Anti-concurrent Clause and Faulty Workmanship Exclusion

Larry P. Schiffer | Squire Patton Boggs

Anti-concurrent clauses preclude coverage even where the loss is partially caused by a covered cause of loss. This clause received considerable attention in hurricane-related coverage litigation following Hurricane Katrina. In a recent case, the Eighth Circuit Court of Appeals addressed the anti-concurrent clause in the context of damage allegedly caused in part by faulty workmanship.

In Joseph J. Henderson & Sons, Inc. v. Travelers Property Casualty Insurance Co. of America, No. 18-3341 (8th Cir. Apr. 20, 2020), a contractor installed panels on a building as part of an environmental project. The panels on the roof of the building were damaged during a windstorm. The contractor sought coverage under the owner’s (city) builder’s risk policy. The insurer disclaimed coverage because of the alleged faulty workmanship by the contractor based on the policy’s exclusion for faulty workmanship. The contractor sued seeking coverage and the insurer lost its motion for summary judgment. After a jury trial, judgment was entered in favor of the the contractor finding coverage. The appeals court affirmed.

The anti-concurrent clause was contained in the external event exclusion. It provided that the insurer would not pay for losses caused by certain external events. The exclusion stated that the policy would not pay under those circumstances regardless of any other cause or event that contributed concurrently or in any sequence to the loss. The court identified this as the anti-concurrent clause, also known to many of us as an anti-concurrent causation clause.

The policy had another exclusion for faulty workmanship. This is the exclusion relied upon by the insurer. The court found it important that the faulty workmanship exclusion did not include anti-concurrent language. In fact, the court noted that the exclusion provided that it did not apply “if loss or damage by a Covered Cause of Loss results.”

In affirming the denial of summary judgment, the appellate court rejected the insurer’s argument that the faulty workmanship exclusion included an anti-concurrent provision. The court construed the exclusion to provide that the policy would not pay for damage caused by faulty workmanship, except when the damage is caused in part by a covered event, such as a windstorm. The court concluded that the faulty workmanship exclusion did not contain an anti-concurrent provision.

The court also rejected arguments that the faulty workmanship was the sole proximate cause of the damage. Instead, the court held that the faulty workmanship and the windstorm were independent causes even though the damage could not have been caused by either independently of each other. Based on the evidence, the court held that the jury could have found that the contractor’s faulty workmanship was not the sole proximate cause of the damages. Accordingly, the denial of summary judgment was affirmed.

Contractor Can’t Blame Inspector Who Failed to Note Non-Compliant Work

Stanley A. Martin | Commonsense Construction Law

An electrical contractor was supposed to run power cables through conduit, but elected on its own to run about 40% of the power cable with flexible metal-clad (MC) cable, without conduit. For a large portion of the project, Army Corps of Engineers inspectors made no comment about use of the MC cable. But then an electrical inspector for the Corps visited the site, and directed removal and replacement of the MC cable.

The contractor made a claim for $415,120 in additional costs of this work, which was denied by the contracting officer.

The contractor’s first argument on appeal, that the contract was ambiguous, failed. The Armed Services Board of Contract Appeals held that the specifications clearly required use of conduit for power cable.

The second argument is that the Corps should have noticed the use of MC cable. Thus, its failure to stop the contractor was either a signal that the Corps agreed with the contractor’s interpretation of the specs, or else that the Corps had waived the contract requirements.

The Corps’ failure to note the improper installation until the project was nearing completion, per the ASBCA, was “troubling, to say the least.” But it was the contractor’s obligation to meet the specs in the first instance. And “absent affirmative misconduct,” the Corps’ failure to note the improper installation did not bar the Corps from later demanding removal and replacement of the improper material.

This outcome is consistent with standard contract language. Common contract templates provide that the owner’s or architect/engineer’s failure to identify non-compliant work is no excuse for a contractor who has failed to properly perform the work. See, e.g., AIA A201-2017 § 9.6.6 (payment does not constitute approval of non-conforming work), and § 13.3.2 (no act or failure to act of owner or architect shall mean approval of improper work).

This confirms what contractors should expect: failure of an inspector to identify improper work does not let the contractor off the hook. The case is Appeal of Watts Constructors, LLC, ASBCA No. 61493 (Mar. 19, 2020).

Some Insurers Dismissed, Others Are Not in Claims for Faulty Workmanship

Tred R. Eyerly | Insurance Law Hawaii

    The insured Developer survived a motion to dismiss by one of several carriers who were asked to defend against claims for faulty workmanship. East 111 Assoc. LLC v. RLI Ins. Co., 2019 N.Y. Misc. LEXIS 5331 (Oct. 4, 2019).

    Developers sponsored a residential condominium project and sold all units. The owners subsequently sought damages for $881,450 for alleged design and construction defects, and asserting causes of action for, among other things, breach of contract, specific performance and negligence. The underlying action settled for $350,000. Developers sought coverage from its insurers. 

    The Developers sued the carriers for a declaratory judgment that they were entitled to a defense. Developers had a CGL policy issued by Mt. Hawley. Developers were also additional insureds in policies issued to subcontractors by James River, Admiral and Selective. The insurers moved to dismiss. 

    The insurers’ breach of contract exclusion precluded coverage for “property damage . . . arising directly or indirectly out of . . . (a) Breach of express or implied contract; (b) Breach of express or implied warranty . . .” Developers argued that the owners’ cause of action for negligence did not fall within this exclusion. However, the negligence cause of action alleged – as did the breach of contract – that Developers constructed the building with design and construction defects and not in accordance with the offering plan. Since all of the alleged “property damage arose directly or indirectly” from Developers’ alleged breach of express or implied contract by their failure to deliver a building free of defects, the underlying action fell within the breach of contract exclusions. Therefore, motions to dismiss by James River, Admiral, and Mt. Hawley were granted.

