Westfield Insurance Company v. Sheehan Construction Company ( 2009 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 08-3463
W ESTFIELD INSURANCE C OMPANY,
Plaintiff-Appellee,
v.
S HEEHAN C ONSTRUCTION C OMPANY, INC., et al.,
Defendants-Appellants.
Appeal from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. 1:05-cv-0617-RLY-TAB—Richard L. Young, Judge.
A RGUED A PRIL 8, 2009—D ECIDED A PRIL 29, 2009
Before EASTERBROOK, Chief Judge, and W OOD and
W ILLIAMS, Circuit Judges.
E ASTERBROOK, Chief Judge. Sheehan Construction Co.
was the general contractor for the Crystal Lake residential
subdivision in Indianapolis. A few years after moving in,
the owners began to notice moisture in places that should
have been dry. An investigation traced the problem
to defective work by one of Sheehan’s subcontractors.
Litigation in state court ended with a settlement of
2 No. 08-3463
about $2.8 million. Sheehan wants its insurer, Westfield
Insurance Co., to indemnify that expense. (The settlement
assigned to the homeowners Sheehan’s rights in the
policy, but for simplicity we refer to Sheehan.) Westfield
declined and filed this declaratory-judgment action.
Indiana supplies the rules of decision.
Westfield’s policy covers commercial general liabil-
ity—that is, bodily injury and property damage attribut-
able to accidents. The policy would indemnify Sheehan
for loss caused by construction machinery that damaged
adjacent property or for an injury to a passer by caused
by a misplaced nail. But indemnifying a general con-
tractor for negligent work performed by a subcontractor
is something else again. The moral hazard would be
considerable: the prospect of indemnity would lead the
general contractor to save money by hiring substandard
subcontractors, then turning to the insurer to fix the
customers’ homes. The district court held that several
definitions and exclusions in Westfield’s policy show that
its coverage is limited to accidents of the sort we have
mentioned, and it granted judgment in Westfield’s favor.
580 F. Supp. 2d 701 (S.D. Ind. 2008). To simplify the
exposition we assume for the sake of argument that the
sort of loss the homeowners encountered was “property
damage” caused by an “occurrence” and shall examine
the effect of the policy’s “your work” exclusion.
The policy does not cover property damage to a con-
tractor’s own work. An exclusion says that “ ‘[p]roperty
damage’ to ‘your work’ arising out of it or any part of it
and included in the ‘products–completed operations
No. 08-3463 3
hazard’ ” is outside the policy’s scope. It adds that
this exclusion applies to “[t]he cost of repairing or re-
placing:”
(1) “Your work” defectively or incorrectly done by
you; or
(2) “Your product” manufactured, sold or supplied
by you; unless the “property damage” is caused
directly by you after delivery of “your product” or
completion of “your work” and resulting from a
subsequent undertaking.
The “work” or “product” o f a general contractor is the
whole project, so this language directly addresses the
homeowners’ loss. (The water did not damage separate
property in the homes, such as TV sets or furniture.) But
Sheehan replies that the problem stemmed not from its
work but from the work of a subcontractor, and it
observes that the insurance industry’s standard-form
commercial general liability policy was revised in 1986
to remove subcontractors’ work from the definition of
“your work” in this clause.
The standard form changed in 1986 by adding the
phrase “[t]his 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.” But
Sheehan did not purchase a policy on that form. It
bought one that lacks the “does not apply to subcon-
tractors’ work” language. An endorsement to West-
field’s policy has a definitional clause, under which
“your work” includes:
4 No. 08-3463
(1) Work or operations performed by you or on
your behalf;
and
(2) Materials, parts or equipment furnished in
connection with such work or operations.
Emphasis added. The italicized phrase means that sub-
contractors’ work is included in the scope of “your work”.
This leaves only the question whether water damage is
within the scope of the policy’s “products–completed
operations hazard”. That’s another defined term com-
prising “all ‘bodily injury’ and ‘property damage’ occur-
ring away from premises you own or rent and arising
out of ‘your product’ or ‘your work’ except” for
“[p]roducts that are still in your physical possession” and
a list of other exclusions from this exemption. This
“products–completed operations hazard” definition is
designed to ensure that the policy covers accidents that
occur while construction is under way, but not property
damage caused by poor workmanship in a completed
building. But that’s exactly the sort of claim that was
made and settled in the underlying litigation.
