CGL Provides No Coverage for Damage to the Insured’s Work

Barry Zalma | Zalma on Insurance | March 22, 2019

Construction contracts are risk transfer devices. The owner shifts the risk of loss to the general contractor who shifts the risk of loss to subcontractors and all shift the risks of loss to their insurers. Commercial General Liability (CGL) policies agree to accept the risk of loss faced by those insured by the CGL for an “occurrence” happening during the policy period. It does not, however, provide coverage for the general costs of doing business.

In Skanska USA Building Inc. v. M.A.P. Mechanical Contractors, Inc., and Amerisure Insurance Company and Amerisure Mutual Insurance Company, Skanska USA Building Inc. v. M.A.P. Mechanical Contractors, Inc., Amerisure Insurance Company, And Amerisure Mutual Insurance Company, No. 340871, No. 341589, State of Michigan Court of Appeals (March 19, 2019) the Michigan Court of Appeals was asked to resolve a dispute over whether there was an “occurrence” as defined by the policy that required defense and indemnity.

The dispute arose from the faulty installation of parts in the steam heat system of a hospital construction project resulted in an insurance coverage dispute. The resulting damage required extensive repairs, in excess of $1 million. The insurance carrier, Amerisure Insurance Company (“Amerisure”), appealed an order denying its motion for summary disposition.

BASIC FACTS

Starting in 2008, plaintiff was the construction manager on a renovation project for Mid-Michigan Medical Center in Midland (“Medical Center” or “MMMC”). Plaintiff subcontracted the heating and cooling portion of the project to defendant M.A.P. Mechanical Contractors (“MAP”). MAP obtained a commercial general liability insurance policy (“CGL policy”) from Amerisure. Plaintiff and the Medical Center are named as additional insureds on the CGL policy.

In 2009, MAP installed a steam boiler and related piping for the Medical Center’s heating system. MAP’s installation included several expansion joints, which are designed to accommodate the expansion of the piping caused by the flowing steam. Plaintiff determined that MAP had installed some of the expansion joints backward. Significant damage to concrete, steel, and the heating system had occurred.

According to plaintiff, the cost of the repair and replacement work was approximately $1.4 million. Plaintiff submitted a claim to Amerisure seeking coverage as an insured. Plaintiff’s claim was denied.

Amerisure asserted several grounds for summary disposition, including: (1) MAP’s defective construction was not a covered occurrence within the CGL policy; (2) plaintiff failed to provide proper notice of a claim; (3) plaintiff entered into a settlement without Amerisure’s consent; and (4) several exclusions barred coverage.

The trial court denied Amerisure’s motion.

The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” However, the policy did not define the word “accident.”

Defective workmanship, standing alone, is not an occurrence within the meaning of a general liability insurance contract, an occurrence exists where the insured’s faulty work product damages the property of another.

There is no indication MAP purposefully installed the expansion joints backwards. The parties affected by MAP’s negligence did not anticipate, foresee, or expect backward expansion joints or property damage to the entire length of the underground steam and condensate lines.

ANALYSIS

The dispositive issue in this case is whether there was an “occurrence” triggering coverage. There was no genuine issue of material fact that plaintiff sought coverage for replacement of its own work product.

At issue was whether there was an “occurrence” triggering coverage. Because the policy did not define “accident,” the Court looked to a common definition of “accident,”  that anything that begins to be, that happens, or that is a result which is not anticipated and is unforeseen and unexpected by the person injured or affected thereby—that is, takes place without the insured’s foresight or expectation and without design or intentional causation on his part. In other words, an accident is an undesigned contingency, a casualty, a happening by chance, something out of the usual course of things, unusual, fortuitous, not anticipated, and not naturally to be expected.

The fortuity required is not what is commonly meant by a failure of workmanship. The court was unable to find in the policy language a reasonable basis to expect coverage for defective workmanship.

In sum, the court concluded that defective workmanship of the insured, standing alone, was not the result of an occurrence within the meaning of the insurance contract. Summary disposition was properly granted on this issue.

A fundamental tenet of Michigan jurisprudence, like that of every state, is that unambiguous contracts are not open to judicial construction and must be enforced as written. Courts enforce contracts according to their unambiguous terms because doing so respects the freedom of individuals freely to arrange their affairs via contract. The general rule of contracts is that competent persons shall have the utmost liberty of contracting and that their agreements voluntarily and fairly made shall be held valid and enforced in the courts.

