UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

U.S. WEST, INCORPORATED; KIEWIT
CONSTRUCTION COMPANY;
DYNALECTRIC COMPANY,
Plaintiffs-Appellees,
                                                                   No. 96-1698
v.

AETNA CASUALTY & SURETY
COMPANY,
Defendant-Appellant.

Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
James C. Cacheris, Chief District Judge.
(CA-95-879-A)

Argued: January 28, 1997

Decided: July 16, 1997

Before ERVIN and HAMILTON, Circuit Judges, and
PHILLIPS, Senior Circuit Judge.

_________________________________________________________________

Affirmed by unpublished opinion. Senior Judge Phillips wrote the
opinion, in which Judge Ervin and Judge Hamilton joined.

_________________________________________________________________

COUNSEL

ARGUED: R. Daniel Lindahl, BULLIVANT, HOUSER, BAILEY,
PENDERGRASS & HOFFMAN, P.C., Portland, Oregon, for Appel-
lant. Douglas Leo Patin, SPRIGGS & HOLLINGSWORTH, Wash-
ington, D.C., for Appellees. ON BRIEF: Douglas G. Houser,
BULLIVANT, HOUSER, BAILEY, PENDERGRASS & HOFF-
MAN, P.C., Portland, Oregon; Roger S. Mackey, LAW OFFICES OF
WILLIAM C.E. ROBINSON, Fairfax, Virginia, for Appellant.
Andrew Bramnick, SPRIGGS & HOLLINGSWORTH, Washington,
D.C., for Appellees.

_________________________________________________________________

Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

_________________________________________________________________

OPINION

PHILLIPS, Senior Circuit Judge:

This is a diversity action in which a building owner, a general con-
tractor, and a subcontractor sued Aetna Casualty & Surety Company
(Aetna) under an "all-risk" property insurance policy for losses
incurred when large storage batteries installed by the subcontractor in
the owner's building were damaged during installation and had to be
replaced. The dispositive issue is whether the losses were excluded
from coverage under the policy. The district court, following a bench
trial, concluded that they were covered, rejecting Aetna's contention
that they were excluded under the policy's terms. On Aetna's appeal,
we affirm.

I.

In September 1988, U.S. West (Owner) and Kiewit Construction
Company (General Contractor) entered into a contract for the con-
struction of the Landmark Center in Omaha, Nebraska, a project that
included a five-story data center. Integral to the data center was an
uninterruptible power system (UPS) which was to serve as an emer-
gency power source for the Owner's data equipment. Dynaelectric
Company (Electrical Subcontractor) subcontracted to install the UPS
along with other electrical work. Critical to the UPS were 1,880 elec-
trical storage batteries. Each battery consisted of a large plastic jar

                    2
filled with sulphuric acid in which the battery plates were submerged;
each battery then weighed around 400 pounds. The data center design
called for locating the batteries on racks with several tiers of shelves.
The Electrical Subcontractor used a two-step process in installing
them. The batteries were first lifted by a hydraulically-powered cart
to the desired shelf level. They were then slid from the end of the rack
down the shelf to their intended location on the shelf. Each shelf con-
sisted of two parallel metal rails covered with plastic casings. To aid
in the sliding process, the Electrical Subcontractor covered the rails
with a lubricant, Aqua Gel II, that was designed primarily for use in
pulling wire through conduits and pipes. The Electrical Subcontractor
had previously used other wire-pulling lubricants to install batteries,
but had not before used Aqua Gel II for that purpose.

The batteries were all installed by this process between December
1990 and April 1991. In October 1991, it was discovered that some
of the batteries were cracking on their bottom surfaces and leaking
acid. Upon this discovery, the Owner invoked a warranty provision
in the general contract which bound the General Contractor to correct
all work by it or its subcontractors that was rejected by the Owner as
defective under the General Contractor's warranty. Following negoti-
ations between the General Contractor and the Electrical Subcontrac-
tor, those two agreed to share the cost of replacing all the plastic jars,
whether or not leaks had developed in particular ones. All the jars
were then removed and replaced with new ones into which the battery
plates were put, and the whole then re-installed by another company
than the Electrical Subcontractor. The total cost of replacing the bat-
teries was $626,279.95 which was fully shared, per their agreement,
by the General Contractor and the Electrical Subcontractor.

