Matthew T. Vocci – April 30, 2014
The United States Court of Appeals for the Fifth Circuit issued an opinion this month that should serve as a reminder to prime contractors to review the coverage granted to them as additional insureds on their subcontractors’ Commercial General Liability (“CGL”) policies. In Carl E. Woodward, L.L.C. v. Acceptance Indem. Co., the Fifth Circuit reviewed the standard language of a policy endorsement that provided (limited) coverage to entities added to the policy as additional insureds. At issue was the denial of defense and indemnity to a general contractor/additional insured on a concrete subcontractor’s CGL policy for construction defects discovered on a condominium building allegedly caused by the concrete subcontractor.
Ultimately, the Fifth Circuit sided with the subcontractor’s insurer and found that the insurer owed no duty of defense to the general contractor, given the language of the additional insured endorsement and that the alleged construction defects arose out of the subcontractor’s completed operations. Using typical language, the additional insured endorsement had specifically excluded coverage for damages occurring after covered operations had been completed. The endorsement at issue provided, in pertinent part:
Section II – Who is An Insured is amended to include as an insured the person or organization shown in the Schedule [general contractor], but only with respect to liability arising out of your ongoing operations performed for that insured.
With respect to the insurance afforded to the additional insured, the following exclusion is added:
This insurance does not apply to “bodily injury” or “property damage” occurring after:
All work, including materials, parts or equipment furnished in connection with such work, on the project … to be performed by or on behalf of the additional insured(s) at the site of the covered operations has been completed;….
The alleged construction defects for which the general contractor was seeking a defense related to the concrete subcontractor’s failure to build foundation piers, an atrium floor and balcony slabs in conformity with plans and specifications. These issues related to the subcontractor’s work on the project but the Court found that the general contractor’s liability did not arise out of the subcontractor’s ongoing operations. Rather, the general contractor was sued for breaching its contractual obligations to the project owner and its liability to the owner arose at the time when the owner received the completed building. Therefore, the general contractor’s loss was outside the scope of the additional insured endorsement.
For general contractors, the Woodward decision should prompt a review of additional insured endorsements. General contractors may, by contractual provision, mandate that subcontractors provide them with coverage for completed operations losses. The practical issue is that the general contractor must obtain and review the subcontractor’s additional insured endorsements to ensure that completed operations coverage has been provided.
For those who are not excited at the prospect of reviewing endorsement language, remember that an insurer-provided defense and indemnification for costly construction defect claims are well worth the front-end due diligence.