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Interlachen Properties, LLC v. State Auto Insurance Co.

United States District Court, D. Minnesota

August 4, 2017






         Defendant State Auto Insurance Co. (“State Auto”) provided insurance to construction contractor Kuepers Construction, Inc. (“Kuepers”) under a commercial general liability (“CGL”) policy. Kuepers designed and constructed homes in a common interest community in Nisswa, Minnesota (the “Development”), which Interlachen Properties, LLC (the “LLC”) sold to members of the Interlachen Propertyowners Association, Inc. (“Interlachen”). After discovering a number of design and workmanship defects in the buildings, Interlachen sued Kuepers and the LLC in Crow Wing County District Court. Kuepers and the LLC eventually executed Miller-Shugart agreements[1] with Interlachen. Interlachen, Kuepers, and the LLC (collectively, “Plaintiffs”) now seek enforcement of those agreements against State Auto and also allege that State Auto breached its contractual duties to defend and indemnify Kuepers and the LLC. State Auto moves for summary judgment on all of Plaintiffs' claims. For the reasons described below, the Court will grant in part and deny in part State Auto's motion for summary judgment.



         Kuepers designed and constructed the Development - a community of townhomes resembling log cabins - in Nisswa, Minnesota, between November 1997 and July 2001. (Aff. of Robert L. McCollum (“McCollum Aff.”), Ex. 1 (“State Court Order”) at 3-4, Sept. 28, 2016, Docket No. 65.)[3] Kuepers did not use subcontractors. (E.g., id., Ex. 2 at 227:22-228:2, 232:12-14, 239:25-240:25.) The LLC contracted with Kuepers to build the Development, sold the units in the Development between July 1998 and September 2001, and “issued construction-related warranties regarding the Units to the buyers.” (State Court Order at 4-6; McCollum Aff., Ex. 3; Decl. of Douglas Kuepers ¶ 5, Nov. 11, 2014, Docket No. 16.) The Development is a “common interest community” as defined in Minn. Stat. § 515B.1-103(10);[4] the LLC was the development's “declarant.”[5](McCollum Aff., Ex. 5 (“State Court Compl.”) ¶ 3.) Interlachen is the association of unit-owners in the Development. (State Court Order at 3.)


         State Auto provided CGL insurance coverage (under the “CGL Policy”) to Kuepers between December 26, 2001 and December 1, 2011.[6] (Aff. of Steve Kuepers (“Kuepers Aff.”) ¶¶ 5-8, Oct. 19, 2016, Docket No. 71.) State Auto was Kuepers's only CGL insurer during this period. (Id. ¶ 9.) The limits for the CGL Policy were $1, 000, 000 for each occurrence and $2, 000, 000 for general aggregate. (Id. ¶¶ 5-8; see also id., Exs. A-C; McCollum Aff., Ex. 8 (“CGL Policy”).) Subject to a number of exclusions and limitations, the CGL Policy generally covered “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury' or ‘property damage, '” as long as the property damage took place during the coverage period and was caused by an “occurrence” in the “coverage territory.” (CGL Policy at 8.) The CGL Policy included the following exclusions:

L. Damage To Your[7] Work “Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.” This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.
m. Damage To Impaired Property Or Property Not Physically Injured “Property damage” to “impaired property” or property that has not been physically injured, arising out of:
(1) A defect, deficiency, inadequacy or dangerous condition in “your product” or “your work”; or
(2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.
This exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to “your product” or “your work” after it has been put to its intended use.