Analysis of the cracked and leaking battery jars revealed that the
combined effect of sliding the batteries and using Aqua Gel II as a
lubricant caused stress corrosion that resulted in the cracks. In partic-
ular, it was revealed that the chemical composition of Aqua Gel II
was such as to constitute a corroding agent in its interaction with the
plastic battery jars. The sliding process created scratches in the bot-
tom surfaces of the jars which made them then more susceptible to
cracking by the corrosive agent in the Aqua Gel II.

                     3
At the critical times in issue, the construction project was insured
by the "All Risk" property insurance policies issued by Aetna whose
coverage is the dispositive issue in this case. In December 1991, the
Owner, as an insured under the policies, filed with Aetna a claim for
the battery-replacement expenses. Aetna ultimately denied the claim,
taking the position that the losses involved were expressly excluded
under both the "faulty workmanship" and "latent defect" exclusion
provisions of the policies. The Owner, the General Contractor, and
the Electrical Subcontractor, each asserting that it was an insured
under the policy, then jointly brought this action to recover on the
claim denied by Aetna.1 Following a two-day bench trial, the district
court made findings of fact respecting the cause of the losses incurred
and on their basis concluded that they were excluded by neither of the
exclusion provisions relied upon by Aetna, hence were covered by the
policies' basic coverage provision, and gave judgment accordingly
against Aetna for the full amount of the claim.

This appeal by Aetna followed. Aetna challenges the district
court's interpretation of the critical exclusion provisions and certain
of the factual findings upon which the court based its application of
the provisions as so interpreted.

II.

The critical provisions of the policies are those defining their basic
coverage, the perils insured against, and two of the perils excluded,
as follows:

          6. COVERAGE

         Except as hereinafter excluded, this policy covers:
_________________________________________________________________

1 Following replacement of the batteries at the shared expense of the
General Contractor and the Electrical Subcontractor, the Owner assigned
to them jointly its right to receive payment under the insurance policies.
In the district court, Aetna contested the two contractors' status as
insureds under the policies, but does not challenge on this appeal the dis-
trict court's determination that each was an insured.

                     4
            (1) The interest of the Insured in all Real and
          Personal Property, including improve-
          ments and betterments, owned or used by
          the Insured, or hereafter constructed,
          erected, installed, or acquired, including
          while in course of construction, erection,
          installation, and assembly.

The perils that the property is insured against are described in sec-
tion 7:

          7. PERILS INSURED AGAINST

           This policy insures against all risks of direct physical loss
          or damage to property described herein . . . except as
          hereinafter excluded.

The perils excluded from coverage are stated in section 8, which
states in pertinent part:

          8. PERILS EXCLUDED

            This policy does not insure:

            ***

            B. Against loss or damage caused by .. . inherent
          vice, latent defect, wear, tear, or gradual deteriora-
          tion . . . .

            ***

            F. The cost of making good defective design specifi-
          cations, faulty materials, or faulty workmanship,
          however, this exclusion shall not apply to loss or
          damage resulting from such defective design or
          specifications, faulty material or faulty workman-
          ship.

                     5
As indicated, Aetna has relied throughout entirely upon the "latent
defect" (Par. 8.B.) and "faulty workmanship" (Par. 8.F.) exclusions
from coverage. There is no contention that coverage does not other-
wise exist under the policies. Whether either exclusion applies is
therefore dispositive of this appeal from the district court's decision
holding that neither applied. We take them in turn, after a brief sum-
mary of their function in the general structure of these all-risk prop-
erty insurance policies.

That structure is simple, though specific applications inevitably are
not. Basic coverage of these policies runs to the interests of insureds
in all of specified property, insuring against "all risks" of direct physi-
cal loss or damage to that property (as distinguished from only speci-
fied risks such as wind, fire, etc.), except as specific risks are then
expressly excluded. The policies thus turn out to cover considerably
less than all risks, with those risks less than"all" being simply identi-
fied by specific exclusion rather than by limitations upon the risks
basically covered. Where, as here, coverage under such a policy is
denied on the basis of particular exclusions, the dispositive issue is
simply whether the peril that caused the loss or damage was one
within either exclusion.

