Lead Opinion
OPINION
Thommes & Thomas Land Clearing (Thommes) is a partnership engaged in the business of clearing and grubbing land for construction projects. In September 1996, Thommes entered into a subcontract to clear and grub land for a commercial development owned by Dean Morlock, Charles Vig, and HHA Development, Inc. (collectively, HHA). Adjacent to the HHA property was land owned by Morlock’s sister and her husband, Donna and John Krajewski (collectively, the Krajewskis). Complying with Morlock’s instructions as to the area to be cleared and grubbed, Thommes cleared and grubbed approximately one-half acre of the Krajewskis’ land, damaging grass and a number of their trees, shrubs, and other plants. That land was not a part of the HHA property and the Krajewskis did not consent to it being cleared and grubbed. The Kra-jewskis brought an action against Thom-mes, among others, for the damage done to their property. Thommes tendered defense of the Krajewskis’ lawsuit to its commercial general liability (CGL) insurance carrier, Milwaukee Insurance Company (Milwaukee). Milwaukee declined to either defend or indemnify Thommes, contending that exclusions 2j(5) and 2j(6) of Thommes’s CGL policy excluded the damage to the Krajewskis’ property from coverage.
Thommes then initiated this action, seeking a declaratory judgment that Milwaukee had a duty to defend and indemnify under Thommes’s CGL policy. The parties filed cross-motions for summary judgment, and the district court granted summary judgment in favor of Milwaukee. The court of appeals, relying on the “business risk doctrine,” reversed and granted summary judgment in favor of Thommes. Thommes v. Milwaukee Mut. Ins. Co.,
On review of a summary judgment, this court determines whether there are any genuine issues of material fact and whether the district court correctly applied the law. Burlington N. R.R. v. Comm’r of Revenue,
It is well-established that general contract principles govern the construction of insurance policies, and that insurance policies are to be interpreted to give effect to the intent of the parties. Nathe Bros. v.
Exclusions contained in an insurance policy are as much a part of the insurance contract as any other part, and must be given the same consideration in determining what the policy covers. Lobeck v. State Farm Mut. Auto. Ins. Co.,
Milwaukee argues that the court of appeals improperly based its decision on the business risk doctrine and largely ignored the actual language contained in Thom-mes’s CGL policy. In reaching its decision, the court of appeals, instead of applying our rules for construing insurance contract exclusions, focused its analysis on the so-called “business risk doctrine.” The court of appeals stated that the “business risk doctrine is the expression of a public policy applied to the insurance coverage provided under commercial general liability policies.” Thommes,
We have discussed the intersection of business risk principles and the coverage provided by a contractor’s CGL
In resolving this issue, we analyzed the risks intended to be covered by CGL policies. As part of the analysis, we identified two types of risk undertaken by an insured-contractor. The first, termed a “business risk,” is the risk that the insured “may be hable as a matter of contract law to make good on products or work which is defective or otherwise unsuitable because it is lacking in some capacity.” Id. at 63 (quoting Roger C. Henderson, Insurance Protection for Products Liability and Completed Operations — What Every Lawyer Should Know, 50 Neb. L.Rev. 415, 441 (1971)). The court concluded that this type of risk was not what the contractor’s CGL policy was “designed to protect against.” Id. (quoting Henderson, 50 Neb. L.Rev. at 441).
The second type of risk faced by a contractor is the risk that its work or product will cause bodily injury or property damage to other property. Id. at 63-64. We observed that it was this type of risk, which may give rise to tort liability to third parties, that CGL policies are intended to insure against. Id.
Applying these principles, the court held that the owner’s damages flowed from the contractor’s breach of contract, that the damages were the result of the contractor’s faulty workmanship, and that such liability on the part of the contractor was not within the coverage provided by its CGL policy. Id. at 63.
In Knutson, the owner of an apartment complex brought suit against a general contractor to recover the cost of repairing structural damage to the complex.
Our review of Bor-Son and Knutson reveals that the distinction between uncovered business risks arising from contractual liability for defective materials and workmanship and covered risks arising from tort liability to third parties is helpful as a means of informing our understanding of the risks intended to be covered by CGL policies. Other jurisdictions have also found this distinction useful. See, e.g., Hartford Accident & Indem. Co. v. Pac. Mut. Life Ins. Co.,
While the distinction set out in Knutson and Bor-Son is useful for exploring the fundamental purpose of CGL insurance, it is not dispositive because the parties to an insurance contract may agree to coverage that is different in scope. “[P]arties are free to contract as they desire, and so long as coverage required by law is not omitted and policy provisions do not contravene applicable statutes, the extent of the insurer’s liability is governed by the contract entered into.” Am. Family Mut. Ins. Co. v. Ryan,
Thus, if parties to an insurance contract demonstrate their intent, using clear and unambiguous language, to exclude the risk of damage to the real property of third parties, then there is no need to look to business risk principles to ascertain whether the policy was intended to cover such risks. See Nathe Bros.,
The first step, therefore, in determining whether Thommes’s CGL policy covers damage to the Krajewskis’ property is to examine the policy language. The policy’s statement of coverage provides that Milwaukee “will pay those sums that the insured [Thommes] becomes legally obligated to pay as damages because of 'bodily injury’ or ‘property damage’ to which this insurance applies,” and that Milwaukee has the “right and duty to defend any ‘suit’ seeking those damages.” The policy’s definition of “property damage” includes “[p]hysical injury to tangible property, including all resulting loss of use of that property.” There is no dispute that the damage to the trees, shrubs, grass, and other plants located on the Krajewskis’ property constitutes “property damage,” as that term is defined in Thommes’s CGL policy. The question here is whether the damage to the Krajewskis’ property is excluded from coverage by section 2j(5) or section 2j(6).
