a Exterior Wall Systems of North Carolina, Defendant, 28 F. App'x 253

Source: United States Court of Appeals for the Fourth Circuit

Date: 2002-01-25

Jurisdiction: United States

Docket: No. 01-1546

Citation: 28 F. App'x 253

Opinion

OPINION PER CURIAM. On March 16, 2001, in this declaratory judgment proceeding relating to insurance coverage, the district court for the Eastern District of North Carolina awarded

summary judgment to Penn America Insurance Company (“Penn America”). Joseph A. Valade, doing business as JAV, Incorporated (“JAV”), appeals the adverse ruling of the district court, maintaining that it erroneously ruled in favor of Penn America. As explained below, we affirm the district court’s award of

summary judgment. I. In January 1998, JAV entered into a contract with a townhouse community in southeastern North Carolina, known as Pembroke at Land Fall Townhouses Homeowners’ Association (“Pembroke”), to remove synthetic stucco from several private homes at Pembroke and replace it with a substance called synthetic hard-coat stucco. JAV subcontracted to Edmond R. McKeon, doing business as Exterior Wall Systems of North Carolina (“Exterior Wall”), the hard-coat stucco work it had agreed to perform at Pembroke. After Exterior Wall completed its stucco work, it was fully paid.

Thereafter, JAV received complaints from Pembroke concerning damage to Pembroke properties (the “Pembroke Damage”) that had occurred during the work subcontracted to Exterior Wall. JAV demanded that Exterior Wall repair the Pembroke Damage, but Exterior Wall refused. As a result, in order to meet its contractual obligations to Pembroke, JAV repaired the Pembroke Damage caused by Exterior Wall. Exterior Wall was the insured under a General Commercial Liability Policy (the “Policy”) issued by Penn America, and the parties agree that the Policy was in effect when Exterior Wall caused the Pembroke Damage.

When Exterior Wall refused to repair the properties, JAV notified Penn America, as Exterior Wall’s insurer, that it possessed a claim against Exterior Wall for the Pembroke Damage. Penn America investigated JAV’s claim, but denied coverage. In March 1999, JAV filed a lawsuit against Exterior Wall in North Carolina state court (the “North Carolina Lawsuit”), alleging that it was entitled to recover from Exterior Wall for the Pernbroke Damage. In March 2000, Penn America filed this declaratory judgment action in the Eastern District of North Carolina.

Penn America named both Exterior Wall and JAV as defendants in the declaratory judgment proceeding, seeking a declaration that “Penn America has no duty to defend Exterior Wall in [the North Carolina Lawsuit], and no obligation to indemnify Exterior Wall for any settlement or judgment for damages arising out of the underlying civil action.” On June 23, 2000, the district court entered default judgment against Exterior Wall because it had failed to answer or respond to Penn America’s complaint.

In its default judgment, the court ruled that, under the Policy, Penn America possessed no duty to defend or indemnify Exterior Wall. The court decreed, by way of default, that Penn America was relieved of any duty to defend Exterior Wall and had no obligation to indemnify for any damages arising out of the underlying civil action. Thereafter, on December 28, 2000, with JAV still a defendant in the case, Penn America moved for

summary judgment against JAV maintaining that, under the Policy, it had no duty either to defend or to indemnify in the North Carolina Lawsuit. On March 16, 2001, the district court granted Penn America’s

summary judgment motion. This appeal followed. II. Penn America and JAV, the parties to this appeal, assert that we possess jurisdiction to hear and decide it pursuant to 28 U.S.C. § 1291. Nevertheless, pursuant to Rule 12(h)(3) of the Federal Rules of Civil Procedure, we are obligated to examine the question of subject matter jurisdiction “[w]henever it appears” it may be lacking. 5A Charles Allan Wright & Arthur R. Miller, Federal Practice and Procedure § 1393 (2d ed. 1990 & Supp.2001) (collecting cases).

The posture of this appeal — an insurer (Penn America) maintaining a declaratory judgment action against an injured third party (JAV) after default judgment has been entered against the insured (Exterior Wall) — creates the appearance that we may lack subject matter jurisdiction. We must therefore examine whether we possess jurisdiction over this appeal. The Supreme Court, in Maryland Casualty Co. v.

Pacific Coal & Oil Co., 312 U.S. 270, 61 S.Ct. 510, 85 L.Ed. 826 (1941), determined that an “actual controversy” exists between an insurer, on the one hand, and a third party injured by the insured, on the other, when the insurer has initiated a declaratory judgment action against both its insured and the injured third party seeking court determination of its obligations under an insurance policy. Id. at 273-74, 61 S.Ct. 510. We had occasion to apply the principle of Maryland Casualty in our decision in Nautilus Insurance Co. v. Winchester Homes, Inc., 15 F.3d 371 (4th Cir.1994).

Writing for our Court, Judge Phillips concluded as follows: [a] dispute between a liability insurer, its insured, and a third party with a tort claim against the insured over the extent of the insurer’s responsibility for that claim is an “actual controversy” ..., even though the tort claimant has not yet reduced his claim against the insured to judgment. Id. at 375 n. 3. In so concluding, we recognized that the third party’s interest in defining the scope of insurance coverage is independent of the interest of the insured.

