Nautilus Ins. v. Farrenses and Rock & Water

INSURANCE: Coverage of $3.76 million net verdict for defectively designed & constructed disappearing floor pool at residence precluded by CGL business risk and professional liability exclusions… Molloy.

Insurance. An ingenious modern game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table. The Devil’s Dictionary, Ambrose Bierce.

So it is with the case before the Court, the balance of the insured’s comfort measured against the words of the insurance policy. This dispute arises out of construction of a “disappearing floor” pool at a residence on Big Mountain. What is at issue is whether Nautilus has a duty to indemnity Michael & Robin for the millions in damages awarded by jury. Because several exclusions bar coverage, summary judgment is granted for Nautilus.

Farrens engaged Rock & Water, an Idaho-based LLC that designs & builds swimming pools and water features, in 2014 to construct a floating or disappearing deck/floor pool & spa with features such as an infinity edge, a basin to catch the water overspilling the edge, a moveable & disappearing pool & spa deck, a waterslide, and a fire pit. Construction began in 2015 and ended in 2018. Because Rock & Water had not built a floating floor pool, to avoid paying an engineer, its owner Sean Henry designed a ballast-tank system based on information he found on YouTube. Although the system’s operation is disputed, the general idea was that the tanks would fill with air and make the floor float to create a deck and then fill with water and sink to reveal the pool. The tanks and frame used to lift the floor were made of aluminum and the floating floor was made of Ipe wood.

Although many aspects of the pool and deck were completed in 7/16, there were immediate problems with the floating floor. It would not raise or lower evenly and therefore jammed inside the pool shell, damaging the shell and wood flooring. The aluminum tanks began to corrode due to contact with chlorine. 15,000 gallons of water were released down the hill below the pool every time the floor was moved, eroding the soil and requiring installation of riprap.

Farrens sued Rock & Water in State Court in 11/18. Nautilus provided a defense under reservation. Following a 4-day trial in 3/22, the Kalispell jury awarded Farrens $4.5 million for repairs and found them 20% contributorily negligent. It also awarded $100,000 for loss use and $100,000 for emotional distress. Judgment was entered against Rock & Water in the amount of $3.76 million in damages and $11,976.49 in costs.

Rock & Water was insured 2016-18 by a Nautilus CGL policy with $2 million General Aggregate Limit (other than products/completed operations) and $1 million limit occurrence. Under the 2016 and 2017 policies, the “products/completed operations aggregate limit” is stated as “$INCLUDED.” For the 2018 policy it is stated as $2,000,000.” Farrens offered to settle for the $1 million limits twice prior to trial.

Nautilus filed this case in 12/22 seeking a declaration that there is no coverage under the policies and therefore no duty to indemnify, and that even if coverage was triggered, a number of exclusions apply. Farrens counterclaimed seeking a declaration that Nautilus has a duty to indemnify and that because it acted in bad faith in failing to settle for policy limits it is obligated to pay the judgment in excess of the limits. The parties moved for summary judgment. Farrens moved to dismiss their bad faith counterclaims.

Coverage is triggered only if there is “bodily injury” or “property damage” caused by an “occurrence.” Nautilus argues that there is no coverage because the damage was the product of defective workmanship, which is never considered an occurrence, and the damage was exclusively to Rock & Water’s work product. Farrens argue that because an occurrence includes intentional acts with unexpected results, it can apply in circumstances such as here.

Nautilus relies primarily on Phoenix Ins. v. Boland Const. (D.Mont. 2017) which involved construction delays caused by a subcontractor and which the Court stated that “Montana federal courts, applying Montana law, have concluded that defective workmanship is not considered an ‘occurrence’ under the insuring language of a CGL policy.” But no further analysis was provided, and while Phoenix cited 2 federal district court decisions, neither bolsters Nautilus’s argument.

Because there appears to be no dispute that Rock & Water’s installation of the floating pool system and its components — such as the aluminum — was an intentional act, the dispositive inquiry under Fisher (Mont. 2016) is whether it intended or expected Farrens’s damages. Applying an objective standard, the record shows that it did not intend or expect its floating floor to cause the damage. It is undisputed that Henry did not anticipate that the floor would bind when it was raised or lowered, which damaged the mechanism, the pool shell, and the Ipe wood flooring. It is also undisputed that he did not research the effect that chlorine would have on the aluminum components which caused additional damage to the spa frame and hydraulics. Although the parties disagree whether the lift system caused the pool epoxy to delaminate or whether the epoxy was simply the wrong product for this job, that damage was equally unexpected and unintended. Indeed, Rock & Water contacted the epoxy manufacturer who stated that it was not the application that caused the problem, but rather the coating had failed on other jobs in Montana.

