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Application of Wrong Kind of Paint Held to Be Insured Property Damage Under CGL Policy
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March 8, 2010
ConstructionWebLinks.com
The Montana Supreme Court has held that the application of the wrong type of paint constitutes “physical injury to tangible property” within the meaning of a subcontractor’s commercial general liability insurance policy’s definition of “property damage.”
The court also held that policy exclusions were ambiguous and thus not applicable to an additional insured and that the damage was covered under the policy in effect at the time of the paint was applied although the problem was not discovered until after the policy expired.
The general contractor contracted with the City of Libby, Montana, to build a water treatment plant. The general contractor subcontracted painting of the plant’s filter tanks and pipes. The subcontract required the subcontractor to obtain a commercial general liability (CGL) insurance policy naming the general contractor as an additional insured. The subcontractor did so.
After the subcontractor completed its work, the city discovered that the wrong type of paint was used. The plant had to be shut down while the paint was stripped and the facility was repainted. The city then sued the general contractor for the costs of stripping and repainting the plant.
The general contractor tendered defense of the suit to the subcontractor’s insurer and made a demand for indemnity. The subcontractor’s insurer refused coverage, citing exclusions (j), (k), (l) and (m) of the CGL policy. It argued that exclusions applicable to the subcontractor also were applicable to the general contractor as an additional insured. The general contractor’s own insurer then defended the city’s action and paid the city $120,102 to settle the claim. The general contractor and its insurer brought a declaratory judgment action against the subcontractor’s insurer for a determination of whether it owed a defense and indemnity.
The general contractor moved for summary judgment. The trial court held that the CGL policy did provide coverage for the general contractor and entered judgment against the subcontractor’s insurer for the settlement amount plus attorney fees. The subcontractor appealed. The Supreme Court affirmed. In response to a cross-appeal by the general contractor, it also held that the general contractor was entitled to pre-judgment interest. Swank Enterprises, Inc. v. All Purpose Services, Ltd., 336 Mont. 197, 154 P.3d 52, 2007 MT 57 (2007).
The CGL policy defined “property damage” as:
| a. | Physical injury to tangible property, including all resulting loss of use of the property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
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| b. | Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.
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The Supreme Court held that application of improper paint caused “physical injury to tangible property,” which in turn caused a loss of use of the plant while it was shut down for stripping and repainting. The court wrote that “the term ‘physical injury’ refers to a physical and material alteration resulting in a detriment.” The court noted that even if the plant had not been closed for stripping and repainting, the plant would have been damaged because it would not have been sufficiently protected by the improper paint.
The fact that the injury was not discovered until after the policy period ended was “of no consequence” because a “ ‘physical injury’ can occur ‘even though the injury is not ‘diagnosable,’ ‘compensable, or manifest during the policy period,” the court held.
In analyzing whether the policy’s exclusions applied to the general contractor as an additional insured, the court noted that the exclusions directly referred only to the subcontractor, the named insured. The exclusions applied to “all property damage” arising out of the subcontractor’s operations and “property damage” to the subcontractor’s “product.” Thus, the court found that if the exclusions were applicable to the general contractor, they would preclude coverage.
Because the exclusions only expressly referred to the subcontractor, the court held that the policy could be read not to exclude claims by the general contractor as an additional insured. This reading was supported by the fact that the policy contained a “severability of interests” clause, which applied the policy separately to each insured against whom a claim is made or suit is brought. However, the court found that the exclusions also could be read to arise from the actions of the named insured but apply to exclude coverage for any insured seeking coverage. Based on these ambiguities, the exclusions were interpreted against the insurer and held to be unenforceable.
The court also held that the insurer was estopped from seeking to share the loss with the general contractor’s insurer because, among other reasons, the subcontractor’s insurer unjustifiably failed to provide a defense.
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