Where a subcontractor, without knowledge or permission of the prime contractor, purchased and installed shingles on the roof of a new garage that were a different color and an inferior grade than specified by the contract, the homeowner sued the prime contractor for damages for breach of contract, negligence and consumer fraud.  The prime contractor’s general liability (CGL) carrier defended the case.  Before the case was given to the jury for deliberations, the plaintiff withdrew the negligence count of the complaint.  The jury returned a verdict for the plaintiff on the remaining counts of breach of contract and consumer fraud.  The CGL carrier then withdrew its defense and refused to indemnify the prime for the damages awarded by the jury – stating that the award was not covered by the terms of the policy.  Both the trial court and appellate court found that the CGL carrier correctly denied coverage because there had been no “property damage” as defined under the policy.

In a declaratory judgment action by the prime contractor against its CGL carrier, the trial court ruled in favor of the insurance carrier on a summary judgment motion – holding that the jury award was excluded from coverage under the policy.  On appeal, the appellate court affirmed the decision, and explained that the basis of its holding was that neither “physical injury” nor “loss of use” of property occurred in this case.

The key to the court’s decision was the term  “property damage” which was defined by the policy (CGL Form 23-3) to be “physical injury to tangible property” or the “loss of use of tangible property that is not physically injured.”

The court decided that although the shingles were inferior in quality and different in color from those specified in the contract, “Nothing in the record, however, suggests that any physical defect existed in the shingle material used or in the manner in which the shingles were installed, or that the [homeowner] was unable to use their new garage as a result of the inferior shingles.”    For this reason, the court stated “We decline to find coverage for aesthetic damage under a CGL policy that does not explicitly provide for it.”    Down Under Masonry, Inc. v. Peerless Insurance Co., 950 A.2d 1213 ( Vt. 2008).

Comment: Where the only item asserted to be damaged is the work itself, many cases have held that the “your work” exclusion in the policy bars coverage.  In this case, the court did not address that issue.  It limited its review to the more basic question of whether an inferior quality product that was aesthetically unpleasing to the homeowner could be considered to be “property damage” under the policy.  There was no allegation that the shingles leaked or that they otherwise permitted damage to occur to other parts of the building or to equipment stored inside the building.  Had there been such allegations, there are a number of court decisions in various jurisdictions holding that the damages to these areas or items (other than the shingles themselves) could potentially be covered as “property damage” under the policy.

An interesting aspect of the fact pattern in this case, not discussed by the court, was that the jury found the prime contractor liable for fraud.  Fraud is not covered by insurance.  In a case where a plaintiff drops the negligence count from its complaint but prevails on its fraud count, it seems a reasonable argument could be made that all losses, costs, and damages arising out of the fraud (including breach of contract caused by the fraud) would be excluded.

About the author: J. Kent Holland is a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is also founder and president of ConstructionRisk, LLC, a consulting firm providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report at www.ConstructionRisk.com (Jan 2009).