by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)
If ever a lawyer should have been awarded points for creativity, Diaco Construction, Inc. v. Ohio Security Ins. Co. is the case where it should have happened. It is an insurance coverage dispute, but don’t stop reading just because of that. The underlying facts are interesting and the insured’s lawyer’s arguments, though ultimately unsuccessful, were creative.
The facts in Diaco were summarized succinctly by the Appellate Division:
Plaintiff . . . lost an excavator in the Elizabeth River in the course of constructing concrete headwalls and outlets for stormwater runoff pursuant to its contract with the City of Elizabeth. [Plaintiff’s] employee was operating the excavator on the riverbank when he sensed it slipping into the river. Trying to avert disaster, the operator turned the machine and tried to drive it across the river. The effort was not a success as the excavator got stuck three-quarters of the way across. Although nothing leaked into the river from the wreck, the excavator was a total loss and it cost [Plaintiff] over $300,000 to remove it a week later following oral demand by the City and the Department of Environmental Protection.
Plaintiff’s insurance company paid $95,000 for loss of the excavator and $28,750 for debris removal. Plaintiff then made a claim with its carrier for the balance. The carrier denied the claim and plaintiff sued. The normal, mind-numbing review of insurance policy language followed.
Plaintiff’s policy covered “bodily injury” or “property damage.”
Property damage was defined as: (1) “physical injury to tangible property, including all resulting use of loss of that property;” and (2) “[l]oss of use of tangible property that is not physically injured.”
But the policy did not cover “property damage” to either property that Plaintiff was working on or any property that had to be “restored, repaired or replaced” because of work plaintiff “incorrectly performed on it.”
The policy also did not cover damage to “impaired property,” which was tangible property, other than plaintiff’s property or plaintiff’s work, that could not be used or was less useful because plaintiff failed to fulfill the terms of its contract or agreement, and that could not be restored to use by the repair or removal of plaintiff’s work or property. (Believe it or not, the actual definition is even more confusing than this summary.)
Plaintiff argued that the Elizabeth River was tangible property and the “presence of the excavator” in it therefore constituted “physical injury to tangible property.” Plaintiff also argued that the presence of the excavator in the river amounted to a trespass and interference with navigation, which caused loss of use even if nobody “tried to navigate the river while the excavator remained stuck.” As a result, plaintiff argued, the excavator in the river qualified as “property damage” under its policy with defendant, and defendant should have compensated plaintiff for all costs associated with removing the excavator from the river.
Plaintiff also argued that the “impaired property” exclusion did not apply because the river was “owned by the citizens of New Jersey,” not the City, plaintiff’s contracting partner.
Plaintiff also argued that the exclusion related to property plaintiff was working on did not apply because plaintiff was not working on the river itself.
Defendant, not surprisingly, disagreed with these arguments. Unfortunately for Plaintiff, the trial court sided with defendant, as did the Appellate Division.
The trial court held:
(1) There was no “physical injury” because the river was not “detrimentally altered.” Its “appearance, shape, color, and dimension remained exactly the same” notwithstanding the presence of the excavator. “Once the excavator was removed, nothing was required to repair any damage or harm to the river because no damage or harms was done.” .
(2) Even if there were “physical injury,” both the “impaired property” and “damage to property” exclusions would apply. The former applied because, “immediately upon the excavator’s removal from the river [i.e., the removal of plaintiff’s property], [the river] was immediately restored to its prior condition.” And the latter applied because “plaintiff was performing work on the river itself when the excavator got stuck and plaintiff’s work was ongoing when the accident occurred.”
The Appellate Division concurred with the trial court, adding only the following:
Plaintiff simply could not establish property damage under the terms of the [ ] policy. Assuming the river constituted tangible property, the excavator’s temporary stalled presence therein inflicted no more physical injury on the river than the excavator would have inflicted on the ground had it broken down along the bank and had to be towed away.