Tred R. Eyerly | Insurance Law Hawaii | August 19, 2019
The court determined that there was coverage in a construction defect case for portions of an arbitration award. Liberty Surplus Ins. Corp. v. Century Sur. Co., 2019 U.S. DIst. LEXIS 116093 (S.D. Texas July 12, 2019).
Descon Construction contracted with the City of Edinburg, Texas, to build a library. Descon subcontracted with McAllen Steel Erectors to install the library metal roof. The roof began to leak within two months of occupancy. The leaks continued for seven years.
Edinburg sued Descon. The matter was arbitrated. The arbitration panel found that the library roof was defective, the exterior stucco system was defectively installed and certain work, including fire-caulking, had not been performed. The panel concluded that Descon was liable for breach of contract and breach of warranty. The panel determined that Edinburg was entitled to replacement of the existing roof. Further, McAllen was found to have breached its subcontract with Descon by defectively installing the roof, entitling Descon to recover $762,537 from McAllen.
Descon asked Liberty to cover the award, but Liberty refused. Liberty sued the City and McAllen’s insurer, Century, seeking declaratory relief that its policy did not cover the award. Liberty moved for summary judgment. Liberty contended that if it was liable for the award, Century had to pay under its policy with McAllen, which named Descon as an additional insured. The City cross-moved for summary judgment arguing that some of the award damages were covered and no exclusion applied. Century also cross-moved for summary judgment that its policy did not apply.
The parties agreed that defective roof and exterior stucco installations were “occurrences” under the policies. The question was whether Liberty’s policy covered only: (1) “property damage” caused by the defective roof and stucco, as Liberty and Century argued; or whether the policy covered both (1) “property damage” caused by the defective roof and stucco and (2) the costs of repairing the roof and stucco, as the City argued.
Liberty and Century argued that defective work in and of itself was not “property damage” under Texas law. Because the City sought coverage for the cost of fixing defective work, Liberty’s policy did not cover any arbitration award damages. The City responded that the cost of repairing faulty workmanship was covered if the faulty workmanship resulted in “physical injury” to “tangible property.” The City argued that the defective roof caused interior water damage and Liberty had to cover the award damages for the roof and stucco repair costs. The City also pointed out that the library would continue to sustain water damage until the roof was replaced. Therefore, Texas law required Liberty to pay for the roof replacement costs.
The arbitrators found that the library roof and stucco were themselves defective, not that they were damaged or unusable because of other defective work. The court ruled that Liberty’s policies covered the cost of repairing the ceiling tiles, as Liberty conceded, and not the costs associated with repairing or replacing the stucco or the roof.
Liberty’s motion was granted to the extent that Liberty was not liable for the stucco or roof replacement costs. The motion was denied, without prejudice, as to Liberty’s liability for ceiling tile damages. The City’s motion was denied on coverage because the policy covered only the ceiling tile damages. Century’s motion was denied as moot.