The exclusion found in section 2j(5) of the policy provides that the insurance does not apply to “ ‘[property damage’ to * * * [t]hat particular part of real property on which you [Thommes] or any contractors or subcontractors working directly or indirectly on your [Thommes’s] behalf are performing operations, if the ‘property damage’ arises out of those operations.”
Having concluded that exclusion 2j(5) does not operate to bar coverage of the damage to the Krajewskis’ property, we turn to exclusion 2j(6). The language of section 2j(6) provides that the insurance does not apply to “ ‘[property damage’ to * ⅜ * [t]hat particular part of any property that must be restored, repaired or replaced because ‘your [Thommes’s] work’ was incorrectly performed on it.” The policy’s definition of “your work” includes “[w]ork or operations performed by you [Thommes] or on your [Thommes’s] behalf.”
Milwaukee argues that the plain language of exclusion 2j(6) bars coverage of the damage to the Krajewskis’ property. Thommes argues that section 2j(6) of the policy is inapplicable because the phrase “your work” refers to intentional acts performed under the clearing and grubbing contract, and the clearing and grubbing of the Krajewskis’ property was not performed under the contract. On the facts of this case, it is unnecessary to undertake an interpretation of the term “your work.” Assuming for the sake of argument that Thommes’s clearing and grubbing of the Krajewskis’ property falls within the policy’s definition of “your work,”
Thommes’s clearing and grubbing damaged the Krajewskis’ property only because it was performed in the wrong place. Granted, the language of exclusion 2j(6) could be reasonably interpreted to refer to damage that results from work performed on the wrong property. Yet the language could also be reasonably interpreted to refer to the manner, rather than the place, in which the clearing and grubbing was performed. The word “incorrect” denotes faulty or defective. Under this second
In sum, given our recognition that the underlying purpose of CGL insurance is to provide coverage for the risk of tort liability to third parties, as opposed to risks that arise as a matter of contract law, Knutson,
Affirmed.
Notes
. Before 1986, "commercial general liability insurance" was called "comprehensive general liability insurance." F. Malcolm Cunningham, Jr. & Amy L. Fischer, Insurance Coverage in Consiruction-The Unanswered Question, 33 Tort & Ins. L.J. 1063, 1068 n. 19 (1998).
. While the facts of this case do not require us to decide the issue, we note that the policy’s definition of the term "your work” is silent as to whether it includes acts performed on the real property of third parties.
Dissenting Opinion
(dissenting).
I respectfully dissent, as two provisions of this insurance policy exclude the property damage to the Krajewskis’ land from coverage. I would reverse the court of appeals and hold that Milwaukee is not obligated to defend or indemnify Thommes for the damage to the Krajewskis’ property-
First, I disagree with the majority’s conclusion that insurance policy exclusions 2j(5) and 2j(6) are ambiguous. On the contrary, the plain meaning of the provisions clearly provide for an exclusion from coverage. Provision 2j(5) provides that the insurance does not apply to “ ‘[property damage’ to * * * [tjhat particular part of real property on which you * * * are performing operations, if the ‘property damage’ arises out of those operations.” The plain meaning is nothing more or less than what the words say — here the exclusion applies because Thommes was “performing operations” on the Krajewskis’ property by clearing and grubbing their land, and damage to the Krajewskis’ trees, shrubs, and grass falls squarely within the reference to “property damage.” The ambiguity found by the majority regarding whether the exclusion applies to property owned by third parties comes not from the language of the exclusion, but rather from the majority’s conception of the underlying purpose of CGL insurance — that is, to cover the risk that a contractor’s work will cause bodily injury or property damage to other property, giving rise to tort Lability. In so doing the majority limits the definition of “real property on which you * * ⅜ are performing operations” to property Thommes was supposed to be working on under the clearing subcontract with Richard Knutson, Inc. This is a distortion of the policy language and does not support a conclusion of ambiguity that justifies ignoring the 2j(5) exclusion.
Likewise provision 2j(6) is unambiguous and clearly excludes Thommes’s claim for coverage. Provision 2j(6) provides that coverage does not apply to “ ‘[pjroperty damage’ to * ⅜ ⅜ [tjhat particular part of
Finally, the result seems absurd and inconsistent with our long-standing principle that we construe contracts to avoid absurd or unjust results, where reasonably possible. See Mead v. Seaboard Sur. Co.,
I would reverse the court of appeals.
Dissenting Opinion
(dissenting).
I join in the dissent of Justice STRINGER.