Lowery Construction & Concrete, LLC v. Owners Insurance Co., 2017 SD 53

Background

Lowery Construction was general contractor for the Hagues’ new home; Lowery installed perimeter drain tile but omitted it at the patio/northeast corner. Home was completed in Aug. 2013 and occupied.
The Hagues sued in Feb. 2015 alleging Lowery’s failure to install drain tile allowed water to reach expansive soils, causing heaving and damage to basement slab, walls, ceilings, windows, and doors.
Lowery tendered defense to its insurer, Owners Insurance, which initially defended under reservation but later withdrew, citing CGL policy exclusions for damage to the particular part on which the insured was working and damage requiring repair because the insured’s work was incorrectly performed.
Lowery sued Owners for a declaratory judgment that Owners had a duty to defend; the circuit court granted summary judgment for Owners. Lowery appealed.
The South Dakota Supreme Court reviewed whether Owners met its burden to show the Hagues’ complaint clearly fell outside coverage and whether the exclusions applied as pleaded.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Owners had a duty to defend Lowery against the Hagues’ suit	Hagues’ allegations of water intrusion from omitted drain tile caused damage to nondefective parts of the home, so exclusions should not bar defense	Exclusions for damage to the particular part being worked on and for parts needing repair because insured’s work was incorrect bar coverage; CGL should not act as a performance bond	Owners had a duty to defend because the complaint arguably alleged covered damage to nondefective parts and Owners did not show the claim clearly fell outside coverage
Scope of exclusion for “that particular part . . . on which . . . operations are performed”	Exclusion applies only to the immediate area where insured was actively performing operations	Exclusion broadly bars coverage for problems stemming from insured’s contractual failure to deliver a completed home	Court held the exclusion applies to the immediate area of active operations and should not be read to bar coverage for other nondefective parts damaged by defective work
Scope of exclusion for parts that “must be restored, repaired or replaced because ‘your work’ was incorrectly performed”	Exclusion only bars coverage for property that itself was the subject of defective work	Exclusion bars coverage for consequential damage to other parts of the property arising from the insured’s defective work	Court agreed exclusion 2(j)(7) excludes only parts that were themselves the subject of defective work; nondefective parts damaged by another defective component can be covered
Whether enforcing coverage here would convert CGL into a performance bond	Coverage here addresses tort liability for property damage, not contractual completion; finding duty to defend does not equate to making insurers guarantors of performance	If insurer must cover any failure to perform the contract, CGL becomes a performance bond	Court distinguished purposes and held duty to defend is determined by pleadings and policy terms; finding a duty to defend does not turn CGL into a performance bond

Key Cases Cited

Hawkeye-Security Ins. Co. v. Clifford, 366 N.W.2d 489 (S.D. 1985) (insurer’s duty to defend is determined from the underlying complaint and insurer bears burden of showing no duty)
Swenson v. Auto-Owners Ins. Co., 831 N.W.2d 402 (S.D. 2013) (interpretation of same "that particular part" language; court found no ambiguity in similar policy language)
N. Star Mut. Ins. Co. v. Korzan, 873 N.W.2d 57 (S.D. 2015) (duty-to-defend standard; if any claim arguably covered, insurer must defend)
Mid-Continent Cas. Co. v. JHP Dev., Inc., 557 F.3d 207 (5th Cir.) ("that particular part" and related exclusions should not bar coverage for other nondefective parts damaged)
Fortney & Weygandt, Inc. v. Am. Mfrs. Mut. Ins. Co., 595 F.3d 308 (6th Cir.) (exclusion 2(j)(7) interpreted to bar only damage to parts that were themselves subject of defective work)