Coverage for "Rip and Tear" Costs: A Case Law Survey

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Coverage for "Rip and Tear" Costs: A Case Law Survey
Litigation

Coverage for “Rip and Tear”
Costs: A Case Law Survey
The article was originally published by the American Bar Association in March 2013.
by Melissa C. Lesmes

                                               You say “covered consequential loss”, I   due to alleged construction defects
                                               say “non-covered inflicted injury”: The   that make the structure vulnerable
                                               developing law of coverage for “rip       to collapse. If true (the claim is
                                               and tear” damages in construction         aggressively disputed), the potential
                                               defect litigation.                        loss is the estimated $279 million
                                                                                         investment in the property. Whether
                                               I. Introduction                           insurance would be available to cover
                                               The pace and frequency of litigation      any of the claimed amounts under
Melissa C. Lesmes                              over allegedly defective construction     these circumstances is presumably
Litigation                                     continues unabated, and by all            as aggressively disputed, but the
+1.202.663.9385                                indications keeps rising. Typically,      point is that “rip and tear” costs can
melissa.lesmes@pillsburylaw.com                coverage does not exist under             be tremendous, and the question
                                               standard form general liability           of coverage for such damages is an
Melissa Lesmes is a partner in Pillsbury’s
                                               policies for costs to repair defective    increasingly litigated issue.
Litigation practice and is located in the
                                               work or a defective product itself.
Washington, DC office. She focuses her
                                               A frequent point of contention            This survey attempts to identify
practice on complex commercial litigation
                                               in construction defect litigation,        and briefly summarize the facts and
with an emphasis on construction claims and
                                               however, is whether coverage exists       holdings of cases in which courts
insurance coverage disputes.
                                               for damages caused by the need to         were called upon to determine
                                               remove, or replace non-defective          whether such “rip and tear” or “get to”
Coauthors                                      work to “get to” and repair defective     damages are covered under general
John C. Bonnie                                 work or products. These costs are         liability insurance policies. 1
Weinberg, Wheeler, Hudgins, Gunn & Dial, LLC   generally referred to as “rip and tear”
                                               or “get to” damages, although there       II. Cases Generally Finding Coverage
Charles E. Stauber                             is no uniformity in the use of this       for “Rip and Tear” Costs
Torus Americas                                 terminology in the case law.              In Colorado Pool Sys. Inc. v. Scottsdale
                                                                                         Ins. Co.,2 an insured subcontractor
H. Eric Hilton                                 The financial consequences of errors      was hired by a general contractor
H.J. Russell & Company                         in construction can be staggering.        to build a swimming pool at a local
                                               This is all the more so if the only       community center. Construction
                                               means of repairing the defective          of the pool involved the pouring of
                                               work also requires the demolition         concrete around a rebar frame to
                                               of other, non-defective work. There       create a concrete shell. After the
                                               may be no more extreme an example         shell was poured, a building inspector
                                               of this than the claim of MGM             concluded that some of the rebar
                                               Resorts International that the as-yet     was too close to the surface, and the
                                               completed Harmon Hotel located            general contractor demanded that
                                               at the City Center development in         the pool be replaced. The subcon-
                                               Las Vegas must be razed and rebuilt       tractor consequently demolished and

