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(A revised version of this article appears in The Construction Lawyer, Volume 28, No. 4, Fall 2008, published by the American Bar Association's Forum on the Construction Industry.)
By David T. Dekker and Stephen D. Palley
Howrey LLP
and Douglas Green
Marsh, Inc.
Construction defect litigation is a concern for everyone involved in the construction process. If history is any guide, current economic conditions will lead to an increase in such litigation and an attendant need to consider the scope of protection provided by insurance and non‑insurance risk transfer devices.
Of critical importance to the construction industry is the scope of coverage provided by commercial general liability (CGL) policies for third-party claims of defective construction, in particular the scope of coverage for claims alleging damage to the “work” and “completed operations” of the insured. Contractors are frequently exposed to claims by owners that defective workmanship caused extensive damage to a completed project. Are such claims covered by CGL policies?
For more than 30 years, insurance companies have addressed contractor exposure to claims arising out of defective subcontractor work by marketing Broad Form Property Damage (BFPD) insurance coverage, first by endorsement to the 1973 CGL form and then as a component of the standard insurance policy itself in 1986 and thereafter. In spite of concerted industry marketing efforts, some insurers have tried to eliminate BFPD coverage when presented with claims arising out of defective subcontractor work. Some insurers have taken the view that there is never insurance coverage for claims against a contractor based upon damage to its completed work.
In years past, courts in several states adopted this position, nearly stripping contractors of insurance protection for defective contractor work. More recently, the tide appears to have turned, with courts recognizing the original intent of BFPD coverage. Significant opinions squarely addressing this issue and rejecting the insurer approach, recently have been handed down by several state supreme courts. This article discusses these opinions, after first placing them in historical context.
A hypothetical, first conceived of by the insurance industry itself to sell BFPD coverage, helps frame the issue neatly at the outset. Assume that during construction of a home, a subcontractor installs defective electrical wiring that must be repaired. In that case, the cost of repair might be covered by a surety bond, but typically one would not look to a standard form general liability policy to cover the cost to repair the wiring. 1/ If the defective wiring causes a fire, however, most would agree that the fire damage is a covered “occurrence” as that term is defined in standard CGL policies. 2/
Indeed, most insurers acknowledge that:
 | | There is coverage in the above scenario for any fire damage to adjacent property not constructed by the insured;
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| | There is coverage for any fire damage to the contents of the home (e.g., personal property and effects contained in the home) in which the defective wiring was located; and
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| | There is coverage for any personal injuries suffered in the fire.
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In each case the damages/injuries are accidental, and therefore, arise out of an “occurrence.” The issue is whether there is coverage for any fire damage to the home itself (e.g., to the structure or components of the building). Many insurers say no, based principally on the argument that the damage is not accidental and thus is not an “occurrence.”
Policyholders have responded that such an interpretation is contrary to the language and purpose of the BFPD coverage. But beyond that, to assert that an event may be accidental when it causes bodily injury and property damage to adjacent property but is not accidental if the same event causes property damage to the building itself makes no sense. In the last year, policyholders have had more success persuading courts that their position is correct.
Broad Form Property Damage Coverage
Insurance policies are contracts, first and foremost, and their plain language is of paramount importance. As with any other form contracts, that language has changed over time.
The vast majority of general liability policies sold in this country utilize language drafted by the Insurance Services Office (ISO), an insurance industry trade association. 3/ Reviewing the policy’s drafting history in order to glean the parties’ intent – and especially the insurer’s intent – is a common practice by courts that have addressed the scope of BFPD coverage. 4/ Indeed, much of the confusion reflected in the case law and elsewhere over the scope of coverage provided by ISO forms arises out of a failure to recognize critical changes in policy language over time. 5/
Before 1973, standard-form CGL policies contained an exclusion that eliminated coverage for “property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof....” 6/ The “on behalf of” language under this exclusion meant that no coverage existed for damage to the insured’s own work resulting from a subcontractor’s defective work. Thus, under this exclusion, general contractors bore the risk that subcontractors would expose the general contractor to enormous unforeseeable damages. This was a problem for contractors, as a subcontractor doing $10,000 in work could easily cause $10,000,000 in damage, which of course remains the case today – scope and cost are not necessarily a reliable predictor of long-term risk. As one court noted:
[I]f a general contractor’s liability policy insures against risks outside his or her control, such a risk surely can arise from a subcontractor’s work. Having selected subcontractors, a general contractor may have little or no effective control over the manner in which subcontractors perform work. There are many situations where a general contractor knows little, if anything, about the exigencies of a subcontractor’s work. 7/
In response to industry concern, insurance companies began offering coverage for the risk of damage to otherwise non-defective work resulting from defective subcontractor performance. 8/ This coverage became known as BFPD coverage.
