CONTRACTUAL LIABILITY EXCLUSION IN CGL POLICIES AND “INSURED CONTRACT” EXCEPTION

Posted on July 16, 2015July 16, 2015 by Edward Garber

Commercial General Liability (CGL) policies contain a CONTRACTUAL LIABILITY EXCLUSION (see adjacent picture). The contractual liability exclusion operates to BAR personal injury and property damage claims “which the insured is obligated to pay by reason of the assumption of liability in a contract or agreement.” Think indemnification claims which are assumption of liability claims and common in construction.

But, and this is an important but, there are two exceptions to this exclusion.

First, the contractual liability exclusion does not apply to liability for damages “that the insured would have in the absence of the contract or agreement.” Think tort claims.

Second, the contractual liability exclusion does not apply to liability for damages “assumed in a contract or agreement that is an ‘insured contract’.” The key to this exception is the definition of an “insured contract.”

Applicable to construction, a key definition of an “insured contract” is “that part of any contract…pertaining to your business…under which you assume the tort liability of another party to pay for bodily injury or property damage to a third person or organization.” This portion of the “insured contract” definition should ideally bring contractual indemnification claims back into play so that contractual indemnification claims are not barred by the contractual liability exclusion.

Be careful, though. There are endorsements to CGL policies that have modified the definition of “insured contract” to either remove the aforementioned definition all together, meaning contractual indemnification claims would be excluded. This is a bad endorsement to the definition of “insured contract” if you are involved in construction.

Or, this key definition of “insured contract” has been narrowed to include the following underlined language “that part of any contract…pertaining to your business…under which you assume the tort liability of another party to pay for bodily injury or property damage to a third person or organization, provided the bodily injury or property damage is caused, in whole or in part, by you or those acting on your behalf.” This means that if you contractually agree to indemnify another for that person’s negligence, this would not meet the definition of “insured contract” since you are agreeing to indemnify another for negligence not caused in whole or in part by you.

For example, the opinion in Mid-Continent Casualty Co. v. Royal Crane, LLC, 2015 WL 3609062 (Fla. 4^th DCA 2015), discusses this narrowed definition of “insured contract” with the underlined language above. In this case, a subcontractor leased a crane and crane operator from a rental company. The rental agreement between the subcontractor and rental company contained the following contractual indemnification language:

“Lessee [subcontractor] agrees to indemnify, defend and hold harmless Lessor [rental company], its employees, operators and agents from any and all claims for damage to property, damage to the work or bodily injury (including death) resulting from the use, operation, or possession of the crane and operator whether or not it be claimed or found that such damage or injury resulted in whole or in part from Lessor’s negligence, from a defective condition of the crane or operator or from any act, omission or default of Lessor.”

In other words, the subcontractor was agreeing to indemnify the rental company for the rental company’s negligence. This is known as a broad form indemnification provision.

During construction, a worker was hurt when a truss fell from the crane. The worker sued the rental company and the crane operator for negligence. The rental company and operator third-partied in the subcontractor based on the contractual indemnification provision in the rental agreement. However, the subcontractor’s CGL insurer denied coverage (and, thus, a defense in the lawsuit) based on the contractual liability exclusion.

As a consequence of the CGL insurer’s immediate denial of coverage, the subcontractor entered into a Coblentz settlement agreement with the rental company that allowed the rental company to sue the subcontractor’s CGL’s insurer for its wrongful refusal to deny the subcontractor a defense and for coverage under the subcontractor’s policy.

Coblentz Settlement Agreement

In a nutshell, a Coblentz settlement agreement is an agreement between an insured and a third-party claimant where the insurer denied coverage and, thus, the duty to defend its insured in an underlying lawsuit. The insured agrees to give the claimant a consent judgment to resolve the lawsuit and an assignment of its rights under its CGL policy to the claimant in exchange for the claimant not enforcing the consent judgment against the insured. This allows the claimant to now sue the insured’s CGL insurer directly to enforce the consent judgment. In doing so, the claimant must still prove: (a) the insurer wrongly refused to defend its insured, (b) there is coverage under the policy, and (3) the negotiated consent judgment was made in good faith and is reasonable. But, the consent judgment prevents the insurer from trying to argue the liability of the insured since that could have been argued in the underlying lawsuit that the insurer refused to defend its insured in. See Royal Crane, supra, at *4-5. (For more information on Coblentz settlement agreements, check out this presentation that discusses this in detail.)

“Insured Contract”

But, the heart of the case really pertained to the contractual liability exclusion and the definition of an “insured contract” as narrowed by endorsement. With respect to the definition of “insured contract” in the policy (see above language), the Fourth District Court of Appeals importantly held:

“[A]n indemnity agreement can be an ‘insured contract’ under the policy where the injury is caused by the indemnitee’s negligence, so long as the named insured ‘caused’ some part of the injuries or damages or is otherwise vicariously liable.”

Royal Crane, supra, at *7.

In other words, taking the above fact pattern, the indemnity agreement could constitute an “insured contract” to be excepted from the contractual liability exclusion if the worker’s injury was caused by the rental company’s (indemnitee) negligence, so long as the subcontractor (named insured in the CGL policy) caused some part of the injuries or was otherwise vicariously liable to the rental company for the injuries.