The Michigan Court of Appeal noted that it is an established principle of law that an “occurrence” cannot include damages for the insured’s own faulty workmanship. Amerisure was, therefore, entitled to judgment as a matter of law because coverage was not triggered due to lack of an “occurrence” and there is no genuine issue of material fact that the only damage was to plaintiff’s own work product (rather, that of its subcontractor).

Because there is no coverage, there was no need to address whether any of the exclusions apply or whether conditions precedent were met.

ZALMA OPINION

CGL policies provide extensive coverage to its policyholders. It does not, however, cover every potentiality. It will never provide coverage for a loss that is not fortuitous, contingent or an unknown event. It will not protect the policyholder from damage caused by the policyholder’s own negligence to its own product. For that reason judgment was entered in favor of the insurer.

No Coverage for Defects in Subcontrator’s Own Work

Tred R. Eyerly | Insurance Law Hawaii | February 11, 2019

    Damage to the concrete floor installed by the insured subcontractor was not property damage and thus not covered under the insured’s CGL policy. Kalman Floor Co. v. Old Republic Gen. Ins. Corp., 2019 U.S. Dist. LEXIS 3319 (D. Colo Jan. 8, 2019). 

    In 2007, Kalman Floor Co. was subcontracted to construct over 158,000 square feet of concrete flooring for a cold storage facility. The concrete floor was completed in late 2008. In late 2009, the contractor notified Kalman that pockmarks, or “pop-outs,” were visible on the concrete flooring. The only damage to tangible property in the facility caused by the pop-outs was the concrete flooring itself.

    On January 31, 2009, Old Republic issued a general liability policy to Kalman for one year. The policy excluded for damage to “your work,” defined as “work or operations performed by you or on your behalf.” Old Republic denied coverage for damage to the concrete floor. Kalman sued, seeking a declaration that the exclusions did not bar coverage. 

    Under Tenth Circuit law, as established in Greystone Const, Inc. v. Nat’l Fire & Marine Ins. Co., 661 F.3d 1272 (10th Cir. 2011), the term “occurrence” in a CGL policy encompassed unforeseeable damage to non-defective property arising from faulty workmanship. The policy was intended to protect the insured business from claims by third parties concerning personal injury or property damage resulting from accidents. In discovery, Kalman admitted the pop-outs in the concrete floor “did not physically injure or damage any tangible property other than the floor system it installed.” Thus, under the terms of the policy, property damage did not occur. 

    Consequently, Old Republic’s motion for summary judgment was granted and the case dismissed with prejudice.

Ohio Supreme Court Bucks Recent Trend and Holds No Coverage for Construction Defects Under Commercial General Liability Policy

Heather Howell Wright | Bradley | December 2018

The insurance coverage analysis under a commercial general liability (“CGL”) insurance policy begins with the “insuring agreement.” The standard CGL policy provides coverage for “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage.’” The standard CGL policy further provides that the property damage must be caused by an “occurrence,” which is in turn defined as “an accident.” Traditionally, courts had held that a construction defect was not an “accident,” and thus losses associated with such defects or faulty workmanship were not covered under a CGL policy. However, the recent trend has been for courts to find that construction defects or faulty workmanship do satisfy the “occurrence” and “property damage” requirements for CGL coverage. Yet, a recent decision out of Ohio bucks this trend of finding that claims of faulty workmanship may be covered under a CGL policy.

In Ohio N. Univ. v. Charles Constr. Servs. Inc., the Ohio Supreme Court recently held that construction defects do not constitute an occurrence under a standard-form CGL policy, and that an insurer has no obligation to defend or indemnify claims for defective work. The underlying claim in this case involved a contract between Ohio Northern University (“Owner”) and Charles Construction Services, Inc. (“Contractor”) to build a new conference center and hotel. After the project was complete, Owner discovered extensive water damage and structural defects. Owner filed suit against Contractor, which in turn filed third-party claims against its subcontractors. Contractor tendered the defense to its insurer, Cincinnati Insurance Company (“Cincinnati”), which intervened and sought a declaration that it had no duty to defend or indemnify Contractor.

In the trial court, Cincinnati filed a motion for summary judgment on the declaratory judgment claim and asserted that claims for defective workmanship are not claims for “property damage” caused by an “occurrence.” The trial court granted Cincinnati’s motion for summary judgment, finding there was no duty to defend or indemnify for faulty workmanship.

On appeal, the Ohio Supreme Court considered the CGL policy definition of “occurrence” as an “accident including continuous or repeated exposure to substantially the same general harmful conditions.” The court opined that an accident was unexpected or unintended – involving fortuity. Because a subcontractor’s faulty work is not fortuitous, it could not satisfy the “occurrence” requirement in the CGL.

