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Lexstar Construction, LLC v. AGCS Marine Insurance Co.

United States District Court, D. North Dakota

August 16, 2019

Lexstar Construction, LLC, Plaintiff,
AGCS Marine Insurance Company, a foreign insurance company, Defendant.


          Charles S. Miller, Jr., Magistrate Judge.

         I. BACKGROUND

         A. The Dispute

         This case involves a dispute over insurance coverage for damage to an office building located at 43rd Avenue and Normandy Street in Bismarck, North Dakota. The damage occurred while plaintiff Lexstar Corporation, LLC (“Lexstar”) was constructing the building. While the building was under construction, Lexstar had in place an inland marine insurance policy (“Policy”) issued by defendant AGCS Marine Insurance Company (“Allianz”) that provided builder's risk coverage.

         The building is built into a hill with the ground sloping from north to south. Originally, the entire building was going to be four complete stories with the first floor extending into the side of the hill on the north side. At site, there was a couple feet of topsoil overlying a layer of glacial till below which was a claystone formation. The firm that did the geotechnical work on the project concluded that the layer of glacial till would not support the load of the foundations but that the underlying claystone formation was suitable. Because the original design called for the first floor to extend into the hill, the excavation for the foundation below most of the first floor would reach the claystone formation. The exception was in the area of the southeast portion of the building. There, the geotechnical firm recommended the glacial till be removed and replaced with engineered fill and compacted.

         Later the design of the building changed so that the first floor would not extend into the hill for the whole footprint of the building. The net result was that the foundations supporting the building where there was no first floor were going to placed at a higher elevation that did not reach the claystone. The geotechnical firm that provided the original recommendations states it was consulted by Lexstar about the change in design and that it recommended to Lexstar that, for the foundations that originally were going to rest on the claystone, the glacial till be replaced to a recommended depth with engineered fill and compacted.

         While the building was under construction, one of Lexstar's subcontractors reported deflection in certain structural steel members. An investigation revealed that at least five of nine column pad footings on the north side below the second floor experienced downward movement during construction, which, in turn, caused the partially-erected building to shift, resulting in damage to its superstructure. The investigation further revealed that six of the nine column pad footings had been placed directly on the glacial till and underlying three others was some loose fill that appeared not to have been compacted. Further, all of the footings were undersized and at least one was not in its proper location.

         Before construction could proceed further, the situation needed to repaired. According to Lexstar, the total costs for the repair (which included new foundation installations and lifting the building to the proper elevation) and for the delay in completion of the building was close to a million dollars.

         Lexstar made a demand upon Allianz for coverage. After an investigation, Allianz denied coverage, contending that any possible cause of the claimed damages was excluded under the Policy by an exclusion for earth movement (“Earth Movement Exclusion”) as well as an exclusion for faulty or defective design and workmanship. Allianz also claimed that Lexstar failed to abide by certain Policy provisions that Allianz contends are a condition precedent to payment under the Policy, i.e., the failure to give timely notice of the loss and failure to submit an appropriate sworn proof of loss.

         While there were several issues with the construction, e.g., the column pad footings being placed on soil that was not capable of supporting the load, undersized footings, and at least one footing not located in its proper location, Lexstar takes the position that the overriding problem was the column pad footings not being located on suitable soil. Hence, this will be assumed to be true for purposes of Allianz's motion for summary judgment that is now before the court.

         Further, Lexstar agrees with Allianz that there are no material facts in dispute in terms of application of the two policy exclusions invoked by Allianz. In its brief in opposition to Allianz's motion, Lexstar states in relevant part:

There really isn't much disagreement about what happened to this building and its superstructure during construction. Marc Shannon, Lexstar's expert, describes a shear failure in the underlying native soils on which the support column pads had been placed. (Shannon Expert Report dated January 23, 2018.) Notably, Shannon describes a “load induced movement” of the soils under the foundation, as opposed to some type of natural “earth movement, ” as the proximate cause of the damage to the foundation and superstructure. (Shannon Affidavit, Exhibit B, pp.1-2). He specifically notes “The damage was not caused by soil settlement, but was caused by a load induced movement due to a shear failure in the foundation soils.” Id. at p.2. In short, the weight of the building structure placed on top of native soil caused the earth to shear (and therefore move). This was NOT a situation where there was first some underground shifting or movement of the earth, such as due to underground water or some other earth-induced movement, which caused damage to the building's superstructure; instead it was weight pushing on the ground that caused the earth to “move.” It wasn't a natural changing of the soil conditions, but an externally placed force (weight) pressing on the soil which caused the steel superstructure to deflect.
Notably, no fill was discovered underneath six of the nine footings. As described by AGCS's expert Behrens in his report of March 6, 2014;
The logs indicated that six of the nine footings (E3.9, D2, C2, A2.1, B2.9, and B4.1) were placed directly on the native glacial till. The remaining three (E5.8, E2.6, and B6.2) were placed on a layer of loose fill above the glacial till.” (Waldeck Affidavit, Exhibit M, Doc. No. 21-13, p.7.)
Braun Intertec, a completely neutral engineering firm that was involved in the construction project both before and after the damages were discovered, also concluded that the cause of the structural deflection was a “combination of consolidation and localized shear failures within the glacial till because of stress overload … .” (Waldeck Affidavit, Exhibit E at p.4, ¶2., Doc. No. 21-5, p.4) Of significance is that Braun's conclusion is also that both consolidation and shear failures are due to the weight, ie. “load induced.” This overload caused, in Braun's opinion, “racking of the building's superstructure . . .” because of “unintended load paths” due to the consolidation and shear failures in the soil. This racking was “. . . negatively impacting the structure's framing system”. Id.

         So the question before the Court is whether or not losses or damages caused by shear failure of the native (not compacted fill) soils, either separately or in combination with consolidation of the soils, because of an artificial weight load placed on native soil, which causes damage to the structure of the building placed on top of the soils, is or is not within the language of the exclusions in the Builders Risk Policy. Lexstar's position is, at the very least, that the shear failure and consolidation in the underlying native soil was caused by an external force (i.e., the weight of the building), which caused damage to the building's superstructure, and that such losses are not within the language of the Builders Risk policy exclusions cited by Defendant, and therefore there is coverage.

(Doc. No. 26, pp. 8-9).

         B. The Allianz Policy

         1. Coverage and exclusions under the Policy's builder's risk form

         The relevant provisions of the Policy's standard builder's risk form that extend and exclude coverage are the following:

         A. Coverage

         1. Covered Property

         a. Covered Property means:

Property used in or incidental to construction or installation at Construction Site(s) described and identified in the Declarations ...

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