U.S. Eighth Circuit Court of Appeals Holds No CGL Insurance Coverage for Damages Arising from Contractor’s Shoddy Work

Gregory M. Boucher | Saul Ewing Arnstein & Lehr

On May 12, 2020, the United States Eight Circuit Court of Appeals, applying Missouri law, rejected a contractor’s contention that its commercial general liability (CGL) policy provided coverage for claims arising out of the contractor’s allegedly defective construction work. See Am. Family Mut. Ins. Co., S.I. v. Mid-Am. Grain Distributors, LLC, No. 19-2050, 2020 WL 2373986 (8th Cir. May 12, 2020). The court’s decision affirmed the lower court’s summary judgment decision in favor of the insurer.

Contractor Mid-American Grain Distributors, LLC (“Mid-American”) sought a defense and indemnification under its CGL policy issued by American Family Mutual Insurance Company (the “Insurer”) in response to claims in a lawsuit alleging damages arising from “design and construction issues.” However, the CGL policy only provided coverage for an occurrence, which was defined as an accident under the policy. Under Missouri law, an accident is determined by examining whether “the insured foresaw or expected the injury or damages” and does not include “acts that result in expected or foreseeable damages.”

Reasoning that damages resulting from shoddy workmanship are foreseeable, the appellate court ruled that there was no “accident” to trigger a defense or indemnification for Mid-American. This case serves as a reminder to owners and contractors alike that a contractor’s insurance policy often does not provide coverage for damages resulting from the contractor’s defective or shoddy work.

Not so Fast – Florida’s Legislature Overrules Gindel’s Pre-Suit Notice/Tolling Decision Related to the Construction Defect Statute of Repose

Rahul Gogineni | White and Williams

As discussed in a prior blog post, in Gindel v. Centex Homes, 2018 Fla.App. LEXIS 13019, Florida’s Fourth District Court of Appeal held that when the plaintiffs provided a pre-suit notice in compliance with §558.004 of Florida’s construction defect Right-to-Cure statute, Fla. Stat. §§ 558.001 to 558.005, et. seq., they commenced a “civil action or proceeding,” i.e. an “action,” within the meaning of Florida’s construction defect Statute of Repose, Florida Statue § 95.11(3)(c). Thus, the court held that the plaintiffs commenced their action prior to the time Florida’s 10-year statute of repose period ended. In overturning the lower court’s dismissal of the action, the court found that because the Right-to-Cure statute, §558 of the Florida Statutes, sets out a series of mandatory steps that must be taken prior to bringing a judicial action, filing pre-suit notice of claim sufficiently constituted an “action” for purposes of Florida’s Statute of Repose.

For various reasons, the parties appealed the decision to the Supreme Court of Florida. In July of 2019, before the Florida Supreme Court could decide whether to hear the case, the Florida legislature passed legislation that effectively overruled the decision. To overrule the decision, the Florida Legislature modified § 558.004 of Florida’s Right-to-Cure statute to expressly state that a notice of claim served pursuant to the Right-to-Cure statute does not toll the 10-year statute of repose period for construction claims. See Fla. Stat.
§ 558.004(d).

This article serves as a good reminder that some jurisdictions have Right-to-Cure statutes and that you should take into consideration their impact on a jurisdiction’s Statute of Repose. Additionally, it is always good to stay abreast on possible changes in the law.

