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Eastern District

Eastern District Orders Insurance Company Back to Trial Court on its Refusal to Cover Homeowners’ Construction Policy Claim

in Law/Uncategorized
James R. Keller

BY JAMES R. KELLER

Missouri’s Eastern District Court of Appeals recently granted judgment for homeowners and against their insurance carrier on claims for construction damages to piers, a pole and the foundation of their home. The appellate court sent part of the dispute back to the trial court to consider further whether the insurance company’s refusal to cover a policy claim for these damages was vexatious.

The case is Cockerham v. American Family Mutual Insurance Company, 561 S.W.3d 862 (Eastern District, MO 2018).

The appellate court noted this was the first case in Missouri to directly address the issue of insurance coverage under a policy of this sort. The Missouri Supreme Court denied on Dec. 18 an application to consider the Eastern District’s opinion.

The Eastern District’s decision is now new law affecting all similarly worded insurance policies, at least in Missouri courts in the Eastern District.

Homeowners Robert and Stacia Cockerham sued their insurance provider, American Family Mutual Insurance Company, for damages relating to the construction of an addition to their residence. The addition was a celestial observatory.

The alleged damages involved a newly installed telescope support system attached to the foundation of their home and the homeowners’ loss of use of the observatory.

The homeowners purchased their home on Lakeshore Drive in Creve Coeur, MO in 2001. In 2005 they hired Nicholas Schalk and Schalk Construction, LLC to construct the observatory addition to their home.

The project included a telescope and its support system. Schalk had never before built such a system.

Schalk hired one subcontractor to install the piers and a separate subcontractor to pour concrete over the piers. The homeowners claimed the concrete subcontractor poured the concrete incorrectly, damaging the piers, the support system and the foundation.

The homeowners made a claim on their insurance policy to cover the losses. American Family denied coverage. It contended the claims were excluded from coverage or were not covered at all under the homeowner policy.

After cross motions for summary judgment, the trial court granted American Family’s motion in part by dismissing the homeowners’ claim for vexatious refusal to pay for the piers, pole and foundation damage. The homeowners appealed.

The appeal involved interpretation of the insurance policy and its various sections.  Typically, this is a question of law for judges, not juries, to decide.

The policy excluded defective construction in part C but it did cover “resulting loss” to property described in Part C that was “not excluded.”

The Eastern District found its job to be difficult. The policy required the appellate court to “decipher a rather prolix word puzzle.” Insurance policies tend to be complicated, layered with qualifiers, exceptions and exclusions.

American Family argued that it did not cover the loss because the homeowners’ losses were already excluded due to faulty construction. The “not excluded” clause did not apply, the carrier contended, since the coverage already was excluded.

Focusing on the “resulting loss” clause, the Eastern District rejected this argument. The policy did not define “resulting loss.” As Missouri courts typically do when the contract does not define a word whose meaning the parties dispute, the court turned to Webster’s Dictionary for guidance.

Webster’s Third New International Dictionary (1993), unabridged, defines the verb form of the word “result” as “to proceed, spring or arise as a consequence, effect or conclusion: to come out or have an issue.”

The court noted that the policy did not specifically state what a “resulting loss” may result from except to the extent such losses will not be covered that are “excluded or excepted” from the policy.

The Eastern District concluded that an ordinary purchaser of insurance would conclude that where one loss results from another loss caused by faulty construction, “such resulting loss is covered.”

Thus, the policy covered the damages to the piers, pole and foundation due to the incorrectly poured concrete. This includes the cost to remove and replace the bad concrete.

The Eastern District also found there were factual questions as to whether American Family’s refusal to pay on this claim was vexatious. This included a dispute as to whether the insurance company’s position denying coverage was willful and unreasonable.

The court’s finding means the dispute has returned to the trial court for further consideration regarding the piers, pole and foundation claims for vexatious refusal to pay.

The homeowners also had a claim for loss of use of their observatory. The policy, however, covered such a loss only when the property as a whole was uninhabitable, causing additional homeowner expenses.

The appellate court agreed with the trial court’s denial of this claim.

It was undisputed that the house was not uninhabitable – especially since the homeowners continued to live there.  They had no claim for additional living expenses because there were none.

The appellate court concluded that American Family clearly was not subject to a vexatious refusal to pay claim for loss of use. Since there was no coverage, the carrier’s position was proper.

The homeowners had additional assertions that the Eastern District found persuasive enough to raise more genuine fact questions meriting further trial court consideration.  They included that American Family’s representatives told the homeowners they did not need a builder’s risk policy to cover losses like the ones that occurred in this case, given the policy they had. The representatives included an adjuster who allegedly told them that “their losses would be covered.”

The appellate court also noted that the carrier did not cite the “resulting loss” clause in its defense when it filed its answer to the initial lawsuit. It did not rely on this clause in its briefs on the motions for summary judgment.

The insurance company relied solely on the faulty construction exclusion.

James R. Keller is counsel with Sandberg Phoenix & von Gontard P.C. where he concentrates his practice on construction law, complex business disputes, real estate and alternative dispute resolution. He also is an arbitrator and a mediator. Keller can be reached at (314) 446-4285 or jkeller@sandbergphoenix.com.

