National Surety Corporation, an Illinois Corporation v. Westlake Investments, LLC, an Iowa Limited Liability Company
2016 Iowa Sup. LEXIS 71
| Iowa | 2016Background
- During construction of an apartment complex (2003–2004), defective subcontractor work (building wrap/flashings) caused water intrusion and consequential damage discovered after sale to Westlake.
- Developers/general contractor bought primary CGL insurance (Arch, $1M) and excess follow-form CGL (NSC, $20M) effective July 1, 2003–2004; Arch defended underlying federal suit.
- Westlake obtained a consent judgment in federal court (Feb. 2012) for $15.6M; Arch paid its $1M limit and other contributions left ~$12.76M unsatisfied; insureds assigned their NSC claims to Westlake.
- NSC filed a state declaratory-judgment action seeking a ruling of no coverage; Westlake counterclaimed for breach and coverage under the excess policy (which incorporated Arch’s form).
- The district court granted partial summary judgment that defective subcontractor work may be an "occurrence," instructed the jury that "accident" is determined from the insured’s viewpoint, and a jury returned verdict for Westlake; the court entered judgment and awarded interest but denied certain interest adjustments.
- The court of appeals affirmed liability rulings but remanded to specify the statutory prejudgment interest rate; the Iowa Supreme Court granted further review limited to whether defective subcontractor work can constitute an "occurrence."
Issues
| Issue | Westlake's Argument | NSC's Argument | Held |
|---|---|---|---|
| Whether "accident"/"occurrence" should be judged from insured's viewpoint | "Accident" means unexpected/unintended from insured's perspective; jury may consider insured's intent/expectation | Term should be objective ("undesigned, sudden and unexpected") and not judged subjectively | Court held "accident" is determined from insured's viewpoint (insured did not have to expect both act and damage) and affirmed jury instruction |
| Whether defective work by an insured's subcontractor can be an "occurrence" | Yes — policy language (including subcontractor exception to "your work" exclusion) and post‑1986 ISO revisions show coverage for subcontractor-caused damage | No — defective workmanship is not an "accident/occurrence"; Pursell principle bars coverage for repair of defective work | Court held defective work by subcontractors may constitute an "occurrence" under the modern ISO-based CGL policy (absent a specific exclusion) |
| Whether district court erred by denying directed verdict/new trial for NSC (e.g., insufficiency, juror deliberation) | N/A (Westlake defended verdict as supported by evidence) | Verdict unsupported, insufficient deliberation, inconsistent findings | Court of appeals and Iowa Supreme Court affirmed district court: substantial evidence supported verdict; no reversible instructional error on occurrence |
| Prejudgment interest accrual date and rate | Westlake: interest should accrue from date of federal settlement and at §535.2 rate | NSC: different accrual or rate arguments | Court affirmed accrual date (from filing of counterclaim) but remanded to specify statutory rate (court of appeals directed §535.2(1)(a)) |
Key Cases Cited
- West Bend Mut. Ins. Co. v. Iowa Iron Works, Inc., 503 N.W.2d 596 (Iowa 1993) (an intentional act that did not produce intended/expected harm can be an "accident" and therefore an occurrence)
- Pursell Constr. v. Hawkeye-Security Ins. Co., 596 N.W.2d 67 (Iowa 1999) (defective workmanship standing alone is not an occurrence under a CGL policy)
- United Fire & Cas. Co. v. Shelly Funeral Home, Inc., 642 N.W.2d 648 (Iowa 2002) (negligent supervision causing third‑party harm can be an occurrence; highlights insured‑viewpoint analysis)
- Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007) (deliberate act performed negligently is an accident if resulting harm was not intended or expected by insured)
- Liberty Mut. Ins. Co. v. Pella Corp., 650 F.3d 1161 (8th Cir. 2011) (applying Iowa law; held gradual water infiltration from defective windows was not a covered occurrence)
- Greystone Constr., Inc. v. Nat'l Fire & Marine Ins. Co., 661 F.3d 1272 (10th Cir. 2011) (discusses ISO revisions and industry shift toward covering certain subcontractor-caused damage)