Alleging Property Damage in Construction Defect Lawsuit

David Adelstein | Florida Construction Legal Updates

When there is a construction defect lawsuit, there is an insurance coverage issue or consideration.  As I have said repeatedly in other articles, it is all about maximizing insurance coverage regardless of whether you are the plaintiff prosecuting the construction defect claim or the contractor(s) alleged to have committed the construction defect and property damage.  It is about triggering first, the insurer’s duty to defend, and second, the insurer’s duty to indemnify its insured for the property damage.   

The construction defect claim and lawsuit begins with how the claim and, then, lawsuit is couched knowing that the duty to defend is triggered by allegations in the lawsuit (complaint).  Thus, preparing the lawsuit (complaint) is vital to maximize the insurer’s duty to defend its insured.

In a recent opinion out of the Eleventh Circuit, Southern-Owners Ins. Co. v. MAC Contractors of Florida, LLC, 2020 WL 4345199 (11th Cir. 2020), a general contractor was sued for construction defects in the construction of a custom home.  A dispute arose pre-completion and the owner hired another contractor to complete the house and remediate construction defects.   The contractor’s CGL insurer originally provided a defense to the general contractor but then withdrew the defense and filed an action for declaratory relief asking for the declaration that it had no duty to defend the contractor because the underlying lawsuit did NOT allege property damage.  The trial court agreed with the contractor and granted summary judgment in its favor finding that the underlying complaint did not allege property damage beyond defective work.  But, on appeal, the Eleventh Circuit reversed.

Among other allegations, the owner’s underlying complaint against the contractor asserted that the contractor committed defects through chipped pavers in the driveways and walkways, inconsistent paint finish, marks on ceilings, damage to exterior doors, damage to the top stair tread, damage to hardwood floors, metal roof dents, scratches in granite, holes in ceilings, etc.  The owner sought its costs to repair and remediate the defects and damage from the contractor.  In looking at whether the  contractor’s CGL insurer had a duty to defend the contractor–the insured–the Eleventh Circuit (focusing on precedent out of the Eleventh Circuit) stated:

The operative amended complaint alleged that [the contractor] used subcontractors for work on the residence and that the residence was “replete with construction defects” and various damage. It did not further allege which subcontractors performed which work or how the damage occurred. Given these ambiguities, the complaint’s allegations are broad enough to allow [the contractor] to prove that one subcontractor negligently damaged nondefective work performed by another subcontractor.  If [the contractxor] could establish that at least some of the damage arose in this way, there would be “damage apart from the defective work itself” and therefore “property damage.”


For these reasons, we conclude that the underlying operative complaint can fairly be construed to allege “property damage” within the meaning of the CGL policy and Florida law. Accordingly, the district court erred in granting summary judgment to [the CLG insurer] on this basis.

MAC Contractors of Florida, 2020 WL at *4 (internal citations omitted).

Fifth Circuit Holds Insurer Owes Duty to Defend Latent Condition Claim That Caused Fire Damage to Property Years After Construction Work

Jeremy Macklin | Traub Lieberman Straus & Shrewsberry

Most general liability policies only provide coverage for “property damage” that occurs during the policy period. Thus, when analyzing coverage for a construction defect claim, it is important to ascertain the date on which damage occurred. Of course, the plaintiffs’ bar crafts pleadings to be purposefully vague as to the date (or period) of damage to property. A recent Fifth Circuit decision applying Texas law addresses this coverage issue in the context of allegations of a condition created by an insured during the policy period that caused damage after the policy expired.

In Gonzalez v. Mid-Continent Cas. Co., 969 F.3d 554 (5th Cir. 2020), Gilbert Gonzales (the insured) was a siding contractor. In 2013, the underlying plaintiff hired Gonzales to install new siding on his house. In 2016, the underlying plaintiff’s house was damaged in a fire. The underlying plaintiff sued Gilbert in Texas state court alleging that when Gonzalez installed the siding in 2013, he hammered nails through electrical wiring and created a dangerous condition that caused a fire three years later in 2016.