Contractor’s Claim for Interest on Subcontractor’s Defective Work Claim Gains Mixed Results

John J. Gazzola | ConsensusDocs

Skanska USA Bldg., Inc. v. J.D. Long Masonry, Inc., No. SAG-16-933, 2019 BL 336852, 2019 US Dist Lexis 152787 (D. Md. Sept. 9, 2019)

This case concerns calculation of a damages award to a general contractor, Skanska USA Building, Inc., on its claim for breach of contract against its masonry subcontractor, J.D. Long Masonry, Inc., arising from Long’s faulty construction of a masonry façade at a medical research facility in Baltimore. When the façade collapsed and Long failed to repair it, Skanska hired a replacement subcontractor, C.A. Lindman, to remediate Long’s defective work and filed suit against Long to recover the resulting damages. After the court granted Skanska’s motion for summary judgment as to liability, Skanska moved for summary judgment on the issue of damages, relying on the indemnification provision of the subcontract to seek compensatory damages, pre- and post-judgment interest, and litigation fees. In the subcontract, Long agreed to indemnify and hold Skanska harmless from all claims, losses, costs and expenses, including attorneys’ fees, arising before or after completion of Long’s work, caused by, arising out of, resulting from, or occurring in connection with Long’s performance of the work or breach of the subcontract.

The court first applied the terms of this provision to award Skanska compensatory damages, holding that Skanska was, as a matter of law, entitled to recover the amount of the Lindman subcontract and general conditions incurred to supervise remediation of Long’s work. The court, however, denied Skanska’s claim for pre-judgment interest on the entirety of these damages. Skanska asserted that it was entitled to pre-judgment interest on the full award, calculated from the date on which it first paid Lindman. The court disagreed, explaining that, under Maryland law, a claimant is entitled to an award of pre-judgment interest as of right only when the amount due is certain, definite and liquidated by a specific date prior to judgment. The court reasoned that, because much of the Lindman subcontract value was composed of later-executed change orders, an award of pre-judgment interest could not be uniformly calculated back to the date of Skanska’s first payment to Lindman. And moreover, because Skanska continued to withhold sums due to Lindman pending resolution of certain issues, awarding Skanska pre-judgment interest on amounts it had not yet paid would result in a “windfall” to Skanska because there was no “use of income” loss to be compensated.

The court also refused to award pre-judgment interest on Skanska’s overhead and supervisory costs, on grounds that there was no fixed, certain date on which Skanska’s claim to them became liquidated and that these damages were actually composed of costs that Skanska would have incurred regardless of Long’s beach. As such, the court awarded Skanska pre-judgment interest only on amounts actually paid to Lindman and on a “check by check” basis, or from the particular date on which each such payment was made.

Next, the court awarded Skanska its attorneys’ fees, concluding that the subcontract’s indemnification provision expressly provided for such an award because it tied payment of such fees to an action for breach and indicated that Long would indemnify Skanska for fees incurred in a suit between them. The court denied Long’s request for a reduction in the award, noting that Long’s complained-of delays arose from Skanska’s need to investigate and repair Long’s defective work in order to quantify its damages, efforts that did not “unreasonably balloon Skanska’s legal fees.”

Finally, applying federal law, the court awarded post-judgment interest on the total judgment entered against Long, calculated from the date the judgment was entered.

Potential Extension of the Statutes of Limitation and Repose for Colorado Construction Defect Claims

David McLain | Colorado Construction Litigation

On January 27th, Senator Robert Rodriguez introduced SB 20-138 into the Colorado Legislature.  The bill has been assigned to the Senate Judiciary Committee and has not yet been scheduled for its first hearing in that committee.  In short, Senate Bill 20-138, if enacted, would:

1)      Extend Colorado’s statute of repose for construction defects from 6+2 years to 10+2 years;

2)      Require tolling of the statute of repose until the claimant discovers not only the physical manifestation of a construction defect, but also its cause; and

3)      Permit statutory and equitable tolling of the statute of repose.

Colorado’s statute of repose for construction defect claims are codified at C.R.S. § 13-80-104.  In 1986, the Colorado Legislature set the statute of repose period at 6+2 years.  For the last 34 years, Colorado’s statute of repose for owners’ claims against construction professionals has been substantially the same, to wit:

(1)  (a) Notwithstanding any statutory provision to the contrary, all actions against any architect, contractor, builder or builder vendor, engineer, or inspector performing or furnishing the design, planning, supervision, inspection, construction, or observation of construction of any improvement to real property shall be brought within the time provided in section 13-80-102 after the claim for relief arises, and not thereafter, but in no case shall such an action be brought more than six years after the substantial completion of the improvement to the real property, except as provided in subsection (2) of this section.

