The Cincinnati Insurance Co v. Beazer Homes Investments LLC ( 2010 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 10a0021p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
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Plaintiff-Appellee, -
THE CINCINNATI INSURANCE COMPANY,
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No. 08-5967
v.
,
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Defendants-Appellants. -
BEAZER HOMES INVESTMENTS, LLC et al.,
N
Appeal from the United States District Court
for the Eastern District of Kentucky at Lexington.
No. 05-00470—Karl S. Forester, District Judge.
Argued: November 30, 2009
Decided and Filed: February 4, 2010
Before: BATCHELDER, Chief Judge; SILER and GILMAN, Circuit Judges.
_________________
COUNSEL
ARGUED: Martin M. McNerney, KING & SPALDING LLP, Washington, D.C., for
Appellants. Kimberly A. Kyle, KOHNEN & PATTON, LLP, Cincinnati, Ohio, for
Appellee. ON BRIEF: Martin M. McNerney, KING & SPALDING LLP, Washington,
D.C., Michael M. Raeber, Jessica E. Sabbath, KING & SPALDING LLP, Atlanta, Georgia,
Jaron P. Blandford, McBRAYER, McGINNIS, LESLIE & KIRKLAND PLLC, Lexington,
Kentucky, for Appellants. Kimberly A. Kyle, K. Roger Schoeni, KOHNEN & PATTON,
LLP, Cincinnati, Ohio, for Appellee.
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OPINION
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RONALD LEE GILMAN, Circuit Judge. The Cincinnati Insurance Company (CIC)
sued Beazer Homes Investments, LLC in a declaratory-judgment action to establish that CIC
was not obligated to cover the costs that Beazer incurred in repairing water damage to
several houses that Beazer had built as the general contractor. The damage was allegedly
caused by faulty workmanship on the part of Beazer’s subcontractors. CIC’s motion for
1
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judgment on the pleadings was granted by the district court, which held that the damage at
issue was not “property damage” caused by an “occurrence” as defined in Beazer’s insurance
policies with CIC. For the reasons set forth below, we AFFIRM the judgment of the district
court.
I. BACKGROUND
A. Factual background
From 1998 to 2002, Crossmann Communities, Inc. was the general contractor for the
construction of houses in the Beaumont Subdivision near Lexington, Kentucky.
Subcontractors performed all or most of the actual construction work. During this time,
Crossmann entered into a series of commercial general liability (CGL) insurance policies
with CIC (the Policies). The Policies generally covered the “ultimate net loss” that
Crossmann was legally obligated to pay because of “property damage” caused by an
“occurrence.” Crossmann merged into Beazer in 2002, and Beazer became the successor-in-
interest to Crossmann’s insurance policies.
After the Beaumont houses were completed and sold, several homeowners
complained of damage as a result of water intrusion into their homes. The homeowners
claimed that the damage was the result of faulty workmanship by Crossmann and/or its
subcontractors.
B. Procedural history
After Beazer began investigating and repairing the damage, it submitted a claim to
CIC, seeking coverage for the costs incurred in making the repairs. Beazer specifically
sought reimbursement for the costs of repairing properly constructed components of the
houses that had been damaged by the water intrusion, which in turn had been caused by the
faulty construction of other components. In response, CIC sought a declaratory judgment
holding that it was not liable for such costs. Beazer filed an answer and counterclaim,
seeking a declaratory judgment that CIC was obligated to cover the costs of repair. CIC
subsequently filed a motion for judgment on the pleadings.
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The parties agreed in the district court that Indiana law governs their dispute and the
interpretation of the Policies. In March 2008, the district court granted CIC’s motion,
holding that (1) the judgment in a prior South Carolina lawsuit between the parties did not
estop CIC from contesting whether Beazer’s costs were covered by the Policies under
Indiana law, (2) the damage at issue was not “property damage,” and (3) the damage was not
caused by an “occurrence.”
Shortly thereafter, Beazer filed a motion for reconsideration, which was denied.
Beazer also filed motions to supplement the record both in the district court and in this court,
claiming that it had newly discovered evidence that CIC had taken contrary positions on
various matters in parallel litigation in a federal district court in Indiana. A prior panel of
this court denied the motion, but did so without prejudice to our reconsideration of the issue.
Beazer has timely appealed.