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Litigation

 replaced the pool, and in the process      Dewitt’s insurer denied coverage           were cracked, and landscaping
 damaged the deck, a sidewalk, a            for the losses. On appeal of the trial     was damaged to repair the water
 retaining wall, and electrical conduits.   court’s judgment in favor of the           damage. We characterize these
 Despite alleged representations by the     insurer, the Ninth Circuit applying        costs as “damages because of
 subcontractor’s insurer that the claim     Washington law held that the               property damage.” Further, in
 was covered, it denied coverage based      defective manufacture of the piles         some cases, Lennar may have
 upon the absence of an “accident” or       constituted an “occurrence” which          removed some [synthetic stucco]
“occurrence” under the CGL policy           gave rise to “property damages”            to access and repair underlying
 at issue.                                  under the policy. Coverage conse-          water damage or determine the
                                            quently existed for the repair and         areas of underlying damage.
 The trial court entered summary            replacement of damage to other             We characterize these costs
 judgment for the insurer, and the          subcontractors’ work and for the           to remove [synthetic stucco]
 Colorado appellate court reversed,         damage to the buried mechanical            solely to repair water damage
 finding that a portion of the damage       lines despite the lack of coverage for     as “damages because of
 was covered. Relying on Greystone          the cost of replacing the defective        property damage.”7
 Constr. Inc. v. Nat’l Fire & Marine        work itself.
 Ins. Co.,3 the court found that                                                     In Columbia Mut. Ins. Co. v. Epstein,8
“‘injuries flowing from improper or         A Texas Court of Appeal reached a        the insured contractor poured a
 faulty workmanship constitute an           similar conclusion in Lennar Corp v.     foundation using concrete that did
“occurrence” so long as the resulting       Great American Ins. Co., in a coverage   not meet local building code require-
 damage is to nondefective property,        claim by the general contractor on       ments. To remove and repour the
 and is caused without expectation or       a construction project.6 There, the      concrete, the company also had to
 foresight.’”4 The court clarified that     contractor/insured built more than       remove and reconstruct the framing
 this rule applies whether the resulting    400 homes using defective synthetic      and subfloor. The contractor’s insurer
 damage is to the insured’s work or to      stucco, the application of which         denied coverage for the cost of
 the work of a third party. The court       resulted in water being trapped in       replacing the framing and subfloor
 consequently concluded that while          the substrate, causing damages in the    and initiated a declaratory judgment
 the CGL policy did not cover the costs     form of wood rot, mold, and termite      action. The trial court entered a
 incurred in demolishing and replacing      infestation. The contractor sought       judgment in favor of the insured,
 the defective pool itself, coverage was    indemnification from its insurers for    and the Missouri Court of Appeals
 afforded for the “rip and tear” damage     the costs of the stucco replacement      affirmed. The court concluded that
 to the non-defective third-party work,     and repair, and coverage was denied.     there was an “occurrence” which
 which included the deck, sidewalk,         After a lengthy discussion, the Court    caused “property damage” under the
 retaining wall, and electrical conduits.   of Appeal concluded that because         terms of the policy such that coverage
                                            the damage was unintended and            was afforded for the rip and tear costs
In Dewitt Constr. Co. v. Charter            unexpected, the use of the defective     incurred in replacing the concrete.
Oak Fire Ins. Co.,5 an insured              stucco was an “occurrence” under the
subcontractor (DeWitt) negligently          terms of the policy. The court held      In Bundy Tubing Co. v. Royal Indem. Co.,9
installed cement piles in a building        that although the costs to remove and    the Sixth Circuit applied Michigan
foundation which were unusable. As          replace the defective synthetic stucco   law to hold that the cost of removing
a result, Dewitt had to install new         by itself, without damage to other       and replacing a non-defective concrete
piles, which required the removal           property (i.e., as a pure preventative   floor in which defective tubing had
and reinstallation of work already          measure), was not covered, the costs     been imbedded was covered under
completed by other subcontractors.          incurred to repair the water damage      the insured’s liability policy. The
In addition, heavy equipment used by        (including the costs for rip and tear)   court held: “In our opinion, property
Dewitt in replacing the piles damaged       were covered. The court explained:       was damaged by the installation of
underground mechanical lines and                                                     defective tubing in a radiant heating
a coverage claim was made for all             For example, on some homes,            system which caused the system to
claimed damage.                               windows were broken, driveways         fail and become useless.”10

Pillsbury Winthrop Shaw Pittman LLP
Coverage for “Rip and Tear” Costs: A Case Law Survey