Sheehan scarcely tries to argue that the policy’s actual
language covers the loss that the homeowners incurred.^
^
It did offer the view of a former insurance adjuster that he
would have paid Sheehan’s claim. The district court properly
struck this affidavit. The “expert” conceded that he knew
nothing about Indiana law, and at all events the interpreta-
(continued...)
No. 08-3463 5
Nor does Sheehan deny that several Indiana decisions,
addressing functionally identical situations, have held
that the insurer need not indemnify a general contractor.
See, e.g., Amerisure, Inc. v. Wurster Construction Co., 818
N.E.2d 998 (Ind. App. 2004); R.N. Thompson & Associates,
Inc. v. Monroe Guaranty Insurance Co., 686 N.E.2d 160 (Ind.
App. 1997). Sheehan contends that these opinions are
“outdated” (as if judicial decisions came stamped with
expiration dates!) because of the 1986 change to the
trade association’s form policy. How a change in 1986
can supersede judicial decisions rendered in 1997 and
2004 is anyone’s guess. And, to repeat, the policy that
Sheehan actually purchased defines “your work” to
include work performed on the general contractor’s
behalf. If Sheehan’s work had been performed in Florida
or Tennessee, under the 1986 standard form, then the
casualty might be covered. See United States Fire
Insurance Co. v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007);
Travelers Indemnity Co. v. Moore & Associates, Inc., 216
S.W.3d 302 (Tenn. 2007). But in Indiana, under Westfield’s
policy, it is not covered. The premiums paid presumably
reflect this difference.
(...continued)
tion of contracts is for the judge. See Bammerlin v. Navistar
International Transportation Corp., 30 F.3d 898 (7th Cir. 1994); Loeb
v. Hammond, 407 F.2d 779 (7th Cir. 1969). Contracts mean
what they say when read in light of legal principles; what
strangers to the parties’ bargain would do is neither here
nor there.
6 No. 08-3463
According to Sheehan, T.R. Bulger, Inc. v. Indiana Insur-
ance Co., 901 N.E.2d 1110 (Ind. App. 2009), effectively
overrules Amerisure and R.N. Thompson and shows that
it is entitled to indemnity. Sheehan says that T.R. Bulger
is materially identical to this case. Yet T.R. Bulger
reiterates rather than retreats from the holdings of
Amerisure and R.N. Thompson. The insured won in T.R.
Bulger because it was a subcontractor whose work had
been damaged by the negligence of a different subcon-
tractor. The “your work” exclusion in the subcontrac-
tor’s policy did not cover the work of a different subcon-
tractor. There was no moral hazard; one subcontractor
does not choose another. Sheehan, however, was the
project’s general contractor, and the “your work” clause
in its policy covered the work of all subcontractors
it selected.
The parties’ other arguments do not require discussion.
We cannot refrain from remarking, however, that
Sheehan’s insistence that it is entitled to punitive
damages because Westfield’s denial of coverage was “in
bad faith” is the sort of argument that calls into question
the bona fides of all other contentions. How can an
insurer exhibit “bad faith” by taking a position that not
only follows the policy’s language but also is endorsed
by a district judge? We can imagine a procedural form
of bad faith—refusal to take any stance on the policy’s
coverage while leaving the insured to fend for itself in
the underlying litigation—but Westfield addressed
Sheehan’s claim with dispatch and filed a prompt
declaratory-judgment suit to have the dispute resolved.
Sheehan’s insistence, even after losing on the merits in
No. 08-3463 7
the district court, that the insurer acted “in bad faith”
implies that its strategy has been to strong-arm a settle-
ment by in terrorem claims, rather than to vindicate its
legal entitlements. Lawyers should think carefully about
the message that their contentions convey to the court,
as well as the effect they may have on the other litigants.
A FFIRMED
4-29-09