Materials circulated by the insurance industry emphasized that the BFPD endorsement provided coverage to general contractors for losses arising out of subcontractor work. 9/ For example, a circular prepared by the ISO explained that “[t]he insured would have coverage for damage to his own work arising out of a subcontractor’s work [and] [t]he insured would have coverage for damage to a subcontractor’s work arising out of the subcontractor’s work.” 10/
Through the 1970s and early 1980s there continued to be confusion about the extent of coverage provided under the BFPD endorsement. Accordingly, in 1986 ISO made that coverage a part of its standard form basic insuring agreement for general liability policies, now the CG 00 01 policy form. While the ISO forms have continued to evolve since 1986, the BFPD coverage language, which is discussed below, has remained the same.
To understand the scope of BFPD coverage, it is necessary to delve into the policy form’s language. Like most insurance policies, the ISO general liability policies begin with a broad grant of coverage, which is then limited in scope by exclusions. Exceptions to exclusions narrow the scope of the exclusion and, as a consequence, add back coverage. However, it is the initial broad grant of coverage, not the exception to the exclusion, which ultimately creates (or does not create) the coverage sought. 11/
Post-1986 ISO CGL policies provide coverage in pertinent part for “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” 12/ The legal obligation to pay, however, must arise from an “occurrence,” which is defined as: “an accident, including continuous or repeated exposure to substantially the same general harmful condition.” Coverage for “damages because of ‘property damage’” to the insured’s own work is typically limited by Exclusion l in the standard policy form, which excludes:
“Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.” This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor. [emphasis added.]
The final clause of Exclusion l is commonly referred to as the “subcontractor exception” to the “your work” exclusion. This clause provides the insured with the BFPD coverage described above by excepting from the exclusion any liability arising out of the defective work of subcontractors. 13/
As in the cases discussed below, construction defect coverage litigation often boils down to a dispute first over the meaning of the word “accident” within the definition of “occurrence” and then the scope and application of the “your work” exclusion.
Recent Cases
In United States Fire Insurance Co. v. J.S.U.B., Inc., 14/ a subcontractor’s use of poor soil and improper soil compaction and testing caused damage to the foundations, drywall and other interior portions of completed homes. The general contractor’s insurance carrier agreed to cover damage to the homeowners’ personal property such as the wallpaper but refused to cover costs of repairing the structural damage. The contractor (J.S.U.B.) made the necessary repairs and then sued its insurance carrier for a declaratory judgment. The trial court, relying on an earlier 1980 case, LaMarche v. Shelby Mutual Insurance Co., 15/ found that the damages were caused by faulty workmanship, which was not covered.
A Florida Court of Appeals reversed the trial court, and the Florida Supreme Court affirmed the reversal. The Florida Supreme Court observed that the CGL policy provided standard coverage for the "sums that the insured becomes legally obligated to pay as damages” because of "bodily injury" or "property damage" caused by an "occurrence" within the "coverage territory" during the policy period.
U.S. Fire argued that the insuring agreement itself (i.e., the coverage grant language) barred coverage for the claim and that only third-party property damage was covered under the policy. Finding no such distinction in the definition of "occurrence," the Florida Supreme Court rejected this argument and held that the appropriate consideration is not whose property is damaged but whether the damage was expected or intended from the standpoint of the insured.