The same result was reached in            insurer, claiming it breached its duty     damaging its own work in the
Moraine Materials Co., Inc. v. The        to indemnify the insured for the loss.     process. Transform’s insurer denied
Ohio Casualty Ins. Co.11 In Moraine                                                  coverage for the damages and filed a
Materials, defective concrete was         Following a bench trial, the court         declaratory judgment action seeking
incorporated into a retaining wall        held that the policy only covered the      a finding that coverage was absent.
that otherwise contained correctly        cost of repairing “property damage,”       Relying on Yakima Cement Products
comprised concrete, with the result       i.e. the cracks and other defects. The     Co. v. Great Am. Ins. Co.,15 the court
that the entire retaining wall—both       court explained that even though the       held that there was an “occurrence”
the part that was correct and the part    school may have made a wise business       given that third party property
that was defective, had to be removed.    decision to rebuild, the defects           damage resulted from the defective
The court held that because it was        could have been repaired without           workmanship. The court further
impossible to remove the defective        completely rebuilding. Consequently,       determined that neither the “Your
concrete without disturbing the rest      only the hypothetical repair costs         Product” nor the “Impaired Property”
of the structure, the incorporation       were covered under the policy. Basing      exclusions applied to prevent
of the defective concrete into the        its decision on the sparse evidence        Transform from recovering the rip
wall constituted property damage          presented at trial, the court concluded    and tear costs incurred in remedying
for which there was coverage. The         the insurer was liable for $1,000,000      the defective work. The court held
court explained: “Moraine is not          of the approximately $3,500,000            that AHM’s construction of the
seeking to recover for the defective      spent reconstructing the school. The       lobbies, stairs, and other common
concrete, but is seeking to recover the   court held that this was a “reasonable     areas was not part of Transform’s
expenses of removing the wall, which      computation” of what the cost would        product, and the damage to this third
became defective in its entirety by the   have been had the school decided to        party work was consequently covered
incorporation therein of Moraine’s        repair the defects, rather the rebuild     by the policy.
defective cement.”12                      the entire school.
                                                                                    An Oklahoma federal court similarly
A Kansas federal court faced a             III. Cases Finding Coverage For          concluded that rip and tear costs were
difficult issue in Fidelity & Deposit     “Rip and Tear” Costs and Finding          not excluded by the “Your Product” or
Co. of Maryland v. Hartford Cas. Ins.      Inapplicable The “Your Product”          the “Impaired Property” exclusions in
Co.,13 ultimately concluding that          and “Impaired Property” Exclusions       Employers Mut. Cas. Co. v. Grayson.16
some of the cost of demolishing           In Indian Harbor Ins. Co. v. Transform,   In Grayson, Ready Mix supplied
and rebuilding a defectively              LLC,14 Transform contracted               concrete for the construction of a
constructed school was covered            with East AHM LLC and Hansell             bridge in Oklahoma. The concrete
under an umbrella policy, but not the     Mitzel LLC (AHM) to construct             did not harden properly, causing the
entire sum. In Fidelity, the insured      modular condominium units. AHM            rebar to loosen and the bridge to
contractor negligently constructed a      purchased and supplied all the            crack. In removing and replacing the
middle school in Kansas. The faulty       materials Transform used to build         concrete, the deck, rails and rebar
workmanship resulted in cracked           the modules. Once the modules             all had to be repaired as well. Ready
walls, mortar joints and lintels, among   were constructed, AHM “knitted”           Mix sought coverage from its insurer
other defects. Instead of repairing       them together into the existing           for the damages, and coverage was
the defects, the school determined        structure. AHM also constructed           denied. The insurer subsequently
that it would be more cost effective to   the surrounding lobbies, stairs,          filed a declaratory judgment action
completely demolish the school and        elevator shafts, and other common         seeking a determination of no
rebuild. The school subsequently filed    areas. When the building was almost       coverage. Ready Mix conceded in the
suit against the insured and its surety   complete, AHM discovered that the         litigation that the cost of replacing
to recover the cost of rebuilding.        modules Transform constructed were        the concrete itself was not covered,
Eventually the parties settled, and the   defective, causing systemic electrical,   but sought coverage for the costs of
insured assigned its rights to coverage   structural, and plumbing problems.        repairing the damage to other, third
under an umbrella policy to its surety.   As a result, AHM had to tear out and      party work. The Oklahoma federal
The surety then filed suit against the    replace much of the existing structure,   court agreed. As in Indian Harbor,

