News: CJ Exclusives

Appeals Court Rules in Inspection Case

Judges say governmental immunity doesn’t apply in Gaston case

RALEIGH – A Gaston county couple won a significant legal battle earlier this month in their attempt to recover damages from the county for failing to discover serious defects in a house they had hired a contractor to build.

A ruling by the state’s second-highest court rejected a motion by the county to have the couple’s lawsuit dismissed because of governmental immunity.

In August 2006, Patrick and Terri Cowell sued Gaston County, claiming the county’s building inspectors had failed to catch serious code and safety violations during the construction of a house they had hoped to occupy. Because of the defects, the house was unfit for occupation.

Suing a local government in North Carolina is not a simple matter. Counties are ordinarily immune from a lawsuit for negligence, including negligence by their employees exercising governmental functions. Counties can, however, waive their immunity to lawsuit by purchasing liability insurance.

Gaston County had liability insurance, but still moved to have the Cowells’ lawsuit dismissed, claiming that the county’s insurance did not cover building inspections. Superior Court Judge J. Gentry Caudill rejected the county’s claim of governmental immunity and ruled the Cowells lawsuit should come to trial. Gaston County contested Caudill’s determination, and brought the matter before the Court of Appeals.

Specifically at issue before the appeals court was the wording of an insurance policy that Gaston County bought from Zurich North America issued through the Northern Insurance Company of New York. The policy states includes a number of exceptions, of which only one might apply. It states: “Exclusion – engineers, architects or surveyors professional.”

The insurance does not apply to bodily injury, property damage, personal injury, or advertising injury “arising out of the rendering of or failure to render any professional services by you or any engineer, architect or surveyor who is either employed by you or performing work on your behalf in such capacity.”

Professional services include:

1. The preparing, approving, or failing to prepare or approve, maps, shop drawings, opinions, reports, surveys, field orders, change orders, or drawings and specifications; and

2. Supervisory, inspection, architectural or engineering activities.

Gaston County argued that since the term “inspection” was included in the exclusion, this exclusion applied and consequentially it hadn’t waived its government immunity for building inspections. It also separately contended that the “you” in the phrase “professional services by you or any engineer, architect or surveyor who is either employed by you or performing work on your behalf in such capacity” broadens the exceptions beyond engineers, architects, and surveyors to cover building inspections.

The Court of Appeals was unimpressed by these arguments. One of the most basic rules of interpreting insurance contracts is that because the insurance company chose the wording, any resulting ambiguities must be constructed against it. And the appeals court, like the trial court, found the wording ambiguous.

“However, both the caption of the endorsement, and its effective language could be interpreted by a reasonable insured to mean the exclusion applied only to professional engineers, architects or surveyors, whether permanent employees of Gaston County, or otherwise retained by Gaston County,” Judge Barbara Jackson wrote for the Court of Appeals.

“We note that all of the listed ‘professional services’, including ‘inspection’, are services performed by engineers, architects and surveyors.

“Defendant’s interpretation of the endorsement would leave Zurich with broad discretion in deciding what professional services could be denied coverage, and leave the insured unable to discern the limits of its coverage. Using this interpretation, it is unclear how the contracting parties could have had any meaningful meeting of the minds as to what services were and were not excluded.”

The appeals court also noted that the county had previously claimed its insurance policy did not exclude building inspections. Indeed, Assistant County Manager Bill Beasley even went a step further in a deposition taken in early 2005, stating that he didn’t believe building inspections were a “professional service” as defined by the insurance contract.

“Having offered Beasley as not only a reasonable person, but one of its employees most qualified to interpret the contested insurance policies, defendant may not now argue the opposite,” Jackson wrote.

N.C. Court of Appeal decisions are binding interpretations of state law unless over-ruled by the N.C. Supreme Court. Because the decision by the three-judge panel of the appeals court was unanimous, the high court can decline to take the case should Gaston Court decide to challenge the appeals court’s ruling.

The case is Cowell v. Gaston Co., (07-1434).

Michael Lowrey is an associate editor of Carolina Journal.