II. ANALYSIS
A. Standard of review
A motion for judgment on the pleadings under Rule 12(c) of the Federal Rules of
Civil Procedure may be granted where the moving party “is entitled to judgment as a matter
of law.” Rawe v. Liberty Mut. Fire Ins. Co., 462 F.3d 521, 526 (6th Cir. 2006) (citation
omitted). When deciding such a motion, the district court must take all the “well-pleaded
material allegations of the pleadings of the opposing party” as true. Id. (citation omitted).
This court reviews a grant of judgment on the pleadings de novo. Id.
B. Collateral estoppel
As an initial matter, Beazer argues that the district court erred in permitting CIC to
contest whether the Policies cover the damage at issue. In 2007, a South Carolina state court
issued a declaratory-judgment ruling against CIC and in favor of Beazer, interpreting South
Carolina law to hold that water damage to properly constructed parts of a house, which was
caused by faulty construction on other parts of the house, was property damage caused by
an occurrence under Beazer’s policies with CIC. See Crossmann Cmtys. of N.C., Inc. v.
Harleysville Mut. Ins. Co., No. 2004-CP-2600084 (S.C. Ct. Com. Pl., May 3, 2007). The
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policies at issue in Harleysville are the same as those in the instant case, but the damaged
properties are located in different states. Beazer argues that CIC is prevented by the doctrine
of collateral estoppel from relitigating whether the Policies cover the damage because
another court has previously ruled on this issue.
Collateral estoppel “bars subsequent relitigation of a fact or issue where that fact or
issue was necessarily adjudicated in a prior cause of action” between the same parties or
their privies, but is appropriate only where the “precise issue” in the subsequent case was
raised and litigated in the prior proceeding. Cobbins v. Tenn. Dep’t of Transp., 566 F.3d
582, 589 (6th Cir. 2009). The question is therefore whether the Harleysville court decided
the same issue as that presented in the instant case.
Over thirty years ago, the United States District Court for the Eastern District of
Michigan articulated a definition of an “issue” for the purposes of collateral estoppel that
was praised by a leading treatise on federal law:
An issue is a single, certain and material point arising out of the allegations
and contentions of the parties. It may concern only the existence or non-
existence of certain facts, or it may concern the legal significance of those
facts. If the issues are merely evidentiary, they need only deal with the same
past events to be considered identical. However, if they concern the legal
significance of those facts, the legal standards to be applied must also be
identical; different legal standards as applied to the same set of facts create
different issues.
Overseas Motors, Inc. v. Import Motors Ltd., 375 F. Supp. 499, 518 n.66a (E.D. Mich. 1974)
(emphasis added) (citations and internal quotation marks omitted), aff’d, 519 F.2d 119 (6th
Cir. 1975), quoted in 18 Charles Alan Wright, Arthur R. Miller & Edward H. Cooper,
Federal Practice and Procedure § 4417 n.2 (2d ed. 2002) (describing the definition of an
“issue” in Overseas Motors as “[a]s good an effort as any”). Beazer characterizes the
relevant issue in Harleysville as whether “the Policies covered the damage to the homes
because it was ‘property damage’ caused by an ‘occurrence.’” But that is too broad a
reading of the Harleysville decision. The issue in that case was not whether the Policies
covered the damage under some universal insurance law, but whether the damage was
covered under South Carolina insurance law. In the present case, the issue is whether such
damage is covered under Indiana insurance law.
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Collateral estoppel does not bar the relitigation of issues where the legal rules
governing a specific case or issue are different. 18 Wright, Miller & Cooper, Federal
Practice and Procedure § 4425 (2d ed. 2002) (“Identity of the issue is established by
showing that the same general legal rules govern both cases and that the facts of both cases
are indistinguishable as measured by those rules. Preclusion should not apply if there has
been a change either in the facts or the governing rules.”) (emphasis added).