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 the court concluded that neither the      judgment that it owed no coverage to      judgment, the court held that not
“Your Product” or “Impaired Property” a building contractor for the negligent        only was the insurer not “obligated
 exclusions applied. Addressing the        installation of hardwood flooring. The    to indemnify [the insured] for the
“Impaired Property” exclusion, the         hardwood floor had to be replaced         costs of repairing and replacing the
 court held that “merely replacing         because it began “cupping” or             walls,” but was also not obligated
 the concrete would not have made         “warping” a few weeks after it had         to indemnify the insured for “any
 the bridge usable, other component        been installed. The insured sought        incidental demolition or reconstruc-
 property had to be replaced as well.      coverage for the costs of removing        tion necessitated by the repair,” as
 Thus, the bridge was not ‘impaired        and replacing the hardwood flooring,      such incidental repairs did not qualify
 property’ because it could not be         and for the costs of restoring the        as “property damage.”
 restored to use by only replacing the     home to the condition it was in prior
 defective concrete.”17                    to removing and replacing the floor.      In Gentry Machine Works Inc. v.
                                           The insurer denied coverage, alleging     Harleysville Mutual Insurance Co.22
 The court reached a similar               that the “business risk” exclusions       a Georgia federal court determined
 conclusion in Clear, LLC v. American      prohibited the insured from               that the “business risk” exclusions
 & Foreign Ins. Co.,18 but on a different  recovering under the terms of the         precluded coverage except to the
 basis. In Clear, the successor in         policy. The Georgia Court of Appeals      extent that the insured’s defective
 interest to a general contractor which    agreed, holding that the “business        product caused damage to other
 negligently constructed a roof sought     risk” exclusions were unambiguous         property. There, the insured manufac-
 indemnification for the costs of          and excluded coverage for defective       tured parts for boilers, including a
 replacing the damage caused by the        workmanship causing damage only           part known as the “pedestal.” The
 defective roof. The insurer denied        to the construction project itself. The   pedestal was welded to the top of
 coverage. The Alaska federal court        court reasoned that “[a]ny damages to     the boiler and served as the main rear
 found coverage on the basis of an         the house during the removal of the       hinge for the rear boiler doors. After
 exception to the “Impaired Property”      hardwood floor and the restoration        receiving numerous complaints from
 exclusion providing coverage for the      of the house to the condition it was      customers, the insured replaced the
“loss of use of property that result[ed]   prior to [insured’s] work were            pedestals and repaired other damage
 from a sudden or accidental physical      merely incidental to [the home            associated with the failure of the
 injury to work done by [the general       owner’s] claimed damages that             pedestals. When the insured sought
 contractor] or its subcontractors.”       [the insured] negligently performed       coverage for the cost of the repairs,
 The court reasoned that because the       the services for which [the home          the insurer denied coverage. Applying
 exception was ambiguous, it had to be     owner] contracted.”20                     Georgia law, the court cited Sapp
 interpreted broadly pursuant to the                                                 and held that the policy’s business
 customary rules of insurance policy       A South Carolina federal court            risk exclusions precluded coverage
 interpretation. Because the exception     reached the same conclusion in            for almost all of the costs associated
 made the “Impaired Property”              Builders Mut. Ins. Co. v. Lacey           with the repair of the pedestals
 exclusion inapplicable, the court         Constr. Co., Inc.21 There, the insured    including property damage to the
 determined that the costs of removing     was alleged to have negligently           pedestals themselves, the cost of
 and replacing the undamaged               constructed two retaining walls in        inspecting the potentially defective
 portions of the building were covered     the common area of a development in       pedestals, and damages to the boiler
 under the policy to the extent they       South Carolina. The retaining walls       or its parts directly caused by the
 were necessary to repair the water        failed to adequately retain the soil      repair of the pedestals, among other
 damage caused by the defective roof.      behind the walls, causing cracks in       things. However, the court found
                                           the foundation. The insured sought        that the business risk exclusions did
 IV. Cases Generally Finding An            coverage for the cost of correcting       not preclude coverage for property
 Absence of Coverage For Rip and           the defects, but its insurer denied       damage to the boilers caused by the
 Tear Costs                                coverage and initiated a declaratory      pedestal failure but unrelated to the
 In Sapp v. State Farm Fire & Cas. Co.,19  judgment action. In granting the          pedestal repair.
 the insurer sought a declaratory          insurer’s motion for summary

Pillsbury Winthrop Shaw Pittman LLP
Coverage for “Rip and Tear” Costs: A Case Law Survey

