Source: http://www.dailybusinessreview.com, September 25, 2015
By: Ronald L. Kammer
Construction litigation is booming, and two recent decisions potentially broaden coverage for builders who are sued for defective construction.
In Carithers v. Mid-Continent Casualty, the U.S. Court of Appeals for the Eleventh Circuit expanded what constitutes covered property damage. Before, there was a bright-line rule that defective construction was not property damage but damage caused by defective construction was property damage.
This is an important distinction for contractors since an insured’s own defective work is not property damage and therefore not covered by insurance. Only damage caused by defective work was property damage and covered by insurance.
The Carithers court recognized this distinction. However, it rejected Mid-Continent’s argument that the contractor it insured could not “recover for any defective work, even where repairing that defective work is a necessary cost or repairing work for which there is coverage”.
The Carithers court, however, held the cost to demolish and repair the defectively constructed balcony was covered property damage because it was necessary to repair the balcony to repair the damage to the garage that was damaged as a result of defective work.
Carithers is the first court that held defective work was covered by insurance because the defective work had to be repaired or replaced to repair other damage caused by defective work. In prior decisions, if property was damaged to repair or replace defective construction, the cost to repair or replace previously undamaged work to repair or replace a contractor’s defective work was not covered by insurance. In other words how defective work was repaired could not convert damages not covered by insurance into damage covered by insurance.
If Carithers is followed by Florida state courts, insurers will now have to determine whether defective work, which was not previously covered by insurance, has to be repaired or replaced in order to repair property damaged by defective work.
For example, an insurer of a general contractor will no longer be able to avoid paying for the cost to repair stucco that was improperly applied by its subcontractor if that stucco has to be removed to repair damage resulting from water penetrating through a crack in that stucco.
This does not mean that insurers will now have to pay for defective construction since nearly all commercial liability insurance policies contain exclusions that eliminate insurance for an insured’s defective work or work performed on the insured’s behalf. Whether this exclusion applies may very well determine if the contractor or its insurer have to pay to repair defective construction.
In Essex Insurance v. Kart Construction, the Middle of District of Florida found that exclusions that limit coverage during construction did not apply. In that case the insured was welding a portion of the metal exterior of a cell tower. The welder was notified of a fire shortly after he completed his work. The fire damaged the tower, as well as antennas, cabling, foundations and other equipment.
The Essex court limited the applicability of exclusion j(5) to property damage to that particular part of real property that the insured was performing its operations at the moment of the accident. In doing so, the court rejected Essex’s argument that the exclusion applied to damage to work the contractor performed under a related agreement for fire prevention during its welding operations.
The court relied on the Fifth District Court of Appeal decision in American Equity Insurance v. Don Van Ginhoven. In that case the court ruled that exclusion j(5) excluded coverage for damage to a pool that popped out of the ground after it was drained to repair tile, rejecting the insured’s position that the exclusion only applied to the tiles the contractor was working on that the time of the incident.
However, the Van Ginhoven court held the insurer was obligated to pay for the cost to repair the property that was damaged when the pool popped out of the ground.
Since Van Ginhoven courts determined whether exclusion j(5) applied by looking at what the contractor was hired to repair as opposed to the temporal aspect of this exclusion. The Essex court observed if the application of exclusion j(5) only relied on the scope of an insured’s contractual obligations then the Van Ginhoven court “would not need to focus on the fact that Van Ginhoven ‘was draining the pool’ ‘when the pool popped.’ ” The court held that since the fire suppression work was finished before the welding was performed that exclusion j(5) did not apply. The court then rejected Essex’s argument that since part of the fire suppression contact including monitoring the work there was no coverage for the entire tower.
The court called Essex’s position “implausible” since monitoring is not performing operations on anything. The court also found that exclusion j(5) did not apply since the damage did not arise out the insured’s monitoring activities but rather out of its welding operations. The court then concluded that exclusion j(5) only excludes from coverage “damage to ‘that particular part’ of real property on which the insured is operating at the time of the accident.”
The court then went on to discuss exclusion j(6) noting that unlike exclusion j(5), exclusion j(6) did not have a temporal aspect. Thus exclusion j(6) precludes coverage for a particular part of property that an insured incorrectly performed on that must be repaired or replaced even if the damage does not take place at a time the work was performed.
Returning to the facts in Essex, the court noted that exclusion j(6) “might exclude damage to the tower” if the insured “incorrectly performed fire-prevention work on the tower … and that incorrect work caused, or contributed to the tower’s damage.”
If courts follow Essex exclusion j(5) will only preclude coverage to that particular part of the work that was damaged at the time of the accident. Thus exclusion j(5) will have very limited application. However insurers should still be able to rely upon j(6) to argue they are not responsible to pay for certain property damage that takes place during construction because of the insured’s defective work.
Ronald L. Kammer is a Miami partner at the national law firm of Hinshaw & Culbertson and co-leader of its specialty litigation and insurance coverage department. Kammer is the partner-in-charge of the firm’s Miami office.