Cogswell Farm Condominium Association v. Tower Group, Inc. & a.

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THE SUPREME COURT OF NEW HAMPSHIRE

___________________________

Rockingham

No. 2013-568

COGSWELL FARM CONDOMINIUM ASSOCIATION

v.

TOWER GROUP, INC. & a.

Argued: June 18, 2014

Opinion Issued: January 13, 2015

McDowell & Osburn, P.A., of Manchester (Gordon A. Rehnborg, Jr. on

the brief and orally), and Scott & Scott, P.A., of Londonderry (Michael J. Scott

on the brief), for the petitioner.

Downs Rachlin Martin PLLC, of Lebanon (Katherine M. Strickland on the

brief), for respondent Tower Group, Inc.

Primmer Piper Eggleston & Cramer, PC, of Manchester (Doreen F.

Connor on the brief and orally), for respondent Acadia Insurance Company.

BASSETT, J. In this declaratory judgment proceeding, the petitioner,

Cogswell Farm Condominium Association (Cogswell), appeals an order of the

Superior Court (McHugh, J.) finding that two exclusions in the insurance

policies issued by the respondents, Tower Group, Inc. (Tower) and Acadia

Insurance Company (Acadia), preclude coverage in the petitioner’s underlying

lawsuit against Lemery Building Company, Inc. (Lemery). We reverse and

remand.

The trial court found, or the record supports, the following facts.

Between June 2000 and November 2003, Lemery was responsible for the

construction and development of 24 residential condominium units in

Atkinson. The owners of the condominium units are now members of the

petitioner association. Acadia issued Lemery a commercial general liability

insurance policy, providing coverage from March 2000 to August 2002. Tower

issued Lemery an identical policy, with coverage from August 2002 until

November 2003. In 2001, Lemery began selling the units to third parties.

In 2009, Cogswell sued Lemery and others, alleging negligence, breach of

contract, and negligent supervision in the construction of the units. Cogswell

asserted that the “weather barrier” components of the units – including the

water/ice shield, flashing, siding, and vapor barrier – were defectively

constructed and resulted in damage to the units due to water leaks.

In 2011, Cogswell filed a petition for declaratory judgment against Tower,

seeking a declaration that its claims against Lemery were covered under

Tower’s policy. Cogswell later added Acadia as a party to the declaratory

judgment action.

The respondents filed motions for summary judgment, arguing that

Cogswell’s claims against Lemery did not trigger coverage under their policies.

The trial court entered summary judgment in favor of the respondents

regarding coverage for Cogswell’s breach of contract and negligent supervision

claims against Lemery, but denied the motion as to the negligence claim. The

court concluded that uncertainty existed regarding whether property damage to

the condominium units occurred during the policy periods and, therefore,

ordered that an evidentiary hearing be held to determine whether the

negligence claim could proceed.

The only witness to testify at the evidentiary hearing was a construction

consultant hired by Cogswell. As noted by the trial court in its order, the

consultant opined regarding “numerous defects in the weather barrier” that

caused “almost immediate[]” water damage to the exterior and interior finishes

of the condominium units. The consultant observed that the damage went

undetected for years and acknowledged that he was unable to discern the

amount of damage that occurred prior to the expiration of each policy.

Following the hearing, Cogswell argued that its claims amounted to an

“occurrence” under the policies, thereby triggering coverage. Cogswell also

maintained that, although the exclusions contained within part J of each of the

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policies precluded coverage for damage to the defectively constructed weather

barriers, the exclusions did “not exclude coverage for the resulting damage to

the otherwise nondefective ‘exterior and interior finishes’ . . . which directly

resulted from water infiltration.”

In response, the respondents again argued that Cogswell’s claims did not

trigger coverage under their policies. They also argued that, even if the trial

court determined that coverage was triggered, two exclusions contained within

the policies, J(1) and J(6), precluded coverage. Exclusion J(1) excludes

coverage for “property damage” to property that Lemery “own[s], rent[s], or

occup[ies].” Exclusion J(6) excludes coverage for property damage to “[t]hat

particular part of any property that must be restored, repaired or replaced

because ‘[Lemery’s] work’ was incorrectly performed on it.”

The trial court issued supplemental orders denying the respondents’

motions for summary judgment on the negligence claim. The court credited

the consultant as being “highly credible” and ruled that “the negligence alleged

by [Cogswell], if proven, would in fact constitute an occurrence” under the

insurance policies, thus triggering coverage. The court also ruled that a jury

would decide whether any property damage occurred during the policy periods.

The court further declined to rule on the applicability of exclusions J(1) and

J(6), reserving that determination for the jury as well.