The court devoted a portion of its decision to the "origin and evolution of CGL policies" discussed above and rejected the argument that faulty workmanship is expected and therefore outside the scope of the policies: "There is simply nothing in the definition of the term ‘occurrence’ that limits coverage in the manner advanced by U.S. Fire, and we decline to read the broad ‘business risk’ exclusions at issue in 1980 decision in LaMarche into the definition of ‘occurrence’ used in the coverage provisions of the post-1986 standard CGL policies at issue."
The court further rejected the argument that construing the definition of "occurrence" to include a subcontractor’s defective work converts the liability policy into a performance bond. 16/ The court also explained that finding the damages that may result from an “occurrence” "is only the first step in determining whether the damages are covered." As the court explained, coverage still may be precluded because the “occurrence” did not cause "property damage" within the meaning of the policy or because of an exclusion to the insuring agreement.
While cautioning that exclusionary clauses cannot be relied upon to create coverage, the court explained that pertinent provisions should be read together. And, the court "simply [could] not ignore the exception that has now been incorporated into exclusion (l), an exception that clearly applies to damages to the insured’s own work arising out of the work of a subcontractor." 17/ As the court reasoned, if the insuring provision does not confer the initial grant of coverage for faulty workmanship, there would be no need for the "your work" exclusion or for the subcontractor exception to this exclusion.
Chief Judge Lewis, in his concurrence, noted the "substantial evidence" that the insurance industry itself altered the intent of CGL policies "by extending coverage – albeit in a convoluted fashion – to insureds for fortuitous damage caused to their completed projects by faulty subcontractor work." Of particular note, he wrote that court opinions which "hold otherwise regarding standard-form post-1986 CGL policies do not address the evidence in this and other more recent CGL cases."
The court further rejected a public policy argument. It found that contractors would not face a "moral hazard" regarding coverage for their own work – being reimbursed under its insurance contracts for the cost of repairing damage caused by defective work is not a windfall to a contractor. Moreover, the court noted, "if the insurer decides that this is a risk it does not want to insure, it can clearly amend the policy to exclude coverage, as can be done simply by either eliminating the subcontractor exception or adding the breach of contract exclusion."
The court concluded that the subcontractor’s faulty workmanship caused structural settlement to the homes, which was "property damage" covered under the policy.
Auto Owners Insurance Co. v. Newman 18/ is a South Carolina Supreme Court opinion that reaches a similar conclusion and clarifies the scope of an earlier opinion by that court. 19/ In Newman, a homeowner sued a general contractor alleging that defective construction related to installed stucco siding “allowed water to seep into the home causing severe damage to the home’s framing and exterior sheathing.” 20/ The stucco was installed by a subcontractor. The general contractor had a post-1986 CGL policy containing the language quoted above. The South Carolina Supreme Court concluded that property damage to something other than the subcontractor’s defective work arose from an “occurrence”:
[C]ontinuous water intrusion resulting from the subcontractor’s negligence qualifies as an “accident” involving “continuous or repeated exposure to substantially the same harmful conditions....” Moreover, as a matter of pure contract interpretation, we hold that the CGL policy covers the damage arising from the negligent acts of the contractor in this case.... A CGL policy in the home construction industry is designed to cover the risks faced by homebuilders when a homeowner asserts a post-construction claim against the builder for damage to the home caused by alleged construction defects. Several construction-specific exclusions in the standard CGL policy exclude from coverage certain types of property damage attributable to risks outside the scope of CGL recovery. The primary exclusion is the “your work” exclusion which provides that the policy will not cover “property damage” to “your work.” In 1986, the insurance industry amended the “your work” exclusion to provide that even if the property damage is to the builder’s own work, the “your work” exclusion does not apply “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” In doing so, the insurance industry extended liability coverage for property damage to the contractor’s completed work arising out of work performed by the subcontractor. 21/
The Texas Supreme Court reached a similar result in Lamar Homes, Inc. v. Mid-Continent Casualty Co. 22/ There, Vincent and Janice DiMare had contracted with Lamar Homes to build a new home. Lamar subcontracted the foundation design and construction to an engineer and foundation subcontractor and did not perform that work itself. The DiMares sued Lamar Homes and its subcontractor alleging defective construction leading to physical damage to the home’s stone veneer and sheetrock. This allegedly was caused by defective design or construction of the foundation.
