Insurer Must Defend Faulty Workmanship Claims

Tred R. Eyerly | Insurance Law Hawaii

   The court determined that the insurer improperly denied a defense for construction defect claims made against the insured. Amerisure Mut. Ins. Co. v. McMillin Tex. Homes, 2022 U.S. Dist. LEIS 40363 (W.D. Texas March 8, 2022). 

    McMillin was a developer, general contractor and home seller. It constructed multiple homes in various communities in the San Antonio area. After the homes were completed, homeowners observed defects in the artificial stucco exterior finish. After claims were lodged against McMillin, the various claims were tendered to Amerisure. Amerisure filed for declaratory judgment that it had to duty to defend or indemnify and moved for summary judgment.

    Amerisure first argued the homeowners’ faulty workmanship claims did not allege “property damage” under the policies. It argued there were no allegations that any property damage existed, but merely that the stucco suffered from construction defects. The court disagreed. Among the allegations was the statement that due to the construction defects, the homes suffered damage “not only to the exterior stucco, but also to the underlying wire lath, paper backing, house wrap, flashing, water resistive barriers, sheathing, interior walls, interior floors and/ or other property.” Consequently, the underlying claims amounted to property damage.

    The court then considered exclusions relied upon by Amerisure. Exclusions J (5) and (6) precluded coverage for faulty workmanship. Both were limited by the phrase “that particular party” of property damaged due to the insured’s work. This limitation precluded application of the exclusions to damage on other parts of the home or non-defective portions of the insured’s work. Here, several of the homeowners alleged damage to parts of the house beyond the stucco system, including interior walls, interior floors and other property. Therefore, Amerisure failed to establish as a matter of law that Exclusions J (5) and (6) prohibited coverage for the homeowners’ claims. 

    Next the court determined that Exclusion k did not apply to the construction of a building because buildings were constructed or erected, not manufactured. 

    Exclusion L, Damage to Your Work, only applied to exclude damages to the insured’s “competed” work. The underlying complaints did not specifically allege when property damage from McMillin’s work occurred. The property damage could have occurred before, during, and after completion of McMillin’s work. 

    Finally, there was a duty to defend rip and tear allegations. Amerisure asserted that the policy did not cover tear-out work performed to remove and replace the stucco system because defective work itself did not constitute covered “property damage” and any ensuing tear-out work would not qualify for independent coverage under the policies. The extent of any property damage and whether repair or removal of the stucco exterior was necessary to fix any covered damages would depend upon the facts in each instance. For the duty to defend analysis, the insured needed only to demonstrate the potential that tear-out work would be necessary. 

    The duty to indemnify could only be determined when the underlying suit was concluded.

    Consequently, Amerisure’s motion for summary judgment was denied. 

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Paying The Ultimate Premium: Does Your Insurance Cover Property Damage Or Will You Be Left Holding the Bag?

Anna-Bryce Hobson | Bradley Arant Boult Cummings

A recent decision by the Eleventh Circuit (the federal appeals court supervising trial courts in Florida, Georgia, and Alabama) sheds light on at least one way that insurers with complicated policies (and a host of exclusions) may avoid providing coverage and defense resources to insured material suppliers whose products are the focus of defect claims. In Morgan Concrete Company v. Westfield Insurance Company, Morgan Concrete (“Morgan”) agreed to supply ready-mix concrete to Georgia Concrete for Georgia Concrete’s work on a multilevel building at Clemson University. The specifications for the job required that concrete for Georgia Concrete’s scope have a specific strength (measured in PSI). During pours for the second level of the structure, Georgia Concrete encountered strength deficiencies which it attempted to remedy by ordering a higher strength ready-mix to achieve the specified PSI.

However, the strength deficiencies continued, and Georgia Concrete blamed its supplier Morgan – ultimately withholding payment and prompting Morgan to cease further deliveries and file a lien on the property. In response, Morgan asserted that the strength issues with its concrete were the result of Georgia Concrete mishandling the concrete, exposing it to high ambient temperatures, and not sampling and maintaining it in accordance with industry standards.

During this period of time, Morgan held an insurance policy through Westfield Insurance Company which included coverage for sums Morgan became legally obligated to pay as damages because of “property damage . . . caused by an occurrence.” A common phrase in CGL policies, Westfield defined “property damage” as “physical injury to tangible property, including all resulting loss of use of that property[.]”  The policy excluded property damage to the concrete itself, “property damage” to Morgan’s work, and “damages claimed for any loss, cost or expense incurred by Morgan or others for the loss of . . ., inspection, repair, replacement, [or] adjustment of Morgan’s product,. . . [or] its work.” The policy included a defense and indemnity provision, and Morgan tendered its defense of this dispute to Westfield.