At the time Gilbert performed construction work, he was insured by Mid-Continent Casualty Company. Mid-Continent disclaimed coverage to Gonzales on the basis that the complaint unequivocally alleged that property was damaged in 2016 and there were no allegations that property damage occurred prior to 2016 or was continuing in nature.

The Fifth Circuit started its analysis by acknowledging Texas’ strict eight-corners rule for determining an insurer’s duty to defend. Relying on prior Texas and Fifth Circuit decisions (Don’s Building Supply, Inc. v. OneBeacon Insurance Co.Wilshire Insurance Co. v. RJT Construction, LLC, and VRV Development L.P. v. Mid-Continent Casualty Co.), the court narrowed its focus to “actual, physical damage alleged in the underlying litigation.” The court reasoned, “[i]f the only alleged damage occurred outside of the policy period, then there is no duty to defend. But if any of the alleged damage occurred during the policy period, then the duty to defend attaches.”

The court held that the underlying lawsuit “plainly alleges physical injury to property that occurred within the policy period.” The court identified three reasons for its holding: (1) the underlying complaint stated that the 2016 fire “relates back to [the] construction and/or installation of siding” in 2013, (2) the policy defined “property damage” to include “all resulting loss of use of that property,” so damage to the wire includes damage to the entire house, and (3) the underlying plaintiff’s claim of damages alleged that “the electrical wires were damaged in 2013.”

Judge Catharina Haynes dissented, explaining that she would hold that property damaged occurred after the policy period ended, when the fire broke out in 2016. Judge Haynes agreed that the court is bound by Don’s BuildingWilshire, and VRV Development, but she emphasized that those cases also hold that when an underlying plaintiff alleges actual, physical damage due to the insured’s negligent conduct, the alleged property damage does not relate back to the time of the negligent act when determining when the property damage occurred. Judge Haynes criticized the majority for focusing on the time of the negligent conduct.

The Gonzales decision highlights the importance of analyzing each allegation in an underlying pleading to determine when any physical injury may have occurred. The dissent also leaves the door open for a different panel of Fifth Circuit judges to distinguish or reverse Gonzales.

Virtual Claims Handling Quickly Delivers Accurate Results

Susan Egeland and Sara Inman | Faegre Drinker biddle & Reath

Property and casualty insurers are integrating drones and other means of virtual claims handling as part of their routine property inspections. But, in litigation, virtual claims handling is unfairly getting a bad rap from plaintiffs’ attorneys who try to pass it off as solely a cost-cutting measure by insurers.

In actuality, virtual claims handling works to the benefit of both insureds and insurers because it allows an insurer to handle a claim sooner without compromising accuracy. The current COVID-19 pandemic is proving the value of virtual claim handling capabilities. Major metropolitan areas have “shelter-at-home” policies in place to minimize in-person contact. Even where such policies are not in place, cities across the country are practicing social distancing. Under such circumstances, an insured may not want an adjuster to come to their property to handle a claim. But, an insurer that utilizes virtual claims handling can send a drone to a property, control it remotely and capture images of damages for an adjuster to review without any in-person contact.

Some plaintiffs’ attorneys may argue drone images are not fully capable of capturing damages present on a property. However, the accuracy of such images has already been established. A virtual imagery system known as Eagleview has long been the industry standard for measuring properties by both contractors and insurers. Eagleview takes aerial, high-resolution images of properties that are so comprehensive they can be used to measure the pitch of a roof and determine the exact number of squares on a roof.

Similarly, aerial images taken by Google are detailed enough to reflect the history of repairs to a property and the general condition of a property. Through such images, one can determine whether a roof has been replaced in subsequent years, the number of metal appurtenances on the roof, whether any appurtenances have been changed and whether any new construction has been completed at the property.

Now consider that, in virtual claims handling, the images are taken in much closer proximity than aerial images. The details of any existing damages are easy to see. The skepticism regarding virtual property inspections is simply unwarranted. Virtual claims handling is the claims handling of the future, and insureds are fortunate if their insurer is one of the carriers leading the transition. This has become even more apparent under recent circumstances such as the COVID-19 pandemic.