 In Desert Mountain Prop. Ltd. P’ship         requiring the general contractor to        plumbing were not covered because
 v. Liberty Mut. Fire Ins. Co.,23 plaintiff   completely demolish the concrete           they were foreseeable consequences
 contracted for the construction of a         pilings and install new pilings with       of the replacement of defective work.
 number of homes in Arizona. Shortly          the proper strength grout. After the       Thus, there was not an accidental
 after the homeowners moved in, the           concrete manufacturer was sued            “occurrence” as required to trigger
 insured builder received complaints          for breach of contract and warranty        coverage under the policy.
 about cracks in the interior walls of        claims, its liability insurer filed a
 the homes, outdoor patio slabs, and          declaratory judgment action seeking       In Bright Wood Corp. v. Bankers
 retaining walls. After an investigation,     to determine its obligations under        Standard Ins. Co.,26 the insured
 the insured determined that the soil         the policy. The Maryland federal          manufacturer supplied wood window
 beneath the homes had not been               court granted the insurer’s motion        sashes that rotted due to a lack of
 properly compacted prior to the              for summary judgment, holding that        preservatives. To remedy the defect,
 construction. In order to rectify the        the cost of demolishing and recon-        the entire window had to be replaced.
 problem, plaintiff had to remove and         structing the concrete pilings was not    After its general liability insurer
 damage the flooring within many              covered by the policy because there       denied coverage for the cost of the
 of the homes to “get to” and repair          was not an “occurrence.” The court        repairs, the manufacturer brought
 the soil. On a motion for summary            defined an occurrence as “an event        a declaratory judgment action. The
 judgment, the superior court                 that takes place without expectation      district court entered summary
 concluded that the insured could not         or foresight.” As such, the court held    judgment in favor of the insurer.
 recover from its liability insurance         that there was no occurrence because      On appeal, the Minnesota Court of
 carrier for either the cost of repairing     the manufacturer “clearly” could          Appeals affirmed, noting that all of the
 the defective soil or the associated         have expected that pilings supported      damages incurred were based solely
“get to” damages of cutting open              by defective grout would have to be       on repairing the defective product.
 concrete floors. The Arizona Court           demolished and replaced.                  The court reasoned that, because the
 of Appeals affirmed, reasoning that                                                    repairs were deliberately undertaken,
 the costs of removing and repairing          In NAS Surety Grp. v. Precision Wood      the resulting damage was not
 the non-defective property necessary         Prod., Inc.,25 the insured subcon-        accidental occurrence. Accordingly,
 to repair the soil was damage caused         tractor provided defective cabinets       there was no coverage under the
 by the repair of the soil, not damage        and millwork in connection with           terms of the policy.
 caused by the poorly compacted soil          the construction of a new medical
 itself. The court did find, however,         center. In the process of replacing the
 that the insured could recover the           defective cabinets with nondefective
 cost of repairing the damages that           materials, the subcontractor damaged
 resulted from the poorly compacted           and was required to repair drywall,
 soil, such as cracks in the floors           repaint the walls, and reinstall sinks,
 and walls of homes caused by the             wiring and plumbing. The subcon-
 defectively compacted soil.                  tractor’s surety sued the subcontrac-
                                              tor’s general liability insurer seeking
 V. Cases Finding An Absence of               indemnification for the amount paid
 Coverage For “Rip and Tear” Costs            pursuant its performance bond. Both
 Based On The Absence Of An                   parties filed motions for summary
“Occurrence”                                  judgment. In ruling on the motions,
In OneBeacon Insurance v. Metro               the North Carolina federal court
Ready-Mix, Inc.,24 a concrete                 held that none of the repair and
manufacturer provided defective               replacement costs were covered
grout for use on a construction project       under the policy. The court explained
in Baltimore. The grout supplied              that the costs incurred in repairing
had a strength significantly lower            the drywall, repainting the walls, and
than that specified in the contract,          reinstalling the sinks, wiring and

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Litigation                                                                                                 Coverage for “Rip and Tear” Costs: A Case Law Survey

Endnotes
1   This survey does not     3   661 F.3d 1272 (10th      8     239 S.W.3d 667 (Mo.     13   215 F. Supp.2d 1171     20   Id. at 205.
    attempt to identify          Cir. 2011).                    App. 2007).                  (D. Kan. 2002).
                                                                                                                     21   C.A. No. 3:11-cv-
    cases decided in
                             4   Id. at *6 (citing        9     298 F.2d 151 (6th       14   2010 WL 3584412              400-CMC, 2012
    the context of other
                                 Greystone, at 1284).           Cir. 1962).                  (W.D. Wash. 2010).           WL 1032539 (D.S.C.
    insurance lines, which
                                                                                                                          March 27, 2012).
    may exist for the        5   307 F.3d 1127 (9th       10   Id. at 153.              15   93 Wash.2d 210, 217
    benefit of contractors       Cir. 2002).                                                 (1980).                 22   621 F.Supp.2d 1288
                                                          11   1979 WL 208510 (Ohio
    such as builder’s risk                                                                                                (M.D. Ga. 2008).
                             6   200 S.W.3d 651 (Tex.          App. Dec. 12, 1979).     16   2008 WL 2278593
    insurance, permanent         App. 2006), abrogated                                       (W.D. Okla. May         23   236 P.3d 421 (Ariz.
    property insurance                                    12    Id. at *4. Similar
                                 on other grounds by                                         30, 2008)                    App. 2010).
    or professional                                            “incorporation” cases
                                 Gilbert Texas Constr.,
    liability insurance.                                        decided in product      17   Id. at *6.              24   427 F. Supp.2d 574 (D.
                                 L.P. V. Underwriters
                                                                cases but outside                                         Md. 2006).
2   No. 10CA2638, 2012           at Lloyd’s London,                                     18   2008 WL 818978
                                                                the construction
    WL 52 65981 (Col.            327 S.W.3d 118                                              (D. Alaska March        25   271 F. Supp.2d 776
                                                                context exist but are
    Ct. App. October             (Tex. 2010).                                                24, 2008).                   (M.D.N.C. 2003).
                                                                outside the scope of
    25, 2012).               7   Id. at 678 n.33.               this survey.            19   226 Ga. App. 200        26   665 N.W.2d 544
                                                                                             (1997).                      (Minn. Ct. App. 2003).

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Pillsbury Winthrop Shaw Pittman LLP                                                                                                                www.pillsburylaw.com
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