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Insurer must revisit 'known loss' provision in case against contractor

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An insurer's interpretation of the “known loss” provision in a commercial general liability policy may not have been correct, says an appeals court, in reversing a ruling in favor of the insurer.

Randy Kaady, a mason who operates his business in Damascus, Oregon, was awarded a subcontract for the installation of manufactured stone, which is molded concrete veneer that is shaped and painted to look like stone brick, for a multi-unit residential project, according to Thursday's ruling by the U.S. Court of Appeals for the 9th Circuit in San Francisco in Randy Kaady v. Mid-Continent Casualty Co.

Construction on the project was completed in May 2006, but in September 2006, Mr. Kaady was called back to inspect cracks in the manufactured stone and masonry caps he had installed, according to the ruling.

In December, almost three months after he had inspected the cracks, Mr. Kaady bought a CGL policy from Mid-Continent , a unit of the Tulsa, Oklahoma-based Mid-Continent Insurance Group.

In June 2007, the homeowners association for the project sued its developer, which sued the general contractor, which in turn sued all the relevant subcontractors including Mr. Kaady, alleging that portions of the structures were damaged as a result of defective workmanship.

Mr. Kaady settled the claims for an undisclosed amount and then sought indemnification from Mid-Continent. He testified he had not known about any of the damage for which he seeks indemnity: damage to the deck posts and wall sheathing behind the masonry. The insurer denied the claim.

Mr. Kaady filed suit against Mid-Continent. The U.S. District Court in Portland, Oregon, granted summary judgment to the insurer on the grounds the claim was barred by the policy's known-loss provision.

A three-judge panel of the appeals court unanimously overturned the lower court's ruling, holding that Mr. Kaady's knowledge of damage to his own work did not automatically constitute knowledge of damage to the components of the structure furnished by others.

“Rather, the correct inquiry is whether the claimed damage to the structural components was a 'continuation, change or resumption' of the cracks,” the panel said.

“If it was, Kaady's knowledge of the cracks would bar coverage of the claims damage; if not, his knowledge of the cracks wouldn't bar coverage,” said the appeals panel, in remanding the case for further proceedings.