DC Court Finds No Coverage for COVID-19 Losses Where Plaintiffs Could Not Show That Property Sustained Direct Physical Loss

Heidi Hudson Raschke | Property Casualty Focus

For going on five months, the United States has been dealing with the difficult impact of the COVID-19 pandemic, which has disrupted daily lives and sometimes devastated businesses. In looking for sources of economic recovery, businesses want to turn to their commercial property policies, but, as this blog has explained, these policies are unlikely to provide the coverage business owners seek because there must first be “direct physical loss of or damage” to the insured property. On Thursday, in Rose’s 1 LLC v. Erie Insurance Exchange, the Superior Court of the District of Columbia weighed in and confirmed the insurer’s position that there is no coverage for COVID-19 losses where the insured cannot demonstrate a direct physical loss.

The plaintiffs in the action own and operate a number of restaurants in the District of Columbia. In response to the COVID-19 pandemic, Mayor Muriel Bowser declared a state of emergency and issued a number of orders due to the “imminent hazard of or actual occurrence of widespread exposure” to COVID-19. The orders placed various restrictions on the operations of the plaintiffs’ restaurants, which were forced to close and suffered significant revenue losses. The plaintiffs sought coverage for their losses under their insurance policies issued by Erie. When their claims were denied, they filed suit, and both sides moved for summary judgment. As the court explained, “[a]t the most basic level, the parties dispute[d] whether the closure of the restaurants due to Mayor Bowser’s orders constituted a ‘direct physical loss’ under the policy.”

The plaintiffs pointed to the dictionary definitions of “direct,” “physical,” and “loss” to support three arguments. First, they argued that “the loss of use of their restaurant properties was ‘direct’ because the closures were the direct result of the mayor’s orders without intervening action.” The court noted, however, that the orders required the businesses to take certain actions. “Standing alone and absent intervening actions by individuals and businesses, the orders did not effect any direct changes to the properties.”

Second, the plaintiffs claimed their losses were “physical” because the COVID-19 virus is “material” and “tangible” and “because the harm they experienced was caused by the mayor’s orders rather than ‘some abstract mental phenomenon such as irrational fear causing diners to refrain from eating out.’” Again, the court was unconvinced. It noted that there was no evidence that the virus was actually present at any of the insured’s properties when they were forced to close. Moreover, “the mayor’s orders did not have any effect on the material or tangible structure of the insured properties.”

Third, the plaintiffs attempted to distinguish between “loss” and “damage,” arguing that they are distinct and loss incorporates “loss of use,” which does not require physical damage. Again, the court did not agree.

[U]nder a natural reading of the term “direct physical loss,” the words “direct” and “physical” modify the word “loss.” As such, pursuant to Plaintiffs’ dictionary definitions, any “loss of use” must be caused, without the intervention of other persons or conditions, by something pertaining to matter – in other words, a direct physical intrusion on to the insured property.

The court noted that Bowser’s orders “were not such a direct physical intrusion.”

After rejecting the plaintiffs’ plain language arguments, the court explained why none of the cases cited by the parties supported the plaintiffs’ arguments. The cases cited by the plaintiffs involved the finding of direct physical loss due to ammonia and gasoline fumes, which rendered the insured properties unsatisfactory or uninhabitable. See Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., No. 2:12-cv-04418, 2014 WL 6675934, at *6 (D.N.J. Nov. 25, 2014) (quoting AFLAC Inc. v. Chubb & Sons, Inc., 581 S.E.2d 317, 319 (Ga. Ct. App. 2003) (finding that the release of ammonia into a factory was a direct physical loss because it constituted “an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so”)); W. Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52, 55 (Colo. 1968) (finding direct physical loss when gasoline fumes entered a church and the fire department ordered its closure). The court noted that in the case involving a church’s closure by the fire department due to gasoline fumes, the fire department’s order “standing alone, does not in and of itself constitute a direct physical loss.” W. Fire Ins. Co., 437 P.2d at 55.

