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Contractor’s Employee Intentionally Demolished Part of House, but Damage Is Covered by Insurance
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October 13, 2008
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By Peter K. Zweighaft
Thelen LLP
Owners hired the contractor to perform demolition work. In separate meetings with the contractor’s president and vice president, the owners explained that the scope of work included the removal of: 1) the carport attached to the owners’ house; 2) the concrete pad beneath the carport; and 3) the asphalt driveway leading up to the carport. The contractor then was to lay a new asphalt parking lot and a new concrete sidewalk. The owners informed contractor’s president and vice president that the house was not part of the scope of work.
The contractor’s president met with a heavy equipment operator to discuss the job and instructed him to meet with the vice president the following day at the job site. The heavy equipment operator and vice president spoke by phone the next day and agreed to meet at the jobsite. The operator testified that he was told he was to perform a teardown but that details were not discussed. The operator arrived at the job site before the vice president and began demolition operations. By the time the vice president arrived 5 to 7 minutes later, not only was the carport demolished but more than half of the house also was demolished.
The operator testified that he knew something was wrong when the vice president arrived at the jobsite, got out of his truck and placed both hands to his head.
The contractor tendered to its commercial general liability (CGL) insurer. The insurer denied coverage, arguing that the damages were not the result of an “accident” and instead were caused by the intentional acts of the contractor’s employee. Even if the damages were the result of an “accident,” the insurer argued that business risk exclusions in the policy precluded coverage.
The contractor filed a declaratory relief lawsuit. The trial court ruled in favor of the contractor, finding that the damages fell within the definition of “accident” because it had not been the result of the contractor’s plan, design or intent. The damage resulted from a communications disconnect, not faulty workmanship, the trial court concluded. It also ruled that the business risk exclusions were inapplicable because the property damage caused by the contractor’s employee was unintended and unexpected by contractor. Accordingly, it held that the contractor was entitled to indemnity and a defense. The insurer appealed.
The Court of Appeals affirmed, and the insurer appealed to the Kentucky Supreme Court. The Supreme Court affirmed. Bituminous Casualty Corp. v. Kenway Contracting, Inc., 240 S.W.3d 633 (Ky. 2008).
The Supreme Court decided two issues: 1) Whether the policy’s definition of “accident” included intentional acts of the contractor’s employee that led to the damage; and 2) If the damage fell within the scope of coverage, was coverage precluded by the policy’s business risk exclusions?
On the first issue, the insurer argued that because the contractor’s heavy equipment operator was acting within the scope of his employment, he was the “insured” under the policy. As the insured, the damages he caused were neither unintended nor unexpected from his point of view: He intended to demolish the house.
The Supreme Court rejected the insurer’s argument. It recognized that the owner’s claim was against the contractor, not against the contractor’s heavy equipment operator. Thus, the contractor was the insured under the policy. Because a corporation such as the contractor can only act through its officers, the issue was whether the damage was intended or expected from the perspective of the contractor’s president and vice president. Kentucky, following the majority rule, provides for coverage if the injury was not actually and subjectively intended or expected by the insured, even if the action giving rise to the injury was intentional. The Supreme Court found that although the acts themselves were intended, the damage to the owners’ property was unexpected and unintended by the insured, and the definition of “accident” thus was satisfied.
The insurer also asserted two of the policy’s business risk exclusions. The first precluded coverage for damage to “that particular part of real property” on which the contractor performed operations if the “property damage” arises out of those operations. The insurer argued that the damage occurred to that particular part of real property (i.e., the house) on which the contractor was performing operations. The insureds argued that there operations should be limited to the carport. The Supreme Court found the phrase “that particular part of the real property” was not defined by the policy and was ambiguous. “That particular part of the real property” could be either just the carport, which the contractor was supposed to demolish, or it could extend to the house. Following the Kentucky rule that an ambiguous policy is to be construed against the insurer and liberally construed in favor of the insured, the court held that this exclusion did not preclude coverage. Only unequivocal exclusions will be enforced, the court noted. Here, there was ambiguity because both parties had suggested a reasonable interpretation.
The second exclusion provided that the insurance did not apply to property damage to any part of property that must be restored, repaired or replaced because the contractor’s work was incorrectly performed on it. The insurer argued that the contractor performed operations on the house. Based on these operations, the house would have to be repaired or replaced. Therefore, the insurer argued, coverage was excluded. The Supreme Court found that the exclusion was ambiguous and could either apply to: 1) work performed properly but in the wrong location, thus requiring repair or replacement; or 2) the manner in which work was performed, with location playing no part. Under the second possible interpretation, the exclusion would not apply because there was no allegation that the contractor’s heavy equipment operator’s work on the carport was faulty. The damage was not the result of work necessary to perform the proper scope of work. Following the rule construing policy ambiguities against insurers, the Supreme Court found that the second exclusion did not preclude coverage.
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For more information about the issues covered in this report, please contact Peter K. Zweighaft in our Los Angeles office at 213-576-8063 or at pzweighaft@thelen.com or contact your Thelen attorney. For more information about Thelen’s Construction and Government Contract's Department, click here.
©2008 Thelen LLP
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