In Boomer v. AT&T Corp., 309 F.3d 404, 422 n.10 (7th Cir. 2002), for example, a
class of AT&T customers argued that AT&T was collaterally estopped from arguing that the
arbitration clause in its service contract was valid. Another class had previously brought suit
against AT&T in a federal court in California, and that court found the clause to be
unconscionable and therefore unenforceable under California law. When the second class
sued AT&T in federal court in Illinois, the Seventh Circuit refused to apply collateral
estoppel to AT&T’s defense because the issue in the second suit was whether the clause was
valid under Illinois law. See id. (“In [the prior case], the question of unconscionability
involved California law, whereas in this case it involves Illinois law, and therefore the issues
are not the same.”); see also Sw. Pet Prods., Inc. v. Koch Indus., Inc., 32 F. App’x 213, 215
(9th Cir. 2002) (holding that collateral estoppel did not bar the litigation of an issue under
Arizona law where California law was applied in the prior suit, because the issues were not
“identical”); Guild Trust v. Union Pac. Land Res. Corp., 682 F.2d 208, 211 (10th Cir. 1982)
(denying the application of collateral estoppel, in part, because the law applied in the prior
case was Colorado property law and the law governing the case before the court was
Wyoming property law); Peterson v. Clark Leasing Corp., 451 F.2d 1291, 1292 (9th Cir.
1971) (per curiam) (holding that collateral estoppel did not apply in a case where the issue
was whether financial records were inadequate under federal law, and a prior case had
determined that the records were inadequate under California law, even though “these
inquiries are likely very similar”); 475342 Alberta, Ltd. v. Starfire, No. 95-2083-GTV, 1996
WL 370221, at *3 (D. Kan. June 19, 1996) (denying collateral estoppel where a prior court
had applied Oklahoma and California contract law to the issue, but Kansas law applied in
the subsequent case, stating that “[b]ecause the law of different states applies, this court is
not presented with an identical issue”).
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This rule of law has been applied within the Sixth Circuit as well. In Quixtar Inc.
v. Brady, Nos. 08-14346, 08-14347, 2008 WL 5386774 (E.D. Mich. Dec. 17, 2008), the
district court refused to apply collateral estoppel with regard to the enforceability of an
arbitration clause. Quixtar had brought suit against several of its distributors, seeking to
enforce the mandatory arbitration clause contained in its distributor contracts. Id. at *1. A
different set of distributors had previously brought suit in a federal court in Texas against
Quixtar and, on appeal, the Fifth Circuit found that the arbitration provision was
unenforceable under Texas law. Id. at *4.
The Quixtar court held that the prior decision by the Fifth Circuit did not collaterally
estop Quixtar from asserting the validity of the arbitration clause because the parties had
agreed that Michigan law governed their dispute. Like Beazer in the current case, the
distributors in Quixtar had attempted to broadly define the issue previously decided,
claiming that the relevant issue decided by the Fifth Circuit and to be decided by the
Michigan court was “the enforceability of the arbitration provisions.” Id. at *5. The Quixtar
court, however, rejected this broad definition. Instead, it defined the issue as whether “these
provisions were unenforceable under Texas law.” Id. (emphasis in original).
Not surprisingly, the Fifth Circuit expressed no view . . . as to whether
Quixtar’s arbitration provisions might be unenforceable under the law of
Michigan (or any state other than Texas). It readily follows, then, that the
“precise issue” to be decided here—namely, the enforceability of Quixtar’s
arbitration provisions under Michigan law . . . was not raised and litigated
before the Fifth Circuit . . . .
Id.
This rule applies with equal force in insurance cases. In Evanston Insurance Co. v.
Affiliated FM Insurance Co., 556 F. Supp. 135 (D. Conn. 1983), one insurance company
(Evanston) sought a declaratory judgment that a second insurance company (Affiliated) was
liable for primary indemnification and the defense of the insured. The contested issue was
which insurer was the primary insurer in light of the conflict between Affiliated’s
occurrence-based policy and Evanston’s claims-made policy. Two years prior to the
decision in Evanston, a federal court in Pennsylvania had held that Affiliated’s occurrence-
based policy (which was identical to the policy at issue in Evanston) made it the primary
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insurer where there was a conflict with a claims-made policy. Evanston argued that the issue
could not be relitigated in Connecticut because collateral estoppel applied. The district court
in Connecticut rejected this argument, however, because the prior case had been decided
under Pennsylvania state law. Because the question in Evanston was how Connecticut
courts would rule on the issue of conflicting occurrence-based versus claims-made policies,
the issues raised were not “identical” and collateral estoppel did not apply. Id. at 137.
A district court in Massachusetts reached the same result in Stop & Shop Cos. v.