When an insurer initiates a declaratory judgment action against both an injured third party and its insured, the injured third party acquires standing — independent of that of the insured — to defend itself in the declaratory judgment proceeding. Fed. Kemper Ins. Co. v. Rauscher, 807 F.2d 345, 353 (3rd Cir.1986) (stating that injured third party “ha[s] standing to defend the declaratory judgment action despite the absence of ... the actual insured”); Hawkeye-Sec. Ins. Co. v.

Schulte, 302 F.2d 174, 177 (7th Cir.1962) (“It would be anomalous to hold here that an actual controversy exists between [an injured third party] and [an insurer] and yet deny [the injured third party] the right to participate in the controversy.”). In this regard, it would be anomalous not to permit the injured third party an opportunity to present its case against the insurer, which initially brought the declaratory judgment action, after the insured defaulted. Accordingly, we are constrained to conclude that we possess subject matter jurisdiction over this appeal.

The default judgment entered by the district court against Penn America’s insured, Exterior Wall, does not negate the case or controversy existing between the insurer, Penn America, and the injured third party, JAV. Our jurisdiction therefore arises pursuant to 28 U.S.C. § 1291, and we will proceed to consider the merits of this appeal. III. Pursuant to Rule 56(

c) of the Federal Rules of Civil Procedure,

summary judgment is appropriate “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Morrel v. Nationwide Mut. Fire Ins. Co., 188 F.3d 218, 222 n. 5 (4th Cir.1999) (internal quotations and citations omitted). This Court reviews de novo a district court’s award of

summary judgment. Id. In conducting such de novo review, “we consider the facts in the light most favorable to the non-moving party.” Id. IV. On appeal, JAV maintains that the district court committed reversible error in two specific respects. First, it contends that the court erred by awarding Penn America

summary judgment on the existence of a duty under the Policy to defend Exterior Wall. Second, JAV asserts that the district court erred by concluding that there were no genuine issues of material fact regarding whether the claims alleged in the North Carolina Lawsuit fell within the coverage provisions of the Policy. We examine each of these contentions in turn. A. First, JAV contends that the district court incorrectly determined that Penn America had no duty to defend Exterior Wall in the North Carolina Lawsuit.

Under North Carolina law, an insurer’s duty to defend arises before the merits of the claim against the insured are adjudicated, County of Guilford v. Nat’l Union Fire Ins. Co. of Pittsburgh, 108 N.C.App. 1, 422 S.E.2d 360, 363 (1992). And an insurer’s duty to defend is broader than its obligation to indemnify under the terms of an insurance policy. Waste Mgmt. of Carolinas, Inc. v. Peerless Ins. Co., 315 N.C. 688, 340 S.E.2d 374, 377 (1986). Moreover, an insurer may possess a duty to defend its insured “even in an action in which no damages are ultimately awarded.” Bruce Terminix Co. v. Zurich Ins.

Co., 130 N.C.App. 729, 504 S.E.2d 574, 578 (1998). The courts of North Carolina utilize the “comparison test” to decide if an insurer possesses a duty to defend its insured. Waste Mgmt., 340 S.E.2d at 378. Under the “comparison test,” the allegations made in the underlying complaint against the insured are compared to the policy provisions, and if the allegations represent a risk covered by the insurance policy, the insurer possesses a duty to defend its insured. Id. And, under North Carolina law, “any doubt as to coverage must be resolved in favor of the insured.” Duke Univ. v. St. Paul Fire & Marine Ins.

Co., 96 N.C.App. 635, 386 S.E.2d 762, 763-64 (1990).

Penn America is obligated under the Policy only to “pay those sums that the insured becomes legally obligated to pay as damages because of ... ‘property damage’ to which this insurance applies.” The Policy covers “ ‘property damage’ only if: ... [t]he ... ‘property damage’ is caused by an ‘occurrence.’” An “occurrence” is then defined to “meant ] an accident,” but the Policy fails to define the term “accident.” The Supreme Court of North Carolina has long defined the term “accident,” in the context of a general liability insurance policy, as an unforeseen, unexpected, unusual, or unprecedented consequence.

Waste Mgmt., 340 S.E.2d at 379; Tayloe v. Hartford Accident & Indem. Co., 257 N.C. 626, 127 S.E.2d 238, 240-41 (1962). In so doing, the court has consistently focused on the expectation or foresight of the insured, and it has determined that “potentially damaging events that can be anticipated are not ‘occurrences’ within the meaning of the policy.” Waste Mgmt., 340 S.E.2d at 380. Accordingly, an “accident” does not occur when property damage is caused by defective or poor workmanship, because an insured should foresee and expect the resulting damage. See Wm. C. Vick Constr. Co. v. Pa. Nat’l Mut. Cas. Ins.