Though Westfield initially provided defense for Morgan under a reservation of rights, it later withdrew because it determined there was no alleged “property damage” under the policy. Morgan sued Westfield in federal court seeking, among other things, a determination that Westfield had a duty to defend Morgan in its state court suit with Georgia Concrete. The federal court, applying Georgia law, agreed with Westfield, explaining that the alleged “property damage was [only] to [Morgan’s] concrete and not to any other component parts of the Level 2 slab or to the structure as a whole.” On appeal, the Eleventh Circuit agreed finding that Georgia law defined property damage “as damage to property that was previously undamaged” and “damage beyond mere faulty workmanship.”  As a result, the Eleventh Circuit determined that there was no trigger under the policy for Westfield to provide a defense.

This “win” for insurers highlights how crucial it is for the construction industry to understand the nuances of coverage provided under policies and actively negotiate the necessary coverage parameters.  Contractors and suppliers should understand what types of damages will trigger coverage for “property damage.” A few other principles to consider when analyzing coverage as it relates to upcoming work:

  1. Think big picture. There is a tendency to only look inwards when evaluating damages. It is important to analyze damages to other project elements and other contractors’ work– those impacts may need to be raised with the insurer.
  2. Strike a balance. It is important to defend your work and materials. It is also important toidentify and explain all potential exposure to an insurer for purposes of coverage.
  3. Reassign Risk. If there are concerns about your insurance not covering certain property damage, consider ways of reassigning that risk elsewhere in the project cycle: contract provisions, estimating factors, negotiations with suppliers/subs, waiver documents, etc.
  4. Explore with your broker buying product defect insurance.

What is or is not “property damage” in any given construction dispute will depend on the specific policy, the project, the jurisdiction, and the players, but all contractors and suppliers should be considering the above principles when contracting for insurance or claiming coverage.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Contractor Entitled to Continued Defense Against Allegations of Faulty Construction

Tred R. Eyerly | Insurance Law Hawaii

    The U.S. District Court found that the contractor was entitled to a defense in the underlying state court action. Pa. Nat’l Mut. Cas. Ins. Co. v. Zonko Builders, 2021 U.S. Dist. LEXIS 168855 (D. Del. Sept. 7, 2021).

    Zonko was the general contractor for building the Salt Meadows Townhomes Condominium. This included supervising subcontractors in the installation of siding, house wrap, and flashing in five buildings between 2005 and 2007. In 2016, Salt Meadows and its individual members (“Association”) found property damage in the condominiums.

    The Association sued Zonko in state court, alleged that resulting damages included drywall damage in ceilings or walls, flooring and carpet, water damage around window trim, rot on window frames, incorrect flashing around roofs and windows, possible ridge vent leaks, and possible foundation issues. 

    Zonko tendered to Penn National, who agreed to defend. Penn National then filed this suit and a motion for judgment on the pleadings, hoping to no longer have to pay defense costs. 

    The court first determined an occurrence was alleged in the underlying case. The policy’s Subcontractor Exception confirmed that Penn National would provide coverage for the faulty workmanship of subcontractors.  The endorsement provided coverage for “property damage” to “your work” if such “‘property damage’ is the result of work performed on your behalf by a subcontractor that is not a Named Insured.” The underlying lawsuit alleged that subcontractors performed defective work causing property damage, which constituted an occurrence.

    Further, none of the exclusions raised by Penn National applied. The “your product” exclusion was not applicable because it “your product” was defined as “goods or products, other than real property.” The underlying complaint concerned property damage to real property, not damage to Zonko’s products or equipment.

    The “contractual liability” exclusion did not bar coverage because the underlying action also plead negligent construction and respondeat superior theories. The court similarly found that the exclusions for “damage to impaired property,” “recall of products,” and “fungi or bacteria” were not applicable. 

    Therefore, Penn National’s motion for judgment on the pleadings was denied.