Because Farrens’s damages arose from the unanticipated and unexpected consequence of Rock & Water’s design and work, its installation of the floating floor and its components constitutes an “occurrence” triggering coverage.

Exclusion j(5) excludes coverage for “property damage to that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the ‘property damage’ arises out of those operations.” Nautilus argues that the damage to the pool, spa, and water features is excluded because it occurred when Rock & Water was performing operations on or immediately adjacent to them. Farrens respond that “particular part” is limited to the discrete project component, not the pool area as a whole. Nautilus counters that while “particular part” is narrower than the residence, it encompasses the entire pool area in which all of Rock & Water’s work was performed. Nautilus has the better argument.

Fortney (6th Cir. 2010) held that “particular part” means “the distinct component parts of a building — things like the interior drywall, stud framing, electrical wiring or the foundation.” However, it relied on JHP (5th Cir. 2009) which focused on the fact that the faulty exterior work and retaining walls “were distinct component parts that were each the subject of separate construction processes and are severable from the interior drywall, stud framing, electrical wiring, and wood flooring.” That is not the case here. The pool shell, aluminum tanks, spa frame, and deck floor were all part of the floating floor pool system upon which Rock & Water continued to perform work until 4/18. Thus the alleged property damage was to the particular part of real property that was the direct focus of its continued operation. Coverage is therefore excluded under j(5).

Exclusion j(6) precludes coverage for “property damage to that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” “Your work” is defined as Rock & Water’s “work or operations,” “materials, parts or equipment furnished in connection with such work or operations,” or “warranties and representations made at any time with respect to the fitness, quality, durability, performance or use of ‘your work.'” Nautilus argues that this applies because “all of the awarded damages were to replace Rock & Water’s own work product (or the materials, parts and equipment used in connection with that work) because Rock and Water’s work was done incorrectly.” Farrens quibble in response that there were completed, properly installed portions of the project that were damaged: the pool shell; the aluminum tanks, frame, and hydraulic cylinders; and the Ipe wood decking. Nautilus has the better argument.

Rock & Water designed & installed all of the pool components and they needed to be replaced because of its design decisions and material choices. It installed the aluminum components without protecting them from the chlorine in the pool. While Farrens may be correct that aluminum can be used in some pools in some situations, it is undisputed that Rock & Water’s submersion of the untreated aluminum in chlorine caused it to corrode and degrade. As argued by Nautilus, “your work” includes the materials used in connection with the insured’s operations. This falls within the definition of “your work.” Similarly, as it relates to the Ipe wood decking, while Farrens may be correct that wood flooring can be an appropriate decking material in Montana, its repeated submersion under the pool water and its removal and replacement by Rock & Water while it was troubleshooting the pool lift system damaged the floor. This product was therefore once again damaged by Rock & Water’s faulty operation of the floating floor and use of the wrong material. While the pool shell is a closer question, it also falls within this exclusion as even if the epoxy was an appropriate material in some pool contexts, Rock & Water installed a component that did not stand up to the repeated raising and lowering of the nylon wheels that caused the pool shell to scar.

Farrens again unsuccessfully try to separate out the failures of what they call the “floating pool floor” from its component parts. Because the alleged property damage was a result of “your work” by Rock & Water, coverage for those damages is excluded under j(6).

The 2016 policy’s Professional Liability Exclusion excludes coverage for property damage “arising out of the rendering of or a failure to render any professional services by you, but only with respect to your providing engineering, architectural or surveying services in your capacity as an engineer, architect or surveyor.” “Professional services” includes “preparing, approving, or failing to prepare or approve shop drawings, opinions, reports, or drawing and specifications” and “supervisory or inspection activities performed as part of any related architectural or engineering activities.” The 2016 policy further states that “this exclusion does not apply to your operations in connection with construction work performed by you.” This exclusion impacts later policy years as the 2017 and 2018 policies define “property damage” to include the “continuation, change or resumption” of property damage and state that if the insured was aware of the property damage prior to the policy period, the “continuation, change or resumption” of that property damage “during or after the policy period will be deemed to have been known prior to the policy period.”

Farrens insist that “Nautilus submitted no evidence that Rock and Water acted in the capacity of an engineer, architect, or surveyor.” They also emphasize that Altius Design Group was the architect and that under the construction agreement an independent engineer was to be consulted. They argue that the exclusion requires the rendering of “professional services,” claiming that Rock & Water rendered no such services. Nautilus responds that the record shows that Rock & Water designed all of the faulty elements and “the fact that Rock and Water lacked the credentials to make these types of design and engineering decisions does not render the exclusion inapplicable. Nautilus has the better argument.