Federal Insurance Co., 946 F. Supp. 99 (D. Mass. 1996), rev’d on other grounds, 136 F.3d
71 (1st Cir. 1998). There, a district court in California had previously decided that an
insurance policy provided coverage for losses that clients of an accountant had suffered
when the accountant diverted millions of dollars that the clients had entrusted to the
accountant to pay to the Internal Revenue Service. Id. at 105. When Stop & Shop, another
client of the accountant, sued for a declaratory judgment that the same insurance policy
provided it with coverage for identical losses, Stop & Shop contended that the insurer was
precluded from arguing that its policy did not provide coverage given the previous
determination in California. The district court in Massachusetts, however, denied the use
of collateral estoppel because California state law was used to resolve the prior dispute, and
Massachusetts state law governed the later dispute. Id. at 106.
Beazer responds by citing Aaron v. Mahl, 674 S.E.2d 482 (S.C. 2009), for the
proposition that even if Indiana and South Carolina courts might interpret the Policies
differently, collateral estoppel still applies. In that case, Mahl’s former employer brought
suit against her in a California state court for various causes of action and won a judgment
of damages. Id. at 483-84. Mahl’s employer then assigned the California judgment to an
individual named Jim Aaron, who filed suit in both Indiana and South Carolina state courts
to enforce the judgment. The Indiana court enforced the judgment, specifically rejecting
Mahl’s argument that the assignment was invalid. Subsequently, a South Carolina trial court
found the assignment to be invalid and refused to enforce the judgment. But the South
Carolina Supreme Court reversed, holding that res judicata and collateral estoppel applied
to require the South Carolina trial court to enforce the California judgment of damages and
the Indiana holding that the assignment was valid. Id. at 485-87.
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Aaron is distinguishable from the present case for two reasons. First, nowhere in the
Aaron opinion is there any suggestion that the law applied in California and Indiana differed
from the law to be applied by the South Carolina courts. The two issues in Aaron—liability
giving rise to the judgment and the validity of the assignment—had thus already been
decided, so the South Carolina trial court erred when it reanalyzed these issues. Here, the
issue of coverage under Indiana law has not been previously determined. Second, Aaron
was ultimately about the enforcement of a judgment, and a final judgment, unlike a matter
of contract interpretation under a different set of laws, is entitled to full faith and credit under
the U.S. Constitution. See Hosp. Underwriting Group, Inc. v. Summit Health Ltd., 63 F.3d
486, 494-95 (6th Cir. 1995) (holding that the district court’s failure to enforce a judgment
of damages from an Arizona state court because it viewed the damages as excessive violated
the Full Faith and Credit Clause of the U.S. Constitution, which requires “federal courts to
give full faith and credit to the judicial proceedings of state courts”). Collateral estoppel is
thus not applicable to the instant case, and CIC is free to contest whether the Policies cover
the costs that Beazer incurred.
C. Property damage caused by an occurrence
Turning now to the merits, Beazer sought coverage not for repair of the faulty work
by the subcontractors, but for damage to other components of the houses caused by water
intrusion that resulted from the allegedly faulty workmanship. The district court held that
such damage was neither property damage nor caused by an occurrence under Indiana law,
and thus was not covered by the Policies. Beazer argues that these conclusions are erroneous
or, in the alternative, that Indiana law on this issue is not settled, thus prompting its request
that we certify the question to the Indiana Supreme Court.
1. Property damage
The Policies define property damage as “[p]hysical injury to or destruction of
tangible property including all resulting loss of use.” Applying Indiana law, the district court
held that each completed house in its entirety is the work of Beazer and that damage to the
contractor’s own work is not property damage under the Policies.
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The first Indiana case to squarely address this issue was R.N. Thompson &
Associates, Inc. v. Monroe Guaranty Insurance Co., 686 N.E.2d 160 (Ind. Ct. App. 1997).
There, a home builder sought coverage for the costs of repairing damage “arising from
inadequate materials and substandard construction work.” Id. at 161. (The definitions of
property damage and occurrence contained in the Policies in the instant case are virtually
identical to the definitions in R.N. Thompson and the various other cases discussed in this
Opinion.) Because the damage was limited to the builder’s own work, the court held that
such damage was not property damage as defined by the builder’s CGL insurance policy:
The great weight of . . . authority is to the effect that CGL policies cover the
possibility that the goods, products, or work of the insured, once
relinquished or completed, will cause bodily injury or damage to property
other than to the product or completed work itself, and for which injury or
damage the insured might be exposed to liability. The coverage is for tort
liability for physical damages to others, and not for contractual liability of
the insured for economic loss suffered because the completed work is not
what the damaged person bargained for.
