In a decision from mid-summer, Judge Rice of the Eastern
District of Washington – a relatively new judge in a jurisdiction without a lot
of coverage decisions – broadly applied what are known as the “ongoing
operations” or “business risks” exclusions, completely voiding the damaged
party’s recovery, demonstrating the devastating impact that subtle coverage
issues can have, and emphasizing that pro-insured Washington isn’t always so
friendly to creative coverage arguments.
In Western Heritage Ins. Co v. Cannon, a general contract
failed to compact fill soils before laying the foundation on a large custom
home, resulting in structural failure of the building – signs of which were
observed during the construction – and the home eventually being
condemned. The contractor stipulated to covenant judgment, and the
homeowner and carrier filed cross-motions for summary judgment in the ensuing
coverage suit.
The insurance carrier argued among other things that
coverage was barred by the “j(5)” and “j(6)” exclusions, which in simple terms
exclude from coverage property damage to “that particular part” of the property
on which the insured was working if the damage occurred during ongoing
operations (as opposed to a latent defect that causes damage after the project
is complete). The homeowner argued that the “particular part” was the
fill that the contract failed to compact, which the property damage was to the
foundation, and other parts of the structure.
The court didn't buy the owners’ argument. The court
noted that Washington courts have broadly interpreted the j(5)/j(6) exclusions,
and rejected a comparable Arizona case adopting a narrow interpretation in
similar loose-fill situation. Judge Rice held, in essence, that the general
contractor was working on the fill, and the house, at the time of the property
damage, making all of the project “that particular part.”
In most situations like this one there would be some
property damage after completion of the project, and the contractor would have
purchased what is known as “Products-Completed Operations Hazard”
coverage. But here the contractor appears not to have purchased that
coverage. So the court held that the owners were completely out of
luck. This is an excellent object lesson that Washington law is not
always favorable to the insured, and that any owner contemplating a stipulated
judgment arrangement needs to evaluate the considerable risks that they may
come up empty-handed.
