005); Gehan Homes, Ltd. v. Employers Mut. Cas. Co., 146 S.W.3d 833, 843 (Tex. App. -- Dallas Oct. 26, 2004, pet. for review filed); Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 825 A.2d 641, 652-58 (Pa. Super. 2003), review granted, 848 A.2d 925 (Pa. 2004). IV.
2 THE MARYLAND COURT OF APPEALS WOULD HOLD THAT PROPERTY DAMAGE TO THE BUILDER'S WORK CAN BE CAUSED BY AN "OCCURRENCE." Although the Maryland Court of Appeals has never decided the issue, the Maryland Court of Appeals would surely agree with the reasoning of the numerous non-Maryland decisions, discussed in Part III above, holding that property damage to the builder's work can be caused by an occurrence within the meaning of the builder's CGL policy. These decisions relied heavily on the fact that post-1986 CGL policies no longer exclude coverage for property damage to The Supreme Court of South Carolina issued a contrary decision in L-J, Inc. v. Bituminous Fire & Marine Ins. Co., 2004 WL 1775571, at *2-*4 (S.C. Aug. 9, 2004), reh'g granted Feb. 3, 2005. But the court granted the policyholder's petition for rehearing. Oral argument on the rehearing was held on April 19, 2005. The court has not yet issued its opinion following the argument on rehearing. 2 - 17 - the builder's work if the work out of which the damage arises was performed by a subcontractor. Neither Lerner Corp. v. Assurance Co. of America, 120 Md. App. 525, 707 A.2d 906 (1998), nor Harbor Court Assocs. v. Kiewit Const. Co., 6 F.Supp.2d 449 (D. Md. 1998), nor any other Maryland court has ever considered the scope of the "occurrence" requirement in light of the post-1986 subcontractor exception to the "your work" exclusion. For this reason, the district court's reliance on Lerner and Harbor Court is misplaced. In Lerner, the Maryland Court of Special Appeals held that damage to a building's stone facade was not caused by an occurrence because the builder had a contractual obligation to repair the damage, and hence the damage should not be deemed unexpected or unforeseen by the builder. 120 Md. App. at 536, 707 A.2d at 911-12. The Lerner court relied on two earlier Court of Special Appeals decisions, Century I Joint Venture v. United States Fidelity & Guaranty Co., 63 Md. App. 545, 493 A.2d 370, cert. denied, 304 Md. 297, 498 A.2d 1183 (1985), and Woodfin Equities Corp. v. Harford Mut. Ins. Co., 110 Md. App. 616, 678 A.2d 116 (1996), rev'd, 344 Md. 399, 687 A.2d 652 (1997), both of which focused primarily on the application of policy exclusions rather than the "occurrence" - 18 - requirement, 120 Md. App. at 533-34, 707 A.2d at 910, and one of which (Woodfin) was reversed by the Court of Appeals. 344 Md. at 415, 687 A.2d 659.
3 In Harbor Court, the federal district court relied on Lerner in holding that the builder is deemed to "expect" damage to the builder's work that the builder is under a contractual obligation to repair, and hence the damage is not caused by an occurrence. 6 F.Supp.2d at 456-57. The court conceded in a footnote, however, that it saw "no principled difference" between damage to other property and damage caused by a subcontractor's work to another part of the building. The Maryland Court of Appeals would not adopt the Lerner or Harbor Court holdings as the law of Maryland. Neither opinion indicated that the policies at issue contained a subcontractor exception to the "your work" exclusion. As a result, neither court analyzed their holdings that a builder should "expect" damage to its own work in light of the subcontractor exception to the "your work" exclusion. If a builder is always deemed to "expect" damage to the building, the "your work" exclusion for damage to the builder's own work would be superfluous The Lerner court also misread the Court of Appeals opinion in Bausch & Lomb, Inc. v. Utica Mut. Ins. Co., 330 Md. 758, 788, 625 A.2d 1021, 1036 (1993). See Lerner, 120 Md. App. at 534, 707 A.2d at 910-11. That opinion did not require that property damage be to property other than the builder's work but rather that environmental damage be to property (ground water) not owned by the policyholder. The holding in Bausch & Lomb has nothing to do with the "occurrence" issue in this case. 3 - 19 - and the subcontractor exception to that exclusion would be meaningless. The Maryland Court of Appeals would not countenance such a violation of well-settled principles of insurance policy interpretation. See JMP Assocs., 345 Md. at 636, 693 A.2d at 834 ("some distinct meaning must be given to every word and no word is to be rejected as mere surplusage"). When presented with the issue, the Maryland Court of Appeals would follow the reasoning of the numerous courts cited in Part III and hold that property damage to the builder's work may be unexpected and hence may result from an "occurrence" within the meaning of the policy. V. IN THE ALTERNATIVE, THIS COURT SHOULD CERTIFY THE "OCCURRENCE" ISSUE TO THE MARYLAND COURT OF APPEALS. If this Court were uncertain as to whether the