Delaware District Court Finds CGL Insurer Owes Condo Builder a Duty to Defend Faulty Workmanship Claims — Based on the Subcontractor Exception to the Your Work Exclusion

Anthony Miscioscia and Laura Rossi | White and Williams

On September 7, 2021, in one of the few decisions addressing the scope of coverage for faulty workmanship under Delaware law, the Delaware District Court denied an insurer’s motion seeking a declaration that it neither needed to defend nor indemnify an insured-builder under a commercial general liability policy.

In this declaratory judgment action, Pennsylvania National Mutual Casualty Insurance Company v. Zonko Builders, the insurer argued that the ongoing underlying action failed to properly plead an “occurrence” in a case alleging damages to a condominium caused by faulty workmanship involving subcontractors.* Zonko Builders (Zonko) served as the general contractor, supervising subcontractors. The Condominium Association sued Zonko for damages allegedly resulting from design and construction deficiencies. The motion was opposed by the Condominium Association, which cross-moved for partial judgment on the pleadings.

In AE-Newark Associates, L.P. v. CNA Insurance Companies2001 Del. Super. LEXIS 370 (Del. Super. Ct. Oct. 2, 2001), the Delaware Superior Court found that an insured was entitled to coverage for damages arising from a faulty roof system installed by a subcontractor on behalf of the insured general contractor.

Although the CGL policy at issue defined an “occurrence” as an accident, the policy also contained an endorsement providing that damages because of property damage to “your work” shall be deemed to be caused by an “occurrence” if the damage was performed on the insured’s behalf by a subcontractor. Nonetheless, the insurer argued that it owed no coverage because faulty workmanship is not an occurrence.

Relying on the 20-year old holding in AE-Newark Associates, as well as a number of out-of-state opinions, the Delaware District court in Zonko noted:“[w]hile we are mindful Delaware Courts have rejected a definition of ‘occurrence’ which includes faulty workmanship, we note no Delaware court analyzed the interplay of subcontractor exceptions and the term ‘occurrence.’” The court went on to explain that “if the Policy does not cover subcontractors’ faulty work, the Policy’s Your Work Exclusion need not specifically except subcontractors’ work. Such an interpretation contravenes Delaware law by rendering the Subcontractor Exception mere surplusage.” Thus, the court found that the Policy’s endorsement provided support to the fact that the definition of “occurrence” included subcontractors’ faulty work.

The court denied the motion as to the insurer’s duty to indemnify and dismissed the Condominium Association’s counterclaims, concluding that the Association lacked standing and the duty to indemnity issue was still unripe.

The Zonko opinion provides insurers with cautionary guidance that, in drafting an exclusion, an insurer may unwittingly provide an insured or court with ammunition to argue/find that the insuring agreement is otherwise broader than the insurer perhaps intended.

Address ‘Your Work’ Exposure Within CPrL Policies With Faulty Workmanship Coverage

Joseph Reynolds | Construction Executive

New faulty workmanship coverage forms have emerged to potentially address the “your work” exposure found in most contractors professional liability (CPrL) policies. Once offered by only a single carrier, several insurers have recently entered the marketplace to cover the cost to repair or replace faulty work or the related material costs associated with the “self-performed work” of general and trade contractors. 

Commonly serving as a separate insuring agreement and offered in carrier-specific CPrL policies, faulty workmanship coverage forms are designed to protect contractors from the “your work” claims triggered by project owners and other third parties. This includes the contractor’s workmanship as well as the equipment, parts and materials such as steel beams, epoxy activators and anchor bolts used to perform construction work.

Insureds should be aware that exclusions and strict conditions apply. For instance, faulty workmanship policies typically do not cover resulting bodily injury and property damage and some policies even exclude project delays and other business risks that can arise from the claims of unhappy customers. Another potentially confusing issue is the scope of coverage offered under a ‘faulty work’ endorsement. While some faulty workmanship enhancements are specifically-designed to cover “your work,” claims, others may only cover the products manufactured or fabricated by the insured and not the work they perform or install.

Another issue is that contractors often are so focused on the potential value of faulty workmanship coverage that they neglect to consider other prevailing exposures such as professional liability and pollution liability. For instance, the moment a contractor subs out work, performs construction management or delegates or performs in-house design, the risk management or coverage emphasis may shift towards professional liability exposures rather than the value of faulty workmanship coverage. In other words, the quality and breadth of the professional liability coverage may be even more critical to a general contractor or large trade contractor than that of a faulty workmanship insuring agreement covering only self-performed work, particularly those professional liability policies that provide carvebacks for coverage of faulty workmanship claims that arise out of negligent provision of professional services (e.g., construction management). 