Under the plain language of this provision, coverage is excluded when a contractor acts in the capacity of an engineer or architect. As contended by Nautilus, that necessarily includes Rock & Water’s design of all the pool components that were designed & built here. Indeed, while it may have contracted only to build the pool, it is undisputed that its owner Sean Henry “said he would design the pool himself.” He then did so. (“Based on this YouTube video, Rock and Water designed a ballast tank system that consisted of nine tanks that were seven feet wide and two feet deep.”) (Emphasis added).) The fact that Henry was not qualified to perform this design or engineering function does not change the undisputed fact that he did. While Farrens may be correct that the “professional” component of these services was questionable considering that he copied an idea from YouTube, that does not alter applicability of the policy terms. He prepared drawings of the pool and a detailed list of structural components. Further, the pay schedule notes that the first 20% of the pool cost included “completion of engineering” that would “be completed in R&W WHSE.” Thus the fact that Rock & Water was not qualified to render the professional services it provided does not void application of this exclusion.

Finally, Farrens argue that per its plain terms this exclusion does not apply to Rock & Water’s construction activities. While that argument is persuasive on its face, it again fails to recognize the services that were provided. Farrens correctly note that Rock & Water performed the physical labor and installed the component parts that comprise this project. But those activities did not give rise to Farrens’s damages. The “construction exception” to the exclusion is meant to insulate a contractor from competently executing a design error when it was not responsible for that design. But Rock & Water competently installed a pool that it poorly designed itself. The professional liability exclusion bars coverage.

Nautilus takes the position that there is no coverage for the hillside erosion caused by repeated draining of the pool because the policies contain a subsidence exclusion. It excludes coverage for property damage “directly or indirectly arising out of, resulting from, contributed to, aggravated or concurrently caused by subsidence or movement of soil, land, bedrock or earth, whether natural, manmade or otherwise.” “Subsidence or movement of soil, land, bedrock or earth” includes but is “not limited to settling, bulging, shaking, sinking, slipping, shifting, eroding, rising, tilting, expanding, contracting, shrinking, instability, falling away, caving in, landslide, mudflow, flood, sinkhole, earthquake, volcano, or avalanche.” Nautilus argues that the “erosion damage” alleged by Farrens is excluded under this provision. Farrens insist that this exclusion is limited to “damage caused by erosion” as opposed to the situation here where the erosion itself is the damage. They have the better argument.

Coverage is excluded if the alleged property damage is caused by subsidence, natural or manmade. It is undisputed that a substantial amount of water ran down the hillside whenever the vanishing basin edge was full and Rock & Water attempted to move the floating floor. This flooding caused the soil below the pool to erode. Thus it is not the case where erosion of the hill below the pool caused damage to the pool foundation; rather, as Farrens argue, the subsidence is the damage. This exclusion does not bar coverage for the hillside erosion.

However, Nautilus further argues that there is no coverage for the erosion because the jury awarded no repair costs related to the hillside. Farrens argue that the jury award includes all of their losses associated with the project and if Nautilus wanted the jury to distinguish between covered and noncovered damages it could have requested special interrogatories on the verdict form. Although Nautilus responds only to the first argument, it prevails.

Farrens are generally correct that an insurer waives its right to itemize covered and noncovered damages when it fails to ask for an allocation of damages. But this is not the case where the jury heard evidence on both covered and noncovered claims and Nautilus is now asking the Court to allocate lump sum damages among those claims. Cf. Automax Hyundai (10th Cir. 2013) (“Damages are presumed to be covered unless the insurer can demonstrate an appropriate allocation.”) It is undisputed that this jury heard no evidence regarding the repair cost or cost of loss of use associated with the hillside erosion. Thus while Nautilus has the duty to indemnify Farrens for damages associated with the hillside erosion, no such damages were awarded.

Although Farrens originally pled that Nautilus acted in bad faith and is therefore on the hook for damages beyond the $1 million policy limits, they moved to dismiss those counter-claims. The issue is now moot based on the Court’s finding of no coverage. Steadele (Mont. 2011) (“Where an insurance policy excludes coverage, a third party’s bad faith claim fails as a matter of law.”).

Summary judgment is granted for Nautilus.

Nautilus Ins. v. Farrenses and Rock & Water, 45 MFR 1, 3/1/24.

Randall Colbert & Emma Mediak (Garlington, Lohn & Robinson), Missoula, and Linda Hsu (Selman Leichenger Edson Hsu Newman Moore), San Francisco, for Nautilus; Sean Frampton (Frampton Purdy Law Firm), Whitefish, for Farrenses.