Opinion
No. 348339
06-18-2020
CARDINAL FABRICATING, INC., Plaintiff-Appellee, v. CINCINNATI INSURANCE COMPANY, Defendant-Appellant.
If this opinion indicates that it is "FOR PUBLICATION," it is subject to revision until final publication in the Michigan Appeals Reports. UNPUBLISHED Wayne Circuit Court
LC No. 18-000994-CB Before: GLEICHER, P.J., and SAWYER and METER, JJ. PER CURIAM.
Cardinal Fabricating, Inc. filed suit against Cincinnati Insurance Company when the insurer refused to defend and indemnify Cardinal under general commercial liability (GCL) and umbrella policies in an underlying lawsuit. The circuit court summarily determined that Cincinnati had a duty to defend Cardinal. Cincinnati contends that the underlying case was based on Cardinal's defective workmanship, which was not an insured occurrence and was exempted under the policy, meaning that Cardinal was not entitled to a defense. The circuit court correctly interpreted the policy and we affirm.
I. BACKGROUND
In February 2014, a joint venture of contractors (the Joint Venture) subcontracted with another company—HSC—to manufacture support beams for a "visual screen" being constructed at the end of a runway owned by the Wayne County Airport Authority (WCAA). HSC purchased and used steel material fabricated by Cardinal. Defects in Cardinal's steel material compromised the integrity of the structure. The steel support columns cracked, causing panels to fall off the screen and damaging the structure's concrete base—each element constructed by other subcontractors.
In an underlying lawsuit, the Joint Venture was held liable to the WCAA. A court ordered HSC to indemnify the Joint Venture. HSC, in turn, sought indemnification from Cardinal, alleging that any damage, or liability, was the result of defective materials supplied by Cardinal.
After receiving HSC's complaint, Cardinal contacted its insurer, Cincinnati, invoking Cincinnati's duty to defend and indemnify under its GCL and umbrella policies. Cincinnati responded that the alleged property damage was not the result of an "occurrence" as defined by the insurance policies, and therefore it had no duty to defend Cardinal. Cardinal ultimately retained counsel and paid for its own defense of the underlying action. Cardinal then filed the current action, alleging that Cincinnati had breached its duties under the terms of the insurance policies. Cincinnati responded by denying coverage based on the absence of a covered occurrence.
Cardinal moved for partial summary disposition under MCR 2.116(C)(10), seeking a declaratory judgment that Cincinnati had a contractual duty to defend it in the underlying action and that Cincinnati's failure to do so amounted to a breach. Cincinnati continued to argue that the pleadings in the underlying action did not allege a covered occurrence as defined by the insurance policies. For the first time, Cincinnati also asserted that the CGL policy's impaired property clause excluded coverage of the damage alleged in the underlying action.
The circuit court found that the alleged property damage to the visual screen was the result of an "occurrence" within the insurance policies' scopes of coverage. Because the alleged property damage was within the scope of the insurance policies, the court found that Cincinnati had a duty to defend Cardinal in the underlying action, a duty which Cincinnati had breached.
Several months after granting summary disposition in favor of Cardinal concerning these issues, the circuit court entered a final judgment awarding it damages. While Cincinnati approved the form of the final judgment, it reserved its appellate rights. This appeal ensued.
II. STANDARD OF REVIEW
We review de novo a circuit court's decision on a motion for summary disposition. Defrain v State Farm Mut Ins Co, 491 Mich 359, 366; 817 NW2d 504 (2012). Summary disposition is appropriate under (C)(10) if, after reviewing the record evidence "in the light most favorable to the nonmoving party," "there is no genuine issue regarding any material fact and the moving party is entitled to judgment as a matter of law." Zaher v Miotke, 300 Mich App 132, 139-140; 832 NW2d 266 (2013) (cleaned up). "The interpretation and construction of insurance contracts are also questions of law, which this Court reviews de novo." Citizens Ins Co v Secura Ins, 279 Mich App 69, 72; 755 NW2d 563 (2008).
