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Drake-Williams Steel, Inc. v. Continental Casualty Co.

Supreme Court of Nebraska

August 5, 2016

Drake-Williams Steel, Inc., appellant and cross-appellee,
Continental Casualty Company, appellee and cross-appellant. Employers Mutual Casualty Company and EMCASCO Insurance Company, appellees and cross-appellants,
Drake-Williams Steel, Inc., appellant and cross-appellee.

         1. Insurance: Contracts: Appeal and Error. The interpretation of an insurance policy presents a question of law that an appellate court decides independently of the trial court.

         2. Summary Judgment: Appeal and Error. An appellate court will affirm a lower court's grant of summary judgment if the pleadings and admitted evidence show that there is no genuine issue as to any material facts or as to the ultimate inferences that may be drawn from those facts and that the moving party is entitled to judgment as a matter of law.

         3. Insurance: Contracts: Appeal and Error. The meaning of an insurance policy is a question of law, in connection with which an appellate court has an obligation to reach its own conclusions independently of the determination made by the lower court.

         4. Insurance: Contracts. In construing insurance policy provisions, a court must determine from the clear language of the policy whether the insurer in fact insured against the risk involved.

         5. Insurance: Contracts: Proof. In a coverage dispute between an insured and the insurer, the burden of proving prima facie coverage under a policy is upon the insured.

         6. __:__:__. If the insured meets the burden of establishing coverage of the claim, the burden shifts to the insurer to prove the applicability of an exclusion under the policy as an affirmative defense.

         [294 Neb. 387] 7. Insurance: Contracts: Damages. Standard commercial general liability policies provide coverage for accidents caused by faulty workmanship only if there is bodily injury or property damage to something other than the insured's work product.

         8. Insurance: Contracts. The cost to repair and replace faulty workmanship is a business risk that is not covered under a commercial general liability policy.

         9. Insurance. Business risks are normal, frequent, and predictable and do not involve the kind of fortuitous events for which insurance is obtained.

         10. Insurance: Contracts: Liability. Where a product manufacturer is liable as a matter of contract to make good on or replace products that are defective or otherwise unsuitable because they are lacking in some capacity, the economic loss incurred because of the product or work is not what was bargained for as part of general liability coverage.

         11. __:__: __ . There is a fundamental distinction between the non-covered business risk of having to correct faulty products or work and the covered risk of liability when faulty products or work cause damage to other property that cannot be corrected through the correction of the faulty products or work.

         Appeals from the District Court for Douglas County: Joseph S. Troia, Judge. Affirmed.

          Steven D. Davidson, of Baird Holm, L.L.P., and Thomas A. Vickers and Scott A. Ruksakiati, of Vanek, Vickers & Masini, P.C., for appellant.

          Karen K. Bailey, of Engles, Ketcham, Olson & Keith, P.C., and John F. Maher, of Colliau, Carluccio, Keener, Morrow, Peterson & Parsons, for appellee Continental Casualty Company.

          Marvin O. Kieckhafer, of Smith Peterson Law Firm, L.L.P, and Brian O'Gallagher, of Cremer, Spina, Shaughnessy, Jansen & Siegert, L.L.C., for appellees Employers Mutual Casualty Company and EMCASCO Insurance Company.

          Heavican, C.J., Wright, Connolly, Cassel, and Kelch, JJ.

         [294 Neb. 388] Wright, J.

         I. NATURE OF CASE

         This case concerns the meaning of coverage provisions in a general liability and umbrella policy insuring the fabricator of steel rebar under a purchase agreement with a general contractor. The rebar was improperly fabricated and had a reduced reinforcing capacity as a result. The defective rebar was incorporated into the construction of concrete pile caps that would form support for the Pinnacle Bank Arena (Arena). Several of the pile caps had to be modified in order to conform to the required specifications of the contract. The insurers refused to reimburse Drake-Williams Steel, Inc. (DWS), for costs incurred to modify these compromised pile caps. The insurers claimed the costs of the remedial measures did not fall under the coverage of the policies. The district court entered summary judgment in favor of the insurers. DWS appeals, and the insurers cross-appeal.


         1. Rebar

         M.A. Mortenson Company (Mortenson) is a general contractor hired by the city of Lincoln to build the Arena. Mortenson entered into a purchase agreement with DWS to supply rebar for the Arena. The rebar was improperly bent when it was fabricated by DWS and therefore did not conform to the terms of the purchase agreement. The rebar was incorporated into three components of the Arena: the columns, the grade beams, and the pile caps. The pile caps provide support for the Arena's columns, which in turn support the floor and the roof. The pile caps were made of concrete with reinforcing rebar and were installed below ground level on top of the concrete piles that extended to the bedrock. The grade beams were also made of concrete and rebar. The beams formed an oval around the Arena and connect different pile caps together and were also installed below ground level. DWS did not seek to recover any expenses for any corrections that were made to [294 Neb. 389] the columns that contained the improperly bent rebar. No corrections were made to the grade beams.

         The rebar was bent by DWS at too tight a radius and did not meet the specifications. This incorrect radius was determined to be the result of machine and operator error during the process of fabrication. Because of the incorrect radius, the rebar had approximately 50 percent of its normal reinforcing capacity. The nonconforming rebar that had not been cast in the concrete pile caps was removed and replaced by DWS. And DWS made no claim on this replacement. There were 52 pile caps that had been cast with improperly bent rebar. Approximately half of these pile caps with the nonconforming rebar would nevertheless perform adequately given the particular pile caps' shape or placement. But the other half were deemed incapable of providing the required structural support, because of the diminished reinforcing capacity of the nonconforming rebar. If these pile caps were not modified, they would not provide the support required. This could have resulted in a structural failure in part of the Arena. Engineers eventually determined that the most cost-effective solution was to install a reinforcing band around each of the compromised pile caps. This modification would provide the necessary structural support.

         To modify these pile caps, new concrete was adhered to the sides of pile caps to make the existing pile caps wider. The new concrete was joined to the existing pile caps by new rebar that was drilled and epoxied into the existing pile caps. This process, once completed, made the pile caps wider and suitable for their intended purpose. The pile caps were essentially wrapped in a ring of concrete and rebar that would then perform as originally designed. The process required excavating around the pile caps, assembling a new form around the pile caps, placing rebar into that form, and pouring concrete into the form.

         DWS initially refused to pay for the costs of the correction. Mortenson paid the costs and sought reimbursement from [294 Neb. 390] DWS in the amount of $1, 355, 860. Eventually DWS reimbursed Mortenson. DWS sought coverage from its insurers. The insurers denied DWS' claim and commenced this action to determine their obligations under the policies of insurance.

         2. Policies

         For the period of November 1, 2010, to November 1, 2011, DWS was insured through a primary commercial general liability (CGL) policy with Employers Mutual Casualty Company (Employers). From November 1, 2011, to November 1, 2012, DWS was insured through a primary CGL policy with EMCASCO Insurance Company (EMCASCO). DWS was also insured during the relevant time period through an umbrella policy with Continental Casualty Company (Continental). DWS sought coverage under its CGL policies and the umbrella policy. We refer to the insurance companies collectively as "the Insurers."

         The relevant coverage provisions of the umbrella policy with Continental are substantially similar to the provisions of the policies with Employers and EMCASCO.

         (a) Damages and Property Damage

         The policies agreed to cover "those sums that [DWS] becomes legally obligated to pay as damages because of . . . 'property damage' to which this insurance applies." "Property damage" is defined by the EMCASCO policy as:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the ...

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