Iowa Supreme Court Rules Consumer Fraud Judgment Not Covered by Contractor's Insurance Policy
In Dostart v. Columbia Insurance Group, 20 N.W.2d 225 (Iowa 2025), the Iowa Supreme Court held that a contractor’s insurance policy did not cover a statutory consumer-fraud verdict against it. Tyler Custom Homes entered into a construction contract with John and Deena Dostart to build them a custom-built, single-family residence in Altoona, Iowa. Disputes arose, and the Dostarts filed suit against Tyler Custom Homes and its owner, James Harmeyer, for failure to complete construction. Included in the Dostarts’ lawsuit were contract and warranty claims, as well as a statutory consumer-fraud claim under Iowa Code Chapter 714H. Tyler Custom Homes and Harmeyer asked Columbia, their commercial general liability (“CGL”) policy insurer, to defend and indemnify them under that policy. Columbia did defend them in the lawsuit under a reservation of rights. The case proceeded to a jury trial where the jury rejected the Dostarts’ contract and warranty claims, but it returned a verdict against Tyler Custom Homes and Harmeyer on the statutory consumer-fraud claim in the amount of $182,408.30 in actual damages plus $17,591.70 in exemplary damages. After the verdict, Columbia notified Tyler Custom Homes and Harmeyer that the verdict was not covered under the CGL policy, and it refused to indemnify them for the verdict. Because the Dostarts were unable to collect the judgment from Tyler Custom Homes and Harmeyer, they filed a lawsuit against Columbia seeking payment for the verdict.
The district court ruled in Columbia’s favor on the exemplary damages portion of the verdict, but ruled in the Dostarts’ favor on the compensatory damages portion. The Iowa Supreme Court granted the Dostarts’ interlocutory appeal, and it transferred the appeal to the Iowa Court of Appeals who affirmed the district court. The Iowa Supreme Court granted further review. The Supreme Court first analyzed the insurance policy and explained that it “provides coverage for ‘those sums that the insured becomes legally obligated to pay as damages because of ... “property damage” to which this insurance applies.’ The policy goes on to clarify that it ‘applies to ... “property damage” only if: ... [t]he ... “property damage” is caused by an “occurrence.”’ The CGL policy defines ‘occurrence’ as ‘an accident, including continuous or repeated exposure to substantially the same general harmful conditions.’ And it defines ‘property damage’ as ‘a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.’” It noted that in a prior case, Yegge v. Integrity Mut. Ins., 534 N.W.2d 100 (Iowa 1995), it had held that common-law fraud was not covered by a CGL policy because common-law fraud did not involve accidental conduct and so was not an “occurrence” under the policy. The district court and Court of Appeals distinguished common-law fraud from statutory fraud under Iowa Code Chapter 714H, and concluded that the latter could be covered by a CGL policy. The Supreme Court rejected that distinction.
The Supreme Court concluded that even if statutory fraud under Iowa Code Chapter 714H covered a broader range of conduct than common-law fraud, such as reckless or negligent conduct, such conduct was still not covered by a CGL policy. It first turned to a prior case, Pursell Constr., Inc. v. Hawkeye-Sec. Ins., 596 N.W.2d 67 (Iowa 1999), where it had held that “’defective workmanship standing alone, that is, resulting in damages only to the work product itself, is not an occurrence under a CGL policy.’” It concluded that the Pursell holding applied to the Dostarts’ entire statutory consumer-fraud verdict because “the Dostarts only sought damages for the very property upon which Tyler Custom Homes performed work. ‘Consequently, ... the damages here were not the result of an “occurrence” as defined in the policy, and for that reason there is no coverage.’” The Court explained that this “conclusion follows from the insurance agreement's limitation to ‘“property damage” ... caused by an “occurrence.”’ Which brings us back to Yegge. There, we emphasized that the underlying suit against the homebuilders ‘was, from beginning to end, a claim of poor performance in constructing a residence. [The plaintiffs] would convert a routine business liability policy into a performance bond, clearly a risk [the CGL insurer] did not undertake.’. Any mens rea distinction between common law fraud and statutory consumer fraud does not change this limitation on the CGL coverage.”
The Dostarts countered that their verdict was not premised on defective work, but instead on Tyler Custom Homes’ failure to complete the work. The Court concluded that distinction did not change the result because “[f]ailing to complete construction of a home is no different than needing to ‘repair ... defective workmanship that damaged only the resulting work product.’ As we explained in Pursell, where the damages sought ‘are limited to the very property upon which [the contractor] performed work,’ those are not damages to property contemplated by the policy.” In conclusion, the Court summarized, “Whether considered as part of the requirement that the conduct be an ‘occurrence’ or the requirement that the conduct cause ‘property damage,’ ‘defective [or incomplete] workmanship, standing alone, is not an occurrence under a CGL policy.’”
This decision is a bad one for both homeowners and residential contractors, both of whom have an interest in CGL insurance coverage for statutory consumer-fraud claims. Homeowners have an interest in coverage because insurance provides a reliable source of money from which homeowners can collect on their statutory consumer-fraud verdicts. Residential contractors have an interest in coverage so that they do not have to pay statutory consumer-fraud verdicts out of their own pockets, or worse, so that such verdicts do not result in bankruptcy or closing of their businesses. This case, combined with the case of Bradshaw Renovations, LLC v. Graham, 20 N.W.3d 479 (Iowa 2025), impose substantial legal and practical limits on statutory consumer-fraud claims against residential contractors. Time will tell whether those limits substantially reduce the number of such lawsuits being filed and going to trial.