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All opinions are subject to modification and technical correction prior to official publication in the North Carolina Reports and North Carolina Court of Appeals Reports. In the event of discrepancies between the electronic version of an opinion and the
print version appearing in the North Carolina Reports and North Carolina Court of Appeals Reports, the latest print version is to be considered authoritative.
PRODUCTION SYSTEMS, INC., Plaintiff, v. AMERISURE INSURANCE
COMPANY and UNION INSURANCE COMPANY a/k/a THE CHESAPEAKE BAY
PROPERTY & CASUALTY INSURANCE COMPANY, Defendants
Filed: 21 December 2004
Insurance--liability of insurance company-_duty to defend and indemnify--property
The trial court did not err in a declaratory judgment action by granting summary
judgment in favor of defendant insurance companies based on the conclusion that defendants
were not obligated to defend or indemnify plaintiff under the terms of the pertinent commercial
general liability policies for a counterclaim brought by another company, because: (1) both
policies restrict coverage to property damage that is caused by an occurrence and both policies
exclude coverage for property damage expected or intended from the standpoint of the insured;
(2) the term property damage in an insurance policy has been interpreted to mean damage to
property that was previously undamaged, and not the expense of repairing property or
completing a project that was not done correctly or according to contract in the first instance;
and (3) property damage does not refer to repairs to property necessitated by an insured's failure
to properly construct the property to begin with, and thus, there was no property damage to the
oven feed line systems in this case since the only damage was repair of defects in, or caused by,
the faulty workmanship in the initial construction.
Appeal by plaintiff from summary judgment entered 12 December
2003 and 22 December 2003 by Judge Catherine C. Eagles in Guilford
County Superior Court. Heard in the Court of Appeals 17 November
Wyatt Early Harris Wheeler, L.L.P., by Scott F. Wyatt, for
Dean and Gibson, L.L.P., by Susan L. Hofer, for defendant-
appellee Union Insurance Co.
Carruthers & Roth, P.A., by Kenneth R. Keller, for defendant-
appellee Amerisure Insurance Co.
Plaintiff Production Systems, Inc. (PSI) appeals from an order
granting summary judgment in favor of defendants Amerisure
Insurance Company and Union Insurance Company. We affirm. The record evidence is summarized, in pertinent part, as
follows: PSI is a corporation based in High Point, North Carolina,
and is engaged in the design and manufacture of industrial
machinery. Rubatex, Inc., is a corporation doing business in
Conover, North Carolina, and is engaged in the manufacture of
rubber products. In 1996 PSI entered into a contract with Rubatex
to design, construct, and install two foam rubber sheet line
systems at Rubatex's Conover plant _ one with a hot feed ensolite
oven and the other with a cold feed ensolite oven. Each line
system was to consist of an oven, nine conveyor belts, and
associated components, including safety and electrical controls,
fans, combustion equipment, temperature controls, smoke hood,
cooling chambers, and belted conveyor sections. The agreement
between PSI and Rubatex further specified that PSI was responsible
for designing, building, and installing the two line systems.
PSI began work on the oven line systems in early 1996, using
its own employees for some of the contractually required tasks, and
hiring subcontractors to perform certain other operations,
including installation of the conveyor belts. The oven feed line
systems were turned over to Rubatex in the fall of 1996; the cold
feed oven line system in October, 1996; and the hot feed oven line
system in December, 1996. Rubatex experienced problems with each
of the lines almost immediately after they were put into operation.
Investigation revealed that certain components of each of the
conveyor belts were improperly installed, were misaligned, and
would not track properly. As a result, neither of the two oven
feed line systems operated properly; the defective conveyor beltassemblies caused damage to other parts of the oven line system;
and Rubatex had to shut down the line systems repeatedly until
repairs were made.
Because of the defects in the oven line systems, Rubatex
refused to pay the sums owed to PSI under their contract. PSI
filed suit in 1998, seeking recovery of almost $200,000.00 that PSI
claimed it was owed. On 15 June 1998 Rubatex filed its answer and
counterclaim. Rubatex's counterclaim alleged that PSI had failed
to design, construct and install proper line systems or to cure
the multiple problems with the line systems[.] Rubatex brought
claims for breach of contract, and for breach of express
warranties, implied warranty of fitness, and warranty of
merchantability. The counterclaim sought damages for the cost of
repairing the two line systems, and for the loss of use of the line
systems. The present appeal arises from PSI's attempt to obtain
insurance coverage for Rubatex's counterclaim.
