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West Bend Mutual Insurance Co. v. Cleland Homes, Inc.

United States District Court, N.D. Indiana, South Bend Division

August 16, 2016

CLELAND HOMES, INC., et al., Defendants.



         This matter is before the court on cross motions for summary judgment filed by plaintiff West Bend Mutual Insurance Company (“West Bend”) and defendants Robert Sniady, Terry Sniady, and Gary Orlowski (jointly referred to herein as the “Homeowners”). Briefly, West Bend brought this action seeking a declaratory judgment to establish that it has no duty to defend or indemnify Cleland Homes, Inc., and/or Cleland Builders, Inc. (referred to jointly herein as “Cleland”) under a policy[1] of commercial general liability (“CGL”) insurance (the “Policy”) for a suit brought against Cleland by the Homeowners, alleging (oversimplifying) that Cleland’s negligence in building their homes caused water intrusion into or under their basements. West Bend contends that two exclusions in the policy operate to preclude coverage, and the Homeowners responded jointly in opposition and designated their response as a cross motion. The Cleland entities appear to have ceased operations and are not actively participating in this case.

         Summary judgment must be granted when “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). When considering the motion, the court must construe all of the evidence and the reasonable inferences to be drawn therefrom in the light most favorable to the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Chaib v. Geo Group, Inc., 819 F.3d 337, 340-41 (7th Cir. 2016). In a case involving cross-motions for summary judgment, that means that each party receives the benefit of all reasonable inferences drawn from the record when considering the opposing party’s motion. See Tegtmeier v. Midwest Operating Engineers Pension Trust Fund, 390 F.3d 1040, 1045 (7th Cir. 2004); Hendricks-Robinson v. Excel Corp., 154 F.3d 685, 692 (7th Cir. 1998).

         In the present case all of the material facts which are necessary to resolve the legal question of coverage under the policy are undisputed. The court therefore simply incorporates the undisputed facts into the discussion and analysis which follows. The parties agree without discussion that the application/interpretation of the policy at issue in this case is governed by Indiana law. (DE #20 at 3.))[2]

         First, it should be noted that in its complaint West Bend alleged that no “property damage” within the meaning of the policy had occurred, completely negating its duty to defend or indemnify. In moving for summary judgment it has abandoned that position. It admits that because Orlowski has alleged damage to personal property in his home, “there is coverage for one of the claims . . . and it [West Bend] has an obligation to protect its insured and provide it with a defense as to all of the claims asserted in the underlying litigation.” (DE # 25 at 17; DE # 30 at 1-2.) In addition West Bend concedes that damage to the structure of the homes themselves that results from faulty workmanship constitutes an “occurrence” of “property damage” within the Policy’s initial grant of coverage. (DE # 25 at 9-10.) West Bend’s argument for summary judgment is that because of two exclusions from coverage in the policy, the initial coverage is avoided: “[N]o coverage exists for the majority of claims” asserted, specifically, the Homeowners’ claims for structural damage to, and diminished value of, their houses. (Id.)

         The underlying litigation the Homeowners filed against Cleland in state court alleges in the complaint as is pertinent here:

The subdivision was designed in a such a way [sic] as to create a run off of ground water onto the lots owned by the plaintiffs wherein defendant Cleland Builders built their home[s].
The design of the subdivision and/or construction of the homes on the lots within the subdivision . . . was defective in that the plaintiffs’ homes are sitting on ground wherein the water table underneath their home[s] is so high that their basements flood and/or damage has occurred to the structure of their home. The ground water flows under the basement slab[s] of their homes.
[Cleland was] . . . negligent in designing and/or constructing the homes for the plaintiffs or . . . negligent in the water drainage plan for the subdivision.

(DE # 1-2 at 2, 3.)

         When deposed in connection with the underlying litigation and asked about the cause of the water problems, Gary Orlowski said he believed that his home had been built at too low an elevation. (DE # 25-2 at 7 (p. 22 of deposition).) Similarly, in his deposition Robert Sniady explained that there was a high water table in the area and that his (and Orlowski’s) home should not have been built with basements because they were below the level of the water table. (Id. at 19 (p. 21-23 of deposition).) Lance Cleland, the principal of the Cleland entities, stated in his deposition that Cleland Builders was responsible for determining the level for the foundation of the homes and that the Homeowners’ houses, like all homes in the subdivision, were sited two feet above street level. (Id. at 45 (p. 19-20 of deposition).)

         As stated, West Bend argues that two provisions in the Policy exclude coverage for the Homeowners’ claims against Cleland for structural damage and diminished value. The exclusions can be referred to for convenience as the “Your Work” exclusion and the “Contractual Liability” exclusion. West Bend raises the Contractual Liability exclusion as its second argument, but the court will address it first.

         It is not necessary to quote the text of the Contractual Liability exclusion, found in section I(2)(b) of the Policy (DE #1-1 at 46), it suffices to say here that the exclusion applies when an insured contractually assumes liability for damages. West Bend recognizes that the Homeowners have pleaded their claims in the underlying action as tortious negligence claims; it further acknowledges that under Indiana law every contract to perform work has an implied duty to do so skillfully, carefully and in a workmanlike manner. “Negligent failure to do so is a tort, as well as a breach of contract.” INS Investigations Bureau, Inc. v. Lee, 784 N.E.2d 566, 576 (Ind.Ct.App. 2003). Although a plaintiff can proceed under both theories, Indiana courts examine the contract between the parties to define the nature of the duty owed and the consequences of the breach. Orkin Exterminating Co. v. Walters, 466 N.E.2d 55, 58 (Ind.Ct.App. 1984) (abrogated on other grounds by Mitchell v. Mitchell, 695 N.E.2d 920 (Ind. 1998)). Thus, parties cannot avoid contractual terms by framing their claims as torts. ...

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