Importantly, the Ohio Supreme Court recognized that its decision conflicted with decisions in other states as well as the trend of finding coverage for construction defects – but the court explained that “[r]egardless of any trend in the law,” it was required to interpret the plain and unambiguous language of the policy. The court also noted that the Arkansas legislature had enacted a statute requiring that a CGL policy sold in Arkansas must define “occurrence” as including “property damage resulting from improper workmanship.” The Ohio N. Univ. Court noted that the Ohio General Assembly could pass similar legislation in response to the decision.

While the recent trend across the country has been for courts to find that construction defects may be covered under a CGL policy, this case may indicate a pendulum swing in the other direction. Even if it proves to be an outlier, it highlights the importance of knowing which law will apply to the interpretation of insurance policies, because the law can vary significantly from one jurisdiction to another.

Additional Insured Coverage and Primary/Excess Priority Disputes, Oh My

James W. Bryan | Nexsen Pruet | July 19, 2018

Additional insured coverage in construction projects is one of the most vexing issues facing insurance coverage lawyers. Add to the complexity a priority dispute between primary and excess insurers and you have a recipe for complex coverage litigation. Recently, the Fourth Circuit tackled these issues in the North Carolina case, Continental Casualty Company v. Amerisure Insurance Company, 886 F.3d 366 (4th Cir. 2018). The end result was not a good one for Amerisure. Amerisure, with its primary policy, got it wrong on the duty to defend additional insureds and with its excess policy, also got it wrong on the duty to indemnify. Continental obtained a judgment for over $2.3 million.

Background

In Continental, the general contractor building a hospital near Charlotte, North Carolina entered into a subcontract with a supplier/builder of the steel infrastructure. This first-tier subcontractor in turn entered into a subcontract with an erector of the steel structure, a second-tier subcontractor. During his work on the project, Dustin Miller, an employee of the second-tier subcontractor, suffered severe injuries when he tripped and fell 30 feet to the ground after his safety cable broke. At the time of the accident, the second-tier subcontractor held both commercial general liability (“CGL”) and umbrella insurance policies issued by Amerisure (the “Amerisure policies”). As required by the subcontract between first-tier and second-tier subcontractors, the Amerisure policies included the general contractor and first-tier subcontractor as “additional insureds” and provided minimum coverage limits of $2.0 million. The CGL policy provided a limit of liability of $1,000,000 per occurrence and the umbrella policy provided an additional $5,000,000 per occurrence. Additionally, the subcontract between first-tier and second-tier subcontractor stated “the insurance required of [second-tier subcontractor] must be primary and noncontributory with [first-tier subcontractor’s] Insurance program.” (Emphasis added).

In addition to its “additional insured” status under Amerisure’s policies, first-tier subcontractor held its own CGL policy issued by Continental, which included an “additional insured” endorsement covering the general contractor. The general contractor also was insured under the hospital’s “rolling owner controlled insurance program” (“ROCIP”), which provided coverage under policies issued by a separate provider. Although the terms of the ROCIP required participation by all tiers of contractors, participation was not automatic, and the general contractor did not enroll either the first-tier or second-tier subcontractor in the ROCIP. Instead, as required by an additional provision of the ROCIP, these unenrolled subcontractors maintained their own insurance coverage as previously described.

Underlying Action

As a result of the accident, Miller sued the general contractor and first-tier subcontractor for: failure to provide a safe work environment; failure to ensure that their subcontractors followed certain safety measures; failure to properly inspect certain safety features; failure to control and supervise the workplace; and failure to warn subcontractors about the lack of safety measures. Continental agreed to provide a defense to the first-tier subcontractor and the general contractor under a reservation of rights, but Amerisure declined to provide a defense, asserting coverage was barred pursuant to a controlled insurance program exclusion (“CIP exclusion”) in the Amerisure policies.

Declaratory Judgment Action

After settling the action for $1.7 million, Continental filed this declaratory judgment action in the United States District Court for the Western District of North Carolina, seeking a declaration that Amerisure be required to reimburse Continental for the entire settlement and for all of Continental’s defense costs. On motions for summary judgment, the district court held that Amerisure had breached its duty to defend the underlying action and that, under the terms of Amerisure’s policies, Amerisure was liable to reimburse Continental for the $1.7 million settlement. Finding “[e]quity dictates that the defense costs be shared equally among the two insurers,” the court ordered Amerisure to reimburse Continental for half the associated costs and fees.

