Where Primary Cause Of Stone Floor Cracking Was Improperly Applied Mortar, Cost of Making Good Exclusions Barred Coverage Under Builder’s Risk Policies And Ensuing Loss Exception Did Not Restore Any Coverage
Olympic and Georgia Partners LLC v. Arch Specialty Ins. Co., 2016 Cal. App. Unpub. LEXIS 5559 (Cal. App. 2d Dist. Div. 2, July 28, 2016)
Categories: Builder’s Risk Insurance – Cost of Making Good Exclusion – Ensuing Loss Exception
Where an excluded peril of mortar improperly applied too thick causes cracking of stone that, combined with the mortar, comprises the flooring, is the cracking, itself, a covered ensuing loss? In Olympic and Georgia Partners LLC v. Arch Specialty Ins. Co., the California Court of Appeal for the Second District, held that it was not – rather, the cracking stone was the very damage necessitating repair.
Olympic and Georgia Partners LLC developed and built a 54-story high rise hotel and condominium as part of the L.A. Live! complex in downtown Los Angeles. It obtained builder’s risk insurance policies for the project from a consortium of eight insurers, each of which agreed to cover a percentage of the overall coverage. The policies protected against “all risks of direct physical loss or damage to insured property[,]” subject to certain terms and conditions, including exclusions for the “[c]osts of making good faulty or defective workmanship or material” and the “[c]ost of making good fault, defect, error, deficiency or omission in design, plan or specification.” These exclusions were subject to an exception if “direct physical loss or damage by an insured peril ensue[d],” in which case the “policy [would] cover [such] ensuing loss or damages only.”
The insured hired subcontractors to install stone flooring in the condos. The subcontractors used varying depths of mortar beneath the stone to ensure that the floor was level, but when the drying mortar shrank (and where it was applied more thickly), it caused small fractures in the stone. The insured filed a claim under the policy, but the insurers denied the claim citing the above-referenced exclusions. The insured sued the insurers and others. The trial court granted summary judgment to the insurers because it was undisputed that “the overly thick mortar bed was the primary if not exclusive cause of the cracking of the natural stone,” which itself was the product of the architect’s deficient plans as well as the defective workmanship of the subcontractors in following those plans, and the trial court concluded that the exclusions for the cost of making good defective design and defective workmanship applied. It further concluded that “the cracking of the natural stone was not a severable ‘ensuing loss’ such that it qualified for the exception to the exclusion.” The Court of Appeal affirmed.
The Court of Appeal explained that a “cost of making good” provision excludes not only the cost to repair or replace the contractor’s defective work, but also the cost to replace or repair the contractor’s satisfactory work that is damaged by the defective work. Because the defective design and installation of one part of the flooring (the mortar) damaged another satisfactorily designed and installed part of the flooring (the stone), because only one subcontractor installed the flooring in any given room, and because it was physically impossible to replace the mortar without also replacing the stone, the “cost of making good” provisions excluded from coverage the cost of replacing or repairing the stone as well as the mortar.
Further, the Court of Appeal held, the ensuing loss exception did not apply as such provisions require that an original, excluded peril triggers a second, subsequent peril that “causes a loss or injury separate and independent … from the original excluded peril.” The Court of Appeal emphasized that a “peril” is “a hazard or occurrence which causes a loss or injury” and “not the loss or injury itself.” The insured noted that the policy excludes “[n]ormal … cracking … of … floors” and argued that, while thick mortar was the original peril, it gave rise to the subsequent covered peril of “extraordinary cracking.” However, the Court of Appeal concluded that, extraordinary or not, the cracked stone was the very damage necessitating repair. The Court of Appeal rejected other arguments as well, including the argument that material factual disputes existed regarding cause, reasoning that the “efficient proximate cause” or “predominant” factor is key, which in this case was indisputably the improper application of the mortar.
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