    The Developers were additional insureds under the Selective policy issued to Walsh, a subcontractor. The underlying complaint carried the possibility that Walsh’s allegedly fault workmanship damaged other parts of the building – which was not, as a whole, Walsh’s work – an “occurrence” giving rise to “property damage” could exist under the Selective policy. Accordingly, the alleged water damage triggered Selective’s duty to defend Developers. 

Contractor Entitled to Defense for Alleged Faulty Workmanship of Subcontractor

Tred R. Eyerly | Insurance Law Hawaii

    Applying Nevada law, the Federal District Court in Florida found that the general contractor was entitled to a defense of claims based upon alleged faulty workmanship of a subcontractor. KB Home Jacksonville LLC v. Liberty Mutual Fire Ins. Co, 2019 U.S. Dist. LEXIS 151235 (M.D. Fla. Sept 5, 2019).

    KB Home completed six residential developments utilizing various subcontractors. One subcontractor was Florida State Plastering, LLC (FSP) for installing stucco. Eighty-eight complaints against KB Home implicated FSP’s stucco work. Plaintiffs alleged that the stucco subcontractor’s work suffered from construction defects, causing damages not only to the exterior stucco, but also the underling wire lath, paper backing, house wrap, wood sheathing, interior walls, interior floors and other property. 

    Ironshore insured FSP under a CGL policy. KB Home was an additional insured for liability for property damage caused by “your work.” KB Home was also insured under its own CGL policy with Liberty Mutual. Both insurers refused to defend.

    KB Home filed suit for a declaratory judgment. Liberty Mutual then agreed to defend. Ironshore argued that KB Home was not entitled to partial summary judgment because there were material facts in dispute. The court concluded that the underlying complaints alleged “property damage,” caused by an “occurrence” of FSP’s allegedly faulty workmanship. Further, there were allegations of damage to property other than FSP’s own work. The underlying complaints alleged that FSP’s faulty stucco installation caused damage to paper backing, house wrap, wood sheathing, interior walls and interior floors. 

    Ironshore next argued it still had no duty to defend because Liberty Mutual was providing KB Home a defense. The court disagreed. The presence of multiple insurers did not excuse any single insurer from fully defending the insured. Therefore, KB Home’s motion for partial summary judgment was granted to the extent Ironshore had a duty to defend. 

Endorsements Preclude Coverage for Alleged Faulty Workmanship

Tred R. Eyerly | Insurance Law Hawaii

    The court found coverage for alleged faulty workmanship was barred by the Combination Construction Related Endorsement and Roofing Endorsement. Evanston Ins. Co. v. A&S Roofing, 2019 U.S. Dist. LEXIS 142828 (W.D. Okla. Aug. 22, 2019).

    In 2010, A&S entered into a subcontract with the contractor to replace roofs on three buildings owned by Oklahoma Property Investors (OPI). Eagle was a subcontractor of A&S that installed the roofing. After the roofs were replaced, OPI filed suit against A&S, alleging that A&S provided 15-year warranties for the roofing work performed on the three buildings and that A&S breached each warranty by performing the work in a poor manner, resulting in failures to each of the roofs. OPI sought monetary relief including damages to its properties, of its tenants, and costs of repairs to its properties. 

    A&S’s insurer, Evanston, denied coverage. Evanston pointed to the”legally obligated to pay” language of the CGL policy and argued coverage only extended to tort-based claims. Evanston argued the OPI lawsuit did not allege any tort claims, only warranty claims arising from contract. Second, Evanston contended the alleged “poor craftsmanship” giving rise to the claims in the OPI lawsuit that did not constitute an “occurrence” under the policy. 

    A&S argued that OPI’s claims sounded in negligence. The court found that the OPI lawsuit alleged claims that arguably sounded in both contract and tort. Although the word “negligence” did not appear in the complaint, the claims alleged a breach of warranty due to the work being performed in “a poor craftsmanship like manner” and sought damages proximately caused by the poor performance of that work, i.e., damage to OPI’s properties (other than costs of repair or replacement) and damage to the property of OPI’s tenants. Such proximately-caused damages sounded in tort. Evanston was entitled to a declaratory judgment that it had no duty to indemnify with respect to the contract-based claims. But because the OPI lawsuit included allegations which rose the potential of liability with respect to tort-based claims, Evanston was not entitled to a declaratory judgment that the “legally obligated to pay” coverage language applied to relieve Evanston of its duty to defend.

    Regarding an “occurrence,” faulty workmanship gave rise to an occurrence where, as here, the work was not that performed by the insured but by a subcontractor of the insured, the property damage was not caused by purposeful neglect or knowingly poor workmanship and the damage included damage to the non-defective work product of the contractor and damage to the third-party property. Here, the undisputed factual record showed that Eagle, a subcontractor of A&S, installed the roofing. Accordingly, the court denied Evanston’s summary judgment motion on grounds no occurrence triggered coverage. 

    But the Combination General Endorsement exclusion barred coverage for breach of contract. Further, the Roofing Endorsement precluded coverage for operations involving membrane roofing. Evanston’s expert had found that membrane roofing was installed on the OPI buildings. Therefore, Evanston had neither a duty to indemnify nor a a duty to defend and was entitled to summary judgment.