Id. at 162 (emphasis in original).
Other Indiana cases have adopted this reasoning. In Amerisure, Inc. v. Wurster
Construction Co., 818 N.E.2d 998 (Ind. Ct. App. 2004), for example, the court denied
coverage to a general contractor that was seeking reimbursement for repairs made to the
houses that it had built. Faulty exterior and insulation systems, which were installed by
subcontractors, caused the damage. The court found that such damage was not property
damage because “CGL policies cover the risk of damage to property other than the project
itself.” Id. at 1004 (emphasis in original). Because Wurster did not allege damage to “any
person or property, other than these interconnected systems on the buildings being
constructed by [the general contractor],” there was no property damage. Id. (emphasis in
original).
The court in Amerisure followed the same reasoning as the court in R.N. Thompson:
The construction of CGL insurance contracts . . . is based upon two types of
risk arising from a contractor’s work. The first, business risk, is a result of
not performing well (i.e., faulty work) and is borne by the contractor in order
to satisfy its customers. The second type of risk is occurrences which give
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rise to insurable liability. These occurrences are accidental injury to persons
or property due to faulty workmanship. In other words, a business risk
arises when, for example, a craftsman applies stucco to . . . a home in a
faulty manner and discoloration, peeling and chipping result, [where] the
poorly-performed work must be repaired or replaced by the contractor. On
the other hand, should the stucco peel and fall from the wall, and thereby
cause injury to the homeowner or his neighbor . . . or to a passing
automobile, an occurrence of harm arises which is covered under a CGL
policy.
Id. at 1003 (citations and internal quotation marks omitted).
Similarly, in Sheehan Construction Co. v. Continental Casualty Co., 908 N.E.2d 305
(Ind. Ct. App. 2009), vacated, No. 49A02-0805-CV-420, SC No. 49S02-1001-CV-32 (Ind.
Jan. 14, 2010), the homeowners sued a general contractor after their homes were damaged
by water intrusion, which was caused by the subcontractors’ faulty work on various
components of the houses. The court held that such damage was not property damage as
defined in CGL policies because the builder did not claim any damage to property “other
than the structural components of the homes themselves.” Id. at 307-08 (citation omitted).
Beazer seeks to distinguish these prior cases by arguing that they involved repairs
only to the faulty components themselves, not the properly constructed parts of the houses
that were damaged as a result of the faulty components. But even if this is a factually
accurate reading of the prior caselaw, the distinction ignores the holding of the Indiana
Supreme Court that the entire house is the general contractor’s work. See Ind. Ins. Co. v.
DeZutti, 408 N.E.2d 1275, 1280 (Ind. 1980) (holding that “the entire project or house which
he built and sold” is the product and work of the general contractor). Beazer, in other words,
cannot successfully argue that damage to a properly constructed component of a house due
to faulty workmanship on another component is “property damage” under a CGL policy.
Other courts applying Indiana law have similarly rejected this argument. See Trinity
Homes LLC v. Ohio Cas. Ins. Co., No. 1:04-cv-1920-SEB-DML, 2009 WL 3163108, at *6
(S.D. Ind. Sept. 25, 2009); Westfield Ins. Co. v. Sheehan Constr. Co., 580 F. Supp. 2d 701,
711 (S.D. Ind. 2008), aff’d, 564 F.3d 817 (7th Cir. 2009). These federal cases, together with
the Indiana state cases of R.N. Thompson, Amerisure, and Sheehan, clearly hold that a
general contractor cannot claim CGL insurance coverage for the costs it incurs in repairing
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houses that are subsequently damaged due to the faulty workmanship of its own
subcontractors.
Beazer, however, relies on one of the Policies’ exclusions in arguing to the contrary.
The “your work” provision excludes coverage for damage to “work performed by [the
policyholder] or on [its] behalf.” But the 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.”
Beazer argues that the interpretation of “property damage” adopted by the Indiana courts
renders superfluous the Policies’ “your work” exclusion and that exclusion’s subcontractor
exception.
