A CGL insurance carrier owed a duty to defend its insured against a homeowner suit that alleged defective work, despite lack of clarity in the complaint that the work was performed by a subcontractor, and despite any indication in the complaint that the work caused damage to anything other than the work itself. The homeowner’s complaint alleged (1) “significant cracking in the foundation at the right rear corner of the dwelling, creating an unsafe and potentially life-threatening condition;”(2) “Forrest recklessly performed, or caused to be performed, work of such poor workmanship that it created an unsafe condition, causing a potentially deadly collapse of the residence;” and (3) Forrest recklessly constructed the foundation or recklessly caused to be constructed the foundation of the … residence.”
The carrier denied coverage on the basis that the allegations concerned the insured’s own work, and no coverage existed under the policy due to the “your work” exclusion of policy. The carrier acknowledged the exclusion would not apply “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” In rejecting that argument, the court held that the complaint, as quoted above, included sufficient allegations to get around the exclusion by using the words “or caused to be performed,” “or caused to be constructed.” Forrest Construction v. The Cincinnati Insurance Company, 703 F.3d 359 (6th Cir. 2013).
What is odd about the court’s explanation, however, is that there is no allegation or indication whatsoever that anyone other than the prime contractor actually performed the defective work in question. It seems like the court found a duty of the carrier based on merely the hypothetical possibility that a subcontractor might have performed the work. It is surprising that there was no affidavit or other information to flesh out the details of what happened on the project.
Another aspect of the decision that is surprising is that the court rejected the carrier’s argument that there was no “property damage” as defined by the policy. The carrier argued that only the work itself was damaged, and that based on case precedent, there must be a finding that the defective work caused damage to some property other than the work itself – otherwise there is no property damage to cover. The trial court found that the allegations in the complaint were “ambiguous” regarding the extent of the damage to the house. Despite that finding, however, the appellate court stated that “while not a model of specificity as to the nature of the damages flowing from the faulty foundation, … implies that the faulty foundation caused damage elsewhere in and to the house and allegedly rendered the house unsafe to even enter, putting Cincinnati Insurance on notice that more than the foundation itself was affected by the faulty workmanship and that the [Homeowners] were alleging loss of use of their property.” The court held that the ambiguous complaint must be interpreted in favor of providing coverage to the insured.
Comment: Taken to its logical conclusion, the holding of this decision would mean that even if there was no subcontractor on a project and no damage to anything other than the defective work itself, a CGL carrier would have to defend its insured prime contractor against every construction defect claim. I have no knowledge concerning the facts of this case other than what was reported in the decision.
But what if the insurance carrier investigated the matter and determined that there was no subcontractor. Would that change the outcome? Or would the court still rule that only the ambiguous allegations of the complaint implying that a subcontractor might have been involved still trigger duty to defend despite the actual facts of the matter? And what if the investigation determined there was no damage to any other property? Would that affect the carrier’s duty to defend?
Presumably, the work was indeed done by a subcontractor, and there was actually damage to something other than the work itself in this case, otherwise a carrier is entitled to seek reimbursement of its defense costs from the named insured prime contractor as soon as it is legally determined through depositions or discovery that there were no subcontractors involved in the alleged damages or that there was no actual damage to the house other than the defective work itself.
One thing that is surprisingly missing from the court’s analysis is the nature of the hypothetical injuries and damages claimed. The plaintiff alleged that the defective work created “an unsafe and potentially life-threatening condition.” They also alleged that the poor workmanship “created an unsafe condition, causing a potentially deadly collapse of the residence.”
This type of future possibility of damage is generally rejected by courts as a basis for finding current property damage. More than a mere possibility of future damage must be alleged in most jurisdictions. If I am reading this case correctly, insurance companies insuring construction contractors in Tennessee better take notice that the risk they are insuring just got a lot riskier.
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, Vol. 15, No. 7 (July 2013).
Copyright 2013, ConstructionRisk, LLC