(Id. at 11.) The CGL Policy also included the following definitions:

3. “Bodily injury” means bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.
. . . .
13. “Occurrence” means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.
. . . .
16. “Products-completed operations hazard”:
a. Includes all “bodily injury” and “property damage” occurring away from premises you own or rent and arising out of “your product” or “your work” except:
(1) Products that are still in your physical possession; or
(2) Work that has not yet been completed or abandoned. However, “your work” will be deemed completed at the earliest of the following times:
(a) When all of the work called for in your contract has been completed.
(b) When all of the work to be done at the job site has been completed if your contract calls for work at more than one job site.
(c) When that part of the work done at the job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project.
Work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed.
. . . .
17. “Property damage” means:
a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.
. . . .
22. “Your work”:
a. Means:
(1) Work or operations performed by you or on your behalf; and
(2) Materials, parts or equipment furnished in connection with such work or operations.
b. Includes
(1) Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of “your work”, and
(2) The providing of or failure to provide warnings or instructions.

(Id. at 17, 19-20.)

         The CGL Policy obligated State Auto to defend Kuepers (and any other insured) against any lawsuit seeking covered damages. (Id. at 8.) But State Auto had “no duty to defend [Kuepers or any other] insured against any ‘suit' seeking damages for ‘bodily injury' or ‘property damage' to which [the CGL Policy] d[id] not apply.” (Id.)


         Starting in 2004, Interlachen discovered defects in and damage to the buildings in the Development, including discolored and peeling wood siding attributable to high levels of moisture in the logs. (State Court Order at 7-10.) In April 2011, Interlachen commenced a construction-defect action against Kuepers and the LLC in Crow Wing County District Court. (Id. at 10; see also McCollum Aff., Ex. 4.) After amending the complaint, Interlachen's claims against Kuepers included: breach of contract; breach of statutory and implied warranties; intentional and/or negligent misrepresentation; negligence; breach of the duty of good faith and fair dealing; professional engineering and design negligence; negligent repair; and equitable estoppel. (State Court Compl. ¶¶ 33-49, 61-116.)[8] Interlachen also alleged breach of express warranties, breach of implied warranties, and negligence against the LLC. (Id. ¶¶ 50-60, 79-87.) In the amended complaint, Interlachen alleged the following under the heading “DAMAGES”:

The cost to correct the building code violations, remedy the construction defects and product failures, and repair the damage to the [Development], including the Townhomes, is believed to exceed $50, 000.00. In addition, as a result of the building code violations, construction defects, product failures, and related damage, the value of the [Development], including the Townhomes, is believed to have been impaired and diminished in an amount greater than $50, 000.00.

(Id. ¶ 32.) In the end, Interlachen produced professional estimates of between approximately $5.4 million and $5.5 million for the cost of remedying the defective construction and negligent repairs. (Aff. of Lauris A. Heyerdahl (“Heyerdahl Aff.”), Ex. G at 73, Oct. 19, 2016, Docket No. 70 (approximately $5.38 million); id., Ex. H at 1682:2-7 (approximately $5.5 million); id., Ex. J at 1280:8-15 (approximately $5.4 million).)

         Both Kuepers and the LLC notified State Auto about Interlachen's lawsuit. Kuepers tendered defense of all but the design-defect claims to State Auto.[9] State Auto provided a defense to Kuepers subject to a Reservation of Rights dated April 12, 2011. (McCollum Aff., Ex. 6 at 1.) State Auto hired the law firm Cousineau McGuire to defend Kuepers at no cost to Kuepers. (Id.) State Auto did not provide any defense to the LLC; the LLC hired its own counsel.

         On January 4, 2013, the state court granted summary judgment to the LLC and granted partial summary judgment to Kuepers. (State Court Order at 30-31.) The state court dismissed most claims as barred by the applicable statutes of limitations, including: breach of contract, breach of implied warranty, breach of express warranty, intentional and/or negligent misrepresentation, breach of the duty of good faith and fair dealing, negligence, and professional engineering and design negligence. (Id. at 20-23, 26 (citing the applicable statutes of limitations at Minn. Stat. ยงยง 515B.4-115(c), 541.051, subd. 1(a)).) The only claims that remained after summary judgment were (1) the statutory warranty claims against Kuepers based on Minn. Stat. ch. ...

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