Unfortunately for Beazer, the Indiana Supreme Court has rejected the concept that
exclusion clauses can be interpreted to enlarge coverage. See DeZutti, 408 N.E.2d at 1278.
In DeZutti, the insurance policy specifically excluded coverage for “liability assumed by the
insured under any contract or agreement.” Id. at 1277. The exclusion had an exception,
however, for “a warranty of fitness or quality of the named insured’s products or a warranty
that work performed by or on behalf of the named insured will be done in a workmanlike
manner.” Id. DeZutti argued that the exception “must grant or extend coverage to breach
of contract damages for the performance of work in a negligent and unworkmanlike
manner.” Id. at 1278. The Court rejected this argument because such logic ignored the
fundamental tenet of insurance law that “exclusion clauses do not grant or enlarge coverage.”
Id.
But Beazer argues that DeZutti’s reliance on a policy exclusion to deny coverage
actually supports its position that the damage at issue is covered property damage. DeZutti
was a general contractor for a set of houses and was assisted in the actual construction by
various subcontractors. The homeowners discovered problems with the foundation and sued
the general contractor, who then sought coverage for the cost of repairs from his insurance
company. The Court first stated that the general insuring clause, which covered property
damage caused by an occurrence, “would seemingly provide coverage” for the damages. Id.
at 1277. Next, however, the Court analyzed a set of exclusions, and held that an exclusion
that eliminated coverage for “property damage to work performed by [you]” meant that the
damage at issue was not covered. Id. at 1278-79. The Court then outlined its reasoning,
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using the same business risk/tort liability risk distinction relied on by the intermediate
Indiana courts in R.N. Thompson, Amerisure, and Sheehan:
[T]he two risks involved are quite different and the costs attendant upon the
repair or replacement of the insured’s own faulty work is part of every
business venture and is a business expense to be borne by the insured-
contractor in order to satisfy customers. It is a business risk long excluded
by comprehensive liability policies. Another form of risk . . . is injury to
people and damage to other property caused by the contractor’s negligence
or defective product. It is this risk which the policy in question covers.
Id.
Beazer submits that because the Indiana Supreme Court resorted to looking at the
exclusions in the policy in DeZutti, rather than rejecting coverage based on the meaning of
property damage alone, it would find coverage in the instant case. But the court in R.N.
Thompson explicitly rejected this argument. See R.N. Thompson, 686 N.E.2d at 163 n.4
(“We recognize that . . . DeZutti defined the scope of the CGL coverage in part by addressing
exclusions to the policies . . . . However, the [business-risk/tort-risk] reasoning has led
courts to the same result without reliance on the policy exclusions.”); see also Sheehan, 908
N.E.2d at 309 n.3 (rejecting the argument that the “your work” exclusion and subcontractor
exception demonstrates that damage to the contractor’s own work is covered property
damage, reasoning that “[i]f the insuring clause does not extend coverage, ‘one need look
no further’”) (quoting Amerisure, Inc., 818 N.E.2d at 1005).
The United States District Court for the Southern District of Indiana, when faced
with nearly identical facts as those in the instant case, has similarly concluded that Indiana
law interprets property damage as covering only damage to property other than the finished
houses. As recently as September 2009, that court ruled that costs incurred by a general
contractor in repairing properly constructed components of a house, which were damaged
by faulty subcontractor work on other components, were not covered under the Policies
because the damage was not CGL property damage:
[I]t is clear that the cost of repairing faulty workmanship is not deemed
“property damage” if the damaged property is limited to the project
itself. . . . Therefore, the insured seeking coverage must demonstrate that
some property other than the project itself—that is to say, something other
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than the homes constructed by [the general contractors] and their
subcontractors—was damaged.
Trinity Homes LLC, 2009 WL 3163108, at *6 (citations omitted); see also Westfield Ins. Co.,
580 F. Supp. 2d at 711 (holding that, under Indiana law, “damage to the otherwise non-
defective parts of the houses damaged by faulty workmanship” does not constitute property
damage).