(2)  In case any such cause of action arises during the fifth or sixth year after substantial completion of the improvement to real property, said action shall be brought within two years after the date upon which said cause of action arises.

C.R.S. § 13-80-104.

The language of SB 20-138 would amend these sections to read:

(1) (a) Notwithstanding any statutory provision to the contrary, all actions against any architect, contractor, builder or builder vendor, engineer, or inspector performing or furnishing the design, planning, supervision, inspection, construction, or observation of construction of any improvement to real property shall MUST be brought within the time provided in section 13-80-102 after the claim for relief arises, and not thereafter LATER, but in no case shall such MAY an action be brought more than six TEN years after the substantial completion of the improvement IMPROVEMENTS to the real property, except as provided in subsection (2) of this section.

(2) In case IF any such cause of action DESCRIBED IN SUBSECTION (1) OF THIS SECTION arises during the fifth NINTH or sixth TENTH year after substantial completion of the improvement IMPROVEMENTS to real property, said THE action shall MUST be brought within two years after the date upon which said THE cause of action arises.

It cannot be overstated what a devastating effect this would have on the ability of builders to provide affordable or attainable housing in Colorado.  Such a shock to the system would make insurers shy away from insuring projects more than they already do.  With the hardening of the insurance market as it is, this would certainly not help the housing crisis in Colorado.

With respect to the accrual of construction defect claims, Senate Bill 138 would change Colorado law as follows:

(b) (I) Except as otherwise provided in subparagraph (II) of this paragraph (b) SUBSECTION (1)(b)(II) OF THIS SECTION, a claim for relief arises under this section at the time the claimant or the claimant’s predecessor in interest discovers or in the exercise of reasonable diligence should have discovered BOTH the physical manifestations AND THE CAUSE of a defect in the improvement which THAT ultimately causes the injury.

Enactment of this section would legislatively overturn a long line of Colorado Appellate Court decisions, including Highline Village Assocs. v. Hersh Cos., 996 P.2d 250, 253 (Colo. App. 1999) (holding, “under the contractors’ statute, a claim accrues when a physical manifestation of a defect appears, even though its cause is not known at that time.”); United Fire Group v. Powers Elec., Inc., 240 P.3d 569, 572 (Colo. App. 2010) (stating, “we also conclude that it was not necessary to know that the defect caused the fire for the fire to be the defect’s physical manifestation.”), and; Broomfield Senior Living Owner, LLC v. R.G. Brinkmann Co., 413 P.3d 219, 226 (Colo. App. 2017) (“Accrual under CDARA, therefore, depends on the discovery of the manifestation of the defect and not its cause.”) (emphasis in the original).

Finally, with respect to equitable tolling of the statute of repose, Senate Bill 138 inserts a section, which reads:

(3) The limitations provided by this section:

(a) ARE SUBJECT TO BOTH STATUTORY AND EQUITABLE TOLLING;

There are several statutes that may toll the statute of repose, including C.R.S. 13-80-104(3), which this bill would amend to read:

(3) The limitations provided by this section:

*          *          *

(b) Shall MAY not be asserted as a defense by any person in actual possession or control, as owner or tenant or in any other capacity, of such an improvement at the time any deficiency in such an THE improvement constitutes the proximate cause of the injury or damage for which it is proposed to bring an action.

Colorado’s Common Interest Ownership Act also provides for statutory tolling for claims brought under C.R.S. § 38-33.3-311(1), which states, in pertinent part: “Any statute of limitation affecting the association’s right of action under this section is tolled until the period of declarant control terminates.”  While it is hard to conceive of a claim that would arise under this section arising out of a construction defect claim, it may be theoretically possible.