This opinion uses the new parenthetical "cleaned up" to improve readability without altering the substance of the quotation. The parenthetical indicates that nonsubstantive clutter such as brackets, alterations, internal quotation marks, and unimportant citations have been omitted from the quotation. See Metzler, Cleaning Up Quotations, 18 J App Pract & Process 143 (2017). --------
III. ANALYSIS
The circuit court properly determined that the underlying action involved an "occurrence" under the CGL and umbrella policies and therefore Cincinnati had a duty to defend Cardinal. "An insurance company has a duty to defend its insured if the allegations of the underlying suit arguably fall within the coverage of the policy. . . . The duty to defend arises from the language of the insurance contract." Citizens Ins Co, 279 Mich App at 74 (cleaned up).
"The duty of the insurer to defend the insured depends upon the allegations in the complaint of the third party in his or her action against the insured. This duty is not limited to meritorious suits and may even extend to actions which are groundless, false, or fraudulent, so long as the allegations against the insured even arguably come within the policy coverage. An insurer has a duty to defend, despite theories of liability asserted against any insured which are not covered under the policy, if there are any theories of recovery that fall within the policy. The duty to defend cannot be limited by the precise language of the pleadings. The insurer has the duty to look behind the third party's allegations to analyze whether coverage is possible. In a case of doubt as to whether or not the complaint against the insured alleges a liability of the insurer under the policy, the doubt must be resolved in the insured's favor." [Id. at 74-75, quoting Detroit Edison Co v Mich Mut Ins Co, 102 Mich App 136, 141-142; 301 NW2d 832 (1980).]Under these principles, the duty to defend is broad and is triggered when even a relatively expansive reading of the pleadings in the underlying suit supports a theory of recovery under a policy.
Cincinnati incorrectly posits that Cardinal was required in this case to provide evidence that the underlying action actually involved an "occurrence" triggering coverage. That simply is not Cardinal's burden. An insurer's duty to defend an insured party derives from the allegations made in the underlying action, and the duty to defend "may even extend to actions which are groundless, false, or fraudulent, so long as the allegations against the insured even arguably come within the policy coverage." Id. at 75 (cleaned up).
The terms of Cardinal's CGL policy state in relevant part: "We will pay those sums that the insured becomes legally obligated to pay as damages because of . . . 'property damage' to which this insurance applies. We will have the right and duty to defend the insured against any suit seeking those damages." The CGL policy further states that the policy only applies to property damage "that is caused by an 'occurrence,' " which is defined as "[p]hysical injury to tangible property, including all resulting use of that property . . . or . . . [l]oss of use of tangible property that is not physically injured," and also as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Similar provisions are found under the umbrella policy as well. Reading these provisions together, Cincinnati has a duty under the policies to defend Cardinal in suits alleging physical injury to or the loss of use of tangible property caused by an accident.
This Court has held that "defective workmanship . . . standing alone" does not qualify as an occurrence under the terms of a CGL policy. Hawkeye-Security Ins Co v Vector Constr Co, 185 Mich App 369, 378; 460 NW2d 329 (1990). However, this Court has also held that incidents where defective workmanship or work product damages the property of others, beyond damage to the insured party's work product, can be classified as an occurrence under a CGL policy. Radenbaugh v Farm Bur Gen Ins Co of Mich, 240 Mich App 134, 146-148; 610 NW2d 272 (2000). Thus, for Cincinnati's duty to defend Cardinal to be triggered, the pleadings in the underlying action must allege that Cardinal's defective workmanship or work product caused damage beyond Cardinal's own work product.
The WCAA's complaint in the underlying action alleged that the visual screen had become unusable as a result of construction defects and errors. The WCAA described specific issues with the visual screen—several panels on the screen had fallen off, the structural steel in the support columns had cracked, and the concrete pads at the base of the visual screen were damaged. The Joint Venture sought indemnification from HSC, alleging that any damage or liability alleged by the WCAA was the result of defective work performed by HSC. And HSC sought indemnification from Cardinal, alleging that the materials provided by Cardinal were defective and led to HSC's liability. When read together, the pleadings establish a causal chain linking the allegedly defective material supplied by Cardinal to the damage to the visual screen. One party's defective material causing physical damage to portions of a construction project in which the material has been incorporated is a type of "unforeseen, unexpected, and unintended" accident, Radenbaugh, 240 Mich App at 144 (cleaned up), that classifies as an occurrence under the terms of the insurance policies. The pleadings in the underlying action thereby raised allegations "arguably com[ing] within the policy coverage," Citizens Ins Co, 279 Mich App at 75 (cleaned up), and triggering Cincinnati's duty to defend.
