United States District Court, D. Minnesota
INTERLACHEN PROPERTIES, LLC, KUEPERS CONSTRUCTION, INC., and INTERLACHEN PROPERTYOWNERS ASSOCIATION, INC., Plaintiffs,
STATE AUTO INSURANCE COMPANY, Defendant.
A. HEYERDAHL, LARKIN HOFFMAN DALY & LINDGREN, LTD., FOR
A. HOOD LANGEL AND ROBERT L. MCCOLLUM, MCCOLLUM CROWLEY
MOSCHET MILLER & LAAK, LTD, FOR DEFENDANT.
MEMORANDUM OPINION AND ORDER ON DEFENDANT'S
MOTION FOR SUMMARY JUDGMENT
R. TUNHEIM CHIEF JUDGE UNITED STATES DISTRICT COURT
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 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.
THE INTERLACHEN DEVELOPMENT
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.
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); the LLC was the development's
“declarant.”(McCollum Aff., Ex. 5 (“State
Court Compl.”) ¶ 3.) Interlachen is the
association of unit-owners in the Development. (State Court
Order at 3.)
THE RELEVANT INSURANCE POLICIES
Auto provided CGL insurance coverage (under the “CGL
Policy”) to Kuepers between December 26, 2001 and
December 1, 2011. (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 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
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
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
(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
(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
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”:
(1) Work or operations performed by you or on your behalf;
(2) Materials, parts or equipment furnished in connection
with such work or operations.
(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
(Id. at 17, 19-20.)
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.)
THE CONSTRUCTION-DEFECT ACTION
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.) 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
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
Kuepers and the LLC notified State Auto about
Interlachen's lawsuit. Kuepers tendered defense of all
but the design-defect claims to State Auto. 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
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. §§
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.