Maryland Court of Appeals would reach the same conclusion as have the courts cited in Part III above regarding the policy's "occurrence" requirement, this Court should certify the "occurrence" issue to the Maryland Court of Appeals. Maryland law provides that the Maryland Court of Appeals "may answer a question of law certified to it by a court of the United States . . . if the answer may be determinative of an issue in pending litigation in the certifying court, and there is no controlling appellate decision, constitutional provision, or statute of this State." Md. Code Ann., Courts - 20 - & Judicial Proceedings, § 12-603. See also id. at §§ 12-605 and 12-606 (describing certification procedure). This Court has previously certified to the Maryland Court of Appeals dispositive issues governed by state law where there was no controlling precedent on the issue or the issue was unsettled. See, e.g., United Pacific Ins. Co. v. East, 250 F.3d 234, 236 (4th Cir. 2001) ("Because we are unaware of any controlling decisions of the Maryland state courts on these determinative questions, we believe that they are properly subject to review by the Maryland Court of Appeals on certification"); Roth v. Dimensions Health Corp., 992 F.2d 36, 37 (4th Cir. 1993) ("It appearing to this court that the issue of Maryland law indeed controls this case, and that there exists no controlling precedent in the Court of Appeals of Maryland, we hereby request the judgment of the Maryland Court of Appeals, by certifying to it"); Welsh v. Gerber Products, Inc., 839 F.2d 1035, 1036 (4th Cir. 1988) ("Because we conclude that the dispositive issue in this appeal presents a question of Maryland law which appears to be unsettled, we certify"); Goldstein v. Potomac Elec. Power Co., 578 F.2d 975, 976 (4th Cir. 1978) (certifying "potentially dispositive question of state law as to which there appears no controlling precedent in the Maryland case law"). Whether property damage to the building can be caused by an "occurrence" within the meaning of a builder's CGL insurance policy is dispositive of the rights - 21 - of the parties to this coverage dispute. This issue is governed by state law, but the Maryland Court of Appeals has not addressed the issue and the lower court opinions in Maryland have not addressed the issue in light of the modern CGL policy containing the subcontractor exception to the "your work" exclusion. Under these circumstances, the Maryland Court of Appeals would follow the reasoning in the cases cited in Part III above. But if this Court is in doubt as to how the Maryland Court of Appeals would decide the "occurrence" issue, certification is appropriate and would resolve conclusively an unsettled question of Maryland law that is significant to homeowners, builders, and insurers alike. VI. INSURANCE PLAYS A VITAL ROLE IN THE HOME BUILDING INDUSTRY. The district court's holding that property damage resulting from inadvertent construction defects can never be caused by an "occurrence" would be felt by Maryland home builders and Maryland homeowners alike. Home builders pay premiums to insurance companies to buy liability insurance to protect themselves, inter alia, against claims for unintended and unexpected property damage caused by inadvertent construction defects that can occur in the homes they build. If the property damage results from work performed by the builder's subcontractors, the builder's liability insurance policy provides coverage for the builder's damages resulting from such property damage, including the cost of any judgment or - 22 - settlement of the homeowners' claims. Builders buy liability insurance -- and pay substantial premiums -- to protect against the risk of such losses. Depriving builders of such valuable insurance protection would disrupt an industry that is a vital part of a healthy economy. Housing is a critical component of local economic development -- creating jobs and demand for goods and services, generating revenues, and providing affordable housing. Given the vital role the housing industry plays in the Maryland economy, it is important to consider the impact of the insurers' position that a builder's damages because of property damage caused by inadvertent construction defects are never covered by the builder's insurance. The ability to operate efficiently in the home building industry and to price a home competitively depends on the degree to which the builder's overall costs are certain and predictable. The Insurers' position would expose home builders to the uncertainty of additional costs and litigation expenses. This increased exposure by builders to claims of inadvertent construction defects would lead to an increase in the cost of building homes in Maryland. Builders would have to increase the price of their homes to cover these costs. Increased prices would adversely affect the - 23 - housing industry, with ripple effects on construction-related industries and the Maryland economy in general.