Issue #1: Controlled Insurance Program Exclusion

On appeal, the first issue addressed by the Fourth Circuit was whether the CIP exclusion in the Amerisure policies excused it from defending the underlying action. The exclusion states, “This insurance does not apply to ‘bodily injury’ … arising out of … [second-tier subcontractor’s] ongoing operations … if such operations were at any time included within a ‘controlled insurance program’ for a construction project in which [second-tier subcontractor] [is] or [was] involved.” The Fourth Circuit focused on whether the “arising out of” condition was met. Under North Carolina law, courts must strictly construe the phrase “arising out of” when that phrase appears in a policy exclusion. Thus, coverage will not be denied where there is more than one cause of an injury and only one cause is excluded. Under the plain language of the CIP exclusion, only injuries arising from second-tier subcontractor’s operations were excluded, but injuries allegedly arising out of the operations of the general contractor or first-tier subcontractor were not excluded. At the time of Miller’s accident, he unquestionably was performing work for his employer while installing metal decking. However, Miller’s complaint alleged more than one potential cause of his injuries. Numerous allegations in his complaint rested on the failures of general contractor and first-tier subcontractor with respect to their supervisory role over second-tier subcontactor’s operations and safety procedures. Miller also alleged that general contractor and first-tier subcontractor, independently from second-tier subcontactor, failed to provide adequate safety equipment and procedures, causing Miller’s injuries. Regardless of the actual cause of those injuries, at the time Amerisure refused to defend the action, the allegations presented a distinct possibility that Miller’s injuries arose from the operations of the other contractors. Because Miller’s injuries arguably “arose out of” operations other than those conducted exclusively by second-tier subcontactor, the condition of the CIP exclusion was not satisfied. Therefore, the district court did not err in concluding Amerisure breached its duty to defend against the underlying personal injury action.

Issue #2: Priority and Additional Insureds

Given Amerisure’s breach of the duty to defend, the second issue before the Fourth Circuit was whether Amerisure was liable to reimburse Continental for the full $1.7 million settlement. Amerisure argued its coverage was capped at the $1.0 million limit of the CGL policy and did not reach the umbrella layer. The court disagreed.

For starters, the court rejected the argument that the second-tier subcontractor did not agree to extend the umbrella coverage to the additional insureds (i.e. general contractor and first-tier subcontractor). Simply put, the Amerisure CGL policy provided that any “additional insured” under the policy, namely, the general contractor and first-tier subcontractor, were “automatically” insureds under the umbrella policy. Plus, the Amerisure umbrella policy stated: “We will have the right and duty to defend the insured against any ‘suit’ seeking damages for such ‘bodily injury’ … when the ‘underlying insurance’ does not provide coverage or the limits of the ‘underlying insurance’ have been exhausted.” This language plainly meant (1) coverage was triggered when the Amerisure CGL policy limit had been exhausted and (2) because the settlement amount of the action exceeded the $1,000,000 limit in the Amerisure CGL policy, the umbrella coverage necessarily was triggered. The court further rejected Amerisure’s argument that its coverage was capped at the CGL policy’s $1.0 million limit. The court pointed to the umbrella policy language that “the most we will pay on behalf of the additional insured is the amount of insurance required by the contract, less any amounts payable by the underlying insurance.” In support of this rejection, the court focused on the subcontract between the first-tier and second-tier subcontractors, which plainly required the second-tier subcontractor to obtain $1.0 million in CGL coverage and an additional $1.0 million in umbrella coverage. The subcontract also stated that first-tier and second-tier subcontractors “shall be named as additional insureds on” the CGL policy of second-tier subcontractor and plainly required that second-tier subcontractor obtain $2.0 million in “minimum” CGL and umbrella coverage “with additional insured endorsement.”

The court also rejected Amerisure’s argument that Continential’s CGL policy took priority over the umbrella policy of Amerisure based on the “other insurance” provisions of both policies. In other words, Amerisure believed the Continental CGL policy should be triggered before the Amerisure umbrella policy was triggered. The “other insurance” provision of the Continental CGL policy stated: “If other valid [ ] insurance is available to [first-tier and second-tier subcontractor] for a loss we cover … our obligations are limited as follows: [ ] Primary Insurance—This insurance is primary except when … [t]his insurance is excess over: [a]ny other primary insurance available to you.” On the other hand, the Amerisure umbrella policy’s “other insurance” provision stated that the policy was “excess over … any other insurance whether primary [or] excess.” The court noted that the Amerisure umbrella policy coverage was triggered when the limit of the “underlying insurance” was exhausted and only the Amerisure CGL policy was listed as “underlying insurance” in the policy declarations. Moreover, any ambiguity arising from consideration of the “other insurance” provisions is resolved by the terms of the subcontract between first-tier and second-tier subcontractor, which required Amerisure’s policies to be “primary and non-contributory” to all other insurance provided to first-tier subcontractor, including the Continental CGL policy. The court noted that the Amerisure policies plainly refer to and incorporate the terms of the subcontract in several respects. Thus, the court held that the Amerisure umbrella policy coverage was triggered immediately upon the exhaustion of the Amerisure CGL policy and that the Continental CGL policy did not take priority over that umbrella policy.