Lamar Homes’s CGL carrier, Mid-Continent, refused to provide a defense. Coverage litigation ensued, and the 5th U.S. Circuit Court of Appeals certified three questions to the Texas Supreme Court, of which the following two are relevant to this article:
| 1. | When a homebuyer sues his general contractor for construction defects and alleges only damage to or loss of use of the home itself, do such allegations allege an “accident” or “occurrence” sufficient to trigger the duty to defend or indemnify under a CGL policy?
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| 2. | When a homebuyer sues his general contractor for construction defects and alleges only damage to or loss of use of the home itself, do such allegations allege “property damage” sufficient to trigger the duty to defend or indemnify under a CGL policy?
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The Texas Supreme Court answered both of these questions affirmatively.
The CGL policy in Lamar Homes contained the same coverage grant and BFPD coverage as in J.S.U.B. and Auto-Owners. The court began its analysis by framing a broad question – “whether defective construction or faulty workmanship that damages only the work of the insured is an ‘occurrence,’ ” that the policy defines as an accident. 23/
The insurance company argued that because the damages at issues were “direct damages flowing from Lamar’s undertaking,” they were foreseeable and thus not accidental. The court rejected this argument: “Insurance is typically priced and purchased on the basis of foreseeable risk and [adapting the approach the insurer] urges would undermine the basis for most insurance coverage. Moreover, the carrier’s argument includes a false assumption – that the failure to perform under a contract is always intentional[.]” A bright line rule proposed by the insurer would not work and “[t]he determination of whether an insured’s faulty workmanship was intended or accidental is dependent on the facts and circumstances of the particular case.” In this case, the court held the complaint alleged an “occurrence” “because it asserts that Lamar’s defective construction was a product of negligence.”
The Lamar Homes court then considered whether the complaint alleged “property damage” – that is, “[p]hysical injury to tangible property, including all resulting loss of use of that property.” Cracked sheetrock and stone veneer plainly fall within this definition, and the court concluded that the complaint alleged “property damage.”
The court then turned to the policy’s BFPD coverage contained within the subcontractor exception to the “your-work” exclusion, noting: “By incorporating the subcontractor exception into the ‘your-work’ exclusion, the insurance industry specifically contemplated coverage for property damage caused by a subcontractor’s defective performance.” The insurance carrier attempted to avoid the subcontractor exception by arguing, instead, that the “economic loss rule” barred coverage. The court rather squarely rejected this argument:
The economic-loss rule… is not a useful tool for determining insurance coverage. The rule generally precludes recovery in tort for economic losses resulting from the failure of a party to perform under a contract. Its focus is on determining whether the injury is to the subject of the contract itself. In operation, the rule restricts contracting parties to contractual remedies for those economic losses associated with the relationship, even when the breach might reasonably be viewed as a consequence of a contracting party’s negligence. It is a liability defense or remedies doctrine, not a test for insurance coverage.
Contrary to the carrier’s contentions, the CGL policy makes no distinction between tort and contract damages. The insuring agreement does not mention torts, contracts, or economic losses; nor do these terms appear in the definitions of “property damage” or “occurrence.” The CGL’s insuring agreement simply asks whether “property damage” has been caused by an “occurrence.” Therefore, any preconceived notion that a CGL policy is only for tort liability must yield to the policy’s actual language. The duty to defend must be determined here, as in other insurance cases, by comparing the complaint’s factual allegations to the policy’s actual language. 24/
For these reasons, like courts in Florida and South Carolina that soon after followed suit, the Texas Supreme Court affirmed that the standard general liability policy’s BFPD coverage provides coverage for damage to a contractor’s work resulting from defective subcontractor work.