The respondents then filed motions for reconsideration, arguing that the

interpretation and application of exclusions J(1) and J(6) presented questions

of law for the court – rather than the jury – to decide, and that, as a matter of

law, the exclusions precluded coverage. In its motion, Tower also challenged

the trial court’s decision to allow a jury to determine whether property damage

occurred during the policy periods. In response, Cogswell conceded that the

court could “determine as a matter of law the meaning of exclusions [J](1) and

[J](6),” but argued that, because “factual issues exist concerning whether these

exclusions apply in this case,” a jury should decide such factual issues.

Cogswell also asserted that exclusions J(1) and J(6) were inapplicable.

In ruling upon the motions, the trial court vacated the portion of its prior

order allowing the jury to determine whether property damage occurred during

the policy periods. The court agreed that the issue of whether the two

exclusions applied presented a question of law for it to decide, and it

determined that exclusions J(1) and J(6) both applied and excluded coverage.

Accordingly, the court concluded that neither Tower nor Acadia had a duty to

defend or an “obligation [to pay] any damages to [Cogswell] if [Cogswell] is

successful in the underlying litigation [against Lemery].” This appeal by

Cogswell followed.

“In reviewing a trial court’s summary judgment ruling, we consider the

affidavits and other evidence, and all inferences properly drawn from them, in

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the light most favorable to the non-moving party.” Rivera v. Liberty Mut. Fire

Ins. Co., 163 N.H. 603, 606 (2012). “Summary judgment may be granted only

where no genuine issue of material fact is present, and the moving party is

entitled to judgment as a matter of law.” Id. “We review the trial court’s

application of the law to the facts de novo.” Id.

“In a declaratory judgment action to determine the coverage of an

insurance policy, the burden of proof is always on the insurer, regardless of

which party brings the petition.” Id.; see RSA 491:22-a (2010). “The

interpretation of insurance policy language is a question of law for this court to

decide.” Rivera, 163 N.H. at 606. “We review questions of law de novo.” Great

Am. Dining v. Philadelphia Indem. Ins. Co., 164 N.H. 612, 617 (2013). We first

look to the plain and ordinary meaning of the policy’s words in context, “and

we construe the terms of the policy as would a reasonable person in the

position of the insured based on more than a casual reading of the policy as a

whole.” Id. at 616 (quotation omitted). “This is an objective standard.” Id.

“The insurer asserting an exclusion of coverage bears the burden of

proving that the exclusion applies.” Rivera, 163 N.H. at 606. “If more than one

reasonable interpretation is possible, and an interpretation provides coverage,

the policy contains an ambiguity and will be construed against the insurer.”

Great Am. Dining, 164 N.H. at 616 (quotation omitted); see Colony Ins. Co. v.

Dover Indoor Climbing Gym, 158 N.H. 628, 630 (2009) (“Ambiguity exists if

reasonable disagreement between contracting parties leads to at least two

interpretations of the language.” (quotation omitted)).

On appeal, Cogswell first contends that the trial court erred in

determining that exclusion J(1) operated to bar coverage for all the units at all

times. Exclusion J(1) excludes coverage for “‘[p]roperty damage’ to . . .

[p]roperty you own, rent, or occupy.” “Property damage” is defined as either

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

property” or “[l]oss of use of tangible property that is not physically injured.”

The term “you” refers to the insured, Lemery.

Cogswell concedes that exclusion J(1) excludes coverage for property

damage that occurred while Lemery owned the condominium units – prior to

its sale of the units to third parties beginning in 2001. However, Cogswell

argues that coverage was not excluded under exclusion J(1) for damages

sustained by the units after they had been sold by Lemery and while the

policies were in effect. Notably, the respondents do not disagree with Cogswell.

Neither do we: we conclude that the trial court erred in ruling that exclusion

J(1) operated as an exclusion to bar coverage for each unit after it was sold.

Because the units were sold at different times and the policies were in effect

during two different time periods, on remand, the trial court must determine

which units had been sold by Lemery but continued to be covered under the

policies.

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Cogswell next argues that the trial court erred in determining that

exclusion J(6) applied to bar coverage. Exclusion J(6) precludes coverage for

property damage to “[t]hat particular part of any property that must be

restored, repaired or replaced because ‘your work’ was incorrectly performed on

it.” The term “your work” refers to any “[w]ork or operations performed by

[Lemery] or on [Lemery’s] behalf” and any “[m]aterials, parts or equipment

furnished in connection with such work or operations.” However, exclusion

J(6) “does not apply to ‘property damage’ included in the ‘products-completed

operations hazard,’” which encompasses property damage that occurs when

“all of the work called for in [Lemery’s] contract has been completed” or 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.”