Eleventh Circuit Finds No “Property Damage” Where Defective Component Failed to Cause Damage to Other Non-Defective Components

Anthony L. Miscioscia and margo Meta | White & Williams

In Florida, damage caused by faulty workmanship constitutes “property damage;” however, the cost of repairing or removing defective work does not. Amerisure Mutual Insurance Company v. Auchter Company, 673 F.3d 1294 (11th Cir. 2012) (Auchter). But what happens when the cost of repairing or removing defective work results in loss of use of the tangible property which is not physically injured?

The United States Court of Appeals for the Eleventh Circuit was recently faced with this question in Tricon Development of Brevard, Inc. v. Nautilus Insurance Company, No. 21-11199, 2021 U.S. App. LEXIS 27317 (11th Cir. Sep. 10, 2021). Tricon arose out of the construction of a condominium. Tricon was hired to serve as general contractor for the project and hired a subcontractor to fabricate and install metal railings. The railings installed by the subcontractor were defective and damaged, improperly installed, and failed to meet the project’s specifications. Tricon filed an insurance claim with Nautilus Insurance Company, the subcontractor’s commercial general liability insurer, for the cost to remove and replace the railings.[1]

Relying on Auchter, the court concluded that the repair and removal of defective work does not constitute “property damage”. The court rejected Tricon’s contention that Auchter failed to consider that the repair and removal of defective components may result in a “loss of use of tangible property that is not physically injured”, and thus, qualify as “property damage”. It noted that the Auchter court held that “after interpreting the policy as a whole [and] ‘endeavoring to give every provision its full meaning and operative effect’” there was no coverage for the defective installation. The Eleventh Circuit therefore concluded that “the entire definition of ‘property damage’ in the post-1986 standard form commercial general liability policy must fail to cover the kinds of costs that Tricon incurred from its subcontractor’s deficient work.”


[1] Tricon was an additional insured under the subcontractor’s policy for liability for “property damage” caused, in whole or in part by the subcontractor’s direct or vicarious acts or omissions.

The Common Element Conundrum – When Common Elements Damage Unit Interiors

John S. Prisco | Stark & Stark

One of the most frequent hot button issues in condominium communities, particularly those with multi-residential buildings, is whether or not the association will pay to repair damage to a unit’s interior stemming from a defect or issue, such as a water leak, in the common elements. A condominium association has specific duties and obligations in maintaining the general common elements of the community for which it is responsible for operating and managing. These duties and obligations are not only spelled out in the association’s governing documents, but also are required by law. For instance, the New Jersey Condominium Act requires that the association “shall be responsible for” such things, including but not limited to, “[t]he maintenance, repair, replacement, cleaning and sanitation of the common elements.”

However, while the controlling regulations and typical governing documents of a condominium association assign responsibility for the repair and maintenance of the common elements to the association and the interior of units to the unit owner, that distinction—in practice—does not always work to resolve conflicts between associations and unit owners arising from a leaky common element.

In the most typical of circumstances, a defect or issue with a common element, such as a roof or even a section of improperly installed shingles, allows water to infiltrate the building’s common element exterior and cause damage to the interior finishings of a unit. While it may bring some solace to the unit owner that the roof has been repaired or the path of infiltration remediated, that in and of itself will not make the unit owner whole. After all, the unit owner’s property was damaged because of the common element. In these circumstances, condominium association Boards, absent guidance or controlling provisions in the governing documents, must make the determination, many times a very politically-volatile decision, as to whether the association will compensate unit owners when common elements cause damage to unit interiors.

Condominium Board of Directors could rely on the typical language in governing documents requiring unit owners to “repair and replace” damaged unit property to support their decision not to compensate a unit owner for damage stemming from common elements. However, such a stance may only exacerbate a difficult situation and may ultimately cost both parties a pretty penny. In fact, taking such an approach could result in a lawsuit not only against the association, but against the board and even board members individually for breaching their duties to properly maintain and repair the common elements. Such lawsuits are not uncommon, and New Jersey courts routinely allow unit owners to bring claims against associations for damage to unit interiors caused by common element issues.

Of course, not all damage to unit property will be the association’s fault and careful consideration must be taken when assessing these situations. It must be noted that an association will generally only be liable for damages to a unit’s interior if it is determined that the association negligently maintained or failed to repair the at-issue common elements. Additional considerations include whether the damage is covered under the unit owner’s insurance policy, the association’s policy, or can be recovered against a third-party such as the original builder or recent contractor.

Balancing these considerations can often be a daunting task, but association boards do not have to make these difficult decisions alone. Having experienced counsel on your board’s side will ensure the right decisions are made for your community.