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Gail S. Kelley, P.E., J.D.
ConstructionRisk, LLC

After discovering various defects in their home, the homeowners filed suit against their builder. The builder’s insurance company declined to defend the action (“the underlying action”) on behalf of builder, alleging that the damage, which was not apparent until several years after the house was constructed, occurred after the builder’s insurance policy had been terminated. The policy at issue was a standard ISO commercial general liability (CGL) policy with products-completed operations hazard. The homeowner and builder entered into a consent judgment whereby the homeowners were assigned the builder’s right to seek reimbursement of the judgment from its insurance carrier. After some back and forth in state and federal court actions, it was held that the carrier had a duty to defend the builder. Carithers V. Mid–Continent Casualty Company, 782 F.3d 1240 (CA 11, 2015).

Mid-Continent raised three contentions in its appeal. First, it contended that it did not have a duty to defend the builder in the underlying action and if there was no duty to defend, there was no duty to indemnify the builder for damages. Second, it contended that the trial court should have allowed it to amend its answer to the complaint to include a coverage defense based on the fungus and mold exclusion in the builder’s policy. Third, it contended that the trial court improperly awarded damages for defects that were not considered property damage under the policy.

The trial court had concluded that while the policy’s coverage for “property damage” did not include the defective work of a sub-contractor, it did include damage to other property caused by a sub-contractor’s defective work. Based on this conclusion, the court determined that: (1) an incorrect application of a coating caused property damage to the exterior brick; (2) inadequate adhesive and an inadequate mud base caused property damage to the tile; and (3) defective construction of a balcony allowed water to seep into the garage leading to wood rot, which caused property damage to the garage. The trial court awarded damages for the brick, the tile, and the balcony. Although the balcony was not property damage (because it was the defective work of a sub-contractor), the court found that it had to be replaced in order to repair the garage, which was property damage.

Duty to Defend

The Court of Appeals first addressed the carrier’s duty to defend, which hinged on when coverage under the policy was implicated. The carrier argued that property damage under a CGL occurrence policy occurs when the damage is actually discovered or discoverable by reasonable inspection (the so-called “manifestation” trigger). The homeowners, on the other hand, argued that the property damage occurred at the time the home was damaged, in other words, at time the defective construction was performed (the so-called “injury-in-fact” trigger).

The Court of Appeals held that the carrier had a duty to defend because it was unclear whether there would be coverage for the damages sought by the homeowners, as no Florida appellate court has decided which trigger applies. It is well settled law that an insurer’s duty to defend is broader than the duty to indemnify; the duty to defend arises any time there is a possibility that a claim may be covered by the policy. In this case, the appellate court found that there was a possibility that Florida would adopt the injury-in-fact trigger and the claims would be covered, thus the carrier was required to defend the builder in the underlying action.

Coverage Trigger

The Court of Appeals did not actually decide what should be used as a coverage trigger, noting the difficulty that can arise in cases such as this one, where the property damage is latent and is not discovered until long after construction. The court simply accepted the district court’s determination to apply the injury-in-fact trigger. This meant that the property damage occurred while the builder’s CGL policy was in force.

Coverage for Certain Defects

Coverage for the damage caused by the defective construction was claimed under the CGL policy’s products-completed operations hazard. Under the products-completed operations hazard, a subcontractor’s defective work that has damaged the otherwise non-defective completed project has caused ‘physical injury to tangible property’ within the plain meaning of the definitions in the policy. While there is no coverage for repairing or removing defective work, there is coverage for the costs of repairing damage caused by a subcontractor’s defective work.

The Court of Appeals emphasized the distinction between defective work and damage caused by defective work. With respect to the damage to the brick, if the coating that caused the damage was applied by the same subcontractor that installed the brick, the damage to the bricks was part of the sub-contractor’s work, and the defective work caused no damage apart from the defective work itself. Since the homeowners presented no evidence to show that the brick installation and coating application were performed by different sub-contractors, the Court of Appeals held there was no coverage under the policy for that damage.

Likewise, if the adhesive and mud base were installed by the tile sub-contractor, the sub-contractor’s defective work caused no damage apart from the defective work itself. Since there was no evidence to show that the adhesive, mud base and tile were installed by different sub-contractors, the Court of Appeals held that there was no coverage under the policy for those damages. The Court of Appeals found that the fact that the homeowners had purchased the tile themselves, rather than the subcontractor purchasing them, made no difference to the holding.

The lower court concluded that in order to repair the damage to the garage (which the parties agreed was covered by the policy, because it had been damaged by defective construction), the balcony had to be rebuilt.  Under Florida law, the homeowners had a right to “the costs of repairing damage caused by the defective work….”. Since the court determined that it was necessary to remove the balcony to repair the garage, the Court of Appeals agreed that the homeowners were entitled to the cost of repairing the balcony and that this was covered under the builder’s policy

Although the damage to the garage included wood rot allegedly caused by fungus, the Court of Appeals found that the District Court did not abuse its discretion in denying the carrier’s motion to amend its answer to assert a defense based on the fungus and mold exclusion in the CGL policy. This was because the court concluded that the carrier was aware more than a year before trial, of the homeowner’s expert witness opinion that the wood rot was caused by fungus, and did not file its motion to amend until the homeowners had presented all of their evidence at trial. Essentially the court applied the principle of laches. The carrier sat on its rights too long to enforce them so late in the litigation.

Comment:

On the issue of whether there was coverage for the damage to the tile, the appellate court found that it made no difference that the homeowner purchased the tile instead of it being purchased by the subcontractor. In reaching that conclusion, the Court of Appeals distinguished this case from a previous Florida case, Auto–Owners Insurance Co. v. Pozzi Window Co., 984 So.2d 1241 (Fla. 2008). In that case, windows that were purchased separately by the Homeowner were damaged as a result of faulty installation. The Pozzi Windows court found that this was property damage under the policy, as there was physical injury to tangible property other than the work itself.

The Carithers court instead followed a previous 11th circuit decision, Amerisure Mutual Insurance Co. v. Auchter Co., 673 F.3d 1294 (11th Cir. 2012).   In Auchter, a sub-contractor negligently installed tiles on a roof and the entire roof needed to be replaced and the court held that that the defective work was the entire roof, not just the tiles, and thus there was no coverage under the policy since the sub-contractor’s defective work (the roof) did not cause damage to any other property.

 

About the Author:  As a professional engineer, Gail Kelley has performed structural design and analysis of post-tensioned structures, has performed constructability reviews, due diligence inspections, and condition assessments, and has provided litigation support for construction defect and delay claims in both state and federal court.  She received her B.S. in Civil Engineering from Cornell University, and Master of Science in Structure and Materials from Massachusetts Institute of Technology (MIT), and she received her Juris Doctorate from American University, Washington College of Law.  She provides risk management services for ConstructionRisk, LLC.   This article is published in ConstructionRisk.com Report, Vol. 17, No.8 (November 2015).

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