In any event, the fact that Senate Bill 138 seeks to provide for equitable tolling is a frontal assault on the Colorado Supreme Court, which previously did away with the repair doctrine, a form of equitable tolling, by stating: “”equitable tolling is not permissible where it is inconsistent with the text of the relevant statute.”  Smith v. Exec. Custom Homes, Inc., 230 P.3d 1186, 1191-1192 (Colo. 2010).  The Court concluded on this issue, stating: “equitable tolling pursuant to the repair doctrine is inconsistent with the CDARA [the Construction Defect Action Reform Act, C.R.S. § 13-20-801, et seq.] because the CDARA already provides an adequate legal remedy in the form of statutory tolling of the limitations periods under specific and defined circumstances, including during the time in which repairs are being conducted.”  Id.

It remains to be seen whether this bill gets legs at the state legislature, stay tuned in that regard.  Between this and SB 20-093, previously discussed, it appears that after quiet session in 2019, the plaintiffs’ lawyers are back at the Colorado State Capitol, with a vengeance, seeking their laundry list of legislative changes to open the tap for construction defect litigation.  Will one-way attorneys’ fees provisions and uncapping the treble damage component of the Colorado Consumer Protection Act be next?  I hope not, but this legislative session is certainly starting off with a bang.

Inadvertent Construction Defects Are an ‘Occurrence’ Under the CGL Insurance Policy

Clifford J. Shapiro | National Law Review

Whether property damage caused by defective construction work constitutes an accidental “occurrence” under the standard form Commercial General Liability (CGL) insurance policy is now highly dependent on which state’s law applies. Determining which state’s law applies to a particular construction defect claim is therefore critical and often outcome determinative. 

The current status of each’s state’s law can be found in the Barnes & Thornburg Construction Law Practice Group’s 50 state survey of the “occurrence” issue.

This article discusses some of the correct and the incorrect ways that courts are currently addressing this issue. In particular, it focuses on the failed state of the law in Illinois, a state that continues to use an incorrect and outdated analysis to determine whether construction defects constitute an “occurrence” under the CGL insurance policy. 

A majority of jurisdictions find that defective or faulty workmanship can constitute an “occurrence” under the modern day CGL insurance policy. Generally, these jurisdictions find that defective construction work that occurs unintentionally is a fortuitous “accident,” and therefore an “occurrence” within the meaning of the coverage grant in the CGL policy. Other jurisdictions find that unintentional defective work can constitute an accidental “occurrence” if the defective work causes property damage to something other than the defective work itself. In all of these jurisdictions, a policyholder can potentially trigger coverage for a construction defect claim, assuming other terms and exclusions in the policy do not apply to bar coverage.

A minority of jurisdictions still hold that construction defect claims do not, and cannot, give rise to an accidental “occurrence” within the meaning of the CGL insurance policy, and therefore refuse to provide any coverage at all for construction defect claims. This is the situation in Illinois, and frankly the law in Illinois needs to be corrected. 

Understanding ‘Occurrence’ Under the CGL Policy

The modern day CGL insurance policy contains two key parts: the coverage grant and the policy exclusions. The coverage grant broadly provides insurance coverage up to the policy limits for amounts the policyholder becomes legally obligated to pay because of “property damage” caused by an accidental “occurrence.” The CGL policy then narrows and defines the actual scope of insurance coverage for a particular claim through the many policy exclusions.

The correct legal analysis recognizes that there is an accidental “occurrence” under the CGL policy coverage grant when a claim alleges that a general contractor or subcontractor caused property damage by accidentally (not intentionally) performing faulty construction work. Whether or not coverage exists for the claim is then determined by examining the various construction-specific policy exclusions that may apply to the particular situation. 

The correct legal analysis then examines the kind of property damage at issue only as required by the analysis of the policy exclusions, and not to determine in the first instance if the claim involves an accidental “occurrence.” This is a very important difference. A threshold finding of no “occurrence” is an absolute bar to coverage, which means there is no possibility of coverage and therefore no duty to defend the policyholder against the claim. 