Issue #3: Defense Costs

The third and final issue addressed by the Fourth Circuit again arose because of Amerisure’s breach of the duty to defend, namely, whether Amerisure was required to reimburse Continental for the full amount of the costs and fees incurred by Continental ($660,700) in defending the Miller action. The court held yes, reversing the district court. Key to the Fourth Circuit’s holding was the Amerisure CGL policy language that coverage afforded to an additional insured shall be “primary and without contribution” from the additional insured’s own insurance. Further, under Continental’s CGL policy, “[w]hen this insurance is excess, we will have no duty … to defend the insured against any ‘suit’ if any other insurer has a duty to defend the insured against that ‘suit.’” Thus, Continental’s CGL policy establishes that Amerisure’s CGL policy was “primary” to Continental’s “excess” CGL policy. In other words, Continental did not have an independent duty to defend.

Conclusion

There are three takeaways from this decision. First, North Carolina strictly construes the “arising out of” wording in policy exclusions, which tends to weaken the exclusions. Not many other states follow such a rule. Second, where a contract requires one party to provide additional insured coverage for the other party, courts give great weight to the terms of that contract when assessing the extent and scope of additional insured coverage provided by the insurance policy itself. This clearly applies to a contract that requires such coverage to be “primary and non-contributory” in relation to coverage under another policy. Third, where one insurer provides a defense to an insured that another insurer should have provided, there is a risk the court will require the latter to pay all legal costs and expenses incurred by the former in the defense of the insured. This can happen particularly when, as in this Continental case, the latter insurer was required to provide “primary and non-contributory” coverage for additional insureds.

Contractors: Consult Your Insurance Broker Regarding Your CGL Policy

David Adelstein | Florida Construction Legal Updates | February 10, 2018

Contractors:  do yourself a favor and consult your insurance broker regarding your commercial general liability (CGL) policy.   Do this now, especially if you subcontract out work.

CGL policies contain a “your work” exclusion.  The CGL policy is written such that it excludes “‘property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’” This exclusion will be raised in the post-completion latent construction defect scenario. (There are other exclusions that will be raised to a defect discovered during construction.)  Certain policies will contain a subcontractor exception to this “your work” exclusion.  You WANT this exception- no doubt about it so that this exclusion does not apply to work performed by your subcontractors.  Without this subcontractor exception, truth be told, this “your work” exclusion is a total back-breaker to contractors.   It will give your insurer an immediate out for many latent defect property scenarios since excluded from coverage is property damage to your work including work performed by your subcontractors.

In a recent opinion, Mid-Continent Casualty Co. v. JWN Construction, Inc., 2018 WL 783102 (S.D.Fla. 2018), an owner discovered water intrusion and damage at his property.  He sued the general contractor and the general contractor’s insurer filed a separate action for declaratory relief claiming it had NO duty to defend or indemnify its insured—the general contractor—in the underlying suit.  The court agreed because the contractor did not have the subcontractor exception to the “your work” exclusion.

If work was performed by JWN [contractor] or on JWN’s behalf-here by a subcontractor-then the “your work” exclusion applies.  Historically, insurers could be liable under commercial general liabilities policies resembling the policy in the instant case for certain types of damages caused by subcontractors….Nonetheless, insurers do possess the right to define their coverage as excluding damages arising out of a subcontractor’s defective work by eliminating subcontractor’s exceptions from the policy. An insurer is only liable for a subcontractor’s defective work when the “your work” exclusion does not eliminate coverage for work performed by a subcontractor….In conclusion, the insurance policy in this case excluded coverage for work performed not only by JWN, but also by JWN’s subcontractors.

JWN Construction, Inc., supra, at *4.

This ruling meant that the general contractor’s CGL insurer had no duty to defend or indemnify its insured—again, the contractor—for the defects or resulting water damage.  A total killer illustrating the absolute importance of the subcontractor exception to the “your work” exclusion in your CGL policy.