Given the clear line of cases discussed above, there is no need to certify this issue
to the Indiana Supreme Court. “Resort to the certification procedure is most appropriate
when the question is new and state law is unsettled.” Transamerica Ins. Co. v. Duro Bag
Mfg. Co., 50 F.3d 370, 372 (6th Cir. 1995). The Indiana Supreme Court has clearly made
a distinction between the two types of risks facing a builder. See DeZutti, 408 N.E.2d at
1279 (“The same neglectful craftsmanship may cause both a business expense of repair and
a loss represented by damage to persons and property other than the insured’s own product
or work. If . . . the damage is confined to the insured’s own work, it is a business risk and
expense not intended to be covered under the policy.”). Several decisions by both state and
federal courts in Indiana have applied this reasoning to come to a consistent view that
damage to houses caused by faulty workmanship by subcontractors is not considered
property damage under CGL policies. See Trinity Homes LLC, 2009 WL 3163108, at *6
n.10 (“Indiana courts have adopted clear and controlling precedent governing the issues in
this case.”).
We recognize that the Indiana Supreme Court recently granted transfer in Sheehan
v. Continental Casualty Co., 908 N.E.2d 305 (Ind. Ct. App. 2009), to decide whether the
type of damage at issue in the instant case is property damage caused by an occurrence under
the terms of CGL policies. This action clearly obviates the need for us to certify the same
issue. Moreover, the law in Indiana is relatively settled as to whether such damage is
property damage for CGL insurance purposes unless and until the Indiana Supreme Court
decides otherwise. See Transamerica Ins. Co., 50 F.3d at 372 (declining to certify an issue
for resolution by the Kentucky Supreme Court where Kentucky law was “relatively settled”
on the issue). The district court therefore did not err in holding that, under Indiana law,
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Beazer’s repair costs were not covered by its Policies with CIC. Nor did it err in declining
to certify the issue to the Indiana Supreme Court.
We would note, by the way, that our decision and the decisions of multiple Indiana
courts that such damage is not encompassed by the property-damage definition in standard
CGL policies does not leave general contractors without any protection against the risk in
question. General contractors can require performance bonds, can contract for professional-
liability insurance or subcontractor-default insurance, or can seek breach-of-contract
damages against subcontractors who do not adequately perform. See 4A Philip L. Bruner &
Patrick J. O’Connor, Jr., Construction Law §§ 12:13 (professional bonds); 11:118
(professional-liability insurance); 11:130 (subcontractor-default insurance); and 18 (breach
of contract) (2009). These costs can thus be covered through other legal avenues, but are not
covered by the standard CGL policy as interpreted under Indiana law.
2. Occurrence
The district court also concluded that the damage to the houses was not caused by
an “occurrence.” The Policies define an occurrence as “[a]n accident, including continuous
or repeated exposure to substantially the same general harmful conditions.” The district
court reasoned that
even if Crossmann and/or its subcontractors were negligent in building the
houses and did not intend a defective result, the act itself of building the
houses was intentional and cannot be considered accidental conduct under
the policies. Further, any damage to the non-defective components of the
houses was also the natural and ordinary consequence of the faulty work . . .
and therefore not an “accident.”
Given the conclusion that the damage at issue was not property damage under the
Policies, the question of whether the damage was caused by an occurrence is a moot point.
Several Indiana courts, however, have agreed with the district court’s conclusion and held
that the natural consequences of intentional acts are not accidents. In Jim Barna Log
Systems Midwest, Inc. v. General Casualty Insurance Co. of Wisconsin, 791 N.E.2d 816
(Ind. Ct. App. 2003), for example, the purchasers of a log-home package sued the distributor
for various causes of action, including negligently hiring a contractor with insufficient
experience, after their home was inadequately constructed. The distributor sought coverage
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from its insurer, but the court held that no accident was involved because the act of hiring
the contractor was intentional, “[e]ven if [the distributor] acted negligently or carelessly by
hiring” the contractor. Id. at 826; see also R.N. Thompson, 686 N.E.2d at 165 (holding that
degradation of the roofing materials was the “natural and ordinary consequence of the work
done by [the general contractor] or under its supervision” and therefore was not an accident);
Amerisure, Inc., 818 N.E.2d at 1005 (“[C]onsistent with . . . R.N. Thompson as well as the
majority of jurisdictions outside our state, we hold that defective workmanship that results
in damages only to the work product itself is not an occurrence.”).
The Indiana Supreme Court has also applied the business-risk/tort-risk distinction
to determine whether a loss is caused by an accident. When an alarm company sought
coverage for a wrongful-death judgment against it, which flowed from a case alleging that
the alarm company had unreasonably delayed reporting an incident, the Court held that the
damages were not an insurable loss because they did not flow from an accident as defined
in the CGL policy. Tri-Etch, Inc. v. Cincinnati Ins. Co., 909 N.E.2d 997, 1002-03 (Ind.