Conclusion
Florida, Texas and South Carolina join a growing majority of states in which courts have concluded that BFPD coverage applies to damage to a contractor’s work caused by defective subcontractor work. 25/ Contrary authority exists in a minority of states. 26/ In those jurisdictions, practitioners need to take extra care to address risks associated with subcontractor construction defects within contractual indemnities and in alternative or additional insurance coverage where available. 27/
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For more information about the issues covered in this report, please contact Dave Dekker in our Washington office at 202-383-7327 or at DekkerD@howrey.com, Steve Palley in our Washington office at 202-383-7253 or PalleyS@howrey.com, or contact your Howrey lawyer. For more information about Howrey’s Construction Practice, click here.
ENDNOTES
| 1/ | BFPD coverage has been part of the standard ISO forms since 1986. Underwriters have sold enhancements to that coverage to some insureds and have sought to cut back its scope in other cases. For example, certain insurers have, from time to time, marketed “rework” endorsements that explicitly provide coverage for repair of defective work where structural or life/safety issues are present. The fact that the scope of coverage for damage to defective workmanship can be negotiated arguably belies the argument that a construction defect claim can never be an “occurrence.” In addition, underwriters (particularly for larger projects where controlled insurance programs are used) may be willing to delete Exclusion l in its entirety as well as Exclusions j(5) and j(6), which are similar to Exclusion l but apply to claims that arise before project completion.
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| 2/ | This hypothetical was referenced by the court in O’Shaughnessy v. Smuckler Corp., 543 N.W.2d 99 (Minn. Ct. App. 1996), which in turn cites industry publications from which the hypothetical was taken by the court.
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| 3/ | See, e.g., French v. Assurance Co. of America, 448 F.3d 693, 697 (4th Cir. 2006), citing Hartford Fire Insurance Co. v. California, 509 U.S. 764, 772, 113 S.Ct. 2891, 125 L.Ed. 2d 612 (1993) ["ISO develops standard policy forms and files or lodges them with each State's insurance regulators; most CGL insurance written in the United States is written on these forms."]. The standard ISO CGL occurrence policy is written on the CG 00 01 form; the most recent revisions to the form include editions released in 1998, 2001, 2004 and 2007. Many underwriters (both primary and excess) incorporate ISO language into their own proprietary forms. Thus, even if a form is not the CG 00 01, it will likely include the CG 00 01 coverage grant and many of the form’s exclusions. Thus, the standard ISO language often is at issue even if the ISO form is not itself used verbatim.
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| 4/ | See, e.g., United States Fire Insurance Co. v. J.S.U.B., Inc., 979 So.2d 871, 877-881 (Fla. 2007); Lamar Homes v. Mid-Continent Casualty Co., 242 S.W.3d 1, 12-13 (Texas 2007); Owens-Brockway Glass Container, Inc. v. Seaboard Surety Co., Civ. No. S-91-1044 DFL, 1992 U.S. Dist. LEXIS 10337 *6 (E.D. Cal. May 27, 1992); Rhone-Poulenc Rorer, Inc., v. The Home Indemnity Co., No. 88-9752, 1991 U.S. Dist. LEXIS 6215, *3-5 (E.D. Pa. May 7, 1991); Lone Star Industries, Inc. v. Liberty Mutual Insurance Co., No. 59-C-SE-187-1-CV1, 1990 Del. Super. LEXIS 407 *3-4 (Del. Super. Ct. Nov. 13, 1990); Kerr-McGee Corp. v. Admiral Insurance Co., 1995 Okla. 102, 905 P.2d 760 (1995), citing an exhaustive review of drafting history in Morton International, Inc. v. General Accident Insurance Co., 134 N.J. 1, 36, 629 A.2d 831, 851 (1993).
