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In Kaady v. Mid-Continent Casualty Company, 2015 U.S. App. LEXIS 10754 (9th Cir. June 25, 2015), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance], the United States Court of Appeals for the Ninth Circuit, applying Oregon law, had opportunity to consider the meaning of the “known-loss” limitation on coverage in a commercial general liability insurance policy.
The insured, Kaady, installed a molded concrete veneer to portions of a multi-unit residential project in Oregon. Kaady’s work was completed in May 2006. In September 2006, Kaady was called back to the project inspect cracks that had developed in the veneer. In December 2006, Kaady purchased a general liability policy from Mid-Continent Casualty Company (“Mid-Continent”). In June 2007, the project’s Homeowners’ Association sued the project developer for damage from construction defects. The developer then sued the general contractor, who in turn sued Kaady. The claims against Kaady included liability for damage to deck posts and wall sheathing beneath the molded concrete veneer. Kaady settled the claims against it, and then tendered the suit to Mid-Continent for indemnification. Mid-Continent denied the claim, and Kaady then brought suit against Mid-Continent. Mid-Continent obtained a summary judgment based upon its policy’s known-loss limitation in the policy’s insuring agreement stating that the policy “applies to ‘property damage’ only if… no insured… knew that the ‘property damage’ had occurred, in whole or in part.”
Kaady appealed, and argued that while it knew of the veneer cracks prior to purchasing the Mid-Continent policy, it was not aware of the damage to the deck posts and wall sheathing until afterwards. Mid-Continental argued that knowledge of any damage to a structure was sufficient to bar coverage. The Ninth Circuit disagreed.
The court reasoned that in the construction context, a commercial general liability policy distinguishes between components provided by the insured and those provided by others. Coverage for the former is excluded, while coverage for the latter is not. The court found that Mid-Continent had provided no reason to treat the insured’s work and the work of others differently in the context of the known-loss provision. “Thus, we conclude that the known-loss provision also distinguishes between [the insured’s work and the work of others]. The insured’s knowledge of the damage to his own work doesn’t automatically constitute knowledge of damage to the components of the structure furnished by others.”
The court further reasoned that by using the article “the” in the clause “the… property damage had occurred” indicates that the claimed damage and the known damage must be one and the same. To read the provision otherwise would nullify the known-loss provision’s ‘continuing property damage’ language: “… any continuation, change or resumption of such… ‘property damage….” The court stated that if the foregoing is interpreted to mean any damage, “it wouldn’t matter whether the claimed damage was a ‘continuation, change or resumption’ of the known damage. The court held that as the deck posts and wall sheathing were different “property” that the molded concrete veneer, the claimed damage was of a different type, and the ordinary insured would likely not interpret the known-loss provision as precluding coverage for it. “Rather, the correct inquiry is whether the claimed damage to the structural components was a “continuation, change or resumption” of the molded concrete veneer cracks.
Brian Margolies, Partner, Traub Lieberman Straus & Shrewsberry LLP
Read more at the Traub Lieberman Insurance Law Blog, Edited by Brian Margolies.
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