In September, 1995, PSI bought a Commercial General Liability
(CGL) insurance policy from defendant Amerisure Insurance Company.
PSI purchased another CGL policy in September, 1997, from defendant
Union Insurance Company. The relevant provisions of the two
policies are substantially identical. PSI notified Amerisure and
Union after Rubatex filed its answer and counterclaim, and asked
each to defend and indemnify PSI with respect to the counterclaim.
Both companies contended that there was no coverage under their
respective CGL policies, and each refused to defend or indemnify
PSI. Rubatex and PSI reached a settlement of their lawsuits in
December, 1999, under the terms of which PSI paid Rubatex$500,000.00. On 22 August 2000 PSI filed suit against Amerisure
and Union, seeking, inter alia, a declaratory judgment that the
companies were obligated to defend and indemnify PSI under the
terms of the CGL policies. In November, 2003, PSI, Union, and
Amerisure each filed motions for summary judgment. Following a
hearing on the summary judgment motions, the trial court on 12
December 2003, and 22 December 2003, entered orders of summary
judgment in favor of Amerisure and Union. From these orders PSI
Standard of Review
PSI appeals the court's order for summary judgment in favor of
defendant insurance companies in the declaratory judgment action
filed by PSI. Questions involving the liability of an insurance
company under its policy . . . are a proper subject for a
declaratory judgment. Insurance Co. v. Surety Co., 1 N.C. App. 9,
12, 159 S.E.2d 268, 271 (1968). Summary judgment may be granted
in a declaratory judgment proceeding where '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 any party is entitled to a
judgment as a matter of law,' N.C.G.S. § 1A-1, Rule 56(c)
[(2003)]. Williams v. Blue Cross Blue Shield of N.C., 357 N.C.
170, 178, 581 S.E.2d 415, 422 (2003) (citations and internal
quotation marks omitted). On appeal, this Court's standard of
review involves a two-step determination of whether (1) the
relevant evidence establishes the absence of a genuine issue as to
any material fact, and (2) either party is entitled to judgment asa matter of law. Guthrie v. Conroy, 152 N.C. App. 15, 21, 567
S.E.2d 403, 408 (2002) (citations omitted). In the instant case:
neither party challenges the accuracy or
authenticity of the subject insurance
polic[ies], or the existence of any relevant
facts. Rather, the parties' arguments are
based on their respective interpretations of
the terms of the insurance polic[ies].
Consequently, the record does not present a
genuine issue as to any material fact. We
next consider whether either party was
entitled to judgment as a matter of law.
Hobbs Realty & Constr. Co. v. Scottsdale Ins. Co, 163 N.C. App.
285, 289, 593 S.E.2d 103, 106, cert. denied, 358 N.C. 543, 599
S.E.2d 47 (2004).
The issue raised in this appeal is whether the defendant
insurance companies had a duty to defend or indemnify PSI in the
counterclaim brought by Rubatex.
In North Carolina, the insured has the burden of bringing
itself within the insuring language of the policy. Once it has
been determined that the insuring language embraces the particular
claim or injury, the burden then shifts to the insurer to prove
that a policy exclusion excepts the particular injury from
coverage. Hobson Construction Co., Inc. v. Great American Ins.
, 71 N.C. App. 586, 590, 322 S.E.2d 632, 635 (1984) (citing
Nationwide Mut. Fire Ins. Co. v. Allen
, 68 N.C. App. 184, 314
S.E.2d 552 (1984)).
Insurance policies are contracts and as such, their
provisions govern the rights and duties of the parties thereto.
Where a policy defines a term, this Court must use that definition.
If the meaning of the policy is clear on its face, the policy mustbe enforced as written. Auto Owners Ins. Co. v. Grier,
App. 560, 562, 593 S.E.2d 804, 806 (2004) (citation omitted). An
insurer has a duty to defend when the pleadings state facts
demonstrating that the alleged injury is covered by the policy[.]
Penn. Nat'l Mut. Cas. Ins. Co. v. Associated Scaffolders & Equip.