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| 5/ | As one commentator has noted, “The [insurance] industry has now taken to arguing that whenever a claim of defective construction is alleged against an insured, the claim is automatically barred from coverage as not constituting an ‘occurrence.’ The position is nothing more than a rehash of the ‘business risk’ doctrine, whose success depends entirely on courts’ ignoring the actual language of the CGL policy.” James Duffy O’Connor, What Every Construction Lawyer Should Know About CGL Coverage for Defective Construction, Construction Lawyer, Vol. 21, No. 1, Winter 2001, at 15, 17.
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| 6/ | Bulen v. West Bend Mutual Insurance Co., 125 Wis. 2d 259, 371 N.W.2d 392, 393 (Wis. Ct. App. 1985).
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| 7/ | Maryland Casualty Co. v. Reeder, 221 Cal.App.3d 961, 972, 270 Cal.Rptr. 719 (1990).
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| 8/ | As the 4th Circuit noted in French, 448 F.3d at 701, citing Couch on Insurance 3d §129:18 and Holmes’ Appleman on Insurance 2d §132.9 at 153: “Many contractors were unhappy with this state of affairs, since more and more projects were being completed with the help of subcontractors. In response to this unhappiness, beginning in 1976, an insured under the 1973 ISO CGL policy form could pay a higher premium to obtain a broad form property damage endorsement (the BFPD Endorsement) which effectively eliminated the ‘on behalf of’ language and excluded coverage only for property damage to work performed by the named insured. Thus, liability coverage was extended to the insured’s completed work when the damage arose out of work performed by a subcontractor.” See also, American Family Mutual Insurance Co. v. American Girl, Inc., 268 Wis.2d 16, 673 N.W.2d 65, 82-83 (2004); Couch on Insurance 3d §129:18 [“Due to the increasing use of subcontractors on construction projects, many general contractors were not satisfied with the lack of coverage provided under [the 1973 ISO CGL] commercial general liability policies where the general contractor was not directly responsible for the defective work’’]; Reeder, 221 Cal.App.3d at 972; Holmes’ Appleman on Insurance 2d, §132.9 at 153.
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| 9/ | See, e.g., Fireguard Sprinkler Systems, Inc. v. Scottsdale Insurance Co., 864 F.2d 648 (9th Cir. 1988); Lamar Homes, 242 S.W.3d at 22-25.
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| 10/ | Fireguard, 864 F.2d at 652, quoting the ISO circular. The court then quoted a bulletin published by the National Underwriters Association in 1982, which also explained that “an insured has coverage for his completed work when the damage arises out of work performed by someone other than the named insured, such as a subcontractor....” Id.
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| 11/ | See, e.g., Lamar Homes, 242 S.W.3d at 30.
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| 12/ | See, e.g., ISO Properties, Inc., Commercial General Liability Coverage Form, CG 00 01 10 01, available at www.lexis.com (last visited July 1, 2008); see also, Miller’s Standard Insurance Policies Annotated (2006).
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| 13/ | French, 448 F.3d at 701. The evolution of the relevant forms also is discussed in Lamar Homes, 242 S.W.3d at 12-13; J.S.U.B., 979 So.2d at 877-80; Fireguard, 864 F.2d at 652. A thorough overview also is found in Scott Turner, Insurance Coverage for Construction Disputes, Chapter 3 (2d ed. 2007).
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| 14/ | 979 So.2d 871 (Fla. 2007). See also, Auto Owners Insurance v. Pozzi, No. SC06-779, 2008 WL 2369244, 2008 Fla. LEXIS 1066 (Fla. 2008) [relying on J.S.U.B. and distinguishing between the cost of repairing a subcontractor’s defective installation of defective windows with the cost of repairing non-defective windows damaged by defective installation].
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| 15/ | 390 So.2d 235 (Fla. 1980).