The impaired property exclusion of the CGL policy also did not negate Cincinnati's duty to defend Cardinal in the underlying suit. We note that the circuit court should not have reached this issue in the first instance. "Reliance on an exclusionary clause in an insurance policy is an affirmative defense . . . ." Shelton v Auto-Owners Ins Co, 318 Mich App 648, 657; 899 NW2d 744 (2017). An affirmative defense must be raised "in a responsive pleading," and "[a] defense not asserted in the responsive pleading or by motion as provided by these rules is waived . . . ." MCR 2.111(F)(2). Moreover, "once an insurance company has denied coverage to its insured and stated its defenses, the insurer has waived or is estopped from raising new defenses." Mich Twp Participating Plan v Fed Ins Co, 233 Mich App 422, 436; 592 NW2d 760 (1999).
In its letter denying coverage to Cardinal, Cincinnati quoted the impaired property clause as one of several exclusionary clauses contained within the insurance policies. However, Cincinnati clearly stated that it had no duty to defend Cardinal because "the allegations do not meet the definition of . . . property damage . . . or occurrence" under the terms of the insurance policies. When asserting its affirmative defenses in its answer to Cardinal's complaint, Cincinnati stated in general terms that Cardinal's claims might be excluded under the terms of the insurance policies; however, it did not expressly cite specific policy provisions under which coverage was excluded.
General language reserving rights or defenses contained in letters denying coverage does not comply with an insurer's obligation to provide notice to an insured party and constitutes a waiver of more specific defenses. Bartlett Investments Inc v Certain Underwriters at Lloyd's London, 319 Mich App 54, 61-62; 899 NW2d 761 (2017). Cincinnati failed to assert that a particular exclusion clause of the insurance policy applied to this case in its denial of coverage and in its affirmative defenses. Cincinnati therefore waived reliance on the impaired property exclusion and the circuit court should not have considered its applicability in this case.
And in any event, the impaired property exclusion in the CGL policy would not extinguish Cincinnati's duty to defend in the underlying action. Under the terms of the CGL policy's exclusionary provisions, the insurance policy does not apply to "property damage to impaired property or property that has not been physically injured, arising out of . . . a defect, deficiency, inadequacy or dangerous condition in your property or your work . . . ." The CGL policy defines "impaired property" as tangible property "that cannot be used or is less useful because . . . [i]t incorporates [the insured party's product or work] that is known to or thought to be defective deficient inadequate or dangerous," that can be "restored to use by: . . . [t]he repair, replacement, adjustment, or removal of" the insured's defective workmanship or work product.
"Exclusionary clauses in insurance policies are strictly construed in favor of the insured." Auto-Owners Inc Co v Churchman, 440 Mich 560, 567; 489 NW2d 431 (1992). Here, it is undisputed that the tangible property at issue—the visual screen—sustained physical damage. In addition to the allegedly defective steel supplied by Cardinal and cracking in the support columns that were constructed by HSC with that steel, the WCAA's complaint alleged that defective material and construction errors caused damage to several of the visual screen's panels and the concrete pads, requiring replacement of significant portions of the visual screen. This property damage goes beyond Cardinal's allegedly defective work product. There is no evidence that these damaged portions of the visual screen incorporated Cardinal's workmanship or work product. Similarly, there is no evidence that these other components could be restored by the repair or replacement of Cardinal's defective steel. While Cincinnati asserts that the only alleged damage was to Cardinal's defective work product, that assertion is not support by the record.
Under the terms of the CGL policy, the damage alleged in the underlying action was not to impaired property. As a result, the alleged damage was not excluded from the CGL policy and Cincinnati had a duty to defend Cardinal in the underlying action.
We affirm.
/s/ Elizabeth L. Gleicher
/s/ David H. Sawyer
/s/ Patrick M. Meter