A common question arising from construction defect claims concerns insurance coverage for the costs of resolving the defective work and/or related damages. Commercial General Liability (“CGL”) policies typically do not cover defective workmanship. These risks are generally deemed to be within the contractor’s business risk and, therefore, not covered by insurance. Two recent cases provide insight into how courts look at these types of claims and provide guidance for contractors and insurers facing such disputes.
In Essex Insurance Company v. Bloomsouth Flooring Corp., 562 F.3d 399 (2009), the United States First Circuit Court of Appeals interpreted a CGL policy in connection with claims stemming from flooring defects in a commercial office building project in Massachusetts. The owner rejected the carpet installed throughout the building contending that the carpet produced a substantial chemical odor. The general contractor eventually replaced the carpet and as part of that effort had to grind and shot blast the concrete subfloor to remove the carpet adhesives. The general contractor asserted claims against its flooring subcontractor and its insurer. The First Circuit ruled that the flooring odor constituted “property damage” within the meaning of the CGL policy. In addition, the First Circuit determined that the grinding and shot blasting constituted damages to the concrete subfloor which also triggered coverage. The First Circuit rejected the argument advanced by the subcontractor’s insurer that the claims arose from the subcontractor’s faulty workmanship and were, therefore, not covered. In addition, the Court also rejected the claim that the foul odor was not property damage within the meaning of the policy.
In another case, Mid-Continent Casualty Co. v. JHP Development Inc., 557 F.3rd 207 (2007), the Fifth Circuit Court of Appeals also adopted a narrow view of the contractor’s business risk exclusions, known in most CGL policies as exclusions J(5) and J(6) (1) . In Mid-Continent the contractor failed to properly apply water sealant to exterior masonry and retaining walls. The project owner alleged this failure resulted in significant water damages to the building prior to its completion. The Court held that the business risk exclusions did not apply because the insured contractor had concluded its work even though the project as a whole was not yet finished. In addition, because other components of the project were also damaged, such as interior drywall, stud framing, electrical wiring and wood flooring, the business risk exclusions were deemed inapplicable by the Court.
Owners, contractors and insurers involved in construction defect claims should consult counsel regarding coverage issues. Subtle changes in policy language can make a big difference. In addition, these questions are fact intensive and vary from case to case.
1. Exclusion J(5) excludes coverage for property damages to "...real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the 'property damage' arises out of those operations."
Exclusion J(6) excludes coverage for property damages to "...property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it."
For more information about this alert, please contact Rob Ruesch or John Giffune, Co-Chairs of Verrill Dana's Construction Law Group.
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