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| 16/ | A common argument is that the CGL policies are not the same thing as performance bonds. The principal “purpose of a performance bond is to guarantee the completion of the contract upon default by the contractor. Thus, unlike an insurance policy, a performance bond benefits the owner of a project rather than a contractor. Further, a surety, unlike a liability insurer is entitled to indemnification from the contractor.” Lamar Homes, 242 S.W. 3d at 29. Thus, for example, if a contractor employs a bonded subcontractor that fails to complete its work, the contractor can look to the surety to do so. A general liability insurer does not take on that risk. Likewise, a surety may be responsible to repair defective workmanship if its principal refuses to do so. But CGL insurance coverage is not excluded because it might overlap with the protections afforded by a bond, had one been provided. As the Lamar Homes court observed: “Any similarities between CGL insurance and a performance bond under these circumstances are irrelevant, however. The CGL policy covers what it covers. No rule of construction operates to eliminate coverage simply because similar protection may be available through another insurance product. Moreover, the protection afforded by a performance bond is, in fact, different from that provided by the CGL insurance policy here.”
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| 17/ | 979 So.2d at 887.
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| 18/ | Auto Owners Insurance Co, Inc. v. Newman, No. 26450, 2008 S.C. LEXIS 74, 2008 WL 648546 (S.C. March 10, 2008).
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| 19/ | 19/ That case was L-J, Inc. v. Bituminous Insurance, 366 S.C. 117, 621 S.E.2d 33 (2005), and it was the source of significant dispute in South Carolina before Newman. See, Builders Mutual Insurance Co. v. Burton Co., Inc., No. 2:06-2608-CWH, 2007 U.S. Dist. LEXIS 57523 (D.S.C. August 7, 2007) [denying motion to dismiss and certifying to the South Carolina Supreme Court question of whether a CGL policy covers damages caused by faulty workmanship and the exposure to harmful conditions]; Builders Mutual Insurance Co. v. C.C.W. Marketing, No. 9:06-1996-CWH, 2007 U.S. Dist. LEXIS 57876 (D.S.C. August 7, 2007) [same]; Fidelity and Guaranty Insurance Underwriters, Inc. v. Robert W. Booher Construction, Inc., No. 2:06-690-CWH, 2007 U.S. Dist. LEXIS 61561, *19 (D.S.C. August 15, 2007) [certifying the question of whether a CGL policy provides coverage for damages caused by faulty workmanship and exposure to moisture as this issue is unsettled in South Carolina]; Okatie Hotel Group, LLC v. Amerisure Insurance Co., No. 2:04-2212-23, 2006 U.S. Dist. LEXIS 2980, * 20-21 (D.S.C. January 13, 2006); Owners Insurance Co. v. Lang's Heating and Air Conditioning, No. 2:05-2916, 2006 U.S. Dist. LEXIS 18898, *11 (D.S.C. April 10, 2006); Pennsylvania Manufacturers' Association Insurance Co. v. Dargan Construction Co., No. 4:05-113-25-TLW-TER, 2006 U.S. Dist. LEXIS 53366 (D.S.C. March 6, 2006); Pennsylvania National Mutual Insurance Co. v. Ely Wall and Ceilings, Inc., No. 4:04-1576-RBH, 2006 U.S. Dist. LEXIS 13302, *23-25 (D.S.C. March 6, 2006); Harleysville Mutual Insurance Co. v. Cambridge Building Corp., No. 9:04-23412-23, 2006 U.S. Dist. LEXIS 49380, *9 (D.S.C. July 19, 2006).
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| 20/ | Newman, 2008 S.C. LEXIS 74 at *2.
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| 21/ | Id. at *9-12 [internal citations omitted].
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| 22/ | 242 S.W.3d at 1.
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| 23/ | 642 S.W.3d 1 (Tex. 2007).
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| 24/ | Lamar Homes, 242 S.W.3d at 14 [internal citations omitted]. This follows the analysis of other courts that have considered this issue. See, American Family Mutual Insurance Co. v. American Girl, Inc., 268 Wis.2d 16, 673 N.W.2d 65, 75 (2004) [economic loss doctrine “does not determine whether an insurance policy covers a claim, which depends instead upon the policy language”]; Ferrell v. West Bend Mutual Insurance Co., 393 F.3d 786, 795 (8th Cir. 2005) [CGL policy's grant of coverage did not expressly limit coverage to claims for tort damages, as opposed to contract damages]; Vandenberg v. Superior Court, 21 Cal. 4th 815, 982 P.2d 229, 234 (1999) [holding that to determine coverage "courts must focus on the nature of the risk and the injury, in light of the policy provisions” and concluding that distinguishing contract from tort liability for purposes of the CGL insurance coverage phrase “legally obligated to pay as damages” is incorrect]; ACUITY v. Burd & Smith Construction, Inc., 721 N.W.2d 33, 39 (N.D. 2006) [rejecting insurer’s claim that breach of contract claims are not per se within the scope of coverage of a CGL policy].