As prelude to our specific analysis of the two exclusions upon
which Aetna relies, we observe that under Virginia law,2 as generally,
where an insurance policy's coverage turns on the interpretation and
application of policy exceptions and exclusions of doubtful or ambig-
uous meaning, they are to be construed narrowly in favor of the
insured. See Rush v. Hartford Mut. Ins. Co., 652 F. Supp. 1432, 1436
(W.D. Va. 1987) (so holding in applying Virginia law); First Ameri-
can Title Ins. Co. v. Seaboard Sav. & Loan Ass'n, 315 S.E.2d 842,
845 (Va. 1984) (same); see also M.H. Lipiner & Son, Inc. v. Hanover
Ins. Co., 869 F.2d 685, 687 (2d Cir. 1989) (same; applying New York
law); Equitable Fire & Marine Ins. Co. v. Allied Steel Constr. Co.,
421 F.2d 512, 513 (10th Cir. 1970) (same; applying Oklahoma law).
_________________________________________________________________
2 Neither party challenges the district court's ruling that Virginia law
governed resolution of the dispositive issue, nor does either suggest that
in any critical respect Virginia law differs from that generally applicable
to such issues.

                     6
And relatedly, we note that, as Aetna concedes, the insurer has the
burden of proving that a loss falls within a particular policy exclusion.

A.

Aetna's primary reliance has been upon the "faulty workmanship"
exclusion under which, as indicated, coverage is excluded (subject to
one critical exception) for "the cost of making good . . . faulty work-
manship." Aetna's contention runs essentially, though with more
twists and turns, like this: The undisputed cause of loss, as found by
the district court, "was the scratching of the batteries by sliding them
on rails and use of Aqua Gel II which caused stress corrosion crack-
ing," J.A. 306; these indisputably were incidents of the Electrical Sub-
contractor's "workmanship" which, because it produced a defective
end product (the scratched and corroded batteries) was necessarily
"faulty workmanship," whose cost of "making good" is expressly
excluded from coverage. Put from a slightly different angle, Aetna
says that the essential purpose of this exclusion is to confine covered
losses to those that are "accidental" or "fortuitous" and not matters
"within the sole control of the insured." And, says Aetna, what caused
the loss here was not "accident" or "fortuity" but work methods
employed by and under sole control of the Electrical subcontractor
that were--as it turned out--"defective," hence "faulty."

The insureds, accepting Aetna's proposition that"fortuity" is dispo-
sitive of the issue, counter that fortuity exactly describes the cause of
loss here. They point to the district court's critical findings that chem-
ical incompatibilitiy of the Aqua Gel II with the plastic battery jars
was the effective cause of the loss and that this incompatibility was
unknown, and reasonably unknowable, to the Electrical Subcontrac-
tor, so that use of the substance could not be considered "faulty"
workmanship, being instead a fortuity not within the insured's con-
trol.

Aetna challenges the legal relevance of these "no-fault" findings
upon which rests the district court's ultimate finding that "fortuity"
rather than "faulty workmanship" was the cause of loss. Whether the
subcontractor was negligent or otherwise culpable as a matter of tort
law is irrelevant, says Aetna, to the application of this exclusion.3 The
_________________________________________________________________
3 To make this point, critical to its whole argument, Aetna relies heav-
ily on the undeniable proposition that all-risk property insurance is not

                     7
district court's findings of the reasonable unforeseeability of the Aqua
Gel's corrosive effect and therefore of no fault on the subcontractor's
part in its use do not support the court's legal conclusion that there
was therefore no "faulty workmanship." That there was faulty work-
manship which caused the damage is conclusively demonstrated, says
Aetna, by the undisputed fact that the product of the workmanship
was "defective" so that, by definition, the workmanship that produced
it was "defective," hence "faulty."

These opposing contentions--given here in what we believe is fair
paraphrase of much more convoluted arguments by the parties--serve
but to illustrate the ambiguity in context of the critical term, "faulty
workmanship." It all depends on the term's focus.

Aetna's argument emphasizes the undeniable "fault" or "defect" in
the end product of the workmanship, and reasons back from that: if
a "fault" or "defect" in the product resulted from the insured's work-
manship, then that "workmanship" necessarily was also "defective" or
"faulty."

