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By:  J. Kent Holland, Jr.

Prime contractor’s commercial general liability (CGL) policy was held to clearly and unambiguously exclude coverage for faulty workmanship performed by a subcontractor.   Prime contractor, Greer Construction, was hired by the project owner for construction of an oilfield service facility.  Subcontractors working under the supervision of Greer poured concrete that cracked in both the building and exterior slabs.  The prime contractor then cut out the cracked sections and poured a new slab in its place.  Cracks continued to develop in the concrete, however.  The owner filed suit against its prime contractor and the architect to recover damages resulting from the allegedly faulty design and construction of the concrete slabs.  Greer brought a third-party claim against its insurer, AXA Global Risk U.S. (AXA) to defend and indemnify it under its CGL policy.  AXA moved for summary judgment, arguing that the “work product” exclusion of the policy excluded coverage for improper construction by the insured’s own workers or any of its subcontractors.  The trial court granted the summary judgment motion for AXA but that decision was reversed by the court of appeal which held that (1) the “work product” exclusion was inapplicable to the work performed by subcontractors and (2) the “products-completed operations hazard” (PCOH) provision was ambiguous and should be interpreted in favor of coverage.   The Supreme Court of Louisiana reversed the appellate court decision and reinstated the trial court decision in favor of AXA for the reasons explained below.

The exclusions of the CGL policy in question included exclusion j. “Damage to Property”, subparagraph (6), which states that insurance does not apply to property damage to “That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.”   A concluding paragraph of the property damage exclusion (j) states: “Paragraph (6) of this exclusion does not apply to “property damage” included in the “products-completed operations hazard.”

Two other exclusions were also at issue.  Exclusion (k) “Damage to Your Product” excludes coverage for “Property Damage” to “your work” arising out of it or any part of it.”  Exclusion (L) “Damage to Your Work” excludes coverage for “Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.”

The ambiguity that the court of appeal found was based on the fact that a concluding paragraph of the “L. Damage to Your Work” exclusion provides: “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.”

In the definitions section of the CGL policy, “Your work” is defined to mean: “(a) Work or operations performed by you or on your behalf; and (b) Materials, parts or equipment furnished in connection with such work or operations.”

The Louisiana Supreme Court decision in Supreme Services and Specialty Co., Inc. v. Sonny Greer, Inc. (06-C-1827 — May 2007), begins its analysis with an explanation (quoted in part form the Civil Law Treatise of the state) that the “work product” exclusion reflects the insurance company’s intent to “avoid the possibility that coverage under a CGL policy will be used to repair and replace the insured’s defective products and faulty workmanship.”  As noted by the court, a CGL policy is not written to guarantee the quality of the insured’s work in process.   In this case, the court found that the “work” includes the operations of the prime contractor as well as the subcontractors who performed on behalf of the prime, and that this “work” included the laying of the concrete slab by the subcontractor.  “We find that a reading of the exclusionary language in this liability policy makes it clear that damage to the product itself (concrete slabs) is excluded from coverage.”

Applying exclusion (j)(5), the court found that the policy excluded coverage for the damage to the property on which the prime contractor and its subcontractor worked.  Applying exclusion (j)(6), the court found that the CGL policy excluded coverage to property (concrete slab) that must be repaired or replaced because the work performed by the contractor, or on its behalf, was incorrectly performed.

With regard to whether the “products-completed operations hazard” (PCOH) exclusion had applicability in this case and created ambiguity with the “work product” exclusion, the court explained that there was no conflict and no ambiguity because the PCOH exclusion is not to be applied to the faulty work itself but rather to “other damage that might arise from faulty work.”   The court analyzed decisions cited by the contractor where coverage had been found, and concluded that in those cases there had been damage to persons or property and not just to the work product itself.  In the absence of injury to a third person or product as a result of the damaged work, the court concluded that the PCOH coverage would not triggered. Therefore, only the “work product” exclusion remains in play, and that exclusion clearly excludes coverage.  Quoting from another decision upholding the work product exclusion, the court explained that “repair and replacement costs for faulty work are excluded, whereas, any damage to other property that may result is included.”  Another decision that was quoted by the court explained its own reason for finding no ambiguity between the “work product” exclusion and the PCOH provision as follows:

