The Ninth Circuit upheld a Washington federal court's no-coverage decision over a contractor's $2.66 million settlement relating to faulty retaining walls it constructed, agreeing Wednesday that a "sudden and accidental" exception in an "impaired property" exclusion did not apply to reinstate coverage for one wall that had failed.

Affirming summary judgment for Bitco General Insurance Co., a divided three-judge panel found in its unpublished decision that the insured contractor, Inland Co., already conceded in its summary judgment motion that "the property that was the subject of the loss — the complete parcel — falls within the definition of 'impaired property.'"

The exclusion barred coverage for property that is rendered "less useful" because of Inland's defective work. The "sudden and accidental" exception, meanwhile, reinstated coverage for "loss of use of other property arising out of sudden and accidental physical injury to 'your product' or 'your work' after it has been put to its intended use."

But regardless of which party bears the burden of establishing if the exception applies, the majority found it doesn't nevertheless, further highlighting that "sudden and accidental" under Washington law generally means "unexpected and unintended."

"Under this inquiry, we ask whether Inland, the insured, 'subjectively expected or intended' that wall 4 would fail," the majority continued, referring to the specific retaining wall at issue in the litigation. "We conclude that there is no genuine dispute of material fact that Inland knew and expected that wall 4 would fail before it ultimately failed in January 2019."

According to court filings, the coverage dispute dates back to the summer of 2018, when the property owner, Union Ridge Ranch LLC, hired Inland to construct retaining walls and perform other concrete work on its property, so that URR could sell the property to a home developer.

When URR first attempted to make a sale in October 2018, the prospective buyer commissioned a geotechnical analysis of the project, which identified "numerous defects" with Inland's work, which were not limited to the retaining walls, the district court's decision states. After the prospective buyer walked away from the deal in November 2018, URR met with Inland later that month to discuss the project. Inland ultimately agreed to work with URR on a lower contract price.

By January 2019, URR and Inland discovered that wall four had failed, requiring a full redesign and rebuild. In February 2019, a second geotechnical analysis showed that the retaining walls were still defective.

The next month, Inland filed four lien claims on the property after it said URR refused to properly pay it, later suing URR in state court in April 2019. URR was ultimately able to sell the property in June 2019 to a buyer for a reduced price in order to account for repairs of the retaining walls.

In its July 2019 answer to Inland's lawsuit, URR asserted breach of contract and negligence counterclaims, arguing that Inland's faulty work prevented it from selling the property at a profit. It sought over $2 million in damages.

URR and Inland ultimately reached a settlement in March 2021 for $2.66 million, where URR agreed to not seek recovery against Inland and the contractor further assigned its insurance rights against Bitco to URR. Bitco did not participate in the settlement discussions.

The insurer then kicked off the coverage litigation in August 2022, arguing it owed no coverage for the settlement under the separate commercial general liability and umbrella policies it issued to Inland.

U.S. District Judge Benjamin H. Settle ultimately sided with Bitco's summary judgment bid in August 2024. Both Inland and URR appealed the decision thereafter.

On Wednesday, the panel's majority further rejected Inland's and URR's position that the district court erred by relying on URR's underlying counterclaims, finding that it was entitled to do so under the Ninth Circuit's 1996 decision in Huey v. Honeywell Inc.

"And besides, URR and Inland do not dispute the relevant facts upon which the district court relied and cite the core undisputed facts in their opening brief," they added, determining that Inland and URR were "well aware of problems with Wall 4 before it ultimately failed, and thus that its failure was not unexpected."

In her dissent, U.S. Circuit Judge Morgan Christen agreed that whether Inland expected wall four's failure is the "correct inquiry," but that she was "unable to find evidence in the record that supports the majority's conclusion."

"Bitco offered no evidence in support of its motion for summary judgment, and it conceded at oral argument that it was not sure that evidence as to this point exists in the record," Judge Christen said. She added that the majority's reliance on Huey v. Honeywell Inc. and other cases establish that URR's underlying counterclaims "may serve as evidence of facts, even though the counterclaims cannot be invoked as binding judicial admissions."

While the parties do not dispute that the November 2018 meeting took place, Judge Christen found the record does not establish when Inland was made aware of issues with wall four, saying she would in turn reverse the district court's judgment and remand the case back for further proceedings.

For its part, the majority wrote in a footnote that it is "undisputed" that the purpose of the November 2018 meeting was to discuss issues identified in a report from a geotechnical consulting firm that the first potential buyer hired.

They added that two consultants hired by URR "were the ones who originally designed the retaining walls and were overseeing Inland's construction work in real time, so their testimony about obvious issues with the wall during construction further supports Inland's notice prior to its failure."

A representative of Bitco declined to comment.

Representatives of Inland and URR did not immediately respond to a request for comment.

U.S. Circuit Judges Morgan Christen, Daniel A. Bress and Lawrence VanDyke sat on the panel for the Ninth Circuit.

Bitco is represented by John A. Husmann and Gustavo A. Otalvora of BatesCarey LLP and by Ian M. Leifer of Gordon Thomas Honeywell LLP.

URR is represented by Michael J. Vial of VF Law.

Inland is represented by Douglas M. Bragg of Millard & Bragg Attorneys at Law PC.

The case is Bitco General Insurance Corp. v. Union Ridge Ranch LLC et al., case numbers 24-6473 and 24-6474, in the U.S. Court of Appeals for the Ninth Circuit.