Eastern District Affirms Abuse of Process Damages in St. Louis County Subdivision Lot Split Lawsuit

in Law

By JAMES R KELLER

Missouri’s Eastern District Court of Appeals recently upheld sizable attorney fee awards for a seller and against subdivision trustees. The court also found in favor of those same trustees and against a buyer of a residential lot in the City of Frontenac.

The dispute involved an attempted lot split for construction of another home. The case is Trustees of Clayton Terrace Subdivision v. 6 Clayton Terrace, LLC and Huey, Trustee, June 19, 2018.

The seller’s mother, Jane Huey, lived in a home on a 2.3-acre parcel known as Lot 6 Clayton Terrace. Lot 6 was part of a 22-lot subdivision in Frontenac established by plat in 1923.

Huey died in 2011. The seller was the trustee of her mother Huey’s estate, including Lot 6. The seller had not lived in the home on Lot 6 for decades. She listed Lot 6 with Janet McAfee Real Estate, Inc. in 2012. A few months later, Lot 6 was sold.

The subdivision had various recorded restrictions amended over time. One of them required a 15-day notice to all subdivision lot owners of a pending sale. This allowed the subdivision owners, who had a right of first refusal, the first opportunity to purchase the lot at the sale price of the original sale – subject to all its other sale terms and conditions.

If more than one lot owner decided to a timely purchase, all such purchasing owners would own the lot on a pro rata basis.

The realtor timely hand-delivered notice of the sale to all lot owners. The sale closed for $415,000. No lot owner made a claim to purchase. This was a key piece of evidence for part of the appellate court’s decision.

The seller had no notice of any objection to the sale. There were no signs for someone to claim an irregularity in the sale going forward. The seller disbursed the proceeds to the estate beneficiaries.

The buyer wanted Lot 6 for investment purposes. Meanwhile, he leased it to Kevin McGowan and his six children.

The family made considerable improvements to their new home. Among them were removal of walls, combining the kitchen and dining areas, adding bedrooms and an exterior door, removing trees, refinishing the swimming pool, adding a new heater and replacing/refinishing the concrete pool deck.

The subdivision indentures provided that each lot—no matter its size—can only have one house.

More than a year after the sale, the buyer filed an application with the City of Frontenac to subdivide Lot 6. The City’s Planning and Zoning Commission approved the lot split.  This would allow another house on the new lot.

Two months later, the subdivision trustees sued the seller and the buyer. Count I sought a declaratory judgment against the seller for alleged failure to follow the required 15-day notice of a pending sale. It alleged that the seller failed to accept the offer of lot owner Elizabeth Schwartz to purchase the property under the 15-day notice provision.

Count II sought to enjoin (prohibit) the buyer from building an additional home on Lot 6. The subdivision indenture prohibiting any lot split had been “a matter of public record for almost 85 years and was still in effect,” according to the appellate court. This was another key piece of evidence.

The seller made a counterclaim against the trustees for abusive process in bringing Count I.

The trial took place on stipulated facts with no jury. This means the parties agreed on the evidence. It was up to the judge to apply these facts to the law and decide who would prevail. A stipulated record is not typical in a case tried before a judge, but it does occur occasionally. It never happens in a case tried before a jury.

The trial court’s decision sparked this appeal. On Count I, the judge ruled the sale was proper and the trustees abused process by suing the seller. A claim for abuse of process requires proof that the defendant made an illegal, improper, perverted use of process, a use neither warranted nor authorized by the process. The claim alleges that a defendant had an improper purpose in exercising its action, and this resulted in damage.

The trial court found the seller’s attorney fees and costs due to the litigation in the amount of $119,243 to be fair and reasonable. And yet, the court only awarded her $60,000 with $40,000 of that amount to be paid by the buyer and the other $20,000 to be paid by the trustees. The buyer had no claim against the seller.  The seller had no abuse of process claim against the buyer, only the trustees.

In Count II, the trial court found for the trustees. This allowed the division of Lot 6 into two parcels with a house on each.

The case turned in large part on the testimony of the head subdivision trustee. He stated that the only reason for suing the seller was to have the buyer move out of the neighborhood and take “their schemes with them.” He also acknowledged that the trustees had no “beef with the seller.”

There also was no evidence that subdivision lot owner Schwarz had made an offer to purchase the lot. This lack of evidence probably sealed the trustees’ fate on this point.  Based upon this record, the appellant court increased the attorney fee award to the seller and against all trustees to its full amount of $119,243.

The appellant court decided that the trustees should prevail against the buyer and prevent the splitting of the lot based upon the subdivision indentures which prohibited any lot split.

The Eastern District decided that the trial court’s award of $203,915 in attorney fees and costs to the trustees was too high. It sent the case back to the trial court to determine a “more reasonable amount” to be paid by buyer, “if any.”

James R. Keller is counsel with Sandberg Phoenix & von Gontard, P.C. where he concentrates his practice on construction law, complex business disputes, real estate and alternative dispute resolution. He is also an arbitrator and a mediator. Keller can be reached at (314) 446-4285, jkeller@sandbergphoenix.com.

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