March 20, 2006

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Minnesota Court of Appeals

Kootenia Homes, Inc. v. Federated Mutual Insurance d/b/a/ Federated Insurance

No. A05-278
January 31, 2006 (unpublished)

Federated Mutual Insurance Co. appealed from summary judgment in a coverage dispute regarding new home construction. But its attempt to pass some of the costs of continuing damage to a subsequent insurer also failed at the appellate level. The appeal failed, in part, because of damaging admissions made by the insurance company, which prompted the courts to refuse to allocate damages to the successor insurer.

Kootenia Homes constructed at least 200 homes, using stucco exteriors on more than half of them, in the greater Minneapolis area between 1996 and 2002. Litigation arose because of moisture damage caused by improper stucco installations in 31 homes built between 1996 and 2000. Federated supplied CGL coverage during this period. Federated canceled the Kootenia policy as of April 1, 2002, and Cincinnati Insurance Co. took its place. Between April and December of 2002, Kootenia received reports of moisture intrusion in 12 of the stucco-clad homes. Kootenia tendered the complaints to Federated since the homes were built during Federated’s policy period.

Federated hired structural engineer Charles Lane to investigate. Lane informed the insurer that damage began shortly after the completion of each home and would continue until repaired. He recommended replacing all the stucco under the applicable code. Federated agreed and arranged to pay the full cost of repairs, then later informed Kootenia that coverage would be confined to damage that occurred during its CGL coverage. Federated suggested that Kootenia contact Cincinnati for damages not covered by that time period.

After March 2003, Kootenia received 19 more moisture-intrusion claims concerning homes constructed during the Federated policy period. Federated concluded, as it had on the previous 12 claims, that the water damage “began to occur shortly after (each) home was closed” and would continue until repairs were made. This admission was made in communications with Kootenia, the homeowners and to Cincinnati. In a subrogation claim against a subcontractor, Federated also told a district court that the damages “occurred from the time the stucco system was installed … and until repairs were completed.”

In May 2003, Federated informed Kootenia that it would no longer pay for damages it allocated to the period after April 1, 2001. Cincinnati informed Kootenia in June 2003 that it would not indemnify or defend Kootenia for any moisture claims prior to the start of its policy period.

Kootenia filed a declaratory judgment and breach of contract action against Federated and Cincinnati. The district court ordered that discovery proceed solely on the issue of allocation of damages. All parties moved for summary judgment. The district court granted summary judgment to Kootenia and Cincinnati, concluding that there were no issues of material fact regarding whether the damage to the homes began within Federated’s policy period and that the policy was activated by Minnesota’s actual-injury trigger rule.

As to the timing of the damage, the court observed that the record contained numerous admissions by Federated that the damage began when the homes were completed—well within Federated’s policy period. The court also concluded that Federated must be held solely liable for all insurable damages arising from the improper stucco installations.

The Appeals Court’s Ruling

Federated appealed, but the Minnesota Court of Appeals sided with the district court on all issues. “We agree with the district court’s conclusion that Charles Lane’s June 2004 affidavit, in which he stated his inability to ‘opine, with a reasonable degree of scientific certainty, when the property damage occurred at the Kootenia homes,’ was not sufficient to counter Federated’s admissions or to create a material issue of fact concerning timing.”

Federated’s openness and honesty provided the ammunition its opponents needed to prove Federated’s liability. While honesty is usually the best policy, in this case, it also proved to be the insurer’s downfall.

Case participants: Vernle C. Durocher, Jr., and Katie C. Pfeifer (Dorsey & Whitney) for Kootenia Homes.

Eric J. Strobel and Jennifer S. Kenney (Hinshaw & Culbertson) for Federated Mutual.

Douglas R. Archibald and Michael S. Rowley (Terhar, Archibald, Pfefferle & Griebel) and Daniel G. Litchfield (Litchfield Cavo) for Cincinnati Insurance.

Before: Judges Toussaint, Stoneburner and
Huspeni.

Opinion By: Judge Toussaint.

Decision: Affirmed.