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Westfield Insurance Co. v. Wensmann, Inc.

Court of Appeals of Minnesota

December 16, 2013

Westfield Insurance Company, Respondent/Cross-Appellant,
v.
Wensmann, Inc., f/k/a Wensmann Homes of Rochester, Inc., Defendant, Diseworth at Somerby, A Planned Community, Appellant/Cross-Respondent.

Scott County District Court File No. 70-CV-11-25355

Deborah C. Eckland, Scott R. Johnson, Goetz & Eckland P.A., Minneapolis, Minnesota (for respondent/cross-appellant Westfield Insurance Company)

Douglas A. Boese, Dunlap & Seeger, P.A., Rochester, Minnesota (for appellant/cross-respondent)

Considered and decided by Smith, Presiding Judge; Johnson, Judge; and Rodenberg, Judge.

SYLLABUS

1. In a declaratory judgment action initiated by an insurer to declare the nonexistence of insurance coverage for a known loss, the district court does not err when it permits a nonparty making a claim against the insured to intervene in the coverage litigation.

2. Vacation of a default declaratory judgment is appropriate when an intervenor with an interest in the declaratory judgment action was not notified of the commencement of the action until after default judgment was granted against the insured in default, and where the intervenor acts with due diligence in seeking vacation, shows a reasonable basis for its claim on the merits, and would be prejudiced if the default judgment were not vacated.

OPINION

RODENBERG, Judge

In this insurance coverage appeal, appellant/cross-respondent, Diseworth at Somerby, A Planned Community, argues that the district court erred in granting summary judgment in favor of respondent/cross-appellant, Westfield Insurance Company, concluding that, as a matter of law, the insurance policy at issue excluded coverage for defective construction work because the insured knew of the property damage prior to the inception of the policy. Westfield cross-appeals and argues that the district court erred both in allowing Diseworth to intervene in the declaratory judgment action and in vacating the default judgment that Westfield had obtained in the coverage litigation. We hold that, under Minn. R. Civ. P. 24.01, the district court did not err in allowing Diseworth to intervene in Westfield's declaratory judgment action because Diseworth had an interest in the coverage suit. We further hold that vacation of a default declaratory judgment was appropriate where the intervenor seeking vacation was not notified of the declaratory judgment action until after the default judgment was obtained, where that intervenor acted with due diligence in moving to vacate, showed that the policy at issue may provide coverage for the alleged defects, and made an adequate showing of prejudice. Summary judgment was appropriate declaring noncoverage for some of the claimed property damage but was improperly granted as to those items of property damage with respect to which there remain genuine issues of material fact regarding coverage. We therefore affirm in part, reverse in part, and remand.

FACTS

Diseworth's complaint against Wensmann, Inc., formerly known as Wensmann Homes of Rochester, Inc. (which makes no appearance on appeal) and Westfield's declaratory judgment action seeking a declaration of noncoverage both arise from Wensmann's construction of nine buildings (18 townhome units) operated by Diseworth in Byron. Wensmann was the general contractor in the construction of the 18 units and was responsible for both the design and construction of the units built after 2003. Herbert Wensmann was the owner of Wensmann. Tim Houge served as Wensmann's site supervisor at Diseworth during times relevant to this appeal. Terry Wensmann, a vice president of Wensmann, was in charge of the superintendents and management for the construction at Diseworth. Dupont Brick & Stone, Inc. and South Metro Masonry were the subcontractors responsible for constructing the brick arches at issue in this appeal.

Each Diseworth unit had one, two, or three brick arches under the unit's back deck. Diseworth alleges, and Westfield does not dispute, that the arches were not weight-bearing and were primarily decorative. All of the buildings were built before April 1, 2007, the date on which Westfield issued the comprehensive general liability (CGL) policy of insurance to Wensmann pursuant to which coverage is here in dispute. The last certificate of occupancy was issued in February 2007.

Wensmann first became aware of cracks in the brick arches when the homeowner of unit 934 submitted the first of two requests for warranty work. The first work order, dated July 27, 2005, requested service to "repair brick arch (lower level patio) it's falling." The repair work was completed on September 15, 2005. After being notified of the warranty work request, Houge hired Kent Jones, a structural engineer employed by Encompass, Inc., to create a design plan for future arches. Houge requested Jones's design because the subcontractors had not earlier used any written design in building the existing arches. Jones inspected a number of brick arches at Diseworth and another development in the same community in 2005. In his deposition, Jones said that Houge told him that the arches were cracking where the arch meets the post. Jones testified that the cracks had been tuck-pointed and had subsequently re-cracked with some of the cracks being significant. On September 20, 2005, Jones provided Houge with an arch design for future arches. That design was not used to repair any existing arches but Houge provided Jones's design plan to the subcontractors for the last four units built: 880, 882, 960, and 954. A second warranty work request for unit 934 came on May 26, 2006, requesting a repair of the brick arch: "Repair the brick arch by the patio area by June 15th[, 2006] or Terry [Wensmann] wants Dupont to do it and back charge [South Metro Masonry]."