Cogswell maintains that “[e]xclusion J(6) is simply inapplicable” because

Cogswell “is not contending that the two [respondent] insurance companies are

obligated to provide coverage for the costs associated with repairing the

defective weather barriers in the units.” Rather, “[t]he damage for which

coverage is claimed is the damage to the non-defective work that was caused by

the defectively constructed weather barriers.” In so arguing, Cogswell relies

primarily upon Mid-Continent Cas. Co. v. JHP Development, Inc., 557 F.3d 207

(5th Cir. 2009), in which the court reviewed an exclusion identical to the one at

issue in this case and concluded that the exclusion:

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., 557 F.3d at 215.

The respondents counter by arguing that, because Lemery was the

general contractor responsible for the construction of the units, exclusion J(6)

applies to preclude coverage for all damage caused by Lemery’s defective work,

including damage to work on the units that was not defective. The

respondents assert that Cogswell’s interpretation of exclusion J(6) would

undermine the purpose of commercial general liability policies because those

policies are not intended to serve as performance bonds or to insure typical

business risks associated with faulty work. See McGowan v. State Farm Fire

and Cas. Co., 100 P.3d 521, 525 (Colo. App. 2004). In support of this

argument, the respondents cite decisions in other jurisdictions that have

interpreted exclusions identical to exclusion J(6) and held that the exclusions

were inapplicable in factual scenarios similar to that in the present case. See,

e.g., Lafayette Ins. Co. v. Peerboom, 813 F. Supp. 2d 823, 829-35 (S.D. Miss.

2011); Century Indem. Co. v. Golden Hills Bldrs., 561 S.E.2d 355, 358-59 (S.C.

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2002), overruled on other grounds by Crossmann Communities v. Harleysville,

717 S.E.2d 589, 594 (S.C. 2011).

For example, the respondents rely upon a decision by the South Carolina

Supreme Court, in which homeowners alleged that the defective construction of

their home’s stucco exterior “caused moisture damage to the properly

constructed substrate and framing of the home.” Century Indem. Co., 561

S.E.2d at 356. The insurance policy contained the exclusion at issue here,

and, like Cogswell and the respondents in the present case, the parties

disputed whether the exclusion applied to preclude coverage only for the

defective work (the exterior stucco) or precluded coverage for all resulting

damage to the home, including those parts that were not defectively

constructed (the substrate and framing). Id. at 358-59. The court concluded

that coverage for all of the water damage was excluded pursuant to the

exclusion. Id. at 359. The court based its decision on the purpose of

commercial general liability policies, which are “not intended to insure

business risks, i.e., risks that are the normal, frequent, or predictable

consequences of doing business, and which business management can and

should control or manage. . . . [Such] policies do not insure [an insured’s]

work itself, but rather, they generally insure consequential risks that stem

from that work.” Id. at 358 (quotations omitted); see Lafayette Ins. Co., 813 F.

Supp. 2d at 829-35 (concluding, for similar reasons, that the exclusion applied

to bar coverage).

Although we recognize that the South Carolina Supreme Court and other

courts have premised their conclusions upon the general purpose behind

commercial general liability policies, we disagree with the respondents’

assertion that those decisions necessarily render an alternative interpretation

of exclusion J(6) unreasonable. See Giacomelli v. Scottsdale Ins. Co., 221 P.3d

666, 673 (Mont. 2009) (“[A] split in authority over the interpretation of language

in an insurance policy . . . is a factor that we will consider in determining

whether ambiguity exists.”). This is especially so given that, in New

Hampshire, whether coverage exists “begins with an examination of the

insurance policy language,” Great Am. Dining, 164 N.H. at 616, rather than

upon the general purpose of a certain type of insurance policy.

Here, exclusion J(6) can be interpreted in two ways. The exclusion can

be reasonably read as the respondents suggest, in which the exclusion is

construed broadly to exclude coverage for all damage to the insured’s work

product caused by the insured’s defective work. Applied to the present case,

this reading would, therefore, preclude coverage for all damage resulting from

Lemery’s defective work, including damage to the non-defectively constructed

parts of the condominium units. As noted above, some courts have interpreted

this exclusion in this manner. See, e.g., Lafayette Ins. Co., 813 F. Supp. 2d at

829-35; Jet Line Services v. American Emp. Ins., 537 N.E.2d 107, 111 (Mass.

1989).