Contractors should always assess what professional services (e.g. design assist, value engineering, management of subs, etc.) and construction activities they are performing during the course of their business as well as the overlaying exposures presented with the coverage grants provided under a faulty workmanship or professional liability policy. 

Here are some examples of where a typical faulty workmanship policy could benefit the insured: 

  • An electrical contractor installed the entire electrical and audio-visual systems for a large office building, but failed to see that the plans/specs require (per the building code) that all of the wiring must run through conduits as opposed to running freely through the wall cavities. All of the wiring had to be torn out and replaced to comply with code. The cost to repair and replace is in the hundreds of thousands of dollars. 
  • A flooring contractor installed exotic hardwood flooring. After installation, the hardwood floors started to warp and pop as a result of the contractor failing to acclimate the wood to the humidity and temperature of the building. All of the floors had to be ripped out and replaced.
  • A masonry contractor failed to properly compact the underlying sand and gravel base of a bluestone dining patio install at a restaurant. Further, the drainage layout was improperly laid out and installed. Over the course of a wet winter, the patio heaved and caused cracking and undulations in the patio. As a result, the entire patio had to be torn out, appropriate drainage and compaction applied and stone re-laid costing tens of thousands of dollars. 
FAULTY WORKMANSHIP COVERAGE FORMS

True faulty work coverage forms are currently available from nearly five carriers as part of a blended contractor’s errors and omissions product or totally separate insuring agreement via an endorsement to CPrL policies. This includes capacities ranging from $250,000 to $5,000,000 and premiums starting as low as $2,500-3,500. Know that carriers can be selective when it comes to the types of exposures and projects they cover. 

The benefits for construction firms ranging from electricians, plumbers, HVAC and mechanical contractor to interior finishers, masons, utility contractors and flooring contractors are many. They include the ability to potentially protect contractors from the “your work” faulty workmanship claims of third-parties with reasonably affordable coverage forms provided in an uncertain environment that can be litigious. 

Business Risk Exclusions Bar Faulty Workmanship Claim

Tred R. Eyerly | Insurance Law Hawaii

    The manufacturer of roofing and waterproofing systems was unsuccessful in securing coverage for alleged faulty workmanship due to the “your work” and “your product” exclusions. Siplast, Inc. v. Emplrs Mut. Cas. Co., 2020 U.S. Dist. LEXIS 176539 (N.D. Texas Sept. 25, 2020). 

    Siplast was sued in New York by the Archdiocese for work done at Cardinal Spellman High School. The Archdiocese purchased a Siplast Roof System for the high school. Vema Enterprises installed the roof system. The roof system was covered by a guarantee. 

    After completion, school officials noticed water damage in the ceiling tiles throughout the school. A consultant hired by the Archdiocese concluded that the leaks were caused by the workmanship and the materials that were compromising the entire roof membrane and system. Siplast determined the guarantee was not applicable. The Archdiocese informed Siplast that it would repair the roof and hold Siplast liable for the costs. Siplast gave notice of the claim to Employers, but coverage was denied.

    The Archdiocese sued. The complaint alleged that the only way to remediate the leak issue was to replace the failed membrane and system with a new one. The consultant estimated the total cost of remediation would be $5,000,000. 

    Siplast sued Employers. Siplast maintained that the Archdiocese had alleged claims based on an “occurrence” because they alleged they sustained damage due to faulty work and products. The Archdiocese did not allege that Siplast expected or intended any damage. The court agreed with Siplast that there was an occurrence. The origin of the property damage was alleged to be defects with the workmanship and materials that comprised the roof membrane and system. There were no allegations that Siplast intended or expected its roofing system to fail. 

    However, the next inquiry was whether the business risk exclusions applied. The policy did not apply to “‘property damage’ to ‘your product’ arising out of it or any part of it.” Nor did the policy apply to “‘property damage” to ‘your work’ arising out of it or any part of it.” The “your work” exclusion reflected the intent of the insurer to avoid the possibility that coverage under a CGL policy would be used to repair and replace the insured’s defective products and faulty workmanship.

    Employers argued that the Archdiocese was seeking to recover from Siplast only the cost of a replacement roofing system, not any damage that resulted to the school from the defective roof. Siplast contended that because the interior damage to the school was separate from any damage to the Siplast materials on the school roof, Employers would not meet its burden to show the “Your Product/Your Work” exclusions applied. 

    The court concluded that although the underlying complaint mentioned damage to school property other than the Siplast roofing products, the Archdiocese did not make any allegations to recover from Siplast for any damage to the building caused by the leaky roof that was separate from the damage to Siplast’s product. Siplast was sued based on its failure to replace the roof as required by the guarantee. The Archdiocese did not allege that Siplast’s breach caused other damage. 

    Therefore, Employer did not have a duty to defend Siplast because the damages sought in the underlying suit fell within the “Your Work’Your Product” exclusions.