March 5, 2010
Written By Attorneys: Michael A. Hamilton and Erika C. Aljens
This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
Courts continue to grapple with issues concerning defense coverage for construction defect claims under a commercial general liability policy, more specifically the exclusions for an insured's (or its subcontractor's) work. Two recent decisions have provided more guidance to insurance practitioners in Ohio and Mississippi.
The Mississippi Supreme Court and the Sixth Circuit (applying Ohio law) specifically addressed policy exclusions for construction defect claims arising out of a subcontractor's defective work. In a commonly-used commercial general liability coverage form, one highly litigated exclusion is known as the "your work," or j(6) exclusion, which excludes property damage to "That particular part of any property that must be restored, repaired or replaced because of 'your work' was incorrectly performed on it."
In Architex Association, Inc. v. Scottsdale Insurance Co., 2010 WL 457236 (Miss. Feb. 11, 2010) Scottsdale Insurance Company denied any defense obligation to the insured general contractor on the grounds that the hiring of a subcontractor was an intentional act that fell outside of the definition of "occurrence." The disclaimer did not address or identify the j(6) exclusion.
The lower and intermediate level courts held that the j(6) exclusion barred coverage for claims arising out of property damage to the building due to defective workmanship in the foundation. The Mississippi Supreme Court reversed and found that the intentional act of hiring a subcontractor does not automatically take any of the subcontractor's actions outside of the definition of "occurrence." For example, when a subcontractor accidentally drops a tile off a roof and strikes a passerby, then is no real dispute that such an accident is unintentional and unexpected. Conversely, when a subcontractor intentionally or expected to perform defective workmanship, such work would not constitute an "occurrence."
In light of the fact that Scottsdale was granted summary judgment early in the litigation, the facts were insufficiently developed to determine if the defective foundation work was expected or intended by the subcontractor. While the decision did not focus on this issue, the Court's opinion also implied that the analysis of the disclaimer would be different had Scottsdale relied on the j(6) exclusion.
In Fortney & Weygandt v. American Manufacturers Mutual Insurance Co., No. 05-4031, 2010 WL 481296 (6th Cir. Jan. 22, 2010), the insured, a general contractor on a construction project to build a restaurant, was sued by the project owner and an architect for allegedly defective foundational work. The carrier denied coverage since the defective foundation work was excluded under the j(6) exclusion, notwithstanding the fact that the work allegedly caused damage to the rest of the building.
The Sixth Circuit reversed summary judgment in favor of the carrier. The court found that the policy language "that particular part" contained in the j(6) exclusion only excluded coverage to repair or replace that exact part that was defectively installed, i.e. the foundation. Whether the defective foundation caused damage to the rest of the building was a potentially covered event and the carrier was obligated to provide a defense.
Ohio joins those states that hold that a j(6) exclusion only excludes property damage to that particular part where work was improperly performed and does not extend to other areas damaged as a result. See Mid-Continent Casualty Co. v. JHP Development, Inc., 557 F.3d 207 (5th Cir. 2009) (applying Texas law).
Insurance coverage for construction defect claims remains a hot issue for insurance practitioners. The law in this area can vary widely from state to state. To further complicate matters, in many jurisdictions, these issues have only been decided by trial or intermediate appellate courts, leaving open the possibility of conflicting rulings. Therefore, it is extremely important to frequently monitor this issue on a country-wide basis.
For further analysis of construction defect coverage issues, please contact Michael Hamilton, Chair of NLdH's National Insurance Coverage Group, or Erika Aljens. NLdH is an internationally recognized leader in representing the insurance industry in all coverage areas, including insurance coverage issues arising out of construction projects.
