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Auto-Owners Insurance Co. v. NewMech Companies

April 27, 2004


Hennepin County District Court File No. CT 03-001266

Considered and decided by Randall, Presiding Judge, Klaphake, Judge, and Harten, Judge.


1. A breach of a cooperation clause, which is material and prejudices the insurer, can void coverage under the policy.

2. When an insurance company denies coverage, the insured has a right to protect itself.

3. Ambiguities in an insurance policy are generally resolved in favor of the insured.

The opinion of the court was delivered by: Randall, Judge



Appellant insurer brought a declaratory judgment action for a declaration as to its obligations under an insurance policy issued to respondent. Respondent developed a condominium building in which mold developed as a result of a faulty mechanical system that pulled moisture into the building. Respondent sought coverage for its cost of property damage, a lawsuit by several tenants, and related costs. The district court granted summary judgment to respondent, finding coverage and awarding costs and attorney fees. On appeal, appellant argues (a) the policy did not provide coverage because respondent breached the cooperation clause by failing to consult with its insurer and obtain consent before entering into repair agreements; and (b) other exclusions apply; and (c) the award of costs and attorney fees was error. We affirm.


Respondent, Brighton Development Corporation ("Brighton") is a developer of multi-unit residential property. On July 14, 1999, Brighton contracted with Kraus-Anderson Construction Company ("Kraus"), to build the Stone Arch Lofts (the "Project"), a new seven-story, 36-unit condominium building located on the Riverfront in Minneapolis. The contract provided that Paul Madson & Associates, Ltd ("Madson") was to perform the architectural work. The contract also permitted Kraus to subcontract with NewMech Companies, Inc. ("NewMech") to provide the mechanical and electrical systems for the Project.

Construction on the Project began in July 1999, and was scheduled for completion at the end of November 2000. In the meantime, Brighton entered into purchase agreements for the completion of particular condominium units with new unit owners. Brighton also secured a Tailored Protection Policy from appellant, Auto-Owners Insurance Company ("Auto-Owners"). The policy included a Commercial General Liability Policy (the "Policy"), which has been in effect since September 15, 1999.

By December 2000, the Project was substantially complete and the first residents began to move into their units. Less than a year later, in August 2001, some condominium unit owners began experiencing excessive humidity conditions. The excessive moisture caused several units to be severely damaged. This damage included water damage to the sheet-rock that caused mold growth, and warping of the floors, cabinets and other millwork.

In an effort to investigate the problem and determine the appropriate remedy, Kraus hired Legend Technical Services, Inc. ("Legend") to evaluate the building. Legend reported that there was extensive water damage throughout the building and that there was mold growth in approximately one-half of the units. Brighton and Kraus also investigated the problem and concluded that the air system was defective. Rather than producing a positive pressure, the system created a negative pressure that drew excessively moist outside air into the building's interior.

On January 14, 2002, Brighton sent a letter to Auto-Owners notifying them of the property damage that occurred at the Project and its plans to remedy the situation. The letter informed Auto-Owners that unit owners were demanding repairs to their units and that defects in the mechanical system be cured. The letter also informed Auto-Owners that Brighton was engaged in negotiations with Kraus for a Rework Agreement to repair the damage and fix the mechanical system.

Brighton, Kraus, and NewMech signed the Rework Agreement on January 24, 2002. In the agreement, the parties agreed that Kraus and NewMech would perform corrective work on the Project and Brighton would accomplish whatever temporary relocation of unit owners was required to complete the repair efforts. Shortly thereafter, on January 28, 2002, Auto-Owners notified Brighton that the claims against them might not be covered under the policy.

After receiving the January 28, correspondence from Auto-Owners, Brighton reached an agreement (the "Repair Agreement") with the Condominium Association ("Association") to repair the condominiums. Similar agreements were subsequently entered into between Brighton and various individual owners throughout the winter and spring of 2002. According to Brighton, the primary purpose of these repair agreements was to allow Brighton, Kraus and NewMech to gain access to the units and common areas to undertake repairs.

Despite the efforts to repair the damaged units, three unit owners commenced a lawsuit against Brighton and Kraus on July 25, 2002, alleging that the condominium units were not fit for their ordinary purpose. A few days later, a copy of the complaint was forwarded by Brighton to Auto-Owners. In this letter, Brighton tendered this lawsuit to Auto-Owners for defense and indemnity. On August 13, 2002, counsel for Auto-Owners responded to Brighton informing them that although the insuring clause was arguably triggered, Auto-Owners denied coverage based on Brighton's alleged violation of the cooperation clause in the policy as well as a denial based on various exclusions of coverage contained in the policy.

After being informed by Auto-Owners that neither a defense nor indemnity was afforded under the Policy, Brighton settled the lawsuit with the three condominium unit owners. However, the insurance coverage issues were still in dispute. To resolve the coverage issues, Auto-Owners commenced this declaratory judgment action by service of a complaint for declaratory relief on November 12, 2002. Both parties moved for summary judgment. On May 20, 2003, the district court entered judgment in favor of Brighton on its motion for summary judgment. The court determined that Brighton did not breach the cooperation clause by entering into the Repair Agreements because Auto-Owners denied coverage in the January 28 correspondence. The court then determined that none of the policy exclusions were applicable and that Brighton was entitled to coverage under the policy.

On June 27, 2003, Brighton filed a motion to amend the court's Order to add attorney's fees and costs incurred by Brighton in the amount of $36,765.25. The court amended its previous Order to include attorney's fees based on Brighton's affidavit of fees and costs incurred. This appeal followed.


I. Did the district court err by granting summary judgment in favor of Brighton on the basis that Auto-Owner's insurance policy ...

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