Negligence-related complaint

Because of what it believes were continuing problems with the construction, Diseworth sued Wensmann in Olmstead County district court for negligence and breach of statutory warranties relating to claims of failed arches and water infiltration issues.

Wensmann had gone out of business by the time of Diseworth's suit against it. Westfield appointed counsel to defend Wensmann. Counsel interposed an answer disputing liability and damages. While the masonry complaints were documented prior to April 1, 2007, there is no documentation of water infiltration claims before that date. When deposed, Herbert Wensmann stated that from 2004 to 2006 "there could have been some water infiltration problems, and there could have been some deck heave or something. I don't recall. I wasn't—I came down there once a week." Our review of the record reveals no other reports or complaints of water damage prior to April 1, 2007.

On August 29, 2012, Diseworth's expert, Mark Soderland from Advanced Consulting and Inspection (ACI), provided a summary detailing the defects he located at Diseworth and his recommendations for repair. The ACI report detailed a total of seven areas of deficiencies in the construction of Diseworth: siding, brick veneer, windows and doors, flashing, attics, caulking/sealing, and masonry veneer arches below the deck structures.

This litigation

On October 12, 2011, Westfield commenced this declaratory judgment action in Scott County, alleging that Wensmann knew of the property damage alleged by Diseworth prior to acquiring the policy from Westfield on April 1, 2007, and thus the loss is excluded from the Westfield insurance policy. Westfield named only Wensmann as a defendant in the declaratory judgment action. Wensmann did not answer Westfield's complaint. Westfield moved for default judgment, which was granted by the district court on February 29, 2012. On April 4, 2012, Westfield's attorney withdrew from representing Wensmann in the Olmstead County action. Counsel's withdrawal was Diseworth's first awareness of the declaratory judgment action in Scott County.

On April 19, 2012, Diseworth moved to intervene in the Scott County declaratory judgment action pursuant to Minn. R. Civ. P. 24.01 and Minn. Stat. § 555.11 (2012), and to vacate the default judgment pursuant to Minn. R. Civ. P. 60.02. The Scott County district court granted Diseworth's motions on June 4, 2012. On June 6, 2012, Diseworth filed its answer to Westfield's complaint. Westfield requested permission to file a motion to reconsider pursuant to Minn. Gen. R. Pract. 115.11, which the district court denied. On July 18, 2012, Westfield appealed the Scott County district court order allowing Diseworth to intervene and vacating the default judgment. We dismissed that appeal as having been taken from a non-appealable order. Westfield then moved for summary judgment in the declaratory judgment action, arguing that Wensmann knew of the property damage alleged in Diseworth's complaint at the time the Westfield policy took effect on April 1, 2007, and that coverage for the claims was therefore excluded by the policy language. The district court granted Westfield's motion for summary judgment on February 4, 2013. Diseworth appealed and Westfield cross-appealed from the order granting Diseworth's motion to intervene and to vacate the default judgment.

Relevant policy language

Westfield's CGL policy was effective from April 1, 2007 to April 1, 2008. The relevant insuring agreement reads:

1. Insuring agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages for "bodily injury" or "property damage" to which this insurance does not apply. We may, at our discretion, investigate any "occurrence" and settle any claim or "suit" that may result.
b. This insurance applies to "bodily injury" and "property damage" only if:
(3) Prior to the policy period, no insured . . . knew that the "bodily injury" or "property damage" had occurred in whole or in part. If such a listed insured . . . knew prior to the policy period, that the "bodily injury" or "property damage" occurred, then any continuation, change or resumption of such "bodily injury" or "property damage" during or after the policy period will be deemed to have been known prior to the policy period. . . . .
d. "Bodily injury" or "property damage" will be deemed to have been known to have occurred at the earliest time when any insured . . .:
(1) Reports all, or any part, of the "bodily injury" or "property damage" to us or any other insurer;
(2) Receives a written or verbal demand or claim for damages because of the "bodily injury" or "property ...

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