Supreme Court's ruling in NSC v. Westlake puts Iowa in the minority

Mollie Pawlosky, Iowa Real Estate & Land Use, Dickinson Law Firm, Des Moines Iowa, Iowa Construction Law

Posted on 07/05/2016 at 08:00 AM by Mollie Pawlosky

On June 10, 2016, a closely divided Iowa Supreme Court in National Surety Corporation v. Westlake Investments, LLC, No. 14–1274, held that damage caused by a subcontractor's poor workmanship may constitute an accident covered by a commercial general liability policy.  The Court affirmed the trial court and the Iowa Court of Appeals, requiring National Surety Corp. (“NSC”) to pay Westlake Investments, LLC (“Westlake”) over $12 million toward an underlying settlement of construction defect litigation.

The majority in the 4-3 split ruled that defective workmanship on the part of a policyholder's subcontractor may constitute an accidental occurrence giving rise to coverage under a modern, standard-form CGL policy.  "In short, interpreting the term 'accident' or the term 'occurrence' so narrowly as to preclude coverage for all property damage arising from negligent work performed by an insured's subcontractor would be unreasonable in light of the exceptions and exclusions the [ ] policy contains," Justice David Wiggins wrote for the majority.

The coverage suit addressed a West Des Moines, Iowa apartment complex.  Arch Insurance Group had issued a $1 million primary policy to the developers and general contractor, and NSC had issued a $20 million excess policy. Westlake purchased the complex, and then experienced water penetration of the buildings and resulting interior damage.  Westlake sued the developers and general contractor, seeking damages for lost profits and repair costs. Westlake settled with the developers, the general contractor and all but one of the subcontractors on the project for $15.6 million. Arch paid its $1 million policy limit, and the other defendants contributed just under $2 million. The developers and general contractor then assigned their claims on the NSC excess policy to Westlake.

NSC sought a declaration that NSC did not have to cover the unpaid portion of the settlement to Westlake. NSC argued that any property damage tied to the subcontractors' defective workmanship could not constitute an accidental occurrence under a CGL policy. The state trial court ruled that defective work by a subcontractor can be an occurrence. The case was tried, and a jury found NSC liable for the $12.4 million unpaid portion of Westlake's underlying settlement.  The trial court denied NSC's motions for a judgment notwithstanding the verdict or a new trial, and the Iowa Court of Appeals affirmed.

The Iowa Supreme Court granted further review to consider whether a subcontractor's poor workmanship could be an occurrence under a CGL policy, in light of the Court’s binding precedent in Pursell Construction v. Hawkeye-Security Insurance 596 N.W.2d 67 (Iowa 1999).

The NSC majority ultimately held that Pursell was factually distinguishable, because the only damages in Pursell were the costs of repairing the policyholder's own defective work. The majority said that the policy contemplated coverage for some property damage caused by defective workmanship on the part of an insured's subcontractor; the Court reached that decision by pointing out the policy's exclusion for claims stemming from defective work performed by or on behalf of the policyholder contains an exception for work performed by the insured's subcontractor.

In a dissenting opinion, Justice Thomas D. Waterman wrote that he would have reversed, because there was no accident as required by the policies.  Justice Waterman wrote that an accident is an, "undesigned, sudden and unexpected event," and there is "nothing sudden about the gradual infiltration of rainwater through leaky window frames over seasons."  Justice Waterman "would honor stare decisis and conclude that defective workmanship that allows rainwater to leak into a residence is not an accident and, therefore, is not a covered occurrence under the CGL policy." Justice Waterman also took issue with the majority’s reliance upon the policy’s exclusion, as the Iowa Supreme Court had recently held that exceptions to exclusions cannot be used to broaden the grant of coverage in the insuring clause.  Moreover, Justice Waterman took “issue with [the majority’s] conclusion that most other courts would find CGL coverage on this record.”  By Justice Waterman’s survey of other states, the ruling in NSC v. Westlake placed Iowa in the minority; the dissent fell on the side of the numerous courts holding those costs are not covered under a CGL policy.

For further questions regarding National Surety Corporation v. Westlake Investments, LLC, contact Mollie Pawlosky.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

Mollie Pawlosky


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