Similarly, all the cases cited by the defendant “involved some compromise to the physical integrity of the insured property.” See Port Authority of N.Y. & N.J. v. Affiliated FM Ins. Co., 311 F.3d 226, 236 (3d Cir. 2002) (presence of asbestos in building was not “physical loss” because building owner could not show real or imminent “contamination of the property such that its function is nearly eliminated or destroyed, or the structure is made useless or uninhabitable”); Motorists Mut. Ins. Co. v. Hardinger, 131 F. App’x 823, 826-27 (3d Cir. 2005) (presence of bacterium on property could constitute “direct physical loss” if it “reduced the use of the property to a substantial degree”); TRAVCO Ins. Co. v. Ward, 715 F. Supp. 2d 699, 709-10 (E.D. Va. 2010), aff’d, 504 F. App’x 251 (4th Cir. 2013) (home rendered uninhabitable by toxic gases released by defective drywall constituted “direct physical loss”); Mellin v. N. Sec. Ins. Co., 115 A.3d 799, 805 (N.H. 2015) (cat urine odor from neighboring apartment may constitute “direct physical loss” if plaintiff could show “distinct and demonstrable alteration to the unit”); Murray v. State Farm Fire & Cas. Co., 509 S.E.2d 1, 16-17 (W. Va. 1998) (landslide rendering homes uninhabitable, due to either actual physical damage or palpable future risk of physical damage from a follow-on landslide, was a “direct physical loss”); Sentinel Mgmt. Co. v. N.H. Ins. Co., 563 N.W.2d 296, 300-01 (Minn. Ct. App. 1997) (asbestos contamination in building was “direct physical loss” when “property rendered useless”).

The court further noted that courts reject coverage when a closure is not due to direct physical harm to the insured premises. See Roundabout Theatre Co. v. Cont’l Cas. Co., 302 A.D.2d 1, 7 (N.Y. App. Div. 2002) (finding that the “plain meaning of the words ‘direct’ and ‘physical’” narrowed the scope of coverage and mandated “the conclusion that losses resulting from off-site property damage do not constitute covered perils under the policy”); Newman Myers Kreines Gross Harris, P.C. v. Great N. Ins. Co., 17 F. Supp. 3d 323 (S.D.N.Y. 2014) (holding that a law firm did not suffer a “direct physical loss” when an electric utility preemptively shut off power in advance of Hurricane Sandy).

Last, the court cited to Brothers, Inc. v. Liberty Mutual Fire Insurance Co., 268 A.2d 611 (D.C. 1970), in which a restaurant sought to recover lost business income due to a curfew imposed by the D.C. government as a result of the riots following the assassination of Martin Luther King Jr. in 1968. In that case, the court of appeals interpreted “direct loss” to mean “a loss proximately resulting from physical damage to the property or contents.” There, the restaurant could not recover because its losses due to the curfew were, at best, an indirect result of the riots, not the result of physical damage. While the D.C. court agreed that the case was not directly on point, it “does support the proposition that, in the context of property insurance, the term ‘direct loss’ implies some form of direct physical change to the insured property.”

In sum, the court determined that neither the dictionary definitions of direct physical loss nor the weight of case law supported the plaintiffs’ claims for coverage. In rejecting the last of the plaintiffs’ arguments, the court noted that “even if ‘loss of use’ was covered, Plaintiffs would still have to show that the loss of use was a ‘direct physical loss.’” In addition, the lack of a virus exclusion did not impact the court’s decision. “[E]ven in the absence of such an exclusion, Plaintiffs would still be required to show a ‘direct physical loss.’” Because the plaintiffs could show no such direct physical loss, the court granted summary judgment in favor of the insurer.

This case supports a plain reading of the policy language, which requires direct physical loss or damage to trigger coverage, and follows two early rulings in favor of insurers on COVID-19 issues by the U.S. District Court for the Southern District of New York and the Pennsylvania Supreme Court. In addition, a Michigan court recently held that a virus exclusion barred coverage under the policy’s business interruption provisions for the plaintiff-restaurant’s financial losses caused by “the loss of access or use of the [plaintiff’s] premise[s] due to executive orders and the COVID-19 virus crisis” (among other reasons for there being no coverage). SeeGavrilides Mgmt. Co. v. Mich. Ins. Co., No. 20-258-CB-C30 (Mich. Cir. Ct. July 1, 2020). In making its ruling for the insurer, the Michigan court noted that the policy required direct physical loss of property or direct physical damage to property. The Michigan court, like the D.C. court, found that “the plaintiff just can’t avoid the requirement that there has to be something that physically alters the integrity of the property. There has to be some tangible, i.e., physical damage to the property.”

