BITUMINOUS CAS. CORP. v. BARTLETT

KELLY, Justice.

Plaintiff insurer appeals from a judgment of the district court declaring that it must defend its insured on a counterclaim interposed against him in his lien foreclosure action. We reverse.

The facts are not in dispute. Plaintiff, Bituminous Casualty Corporation, issued a comprehensive general liability insurance policy to defendant, Lance Bartlett, a brick and masonry construction contractor.1 That policy was in full force and effect at all relevant times.

Bartlett contracted to perform brick and masonry work on a new office building owned by Paul Johnson, doing business as A & C Johnson Co. After defendant had completed his work but had not been fully compensated, he filed a mechanic's lien statement and commenced an action to foreclose his lien against Johnson. Johnson interposed a counterclaim which contained the following clause:

A deposition of Paul Johnson, which has been made a part of the record in this action, reveals two complaints which form the basis of the counterclaim: (1) Some of the bricks in the exterior walls of the building were chipped. Johnson testified that there were about 20 chipped bricks per square (100 square feet); that the chips were "big"; and that he had complained about them to Bartlett during the course of construction. (2) Certain of the exterior walls of the building were not built entirely straight and perpendicular, or "plumb," to the ground. Johnson testified that this alleged defect was also brought to Bartlett's attention during construction. Bartlett informed Johnson then and maintains now that it was necessary to run the walls out of plumb because precast concrete columns, which were placed by another contractor and for which he was not responsible, pushed a steel beam out of place. Both the chipped bricks and the out-of-plumb walls were contrary to standards of workmanship in the contract between Bartlett and Johnson. In dismissing the insurer's declaratory judgment action, the district court declared that the insurer was obligated to defend its insured on the counterclaim.

The insurer raises two issues on appeal: (1) Whether the facts set forth above constitute an insured "occurrence" within the scope of the liability insurance policy (2) whether those facts preclude coverage in view of several exclusions in the policy.

Defendant asserts, inter alia, that the insurer must defend its insured against any suit or claim when the allegations of such suit or claim are arguably within the policy coverage. This assertion is based on the following language in the policy involved:

We review some basic law concerning the nature of the insurer's obligation to defend its insured. The obligation to defend is contractual in nature and is generally determined by the allegations of the complaint against the insured and the indemnity coverage afforded by the policy. Republic Vanguard Ins. Co. v. Buehl, 295 Minn. 327, 332, 204 N.W.2d 426, 429 (1973). However, the complaint is not controlling when actual facts clearly establish the existence or nonexistence of an obligation to defend. Crum v. Anchor Cas. Co., 264 Minn. 378, 119 N.W.2d 703 (1963); Bobich v. Oja, 258 Minn. 287, 104 N.W.2d 19 (1960); Weis v. State Farm Mutual Auto. Ins. Co., 242 Minn. 141, 64 N.W.2d 366 (1954).2 If any part of the cause of action against the insured arguably falls within the scope of coverage, the insurer must defend. Christian v. Royal Ins. Co., 185 Minn. 180, 240 N.W. 365 (1932).3 Any ambiguity as to coverage at the pretrial stage is to be resolved in favor of the insured. As we said in Crum:

From the above authorities, it is apparent that an insurer seeking to avoid having to defend an insured carries the burden of demonstrating that all parts of the cause of action against the insured fall clearly outside the scope of coverage. If any part is arguably within the scope of coverage, the insurer should defend, reserving its right to contest coverage based on facts developed at trial on the merits. See, F. D. Chapman Const. Co. v. Glens Falls Ins. Co., 297 Minn. 406, 211 N.W.2d 871 (1973).

The insurer contends that there was no "occurrence" and therefore a condition precedent to its duty to defend was unfulfilled. The insurance policy obligates the insurer to defend "any suit against the insured seeking damages on account of such * * * property damage, even if any of the allegations of the suit are groundless, false or fraudulent." The property damage referred to is defined as "injury to or destruction of tangible property" which is "caused by an occurrence." Occurrence, in turn, is defined as—

For the purposes of this case, then, an occurrence requires: (1) An accident; (2) resulting in property damage; (3) neither expected nor intended by the insured contractor.

In Minnesota, the term "accident" as used in liability insurance has been defined in the landmark case4 of Hauenstein v. St. Paul-Mercury Indemnity Co., 242 Minn. 354, 358, 65 N.W.2d 122, 126 (1954):

The 1966 revision of standard policy forms produced the definition of "occurrence" in the policy at bar. That definition refines the concept of accident by requiring that the damage resulting from accident be neither expected nor intended from the standpoint of the insured. To date, no Minnesota decision6 and few foreign decisions7 have considered that definition in property damage situations. Two commentators have argued that the term should be interpreted broadly and that only highly expectable damage should be excluded from coverage. Hall, Contractors' Liability Insurance for Property Damage Incidental to Normal Operations—The Standard Coverage Problem. 16 U. of Kan.L.Rev. 181, 203 (arguing that policy framers did not intend a more restrictive interpretation); Keeton, Insurance Law, § 5.4(c), p. 300 (arguing that any other interpretation would conflict with coverage in automobile negligence cases).

These arguments are consistent with the relevant principles underlying this type of insurance coverage. A construction contractor's liability policy is designed to protect him from fortuitous losses occurring in connection with his work. If property damage occurs because of mistake or carelessness on the part of the contractor or his employees, he reasonably expects that damage On the other hand, the insurer is in the business of distributing losses due to such property damage among a large number of policyholders. It is able to properly set premiums and supply coverage only if those losses are uncertain from the standpoint of any single policyholder.8 If the single insured is allowed through intentional or reckless acts to consciously control the risks covered by the policy, a central concept of insurance is violated. The facts of the case at bar must be considered in light of these principles.

The insurer argues that any property damage resulting from the use of chipped bricks and the installation of out-of-plumb walls—both contrary to contract standards of workmanship—was expected from the standpoint of the insured. We agree. The record establishes that both of these alleged defects were patent, obvious, and called to the insured's attention during the course of construction. Therefore, any damage from them should have been expected by him.

As to the chipped bricks, the deposition testimony of Johnson establishes that they were "big," but that there were only about 20 chipped bricks per 100 square feet of wall. It also establishes that Johnson informed the insured during the course of construction that chipped bricks were being installed. Despite the relatively small number of chipped bricks, we cannot avoid the conclusion that the insured knew he was installing chipped bricks as he laid them. Big chips on bricks are a patent and obvious condition which is easily noticeable by the person who installs them. Furthermore, in view of contract specifications providing "[c]hipped or otherwise defaced brick will be rejected," the insured also knew that if he used such brick he could expect property damage to his work and a counterclaim against him for that damage.

As to the out-of-plumb walls, the conclusion that insured should have expected property damage is even more inescapable. Insured admits that the walls were intentionally run out of plumb, despite a contract specification that masonry units were to be run "plumb and true." He attempts to excuse this by arguing that he was forced to run the walls that way because of the defective work of another party. Whether this excuse is valid or not, we need not determine. The conclusion remains that a construction contractor who knowingly and intentionally violates a contract specification should expect property damage to result.

In summary, we regard any damage from the alleged defects in insured's work to be highly expectable from his standpoint. A contractor who knowingly violates contract specifications is consciously controlling his risk of loss and has not suffered an occurrence. The absence of any occurrence clearly precludes coverage. Therefore, there is no obligation to defend.9

Reversed with directions to enter judgment that insurer is not obligated to defend its insured.