A very recent case by West Virginia’s Supreme Court of Appeals highlights coverage issues that often arise for contractors seeking coverage under commercial general liability (“CGL”) insurance when construction defects are alleged. The court held that the CGL policy provided neither liability nor cost of defense coverage for the general contractor, even though the owner’s lawsuit against the general contractor sought recovery for damages to the property of others.
Site Problems and the Underlying Lawsuit
A shopping center developer hired a general contractor to perform site work and some, but not all, building construction on a large shopping center outside Huntington, West Virginia. The project experienced four separate problems with the site work. First, a slope failed at a Target Store site causing a landslide, damage to the building pad, and damage to nearby property owned by a third party. Second, soil settlement in another area of the shopping center caused cracking in the walls of certain shops. Third, slope movement in yet another location damaged buildings in a different section of the shopping center. These buildings had been constructed by a different contractor, but the general contractor was responsible for the site work on the third building. Finally, there was also land settlement at another part of the shopping center where an Office Depot had been constructed by another contractor. After the first two problems emerged, the project owner sued its geotechnical consultant for negligence, breach of contract, breach of warranty, and indemnity.
After the third and fourth problems were discovered, the owner amended its complaint to add the general contractor as an additional defendant and asserted breach of contract, contractual warranty, and contractual (and implied) indemnity claims based on all four problems described above.
Insurance Carrier Declaratory Judgement Suit
Initially, the general contractor’s CGL carrier provided a defense to the owner’s claims against the general contractor. Seven months later, the CGL carrier filed a separate lawsuit seeking a declaration that it had no duty to defend the owner’s litigation or to indemnify the general contractor for any judgments in the owner’s litigation. This declaratory judgment action went on for many years, and additional insurers were joined who had provided excess and umbrella coverage as well as a subsequent CGL insurer (the owner contended that the land movement problems were ongoing and progressive).
Eventually, the insurance companies obtained summary judgment on both the duty to defend and duty to indemnify for damages coverage obligations. The basis of this summary judgment was that the policy’s contractual liability exclusion. The general contractor appealed.
The Appellate Decision: Tennessee Law Applies
On appeal, the West Virginia court applied Tennessee law, because the general contractor was a Tennessee company, and the CGL policies were entered into in Tennessee. As a preliminary matter, the court noted that the Tennessee rule, like the rule in many other jurisdictions, is that the insurer’s duty to defend is broader than its duty to indemnify. Under Tennessee law, the insurance company’s duty to defend is triggered “when the underlying complaint alleges damages that are within the risk covered by the insurance contract and for which there is a potential basis for recovery.” The court also confirmed that under existing Tennessee law, CGL policies are analyzed first by determining the scope of coverage under the “insuring agreement” and then by modifications to that scope defined by the exclusions. Finally, the court interpreted Tennessee law as confining it to a review of the pertinent Complaint as the factual source on whether the insurer had to defend.
Under Tennessee law, “property damage,” as defined by a typical CGL policy, does not entail faulty workmanship that requires repair or replacement. The faulty workmanship must cause damage to other property.
The court determined that the owner’s Complaint did seek recovery for damages beyond the cost of correcting allegedly defective site preparation work. Given this fact, and a clarification by the Tennessee Supreme Court in another case distinguishing the insuring agreement from exclusions, the West Virginia court rejected the insurance company’s argument that, under Tennessee law, strictly contractual claims can never be covered by the insuring agreement portion of a standard CGL policy.
But that did not end the inquiry. The court looked to the contractual exclusion to the CGL policy and determined that there was no duty to defend or indemnify. The applicable CGL policy excluded the following: “Bodily injury or property damage for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages: (1) that the insured would have in the absence of the contract or agreement; or (2) assumed in a contract or agreement that is an insured contract, provided that the bodily injury or property damages occur subsequent to the execution of the contract or agreement[.]” The court concluded that a straightforward reading of the Amended Complaint required application of this exclusion. The owner was seeking to have the contractor pay damages flowing exclusively from the construction contracts.
The contractor argued that the contractual liability exclusion did not apply because: (1) other jurisdictions have determined it only applies when a contractor has contractually assumed the liability of a third party; and (2) even if it did apply, the first exception (liability the insured would have in the absence of the contract or agreement). The court rejected the contractor’s first argument based upon the plain language of the exclusion. As to the contractor’s argument that the exclusion’s exception took precedence, the court acknowledged that the contractor may have extra-contractual liability, but it rejected coverage anyway because the Amended Complaint alleged only contract claims. Indeed, any tort claims were time barred. In the end, the contractor had no coverage for defense of any of the owner’s claims alleging defective workmanship in the site preparation.
- Contractors should be very familiar with the scope of its CGL coverage. These policies should be reviewed with the contractor’s agent and counsel on an ongoing basis.
- If another party’s insurance coverage is important to you, be mindful that the description of claims is often crucial to the determination of coverage. Sometimes asserting every claim possible is poor strategy.
CASE: J.A. Street & Assoc., Inc. v. Bitco Gen. Ins. Corp., No. 17-0079 (Sup.Ct. App. W.Va. May 1, 2019)
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