Co., 52 F.Supp.2d 569, 581-83 (E.D.N.C.2000) (recognizing that faulty workmanship does not constitute “accident” under General Commercial Liability Policy). When the comparison test is applied here, i.e., the allegations in the North Carolina Lawsuit are compared to the provisions of the Policy, it is apparent that the allegations do not implicate a risk covered by the Policy.

JAV alleged in the North Carolina Lawsuit that Exterior Wall, “in installing the conventional hard-coat stucco, damaged Pembroke at Landfall’s property including damage to driveways, patios, chimneys, painted walls, stone walkways, slate roofs, air conditioners and landscaping.” JAV, however, made no allegations concerning how the Pembroke Damage occurred, even though its counsel acknowledged at oral argument that part of Exterior Wall’s work included the effort customarily associated with cleaning up a worksite following application of hard-coat stucco.

In short, in order for the Pembroke Damage to be a covered risk under the Policy, JAV was required to allege in the North Carolina Lawsuit that Exterior Wall caused it and that it was the result of an “accident.” JAV failed, however, to make any such allegation. As such, the district court did not err in deciding that Penn America possessed no duty to defend Exterior Wall in the North Carolina Lawsuit. B. JAV also maintains on appeal that the district court erred in awarding

summary judgment to Penn America on the issue of indemnity, asserting that a genuine issue of material fact existed concerning whether the Pembroke Damage constituted an “occurrence” under the Policy. Under the law of North Carolina, a party seeking coverage under an insurance policy bears the burden of proving that any claimed damage falls within the policy’s terms. Hobson Constr. Co. v. Great Am. Ins. Co., 71 N.C.App. 586, 322 S.E.2d 632, 635 (1984) (“We note that the insured ... has the burden of bringing itself within the insuring language of the policy.”).

This burden of proof remains unchanged when the insurer initiates a declaratory judgment proceeding concerning its coverage obligations under an insurance policy. Id. As such, JAV must forecast evidence sufficient to demonstrate a genuine issue of material fact on whether the Pembroke Damage was the foreseen, expected, usual, or normal consequence of poor or defective workmanship. Otherwise, such damage does not fall within the Policy’s indemnity provisions.

In addition to its failure to allege in the North Carolina Lawsuit that the Pembroke Damage was caused by an “accident,” JAV did not forecast any evidence to demonstrate a genuine issue of material fact concerning whether such damage was the expected consequence of defective or poor workmanship. As a result of this failure, the district court correctly concluded that there was no genuine issue of material fact regarding whether the Pembroke Damage was covered by the Policy. Accordingly, the court did not err in awarding

summary judgment to Penn America on the indemnity issue. V. Pursuant to the foregoing, the district court’s award of

summary judgment to Penn America is affirmed. AFFIRMED. In seeking

summary judgment against JAV, and in this appeal, Penn America has never maintained that JAV was bound by the district court’s default judgment against Exterior Wall. Indeed, as we point out in

Part II, infra, JAV was not bound by the default judgment because, as an injured third party, it was entitled to defend on the merits in the declaratory judgment proceeding. Fed. Kemper Ins. Co. v. Rauscher, 807 F.2d 345, 355 (3rd Cir.1986) (recognizing that "it would be anomalous to hold that the [third parties] should not be given an opportunity to establish their case against [the insurer] because of a default which they could not prevent”). .

Under Rule 12(h)(3) of the Federal Rules of Civil Procedure: Whenever it appears by suggestion of the parties or otherwise that the court lacks jurisdiction of the subject matter, the court shall dismiss the action. . See supra note 1 and accompanying text. . The parties agree that this insurance coverage dispute is governed by the law of North Carolina. . The district court’s determination in Vick Construction that faulty workmanship does not constitute an "accident” under North Carolina law is consistent with authority from other jurisdictions. See generally Reliance Ins. Co. v.

Mogavero, 640 F.Supp. 84, 86 (D.Md.1986) (stating that " 'occurrence’ does not include the normal, expected consequences of poor workmanship” and that "it still connotes the idea of ‘accident’ ” which means "an event or condition occurring by chance or arising from unknown or remote causes or lack of intention or necessity”); Indiana Ins. Co. v.

Hydra Corp., 245 Ill.App.3d 926, 185 Ill.Dec. 775, 615 N.E.2d 70, 73 (1993) (determining no "accident” for cracks and loose paint caused by defective installation of concrete flooring, and stating "[a]n accident is an unforeseen occurrence, usually of an untoward or disastrous character or an undesigned sudden or unexpected event of an inflictive or unfortunate character,” and further observing that "[t]he natural and ordinary consequences of

an act do not constitute an accident”). . In its appeal, Penn America also maintains that five Policy exclusions bar coverage for the Pembroke Damage. These exclusions pertain to "Damage to Property,” “Damage to Your Product,” "Damage to Your Work,” "Damage to Impaired Property Not Physically Injured,” and "Recall of Products, Work, or Impaired Property.” We need not analyze the application of these exclusions because we have determined that the Pembroke Damage does not fall within the scope of the Policy.

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