By: J. Kent Holland
Where masonry walls collapsed during construction due to premature removal of supportive braces, a commercial general liability policy provided no coverage for the loss because such loss was excluded under the defective work exclusion of the policy.
In Farmington Casualty Company, v. Rick Duggan, ( U.S. 10th Cir, No. 04-1200, Aug 2005), the court eloquently describes the facts of the case as follows: “Without so much as the blast of a shofar, the perimeter masonry block walls of … [the] partially constructed office building in Golden, Colorado, came tumbling down in a high wind in December 1997.” The matter went to arbitration. The arbitrator concluded that the cause for the walls falling was primarily the negligence of a subcontractor, Masonry Designs. Before the building owner, Rick Duggan, was able to recover the $500,000 judgment from Masonry Designs, however, Masonry Designs went out of business.
Rather than waiting for Mr. Duggan to assert a claim against Masonry Designs’ commercial general liability (CGL) policy, the CGL carrier, Farmington Casualty, brought a declaratory judgment action against Duggan, asking the court to declare that the policy did not cover the arbitrator’s award. The trial court concluded that there was coverage and ruled against Farmington . On appeal, this was reversed.
The 10th Circuit Court of Appeals addressed several distinct arguments that are important. First, the court explained, “The purpose of a CGL policy is to protect the insured from liability for damages when his own defective work or product damages someone else’s property.” As stated by the court, “The rationale for such exclusions is that faulty workmanship is not an insurable ‘fortuitous event,’ but a business risk to be borne by the insured.” The policy excluded coverage from damage to “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”
There was a typical exception to the defective workmanship exclusion to the extent that the damages might arise out of completed work. This exception to the exclusion extends coverage to property damage included in the “products-completed operations hazard.” Work is deemed completed according to the policy “when all of the work called for in your contract has been completed.”
The subcontract under which Masonry Designs was performing required Masonry Designs to build the masonry walls and also to “clean the walls with a light acid solution.” Only a third of the acid-washing had been finished as of the time the walls fell. The trial court concluded that the work was sufficiently completed at that point to be deemed “completed’ for purposes of the coverage under the products-completed operations coverage. The appellate court disagreed with that reasoning, and held it that relevant coverage under the policy kicks in only after ALL the work has been completed. For these reasons, the appellate court held in favor of the insurance carrier denying coverage.
Comment: For another case addressing the question of coverage for defective work and the application of the specific language of the exclusions, see Limbach Company, LLC v. Zurich North American (CA-03-685-A, 4th Cir. U.S. Ct. App., Jan 2005), discussed in Vol. 7, No. 4, July/Aug, 2005 of this newsletter. In that case the prime contractor was able to recover under its policy for the losses caused by faulty work of its subcontractors. The court focused on the meaning of “your work” in the defective work exclusion. The policy in that case excluded “’Property damage’ to ‘your work’ arising out of it or any part of it.” An exception to the exclusion provided: “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.” Making this exception key to its argument for coverage, Limbach argued that its insurance claim covered the cost of repair or replacing damaged work performed by subcontractors and third parties rather than work performed directly by the contractor. Thus, Limbach argued that the damaged work was not excluded from coverage under its policy since it had not itself performed the work.
The opinion in the case of Farmington Casualty Company, v. Rick Duggan does not explain why the subcontractor, Masonry Designs, was held liable directly to the project owner, instead of the owner having only an action against its prime contractor. Perhaps the arbitration proceeding joined the subcontractor into an action that was brought by the owner against its prime contractor. It is possible that different questions might have been raised if it had been the prime contractor and its insurance carrier that had been the subject of the insurance litigation.
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. 1.