Costs incurred by a prime contractor to remediate mold damages caused by subcontractor’s defective work may be covered under umbrella liability policy.
The trial court accepted the insurer’s argument that damage caused by the subcontractor’s work did not constitute an “occurrence” that triggered coverage and therefore granted summary judgment in favor of the insurance company. However, the U.S. Court of Appeals for the Fourth Circuit held that the language of the policy did not exclude coverage for the unintended, unexpected spread of mold from the subcontractor’s defective trusses to surrounding nondefective components. Thus, “any mold damage that spread beyond the defective trusses and the gypsum firewalls to nondefective components of the townhouses was an unintended accident, or an occurrence that triggered coverage under the Ohio Casualty policy.”
In Stanley Martin Cos. v. Ohio Cas. Group, No. 07–2102 (4th Cir. 2008) (unpublished), a subcontractor supplied wood trusses for 24 duplex townhouses. After the houses were completed, homeowners reported mold growth in their homes. An investigation revealed that the mold had originated from defective trusses and surrounding gypsum firewalls. The mold problems led to lengthy litigation, and the prime contractor incurred over $1.7 million in remediation costs.
The Insurance Policy
The dispute involved whether an “umbrella insurance policy” issued by Ohio Casualty Insurance Company to the prime contractor was triggered by the mold damage as “an accident.” The pertinent policy language is as follows:
We will pay on behalf of the “Insured” those sums in excess of the “Retained Limit” that the “Insured” becomes legally obligated to pay by reason of liability imposed by law or assumed by the “Insured” under an “insured contract” because of “bodily injury,” “property damage,” “personal injury,” or “advertising injury” that takes place during the Policy Period and is caused by an “occurrence” happening anywhere.
There was also a “your work” exclusion in the policy as follows:
[A]ny property damage … to “your work” arising out of it or any part of it included in the “products-completed operations hazard”; (but this Subparagraph (2) does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor)….
This policy provided excess coverage that supplemented the contractor’s commercial general liability (CGL) policy issued by another insurer (One Beacon Insurance) with the same effective period.
The Trial Court Decision Granting Summary Judgment
The issue that the trial court decided on the motion for summary judgment was that the umbrella policy insurer (Ohio Casualty) did not breach its duty to indemnify the prime contractor when it refused to contribute to the remediation costs the contractor incurred to address the mold problems.1 The trial court found that the prime contractor failed to show any evidence of third-party damage beyond the costs it incurred to repair the defective trusses and gypsum firewalls. In deciding there was no coverage under the policy for such repairs, the court stated:
As a general contractor, [Stanley Martin] was responsible for fulfilling the terms of its contracts, and [the subcontractor’s] faulty workmanship falls on [the contractor’s shoulders] …. Because [the contractor’s] remediation costs arose out of damage to [the contractor’s] own “work” caused by the faulty workmanship of its subcontractor, the property damage was not “unexpected” or an “accident.” Therefore, this Court will find that under Virginia law there was no “occurrence,” and the Ohio Casualty policy was not triggered.
Reasoning for Appellate Court Reversal
In reversing the summary judgment, the Fourth Circuit rejected the insurance company’s argument that the damages were caused by the initial installation of defective trusses and did not result from a subsequent occurrence of mold. The insurer argued that the source of the ensuing damage was the defective trusses that were already present in the townhouses when they were completed. Any subsequent spread of mold, argued the insurer, merely represented a further deterioration of the already defective work rather than a new, unexpected event that would trigger coverage.
In rejecting this argument, the court stated, “This labored distinction places more weight on the policy language than it can bear.” According to the court, “The policy’s definition of occurrence is broad and inclusive, providing coverage for any ‘accident’—that is, any ‘event that takes place without one’s foresight or expectation.'”
The court noted that the insurer was unable to point to language in the policy that would exclude coverage for unintended, unexpected spread of mold from the defective trusses to surrounding nondefective components, “nor could we find any.”
Although agreeing with the trial court that the prime contractor’s obligation to repair or replace the defective trusses was not unexpected or unforeseen and would, therefore, not trigger a duty to indemnify, the appellate court concluded that:
any mold damage that spread beyond the defective trusses and the gypsum fire walls to nondefective components of the townhouses was an unintended accident, or an occurrence that triggered coverage under the Ohio Casualty policy.
The issue of whether the contractor showed there to be damages beyond the costs it incurred in repairing or replacing the defective trusses is disputed by the parties, the court said. Consequently, the court reversed the summary judgment and remanded the case back to the trial court to determine whether the subcontractor’s defective work caused damage to the prime contractor’s nondefective work, which damage would be covered under the policy.
1Author’s comment: It should be noted that the decision of the appellate court does not explain whether the CGL insurer, One Beacon Insurance, indemnified the contractor under the CGL policy for the damages in question up to the limit of its policy. Nor does the decision address the issue of whether a pollution exclusion was included in the policy and, if so, why such an exclusion was not applied to bar coverage for mold damage. Presumably, there was no pollution exclusion applicable to the damages claimed in this matter.
About the author: Article written by J. Kent Holland, Jr., 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 founder and president of a consulting firm, ConstructionRisk, LLC, 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, (Jan 2010).