On the other hand, a finding that the claim involves an accidental “occurrence” then requires analysis of the claim under the policy exclusions. This often leads to a finding that there is at least potential coverage for part of the claim, and the insurance company is therefore required to provide its policyholder with a defense at the carrier’s cost. As a result, the applicable law regarding the “occurrence” issue can, and often does, dramatically affect the policyholder’s financial posture for a construction defect claim.

The Important ‘Your Work’ Exclusion

A policyholder is more likely to have coverage in jurisdictions that recognize construction defects can be an “occurrence” and properly examine the applicable policy exclusions. For example, in the completed operations context, the “your work” exclusion generally applies to bar coverage for the cost to repair or replace property damage caused by the work of the policyholder, but it also has a specific “subcontractor exception” that does not bar coverage for property damage arising out of the work of the policyholder’s subcontractors. Thus, in a jurisdiction that recognizes that construction defects can be an accidental “occurrence,” a general contractor generally will have coverage for property damage caused by the work of its subcontractors. 

While a subcontractor does not have the benefit of the subcontractor exception in the “your work” exclusion, a subcontractor can still have coverage under the correct analysis of the CGL policy if its work causes property damage to other work (i.e., property damage outside of the subcontractor’s own scope of work). The reason for this is not that the claim alleges an accidental “occurrence” because there is damage to other work. Rather, the correct conclusion is based on the “your work” exclusion, which generally excludes coverage for the cost to repair or replace the policyholder’s own defective work, but does not exclude the cost to repair or replace damage to other work.

Illinois Courts Get It Wrong

The legal framework used by the Illinois courts is fundamentally flawed. In fact, it fails to apply the terms of the CGL insurance policy as intended by the insurance companies themselves. 

Illinois decisions currently hold (incorrectly) that inadvertent construction defects cannot be an “occurrence” unless the defective work causes property damage to something other than the “project,” “building” or “structure.” Most, but not all, of these decisions address the coverage question in situations where the policy holder was a general contractor. The cases find that there can never be an “occurrence” – and that there is therefore no insurance coverage at all for the claim – if the alleged property damage was to any property within the general contractor’s scope of work. Because the general contractor’s scope of work usually includes construction of the entire building or project, this analysis finds that a CGL insurance policy provides no coverage at all to a general contractor for any claim that involves property damage to the building or project. This virtually eliminates insurance coverage for construction defect claims for general contractors. Under this analysis, there can only be insurance coverage if the claim includes property damage to something other than the project or building being constructed.

Among other things, this analysis fails to apply the “your work” exclusion as intended by the insurance contract. The correct legal analysis recognizes that there would be no reason to have an exclusion for property damage caused by the “work” of the policyholder if the “occurrence” requirement in the coverage grant did not allow any possible coverage for property damage caused by inadvertent construction defects in the first place. And there would certainly be no reason for the same exclusion to have an exception that specifically restores coverage for property damage caused by the policyholder’s subcontractors if there never could have been an accidental “occurrence” within the meaning of the policy’s coverage grant in the first place. In short, the Illinois analysis makes the “your work” exclusion essentially meaningless.

Unfortunately, the incorrect analysis is now very established in Illinois. For more than twenty years, Illinois appellate courts have repeatedly applied the incorrect analysis to deny insurance coverage for construction industry policyholders facing construction defect claims, and the Illinois Supreme Court has never decided the issue. Illinois appellate court cases continue to hold that there can never be an “occurrence” if the policyholder is a general contractor and the alleged damage was to any part of the project or building itself. As a result, Illinois decisions continue incorrectly to collapse what should be a second and separate analysis of coverage under the applicable policy exclusions (including the “your work” exclusion) into the initial threshold coverage determination of whether the claim involves an accidental “occurrence.” 

