Insurers have an obligation to defend and indemnify resulting construction damages.

posted by Joseph Spoonster  |  Jan 17, 2012 2:27 PM in Insurance Law

Some courts have adopted a mantra that commercial general liability insurance policies are not “performance bonds” and, as such, do not to insure the risks of an insured causing damage to the insured's own work.  This narrow view focuses on the perceived intent of a CGL policy and ignores the language of the policy.   The Sixth Circuit’s decision in Fortney & Weygandt, Inc. v. American Manufacturer’s Mutual Ins. Co., 595 F.3d 308 (6th Cir. 2010), demonstrates that such a knee jerk reaction is not appropriate.  In that case, the Sixth Circuit ruled that a duty to defend is owed to a contractor that defectively constructed the foundation of a building, where the claim alleged that the entire building was demolished and replaced as a result of the defective foundation.

The insurance carrier argued that there was no duty to defend or to indemnify because the (j)(6) exclusion excluded damage to “That particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”  The court correctly concluded that the (j)(6) exclusion excludes coverage for the cost of replacing the defective foundation, the exclusion does not prevent recovery for damages caused to the contractor’s non-defective work, i.e. the remainder of the building. 

Apart from the foundation, none of the contractor’s other work on the building was defective.  The Sixth Circuit framed the question of coverage as being whether coverage was excluded for the cost of replacing non-defective parts of the building that were replaced because of the insured's defective work on another part of the building.  The court concluded that coverage for the non-defective work was not excluded.

Following a decision from the Fifth District Court of Appeals in Mid-Continent Casualty Co. v. JHP Development, Inc., 557 F.3d 207 (5th Cir. 2009), the Sixth Circuit concluded that “The opening words of the exclusion – namely, ‘[t]hat particular part’--are trebly restrictive, straining to the point of awkwardness to make clear that the exclusion applies only to building parts on which defective work was performed, and not to the building generally. And we also agree that ‘part,’ as used in this exclusion, means the ‘distinct component parts’ of a building--things like the ‘interior drywall, stud framing, electrical wiring,’ or, as here, the foundation.  The (j)(6) exclusion therefore applies only to the cost of repairing or replacing distinct component parts on which the insured performed defective work.”

The analysis of whether exclusions in an insurance policy apply to deny coverage will turn on the facts of each construction case.  The Sixth Circuit’s decision though establishes that insurance coverage may exist in negligent construction cases, even where the damage is to the contractor’s own work product.

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