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| 25/ | See, Lamar Homes, 242 S.W.3d at 6 n.2 [collecting cases]; Travelers Indemnity Co. of America v. Moore & Associates, Inc., 216 S.W.3d 302 (Tenn. 2007); Lee Builders, Inc. v. Farm Bureau Mutual Insurance Co., 281 Kan. 844, 137 P.3d 486 (2006); French, 448 F.3d at 693 [Maryland law]; Ferrell v. West Bend Mutual Insurance Co., 393 F.3d 786 (8th Cir. 2005) [Arkansas and Wisconsin law]; American Family Mutual Insurance Co. v. American Girl, Inc., 673 N.W.2d at 65; Wanzek Construction, Inc. v. Employers Insurance, 679 N.W.2d 322 (Minn., 2004); Corner Construction. Co. v. U.S. Fidelity and Guaranty, 638 N.W.2d 887 (S.D. 2002); Transportes Ferreos de Venezuela II CA v. NKK Corp., 239 F.3d 555 (3d Cir. 2001) [New Jersey law]; Fejes v. Alaska Insurance Co., 984 P.2d 519 [Alaska 1999]; High Country Associates v. New Hampshire Insurance Co., 139 N.H. 39, 648 A.2d 474 (1994); McKellar Development v. Nevada Insurance Co., 108 Nev. 729, 837 P.2d 858 (1992).
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| 26/ | See, J.S.U.B., 979 So.2d at 885-86 [referencing and discussing opposing view].
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| 27/ | In states recognizing that Exclusion L should not govern the scope of coverage available for damage to completed work, other issues arise. For example, is unavoidable damage to non-defective work to get to and repair defective work “property damage”? A number of courts have said yes, but this is not a universal principle. To confirm that this coverage exists, what is often referred to as “rip and tear” coverage for the cost of removing and replacing good work to replace defective work also can be purchased. As another example, costs incurred to mitigate potential damage also is treated as inherent by some (but not all) courts – particularly in the first party insurance context – when necessary to prevent damage. See, e.g., Southern California Edison Co. v. Harbor Insurance Co., 83 Cal.App.3d 747, 148 Cal.Rptr. 106, 112 (1978) [“An insured who avoids or minimizes insurable loss acts for the benefit of the insurer. It is the benefit conferred which creates the duty on the part of the insurer to reimburse the insured for prevention and mitigation expenses.”]; AIU Insurance Co. v. Superior Court, 51 Cal.App.3d 807, 799 P.2d 1253, 1272 (1990) [reimbursement of environmental response costs was “damages,” even if the costs were incurred primarily to prevent damage previously confined to the insured’s property from spreading to third party property]; Goodyear Rubber and Supply v. Great American Insurance Co., 545 F.2d 95, 96 (9th Cir. 1976) [insurance company denied coverage on ground that salvage claim was not property damage, but the court held that peril insured against, the damage caused by the occurrence of an explosion and fire, set the salvage operation in motion, and therefore the salvage expenses would be covered. “It would be a strange kind of justice, and a stranger kind of logic, that would hold the defendant to be liable for as much as $450,000 if the barge and its contents had been consumed by fire, but free of liability for a much lesser amount because of the fortuity of rescue”]; American Concept Insurance Co. v. Jones, 935 F. Supp. 1220, 1227-28 (D. Utah 1996) [noting that requiring a building to fall down before allowing coverage conflicts with the insured’s duty to mitigate damages].
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©2008 Howrey LLP
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