Webcor-Obayashi Joint Venture v. Zurich American Insurance Company

Background

Webcor-Obayashi Joint Venture (WOJV) moved for partial summary judgment concerning coverage under Zurich American Insurance Company’s builder’s-risk policy. The policy insured against “all risks of direct physical loss of or damage to Covered Property” during the policy term. The parties did not dispute that steel girders at the insured project fractured during the policy term.

The policy’s Cost of Making Good exclusion excluded costs that would have been incurred to correct design defects, defective workmanship or materials, and certain other listed conditions, if correction had occurred immediately before the loss or damage. The exclusion also stated that covered property was not considered damaged solely because one of those conditions existed, but provided coverage for ensuing loss or damage caused by an insured peril.

Court’s analysis

The court applied the rule that an insured must first show that the loss falls within the policy’s coverage agreement; once that showing is made, the insurer must prove that a specific exclusion applies. The court found that WOJV met its initial burden. The girders had full fractures and structural damage requiring repair, and the fractures physically altered tangible property. The court therefore concluded that the fractured girders constituted physical damage to covered property under the policy.

The court rejected Zurich’s argument that the fractures could not constitute covered damage because they were inseparable from defective design or workmanship. The court treated the question whether the girders were damaged as distinct from the question whether particular repair costs were excluded.

Ruling

The court granted in part and denied in part WOJV’s motion for partial summary judgment. It granted the request to find that the fractured girders fell within the policy’s Insuring Agreement and that the burden shifted to Zurich to prove that the Cost of Making Good exclusion clearly and unambiguously defeated coverage.

The court denied WOJV’s requested legal rulings that the exclusion covered only costs that would have been incurred to correct defects before the fractures and that the ensuing-loss provision did not need to be considered unless Zurich showed that all fracture-remediation costs would also have been incurred to correct the defects. Factual disputes about what caused the fractures and whether additional defects required correction prevented those rulings. The court also denied WOJV’s request to strike Zurich’s expert declaration.