Illinois decisions also continue to disregard or fail to apply the well accepted requirement that an insurance policy must be read and interpreted as a whole. Instead of applying the “your work” exclusion as intended, Illinois decisions often simply state that the legal analysis does not need to even consider the “your work” exclusion. The decisions find that construction defect claims for property damage within the policyholder’s scope of work are simply not sufficiently “fortuitous” or “accidental” to constitute an “occurrence.” This reasoning is based on an outdated judicial gloss that is not found in the insurance policy itself. It is based on old reasoning used by certain courts and commentators before the CGL policy terms were materially changed, including in 1986. Those changes to the policy modified the exclusions (including the “your work” exclusion) to clarify that the CGL policy provides coverage for certain kinds of property damage caused by inadvertent faulty workmanship, and that the scope of that coverage is found in the policy exclusions. 

Illinois Coverage for Subcontractors: Correct Result, Wrong Analysis

Until recently, there was uncertainty whether the same incorrect “scope of work” analysis for the “occurrence” issue would be applied in Illinois to claims against subcontractors. Some federal decisions held that there could be an “occurrence” if the subcontractor’s defective work caused property damage to some other part of the project or building outside of its scope of work. But other decisions held that the subcontractor, like the general contractor, could not show the existence of any accidental “occurrence” if the claim involved property damage to any part of the entire project or building.

On March 29, 2019 the First District of the Illinois Appellate Court issued an opinion in Acuity Insurance Co. v. 950 W. Huron Condominium Association that directly answers the “occurrence” question for insured subcontractors. The decision finds that a subcontractor can have insurance coverage for an inadvertent construction defect claim under a CGL policy in Illinois if the claim involves property damage to a part of the project that is outside of the subcontractor’s scope of work. A 2017 Seventh Circuit decision in Westfield Ins. Co. v. National Decorating Service also finds that a general contractor can have coverage under its subcontractor’s insurance policy as an additional insured where the general contractor is being sued for defective work performed by its subcontractor that caused damage to property outside of the subcontractor’s scope of work.

Applying Illinois’ flawed analysis, Acuity and Westfield essentially arrive at the correct outcome for claims that involve resulting property damage caused by subcontractors – but for an absolutely wrong reason. Worse, the decisions do nothing to remedy current Illinois law that continues to deny coverage for general contractors even when the claim involves property damage that arises out of the work of subcontractors. Under that law, the general contractor who worked on the same project at issue in Acuity would not be able to obtain any insurance coverage for the loss under its own CGL policy even if the claim involved the exact same property damage caused by the same subcontractor. This is absurd, as the subcontractor exception in the “your work” exclusion should apply in this circumstance to allow coverage for the general contractor under these circumstances.

Similarly, while the insured subcontractor in the Acuity case should have insurance coverage for part of the cost to repair the property damage, it is not because the existence of property damage outside of the subcontractor’s scope of work somehow created an “occurrence.” Instead, the “occurrence” requirement in the policy was satisfied by the accidental and inadvertent nature of subcontractor’s defective work, and the scope of coverage for the claim should have been determined by the applicable policy exclusions. Here, the subcontractor’s defective work itself should be excluded from coverage under the “your work” exclusion in the subcontractor’s CGL policy. But that exclusion does not apply to the resulting property damage to the other non-defective parts of the work, including the damage that the subcontractor caused to other parts of the project. It is for this reason, and not because the claim somehow fails to allege an accidental “occurrence,” that the subcontractor has coverage for the resulting damage it caused to other parts of the project.

Will Illinois Law Ever Be Corrected? 

The Acuity case presented a rare opportunity for the Illinois Supreme Court to reconsider and correct Illinois law, but unfortunately the court recently refused to accept the opportunity to decide the case on appeal. Illinois therefore continues to have an incorrect analysis in its case law for determining whether construction defect claims are covered by the CGL insurance policy. The Illinois Supreme Court needs to consider this issue and publish a decision that finally addresses and corrects the law in Illinois, or the Illinois legislature needs to take up and pass corrective legislation.