4 Home buyers in Maryland would also suffer as the result of the Insurers' efforts to deny insurance coverage for property damage caused by inadvertent construction defects. Not only would the cost of purchasing a new home increase, but also the homeowner may have no effective remedy for claims of construction defects against small or insolvent builders, or against builders who have ceased doing business by the time the homeowner's claim is litigated. The liability insurance policies that stood behind such builders and remodelers in the past would no longer do so. Conclusion The National Association of Home Builders, as amicus curiae, respectfully requests the Court to (i) reverse the judgment of the district court on the The impact would be greatest on buyers and builders of low to moderate income housing. Builders with this increased exposure would be forced to raise their prices to cover the increased cost and risk associated with reduced insurance coverage. Consequently, low and moderate income home buyers, who often only marginally qualify for financing necessary for them to buy a house, could be priced out of the market. Accordingly, those who are on the cusp of qualifying for a new home purchase might no longer be able to afford to purchase a new home. Similarly, builders who build affordable housing would be negatively affected -they would build fewer homes because fewer people would qualify to purchase them. 4 - 24 - "occurrence" issue; and (ii) render summary judgment for the Frenches on the "occurrence" issue, given the undisputed facts of this case. Date: September 8, 2005 Respectfully submitted, ________________________________ David S. Jaffe National Association of Home Builders 1201 15th Street, N.W. Washington, DC 20005 Tel: (202) 266-8317 Fax: (202) 266-8161 Counsel for Amicus Curiae National Association of Home Builders - 25 - ADDENDUM INDEX TO ADDENDUM Md. Code Ann., Courts & Judicial Proceedings, §12-603 ................................... A-1 Md. Code Ann., Courts & Judicial Proceedings, §12-605 ................................... A-2 Md. Code Ann., Courts & Judicial Proceedings, §12-605 ................................... A-3 CERTIFICATE OF COMPLIANCE 1. This brief has been prepared using (SELECT AND COMPLETE ONLY ONE): __X__ Fourteen point, proportionally spaced, serif typeface (such as CG Times or Times New Roman, NOT sans serif typeface such as Arial). Specify software name and version, typeface name, and point size below (for example, WordPerfect 8, CG Times, 14 point) _Microsoft Word, Times New Roman, 14 point _____ Twelve point, monospaced typeface (such as Courier or Courier New). Specify software name and version, typeface name, and point size below (for example, WordPerfect 8, Courier, 12 point) _____________________________________________________________ 2. EXCLUSIVE of the corporate disclosure statement; table of contents; table of citations, statement with respect to oral argument; any addendum containing statutes, rules, or regulations, and the certificate of service, the brief contains (SELECT AND COMPLETE ONLY ONE): _____ Pages (give specific number of pages; may not exceed 30 pages for opening or answering brief or 15 pages for reply brief unless brief is within word or lien limits listed below); Words (give specific number of words; may not exceed 14,000 words for opening or answering brief or 7,000 for reply brief); OR Lines of Monospaced Type (give specific number of lines; may not exceed 1300 lines for opening or answering brief or 650 for reply brief; may be used ONLY for briefs prepared in monospaced type such as Courier or Courier New. OR 5,490 _____ I understand that a material misrepresentation can result in the Court's striking the brief and imposing sanctions. If the Court so directs, I will provide an electronic version of the brief and/or a copy of the word or line print-out. _____________________ (Date) _______________________________ (Signature) -2- CERTIFICATE OF SERVICE I hereby certify that on this 8th day of September, 2005, two copies of the Brief of Amicus Curiae National Association of Home Builders in Support of Appellants James H. French et al. in Support of Reversal were mailed first class, postage prepaid, to: Paul v. Waters David Hilton Wise Waters & Wise, PLLC Suite 210 10201 Lee Highway Fairfax, VA 22031 Counsel for Appellants Robert E. Worst Kalbaugh, Pfund & Messersmith 4031 University Drive, Suite 300 Fairfax, Virginia 22030 Counsel for Appellee Thomas S. Schaufelberger Wright, Robinson, Osthimer & Tatum 5335 Wisconsin Avenue, N.W., Suite 920 Washington, D.C. 20015-2030 Counsel for Appellee David S. Jaffe