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Weide v. Cincinnati Insurance Co.

United States District Court, N.D. Iowa, Western Division

June 30, 2017

TIM VAN DER WEIDE, Plaintiff,
v.
CINCINNATI INSURANCE COMPANY, Defendant.

          MEMORANDUM OPINION AND ORDER ON DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT

          Leonard T. Strand, Chief Judge

         I. INTRODUCTION

         This case is before me on defendant's motion (Doc. No. 40) for partial summary judgment. Plaintiff has filed a resistance (Doc. No. 41) and defendant has filed a reply (Doc. No. 44). No party has requested oral argument and, in any event, I find that oral argument is not necessary. See N.D. Ia. L.R. 7(c). The motion is fully submitted and ready for decision.

         II. PROCEDURAL HISTORY

         Plaintiff Tim Van Der Weide commenced this action against defendant Cincinnati Insurance Company (Cincinnati) on November 7, 2014, by filing a three-count complaint (Doc. No. 1). He asserts claims of (1) breach of insurance contract, (2) bad faith and (3) punitive damages, all in his individual capacity and as trustee of the Tim Van Der Weide Revocable Trust, assignees of Bouma & Company, Inc. (Bouma), and United Fire & Casualty Co. (United Fire). On December 5, 2014, Cincinnati filed an answer (Doc. No. 4) in which it denies liability and asserts various defenses. Trial is scheduled to begin January 29, 2018.

         On August 11, 2015, Van Der Weide filed a motion for partial summary judgment. Doc. No. 9. On September 17, 2015, Cincinnati filed a motion for summary judgment. Doc. No. 15. On October 28, 2015, United States District Judge Mark W. Bennett, to whom this case was then assigned, entered an order (Doc. No. 20) regarding those motions. Judge Bennett determined that the question of whether the faulty workmanship of a subcontractor causing consequential damages beyond the defective work product itself may constitute an “occurrence” was an unresolved question of Iowa law until that same day, when the Iowa Court of Appeals decided that question in the affirmative in National Surety Corp. v. Westlake Investments, LLC, 872 N.W.2d 409 (Iowa Ct. App. 2015). Doc. No. 20 at 1. As a result, Judge Bennett directed the parties to submit additional briefing in light of National Surety.

         On November 18, 2015, Cincinnati filed an unresisted motion to stay further proceedings while the Iowa Supreme Court reviewed the National Surety decision. Doc. No. 23. On November 19, 2015, Judge Bennett granted the stay pending the decision of the Iowa Supreme Court. Doc. No. 25. On June 10, 2016, the Iowa Supreme Court affirmed the decision of the Court of Appeals. See National Surety Corp. v. Westlake Investments, L.L.C., 880 N.W.2d 724 (Iowa 2016).[1]

         On January 12, 2017, I granted Van Der Weide's motion for partial summary judgment regarding Cincinnati's duty to defend and denied Cincinnati's motion for summary judgment. Doc. No. 39. I found that the CGL policy at issue in this case is so similar to the one in National Surety that the Iowa Supreme Court's holding in National Surety controls my construction of that policy. Id. at 13-14. I further found that coverage had been triggered by virtue of an “occurrence” and “as a matter of law that a duty to defend arose no later than May 5, 2014, after Cincinnati was put on notice of allegations that defective work by Bouma's subcontractor caused damage to the home to occur during the policy period.” Id. at 17.

         On February 23, 2017, Cincinnati filed the instant motion for partial summary judgment, seeking dismissal of the bad faith and punitive damages claims. Doc. No. 40.

