J. Kent Holland, Jr.
Where a contractor was sued for defective work on a construction project, it demanded that its commercial general liability (CGL) policy carrier provide coverage for the claim. A trail court ruled that the policy did not cover the damages because they were excluded by the “work-product exclusion” of the policy. This was reversed on appeal, with the court holding that the subcontractor exception to the work-product exclusion rendered the exclusion inapplicable. In addition, the court held that the policy provided coverage for this loss under its “products-completed operations hazard” provision.
In Supreme Services and Specialty Co., Inc. v. Sonny Greer, Inc. (04-1400, Louisiana , 3d Cir. Court of Appeal – 2006), Supreme Services and Specialty Co. (Owner) contracted with Sonny Greer, Inc. (Contractor) for the construction of a commercial building on a lot owned by Supreme. After the project was completed the Owner sued Contractor for breach of contract and breach of a separate warranty agreement arising out of a problem with cracks in a concrete slab installed by the contractor’s subcontractors. Contractor filed a third party claim against its CGL carrier, AXA Global Risk U.S. Insurance Company (AXA). AXA filed a motion for summary judgment alleging that the policy specifically excluded coverage for damages arising out of Greer’s work. The contractor in turn filed a motion for summary judgment against AXA seeking a declaratory judgment that the AXA policy provided coverage. The trial court granted judgment for AXA – finding that the exclusion precluded coverage for the damages.
In its reasons for judgment in favor of AXA, the trail court explained as follows: “The issue before the court is whether the ‘work product’ exclusions in the CGL policy exclude coverage to Sonny Greer, Inc. The pertinent exclusion in the policy reads as follows: Property damage to … (6) that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it. 19. ‘Your work’ means: a. work or operations performed by you or on your behalf; and b. Material, parts or equipment furnished in connection with such work or operations.” The court found that this exclusion applied to the work performed by the subcontractors on the concrete slab. The cracks in the slab did not cause damage to any other property at the site. It was only the damage to the work itself that was at issue. (Note: This application of what is commonly called the “your work exclusion” is how insurance carriers intend for the policy to be read and applied. The key that sometimes permits a contractor to get around the exclusion is that some policies only apply the exclusion to the contractor’s own work and not to work performed by a subcontractor for the contractor. The language of the policy in this case, however, was apparently intended by the carrier to apply equally regardless of whether the work was performed by prime contractor or its subcontractor.)
In reversing this decision, and finding coverage, the appellate court quoted at length from the policy, focusing on exclusion j. “Damage to Property”, exclusion k. “Damage to Your Product”, and exclusion l. “Damage to Your Work.” The court also focused on the definitions of Property Damage”, “Your Product”, “Products-completed operations hazard”, and “Your Work.”
The Property Damage exclusion stated that there would be no coverage for “That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the ‘property damage’ arises out of those operations.” (j. (5)). It also excluded “property damage” to “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” (j. (6)). An exception to the j.6 exclusion stated “Paragraph (6) of this exclusion does not apply to ‘property damage’ included in the ‘products-completed operations hazard.”
In exclusion L, the policy stated that it would not provide coverage for “’Property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’” An exception to this exclusion stated “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.”
Based upon its review of the second paragraph of 2.L stating that the work-product exclusion does not apply to work done by subconrtractors, the court concluded that this constitutes an excepton to the work-product exclusion and thereby creates a conflict with exclusion 2j(5), “which purports to exclude coverage for the work-product of subcontractors as well as the insured.” The court found “the subcontractor exception to the work-product exclusion in part ‘l’ herein renders the exclusion in the AXA policy inapplicable. To the extent that other language conflicts with the exception, the ambiguity created by the conflict also leads to a finding that the work-product of each subcontractor of Greer is covered under the policy.”
The contractor also argued that the policy provided coverage under the “products-completed operations hazard” provision of the policy.” The court agreed that it did. To reach that decision, the court interpreted the damage to the contractors and subcontractors concrete work itself to be property damage arising out of completed operations, and also understood this work to be a “work product” creating product operations liability instead of “your work” which would have been excluded. (Note: This is paraphrased based upon the way the author of this casenote understands the court’s explanation). Since the court sees this as a work product and products-completed operations hazard, it looked to the language of exclusion 2j(6) which excludes insurance for “that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” The court relied upon the exception to that exclusion which states “Paragraph (6) of this exclusion does not apply to ‘property damage’ included in the products-completed operations hazard,” and concluded that the exception rendered the exclusion void as to the cracked concrete which the court opined was work product of the insured with regard to property damage included in the “products-completed operations hazard” provision.
Comment: In reading this decision it is easy to see why contractors file suit against their carriers who deny coverage based on exclusions that although they have a long history of use in the market place may yet appear to some courts to be ambiguous and confusing. Generally, the type of loss in question in this case would be called damage to “your work” and would be excluded pursuant the damage to your work exclusion of the policy. The court focused instead on work “product” and on “completed operations” neither of which seem most appropriate.
The view of many courts would be that damage to a contractors own work is not deemed “Property Damage” within the context of the policy, or that it is not caused by an “accident” and is therefore not covered. The language in the policy at issue made it clear that the exclusion for damage to the contractor’s own work applied regardless of whether the work was performed by the prime contractor or its subcontractors. Some other policies are not as clear on this point and courts have found coverage where the work in question was performed by a subcontractor rather the insured prime contractor.
In a lengthy law journal article that I co-authored with John B. Lennes, Jr. (Zurich North America Insurance), entitled “The Jonah Perspective on Construction Defects: A View from Inside the Fish,” (Federation of Defense & Corporate Counsel, Vol. 53, No. 4 – 2003), we review the wide variety of court interpretations of policy language that often creates insurance coverage where insurance carriers thought they had carefully constructed language to limit or exclude coverage, which AXA no doubt thought it had done in this case. If you are considering suing your carrier for denying coverage you may find this article useful in framing your arguments.
About the author: Kent Holland is a construction lawyer in Tysons Corner, Virginia, and is a risk management consultant for environmental and design professional liability insurance and contracts. He is also publisher of ConstructionRisk.com Report. He may be reached at Kent@ConstructionRisk.com. This article is published in ConstructionRisk.com Report, Vol. 8, No. 6.