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However, we also agree with Cogswell’s assertion that the exclusion can

be reasonably read to exclude coverage only for those parts of the property on

which the allegedly defective work was done. Applied here, this interpretation

would create a distinction between the components of the condominium units

that were allegedly defective and those components that were not defective.

This interpretation would preclude coverage for damage to the defective

weather barriers, but allow coverage for damage to the non-defectively

constructed parts of the condominium units that was caused by the defective

weather barriers. Other courts have interpreted this exclusion in precisely this

manner. See, e.g., Fortney & Weygandt v. American Mfrs. Mut. Ins., 595 F.3d

308, 311 (6th Cir. 2010) (deciding that the exclusion “applie[d] only to the cost

of repairing or replacing distinct component parts on which the insured

performed defective work”); Mid-Continent Cas. Co., 557 F.3d at 214-17

(concluding the same).

Because we conclude that exclusion J(6) is subject to more than one

reasonable interpretation, and one of those interpretations provides coverage,

an ambiguity exists that will be construed against the respondents. See Great

Am. Dining, 164 N.H. at 616 (“If more than one reasonable interpretation is

possible, and an interpretation provides coverage, the policy contains an

ambiguity and will be construed against the insurer.” (quotation omitted));

Preferred Nat’l Ins. Co. v. Docusearch, 149 N.H. 759, 763 (2003) (noting that

insurance companies are free to limit their liability through clear and

unambiguous policy language). We, therefore, conclude that exclusion J(6)

bars coverage for property damage to the defectively constructed portions of the

condominium units, which are alleged to be the weather barriers; however,

exclusion J(6) does not bar coverage for damage to those portions of the units

that were not defectively constructed by Lemery but were damaged as a result

of the defective work. Accordingly, we hold that the trial court erred in

determining that exclusion J(6) operated as a complete bar for coverage of the

claims asserted by Cogswell. On remand, the trial court should, consistent

with this decision, determine the extent of damages that are not barred by

exclusion J(6).

Cogswell further argues that exclusion J(6) does not apply due to the

products-completed operations hazard exception to the exclusion. However,

because we have ruled in Cogswell’s favor in regard to exclusion J(6), we need

not address this argument. Nor must we address Cogswell’s arguments

regarding the trial court’s observations relating to proof of damages in the

underlying case against Lemery. Because the trial court’s observations are not

germane to the issues in the declaratory judgment action now before us, we

conclude that the arguments regarding this portion of the court’s order do not

warrant further discussion. See Vogel v. Vogel, 137 N.H. 321, 322 (1983).

Finally, the respondents argue that their insurance policies do not

provide coverage because there is no evidence in the record of an “occurrence”

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resulting in property damage sufficient to trigger coverage during the policy

periods. In response, Cogswell contends that neither respondent preserved

this argument for our review. We agree with Cogswell.

We generally require issues to be raised at the earliest possible time

“because trial forums should have a full opportunity to come to sound

conclusions and to correct errors in the first instance.” Sklar Realty v. Town of

Merrimack, 125 N.H. 321, 328 (1984). “This is only fair to the parties, the trial

forums and the appellate courts.” Id. In denying the respondents’ motions for

summary judgment on the negligence claim, the trial court ruled that “the

negligence alleged by [Cogswell], if proven, would in fact constitute an

occurrence” sufficient to trigger coverage under both policies. Rather than

challenge this ruling in their motions for reconsideration, the respondents

advanced a different argument – that exclusions J(1) and J(6) precluded

coverage. Although the respondents noted in passing in their trial court

pleadings that they “disput[ed]” that property damage occurred during the

policy periods, because they failed to adequately develop the argument, we will

not address this issue on appeal. See Gulf Ins. Co. v. AMSCO, 153 N.H. 28,

41-43 (2005) (refusing to address the merits of arguments on appeal that were

not adequately raised below). Moreover, we observe that neither respondent

filed an appeal or cross-appeal identifying this issue. See Progressive N. Ins.

Co. v. Argonaut Ins. Co., 161 N.H. 778, 784 (2011) (“Appellate questions not

presented in a notice of appeal are generally considered waived by this court.”

(quotation omitted)). Finally, the respondents asserted at oral argument that

this issue was comprised within the questions presented by Cogswell in its

notice of appeal. We are not, however, persuaded that this issue is fairly

encompassed within the questions presented by Cogswell; therefore, we deem

the issue waived. See id.; cf. Town of Barrington v. Townsend, 164 N.H. 241,

245 (2012) (stating that the questions presented include subsidiary questions

fairly comprised therein).

Reversed and remanded.

DALIANIS, C.J., and CONBOY and LYNN, JJ., concurred.

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