“The products hazard definition allows generally for coverage to property damage ‘arising out of’ the insured product.  The work product exclusion precludes recovery for damage to the product itself.  Coverage remains for personal injury and ‘other property’ damage.  The purpose of any exclusion is to limit the coverage provided elsewhere in the policy; the fact that this exclusion effectively limits some of the coverage provided does not yield an automatic ambiguity.  An argument that a policy provision is ‘somewhat confusing’ does not warrant a finding of ambiguity.”

The court went on to hold that a CGL policy containing the “work product” exclusion and the PCOH provisions is not inherently ambiguous and that the inclusion of the two provisions does not “create a vagueness or possible room for dual interpretation of the policy.”   The court’s explanation for its reasoning is so clear that it is quoted here at length as follows:

“In reviewing both the ‘work product’ exclusion and the PCOH provision, we find no contradiction in their language.  Under the ‘work product’ exclusion, the insured or its subcontractor becomes liable for damages to its work or its product caused by its faulty workmanship.  Under the PCOH provision, damages, other than the faulty product or work itself, arising out of the faulty workmanship are covered by the policy.  Stated differently, if a subcontractor’s faulty electrical work caused the building to burn down before completion, the ‘work product’ exclusion would eliminate coverage for the faulty electrical work performed by the contractor or subcontractor.  However, the operations hazard coverage applies not to the faulty work, but to damages arising out of the faulty work.  Damage to real property arising out of the faulty work (fire damage) would not be excluded as it would be covered under the PCOH provision.  The case sub judice involves a claim for damages to the work product itself, i.e., cracked concrete slab, not a claim arising out of the work and covered by the PCOH provision.  Thus, the exception for the work performed on the insured’s behalf by a subcontractor under the PCOH damage section of the policy simply is inapplicable to the present case.  In other words the PCOH provision only applies to those injuries which might occur as a result of the damaged product.  In the instant case, there is no need to delineate the PCOH provision because there is no other product damaged or third person injured.  Here, the only applicable provision is the ‘work product’ exclusion, which applies to work performed by Greer or on its behalf by subcontractors.”

For these reasons, the state Supreme Court held there was no coverage for damage to the concrete slab.

Comment:   In addition to the above-described explanations of the court’s reasoning, the court quoted from the Louisiana Civil Law Treatise article by Professors McKenzie and Johnson, who explained the PCOH provision with the following example:  “Suppose an insured contracted to make and install a sign on a commercial building.  After the work was completed, the sign fell due to defective installation, causing damage to the sign, the building’s canopy, a parked car, and also bodily injury to a pedestrian.  The insurer covering the products-completed operations hazard would cover all claims except the contractor’s responsibility to repair and replace the sign, coverage for which would be excluded under the product and work exclusions.”

In this decision, the court has provided a clear and logically reasoned explanation for how the sections of a CGL policy work together to provide coverage for damages to third persons and to property other than the contractor’s and subcontractor’s own work.  The CGL language concerning “work product” exclusion and the “products completed operations hazard” provision may not win any writing awards for artistic writing.  But, the lack of great writing style doesn’t, in the opinion on this court decision, make the policy ambiguous and unenforceable.  But the policy language continues to be interpreted and applied differently by different courts in different jurisdictions.  How the claimant asserts the nature of the damages has much to do with the outcome of the case as to whether a court finds coverage under the insurance policies.

About the author: Kent Holland is a construction lawyer located in Tysons Corner , Virginia , with a national practice representing design professionals, contractors and project owners.  He is principal of ConstructionRisk, LLC, providing insurance risk management services and construction risk management services, including but not limited to, advice to insurance underwriters; guidance to those procuring insurance; change order and claim preparation, analysis and defense; contract preparation; contract review and contract negotiation.  Mr. Holland 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, Vol. 9, No. 6.