Insurance Law

Well That Was Easy: Construction Defect: One Insurer’s Simple Solution To It All

If you are reading this then you are familiar with the surfeit of litigation, over the past decade-plus, concerning the availability of insurance coverage for construction defects. In very general terms you could say that there have been two types of cases – ones where coverage turns on whether faulty workmanship qualifies as an “occurrence” and another where the scope of the insurers’ willingness to provide coverage is expressed in one of many endorsements specifically drafted for that purpose. In this second category there are endorsements addressing when property damage must take place, limitations on the insured’s permissible operations, the relationship between the insured and its subcontractors, limitations on additional insured rights, and so on.

In Hanover Ins. Co. v. Plaquemines Parish Government, No. 12-1680 (E.D. La. Mar. 19, 2015), [enhanced version available to lexis.com subscribers], the court addressed coverage for defects associated with the construction of a community center in Boothville, Louisiana. But the case does not fall into either of these categories. Instead, it involves a policy that sets forth an insurer’s position on covering construction defects in a much simpler manner.

The case started out involving a performance bond and morphed into one resembling traditional construction defects. The court observed that the initial filings “spawned an avalanche of litigation” – 30 parties and 90 pleadings. It reminds me of a huge construction defect case I was involved in, in New York, a few years ago. When it came time for a mediation, there were so many party representatives, defense lawyers, defense adjusters, coverage lawyers, coverage adjusters, and experts that it was necessary to rent Madison Square Garden to accommodate everyone. The arena’s club boxes were used as breakout rooms. And it was perfectly understandable that the case was so huge case. At issue was a defective doorbell on a condo unit. [I made all that up. But if you thought for a second that it was true, it’s because you do CD work and know that it could have been.]

The specific dispute before the court involved the availability of coverage, under a general liability policy, for a stucco installer. There were two claims brought by the owner (Parish) against the stucco installer: negligently installing the stucco and breaching its contract to install the stucco.

The insurer argued that no coverage was owed, for either of the Parish’s claims, on account of the policy’s breach of contract exclusion: “This insurance does not apply and no duty to defend is provided by us for ‘bodily injury’, ‘property damage’, ‘personal injury’ and ‘advertising injury’ for claims, ‘suits’, accusations, charges or any loss, costs or expense, whether express or oral, for breach of contract, breach of an implied in law or implied in fact contract. This exclusion also applies to any additional insured under this policy.”

The owner did not dispute that the exclusion clearly and unambiguously precluded coverage for the breach of contract claim. At issue before the court was whether the breach of contract exclusion precluded coverage for the owner’s negligence claim. How could it, according to the owner? The claim is for “negligence” and the exclusion applies to “breach of contract.” Case closed.

However, it could, and did. As the court saw it, based on a review of other Louisiana cases, the owner was alleging that the stucco installer was negligent by: “failing to follow generally accepted construction practices and by negligently constructing the Building, by failing to properly oversee and undertake the construction of its work, by causing and/or contributing to delays, and by failing to adhere to standards for a reasonably prudent contractor in the Plaquemines Parish area.” However, despite this “negligence” claim, “all of the duties alleged by the Parish are personal to the Parish in its capacity as owner of the building and would not have existed but for the contract at issue.” The court observed that the Parish had not alleged that the stucco installer “breached any general duty owed to the public at large.” Thus, the court concluded that the breach of contract exclusion applied to the negligence claim.

That there were both negligence and breach of contract claims alleged against the stucco installer is nothing unusual. In fact, unusual would have been if those two claims had not been alleged. And that the negligence claim did not allege that the insured breached any general duty owed to the public at large is also not unusual. Unusual would have been if it did. Thus, negligence claims generally alleged in construction defect actions aren’t much different than in Plaquemines Parish -- they would not have existed but for the contract at issue.

A simple solution to a complex issue. This construction defect case was certainly easier to resolve than trying to figure out if faulty workmanship qualifies as an “occurrence.”

Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.

The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.

    Randy Maniloff is Counsel at White and Williams, LLP in Philadelphia. He previously served as a firm Partner for seven years and transitioned to a Counsel position to pursue certain writing projects including Coverage Opinions . Nonetheless he still maintains a full-time practice at the firm. Randy concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies, including commercial general liability and various professional liability policies, such as public official’s, law enforcement, educator’s, media, computer technology, architects and engineers, lawyers, real estate agents, community associations, environmental contractors, Indian tribes and several others. Randy has significant experience in coverage for environmental damage and toxic torts, liquor liability and construction defect, including additional insured and contractual indemnity issues. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.

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