2009). It reasoned that “[t]he CGL policy does not guarantee the quality of work or products
of its insured,” and that “[c]laims based on negligent performance of commercial or
professional services are ordinarily insured under ‘errors and omissions’ or malpractice
policies. For this reason, CGL policies typically exclude claims arising out of professional
or other business services.” Id. at 1001-02. Indiana courts would therefore likely agree with
the district court’s conclusion that the damage here was not caused by an occurrence.
D. Fungus exclusion
In its opinion, the district court also noted CIC’s argument that a fungus exclusion
in the policies precludes coverage. The court then stated that it was unnecessary to address
this argument given its conclusion about the scope of the insuring clause, but stated that it
was “of the opinion” that such a fungus exclusion would exclude coverage in the instant
case. Beazer argues that the court erred in considering the alleged exclusion because Beazer
disputed that the Policies actually contained the fungus exclusion. On appeal, CIC has not
contested Beazer’s argument on this point.
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Because of the factual dispute, the district court should have accepted Beazer’s
allegation as true and analyzed the Policies as if they did not contain the exclusion. See
Rawe v. Liberty Mut. Fire Ins. Co., 462 F.3d 521, 526 (6th Cir. 2006) (“For purposes of a
motion for judgment on the pleadings, all well-pleaded material allegations of the pleadings
of the opposing party must be taken as true.” (citation omitted)). This error on the part of
the district court was harmless, however, for two reasons. First, the reference to the alleged
exclusion was dicta because the court did not rely on the exclusion in denying coverage.
Second, as discussed above, Indiana courts would deny coverage in the instant case based
on their interpretation of the terms “property damage” and “occurrence” regardless of any
fungus exclusion.
E. Record on appeal
Beazer’s final argument relates to its effort to expand the record on appeal, having
filed motions to expand both in this court and in the district court. A motions panel of this
court denied Beazer’s request, but did so without prejudice to our reconsideration of the
issue. Beazer seeks to supplement the record with evidence from the Trinity Homes
litigation, see Trinity Homes LLC, 2009 WL 3163108, alleging that the evidence would
establish that CIC has admitted that the Policies do not contain a fungus exclusion and that
the damage at issue is property damage caused by an occurrence.
The evidence about the fungus exclusion is irrelevant in light of the fact that the
district court did not rely on it in denying coverage. As for the other evidence that would
allegedly establish that Beazer’s costs are covered by the Policies, Beazer seeks to
supplement the record from two sources. It first cites the deposition testimony of an
underwriting representative from CIC to the effect that the Policies do not make a distinction
between damaged real property and damaged personal property, which was in response to
hypothetical questions about various types of damage that a house can sustain. Next, Beazer
relies on answers in CIC’s responses to Beazer’s requests for admissions that the Policies’
definitions of property damage and occurrence do not distinguish between damage to a
house, damage to a component of a house, or damage to personal property. CIC’s responses,
however, went on to explain that although the policy definitions do not distinguish between
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these types of damage, Indiana courts clearly interpret CGL policies with such distinctions
in mind.
We see no justification for adding these materials to the record on appeal. “[A] court
of appeals has discretionary authority to supplement the record with material not reviewed
by the district court in special circumstances.” United States v. Murdock, 398 F.3d 491, 499
(6th Cir. 2005). One of the factors that a court should consider in exercising this discretion
is “whether proper resolution of the case was beyond any dispute.” Id. at 500. In light of
the line of Indiana cases discussed in this Opinion, we believe that the proper resolution of
this case is clear.
Moreover, this proffered evidence is hardly an incontrovertible admission by CIC
that the type of damage at issue in both Trinity Homes and the instant case was property
damage caused by an occurrence. The alleged admissions were either in response to
hypothetical questions or were expressly limited by reference to various Indiana cases.
Indeed, the court in Trinity Homes ultimately concluded that the damage was not covered
by the Policies, even after being presented with such evidence. We therefore decline to
exercise our discretion to permit Beazer to expand the record at this late date.
III. CONCLUSION
For all of the reasons set forth above, we AFFIRM the judgment of the district court.