The insureds, however, emphasize that the literal language of the
exclusion relates "fault" to the act of workmanship, thereby making
the exclusion's applicability dependent upon a finding of some kind
and degree of "fault," in the sense of culpability, on the part of the
workman. On that interpretation, a finding of no avoidable fault in
performance of the work, but instead of sheer "fortuity" as the cause
_________________________________________________________________
liability insurance: it provides "first-party" insurance against the risk of
damage to or loss of the insured's property, not, as does "third-party" lia-
bility insurance, against the risk of the insured's liability to third parties.
From this premise, however, Aetna's argument then takes a flatly incor-
rect next step: that all-risk property insurance, unlike liability insurance,
is therefore unconcerned with establishing culpability on any one's part,
being concerned only with establishing the cause of loss. Appellant's Br.
14-16. That proposition is of course true as to the basic coverage provi-
sions of the two types of insurance, but that is as far as it holds up.
Where, as is contended here, a property insurance policy bases an exclu-
sion from its basic coverage precisely on some person's culpability, it
necessarily is concerned with establishing culpability if the exclusion is
invoked to avoid basic coverage.

                     8
of any defect in its product, perfectly supports the legal conclusion
that there was not "faulty workmanship,"

In the face of such ambiguity, we are required by governing law
to construe the term narrowly in favor of the insureds. Doing that
here, we must accept the insured's interpretive theory that the exclu-
sion only applies if fault--some form of avoidable dereliction--can
be ascribed to the subcontractor's doing of the work at issue; that that
is what is meant by "faulty workmanship." Under that theory, the dis-
trict court's finding that "fortuity" rather than any form of avoidable
fault by the subcontractor was the cause of the loss at issue has obvi-
ous relevance, indeed is dispositive of the issue if not clearly errone-
ous. And, it is not clearly erroneous. Though made on the basis of
conflicting evidence, the court's finding of fortuity, not fault, is a
"plausible account" of that evidence, see Anderson v. City of Besse-
mer City, 470 U.S. 564, 574 (1985), that cannot, therefore, be rejected
as clearly erroneous under Fed. R. Civ. P. 52(a).

We therefore conclude that the loss at issue was not one excluded
from coverage under the basic provisions of the faulty workmanship
exclusion.4

B.

Aetna's reliance on the "latent defect" exclusion is also without
merit. As indicated, Paragraph 8.B. of the policies excludes coverage
for "loss or damage caused by . . . inherent vice, latent defect, wear,
tear, or gradual deterioration. . . ." Aetna contends that the corrosive
effect of the Aqua Gel II upon the plastic battery jars was a damage-
_________________________________________________________________
4 In view of this disposition, we do not address the insured's fall-back
argument that even if faulty workmanship were proven, the exclusion
nevertheless would not apply because of its exception of "damage result-
ing from . . . faulty workmanship." The argument specifically is that the
exclusion only applies to "the cost of making good loss or damage from
faulty workmanship" and that here the claim is not for that cost--which
would only be for replacing the Aqua Gel II--but for that incurred in
replacing the batteries that were damaged as a result of faulty workman-
ship. The district court did not address this alternative argument and,
without expressing any opinion upon it, neither will we.

                    9
causing defect which was "latent" because it was not "readily discov-
erable." The insureds contend to the contrary, the district court held,
and we agree, that as a matter of the literal language of this term, "la-
tent defects" are only those integral to the damaged property by rea-
son of its design or manufacture or construction. The corrosive effect
of the Aqua Gel II surely resulted in a "defect" in and damage to the
batteries, but it was not a defect integral to (latent in) their design,
manufacture or construction. Cf. Tzung v. State Farm Fire & Cas.
Co., 873 F.2d 1338, 1342 (9th Cir. 1989) (holding that soil expansion
damage to a building was caused by a "latent defect" in the building's
design and construction). Though, by definition, every "latent defect"
in insured property is likely to be "not readily discoverable," the con-
verse of that proposition does not follow. Not every defect that is not
readily discoverable is a "latent" one; only those not readily discover-
able that also are integral to the damaged property's design or manu-
facture or construction fit that description. The defect here does not
fit it.

We therefore conclude that, as the district court held, coverage
under the all-risk policies is not excluded by the"latent defect" exclu-
sion.

AFFIRMED

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