., 157 N.C. App. 555, 558, 579 S.E.2d 404, 407 (2003). Thus, to
determine if coverage exists, the Court compare[s] the complaint
with the policy to see whether the allegations describe facts which
appear to fall within the insurance coverage. Waste Management of
Carolinas, Inc. v. Peerless Ins. Co
., 72 N.C. App. 80, 84, 323
S.E.2d 726, 730 (1984), reversed on other grounds,
315 N.C. 688,
340 S.E.2d 374 (1986) (citation omitted).
In the case sub judice
, the CGL policies issued to PSI by
Amerisure and Union are substantially the same. Each states, in
relevant part, that it provides coverage for sums that the insured
becomes legally obligated to pay as damages because of . . .
'property damage.' Both policies restrict coverage to 'property
damage' that is caused by an 'occurrence' and both policies
exclude coverage for 'property damage' expected or intended from
the standpoint of the insured. We conclude that the dispositive
issue in the instant case is whether the facts alleged in Rubatex's
counterclaim describe property damage. The relevant policy
15. Property damage means: a. Physical
injury to tangible property, including all
resulting loss of use of that property. . . .
In the instant case, it is undisputed that: (1) PSI contractedwith Rubatex to design, construct, and install two oven feed line
systems for Rubatex, each of which included an oven, nine conveyor
belts, and associated equipment; (2) PSI, acting alone or through
its subcontractor, failed to properly install certain components of
the conveyor belts that were part of the completed line systems;
(3) as a result this faulty workmanship, Rubatex suffered damages
arising from the cost of repairing the line systems and from its
loss of use of the line systems while they were disabled; and (4)
Rubatex's counterclaim alleged no damages other than the cost of
repairing the line systems and the loss of use of the line systems.
On these facts, PSI contends that the mistracking of the conveyor
belts and damage to other parts of the oven feed line systems,
caused by the negligence of its subcontractors, constituted
property damage arising from an occurrence. We disagree.
The term property damage in an insurance policy has been
interpreted to mean damage to property that was previously
, and not
the expense of repairing property or completing
a project that was not done correctly or according to contract in
the first instance. Hobson
, 71 N.C. App. 586, 322 S.E.2d 632. In
, this Court interpreted a CGL policy containing a
functionally identical definition of 'property damage' and held
there was no 'property damage' on these facts: The insureds
contracted to build a concrete arch dam; within a month of its
completion it became apparent that the dam would not hold water.
The insureds were sued on their contract for the costs of repairing
and completing the dam. The Court noted that the
the insureds failed to construct the concrete arch dam in aworkmanlike manner and that due to the breach of contract by
[insureds, the plaintiffs] incurred damage 'in the nature of repair
and cost of completion of the project.' On this basis, the Court
concluded the insureds had failed to bring their particular injury
within the insuring language of the policy. Id.
at 587, 590-91,
322 S.E.2d at 633, 635.
Relying on Hobson
, a federal district court in North Carolina
recently interpreted a similar CGL policy as follows:
Under the clear language of the policies,
property damage requires . . . that the
property allegedly damaged has to have been
undamaged or uninjured at some previous point
in time. This is inconsistent with
allegations that the subject property was
never constructed properly in the first place.
. . . Not only does the plain language of the
policies at issue in the instant case suggest
that no 'property damage' has taken place, the
clear holding in Hobson
further compels this
court to reach the same conclusion. Hobson
indicates that damages based solely on shoddy
workmanship (i.e., damages seeking repair
costs and/or completion costs) are not
'property damage' within the meaning of a
standard form CGL policy[.]
Wm. C. Vick Constr. Co. v. Pennsylvania Nat. Mut.
, 52 F. Supp. 2d
569, 582 (E.D.N.C. 1999).
We conclude that under the precedent of
, property damage does not refer to repairs to property
necessitated by an insured's failure to properly construct the
property to begin with.
We conclude that there was no property damage to the oven
feed line systems because the only damage was repair of defects
in, or caused by, the faulty workmanship in the initial
construction. Consequently, we need not address the remaining
arguments on appeal. Accordingly, the damage to the oven feed linesystems was not covered under either of the policies at issue. The
trial court's summary judgment order is
Judges HUNTER and CALABRIA concur.
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