         III. RELEVANT BACKGROUND FACTS

         I previously summarized the factual history of this case as follows:

This case arises from prior litigation involving Van Der Weide and Cincinnati's insured, Bouma. Van Der Weide contracted with Bouma to construct a house in Orange City, Iowa, in 1996. Before construction began, Bouma purchased a commercial general liability (CGL) policy and a separate umbrella policy from Cincinnati, which were in effect from January 30, 1996, to January 30, 1999 (the policy period). After those policies expired, Bouma purchased insurance policies from United Fire.
Bouma utilized various subcontractors to build the home, including Elkato Masonry (Elkato), which was retained to construct brick veneer and masonry around the house. The home was substantially completed in February 1998 and Van Der Weide moved in during August 1998. No claims were made during the policy period.
At some point after moving into the house, Van Der Weide observed a small amount of water ponding in an unfinished storeroom in the basement. This recurred periodically after rains. Van Der Weide alerted Bouma of the leaking but did not claim that any damage resulted.
In August 2010, Van Der Weide noted that the drywall was peeling in the great room. He asked Bouma to remove the drywall between the windows. Doing so revealed significant water damage. The insulation, studs and sheeting were fully saturated and the wood was severely rotted. To determine the cause, both Bouma and the homeowners insurer retained experts. Kevin Godwin investigated for Bouma and Donald Staley investigated for the insurer. While defective windows were considered as a cause, Godwin and Staley concluded that defective masonry installation permitted substantial water infiltration without any mechanism for the water to escape. Both investigators noted the lack of weeps and through-wall flashing behind the masonry veneer. Godwin also noted substantial mortar bridging of the required cavity between the masonry and the sheeting. As the investigation continued, it was discovered that the walls around the entire house had serious damage, requiring their removal and replacement. Van Der Weide contends that because of the construction defects, moisture infiltrated the masonry and started to cause damage soon after the masonry veneer was installed.
In March 2011, Van Der Weide sued Bouma, Elkato and others in the Iowa District Court for Sioux County (the state court case), alleging negligence and demanding damages. United Fire defended Bouma under a reservation of rights. On July 30, 2012, Bouma and United Fire tendered the defense and indemnity obligations to Cincinnati. On August 10, 2012, Cincinnati rejected the tender and denied any duty to defend Bouma, contending that the alleged defects in the Van Der Weide home were discovered after Cincinnati's policy period ended.
On August 14, 2013, Bouma again tendered defense and indemnity obligations to Cincinnati. Cincinnati retained counsel to evaluate its coverage obligations. On January 9, 2014, Cincinnati again denied coverage on grounds that the property damage occurred outside the policy period. Cincinnati argued that Van Der Weide's pleadings in the state court case contained no allegation that any physical damage or loss occurred during the policy period.
Following this second denial, Bouma's counsel advised Cincinnati that two experts would testify that the property damage occurred due to construction defects and that the damage began shortly after substantial completion in 1998. Cincinnati again denied any duty to defend or indemnify Bouma.
Van Der Weide, Bouma and United Fire then entered into an Agreement for Covenant not to Execute and Stipulation for Entry of Judgment by Confession, pursuant to Red Giant Co. v. Lawler, 528 N.W.2d 524 (Iowa 1995). Pursuant to that agreement, Bouma confessed judgment in Van Der Weide's favor, in the amount of $2, 000, 000, on September 30, 2014, while Bouma and United Fire assigned to Van Der Weide any and all claims Bouma or United Fire may have against Cincinnati or any other person arising out of the incident. Van Der Weide, as the assignee of Bouma and United Fire, then filed this action. Van Der Weide contends Cincinnati breached its insurance contracts with Bouma by failing to defend or indemnify Bouma in the state court case.

Doc. No. 39 at 2-4 (footnote omitted). As for the insurance policies at issue, I explained:

         The CGL and umbrella policies Cincinnati issued to Bouma were occurrence policies, obligating Cincinnati to provide coverage for property damage occurring during the policy period. The CGL policy defines “property damage” as:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss shall be deemed to occur at the time of the “occurrence” that caused it.

Doc. No. 9-2 at 26. The CGL policy defines an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Id. The CGL policy contains the following, “your work” coverage exclusion:

“Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.” This 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.

Id. at 18 (emphasis added). The CGL policy also contains the following exclusion:

“Property damage” to:
(1) Property you own, rent or occupy;
(2) Premises you sell, give away or abandon, if the “property damage” arises out of any part of those premises;
(3) Property loaned to you;
(4) Personal property in the care, custody or control of an insured;
(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations. If the “property ...

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