Coverage for Defective Work? Michigan Joins Majority

Alexander G. Thrasher and Heather Howell Wright | Buildsmart

Michigan has joined the majority of jurisdictions in holding that a general liability policy may provide coverage for claims for property damage allegedly caused by the defective work of a subcontractor. In a unanimous decision reversing the Michigan Court of Appeals, the Michigan Supreme Court held that a subcontractor’s unintentional defective work was an “accident” and, thus, an “occurrence” covered under the subcontractor’s commercial general liability (CGL) policy.

In Skanska USA Building Inc. v. MAP Mechanical Contractors, Inc., Skanska USA Building Inc. served as the construction manager on a medical center renovation project. Skanska hired defendant MAP Mechanical Contractors, Inc. (MAP) to perform heating and cooling work that included the installation of expansion joints on part of a steam boiler and piping system.  Several years after the installation, extensive damage to concrete, steel, and the heating system occurred, and Skanska determined that the cause was MAP’s incorrect installation of some of the expansion joints. Skanska repaired and replaced the damaged property at a cost of about $1.4 million and submitted a claim to MAP’s insurer, co-defendant Amerisure Insurance Company. Amerisure denied coverage for the claim, and Skanska filed suit.

The trial court denied competing summary judgment motions, and Skanska and Amerisure both filed applications for leave to appeal to the Court of Appeals. The applications were granted, and the appeals were consolidated.

The policy provided coverage for “property damage” caused by an “occurrence.” The term “occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Interpreting this language, the Michigan Court of Appeals held that summary judgment should be granted to Amerisure as “there was no ‘occurrence’ under the CGL policy because the only damage was to the insured’s own work product.” The term “accident” is not defined in the policy and the Court of Appeals, applying a definition of “accident” from Michigan appellate court precedent, reasoned that there was no “accident” and thus no “occurrence” to trigger coverage under the policy.

Skanska appealed to the Michigan Supreme Court. The Skanska Court began its review by focusing on the policy’s definition of “occurrence” as an “accident.” In doing so, the court relied on a definition of “accident” as “an undefined 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.” Amerisure contended that an “accident” must involve “fortuity,” or “something over which the insured has no control,” but the court disagreed. Instead, the court concluded that the term “accident” is both plain and broad in its meaning and a subcontractor’s faulty work may fall within the court’s definition of an “accident.” Although “fortuity” is one way to show an accident occurred, the court was steadfast that it is not the only way to do so.

The court also rejected the Court of Appeals’ conclusion that “accident” cannot include damage limited to the insured’s own work product because the policy at issue did not limit the definition of “occurrence” with any reference to the owner of the damaged property.

Finally, the court rejected Amerisure’s argument that providing coverage for the faulty subcontractor’s work would convert the insurance policy into a performance bond. The court observed: The fact that “coverage may overlap with a performance bond is not a reason to deviate from the most reasonable reading of the policy language.”

Whether faulty or defective workmanship constitutes an “occurrence” under the CGL is a state-specific question, and courts across the country are divided on this issue. While some states have held that faulty workmanship or improper construction is not an “occurrence” because it can never be an “accident,” others have held that faulty workmanship can be an “accident” if the resulting damage occurs without the insured’s expectation or foresight. The recent trend has been for courts to find that a construction defect or faulty workmanship satisfies the “occurrence” and “property damage” requirements under a general liability policy and losses sustained as a result of such defects may be covered. The Michigan Supreme Court’s decision is yet another example that the tide continues to change in favor of insureds as to whether property damage caused by defective work may be covered under a general liability policy.Print:EmailTweetLikeLinkedIn