Unfortunately for the rental company, even under this favorable definition of an “insured contract”, the rental company’s third-party complaint against the subcontractor still did not trigger a duty of subcontractor’s CGL insurer to defend and cover the subcontractor:

“Hunter Crane’s [indemnitee-rental company] third party complaint did not assert a legal theory under which Cloutier [insured-subcontractor] can be said to have ‘caused’ the injury in whole or in part. No allegation described how Cloutier contributed to causing the accident. No allegation attempted to invoke the borrowed servant doctrine, which dictates that ‘one who borrows and exercises control over the servant or worker of another in effect assumes all liability for the activities of the borrowed servant or worker.’ Nor did the third party complaint cast Cloutier as the employer of an independent contractor who actively participated in or interfered with the job to the extent that it directly influenced the manner in which the work was performed.”

Royal Crane, supra, at *7 (internal quotations omitted).

For this reason, the Fourth District sided with the CGL insurer finding that the contractual liability exclusion barred coverage to the subcontractor such that the CGL insurer had no duty to defend or cover the subcontractor in the underlying litigation. This also meant that the rental company’s Coblentz settlement agreement provided it no value because it already agreed to give up rights to collect against the subcontractor and it could no longer collect against the subcontractor’s CGL insurer. What this case does exemplify, however, is the importance of pleading allegations to maximize insurance coverage as well as a more relaxed definition of an “insured contract” to hopefully prevent the application of the contractual liability exclusion.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

CGL INSURANCE AND CONSTRUCTION DEFECTS (DUTY TO DEFEND; TRIGGERING OF CGL POLICY; COVERED RESULTING DAMAGE)

Posted on April 11, 2015April 3, 2023 by Edward Garber

I previously wrote about insurance coverage issues in a construction defect dispute, specifically in the context of the insurer denying coverage outright and refusing to defend its insured.

As a sequel to this posting, a noteworthy opinion was issued by the Eleventh Circuit Court of Appeals in Carithers v. Mid-Continent Cas. Co., 2015 WL 1529038 (11^th Cir. 2015) in a commercial general liability (CGL) insurance coverage dispute dealing with construction defects to a house. This opinion discusses central issues to an insurance coverage dispute in a construction defect context: the triggering of a CGL policy, the duty to defend, the duty to indemnify, covered resulting damage stemming from construction defects, and a claimant resolving a dispute with an insured in order to pursue rights against the insured’s CGL carrier (also known as a Coblentz agreement).

In this case, the owners hired a general contractor to build their house. The general contractor had CGL insurance with products completed operations coverage. Upon discovering construction defects, the owners sued the general contractor. The general contractor’s insurer refused to defend the general contractor, meaning the insurer denied coverage (which is the last thing the general contractor ever wants to hear). The insurer denied coverage because the complaint alleged that the damages were not discovered until 2010; however, the general contractor did not have any CGL coverage after 2008. Thus, if the manifestation theory applied to trigger coverage (discussed below), there would be no coverage under the CGL policy.

The general contractor and insurer then entered into a consent judgment in the action for $90,000 in favor of the owners that assigned to the owners the general contractor’s rights under its CGL policy. (This forms the framework for what is known as a Coblentz agreement.) The owners then sued the general contractor’s CGL insurer.

The issues in this case were (a) the insurer’s duty to defend its general contractor-insured, (b) the triggering of an occurrence under a CGL policy, and (c) resulting damage covered under the CGL policy.

(A) Duty to Defend

The insurer’s duty to defend is triggered by the allegations in the complaint. Here, the Eleventh Circuit held that the insurer had a duty to defend because the duty to defend is broader than the insurer’s duty to indemnify and “all doubts as to whether a duty to defend exists in a particular case must be resolved against the insurer and in favor of the insured.” Carithers, supra, at *4 (quotation and citation omitted). “An insurance company must defend an action where the facts alleged against the insured would give rise to coverage, even if those facts are not ultimately proven at trial.” Id.

(B) Triggering of an Occurrence Under CGL Policy

The insurer wanted the manifestation theory to trigger CGL coverage. Under this theory, the CGL policy is triggered if the damage is discovered (manifests itself) during the policy period.

The reason the insurer wanted this theory to apply is because the owners admitted that they discovered the damage / defects in 2010 when the general contractor’s CGL policy was no longer in effect.

Conversely, the owners wanted the injury-in-fact theory to apply to trigger coverage. Under this theory, the policy is triggered when the damage occurs even if the damage is not discovered until sometime later. Here, the trial court found that the damage occurred in 2005 when the general contractor’s CGL carrier was in effect (although the damage was not discovered until 2010). Because there was evidence and a finding as to when the damage occurred, the Eleventh Circuit held that the injury-in-fact theory was the correct theory to trigger CGL coverage.

(C) Resulting Damage Covered Under a CGL Policy

The cost of repairing damage to other work resulting from faulty workmanship would be covered under the CGL policy. In other words, repairing damage to another trade’s work would be covered but repairing / replacing damage to the trade’s own work would not be covered. The Eleventh Circuit analyzed this application to determine whether the trial court appropriately determined that certain items were resulting damage.

(1) Brick

The trial could found that the defective application of exterior brick coating caused resulting damage to the brick itself. If the exterior brick coating was applied by the subcontractor that installed the brick, then the brick should not be covered since the brick was the subcontractor’s own work as opposed to other work. However, there was no evidence at the trial level whether the brick coating and installation of the brick was done by the same subcontractor or different subcontractors. Because the plaintiff owners (who were assigned rights under the policy by the general contractor insured) had the burden of proof on this issue, which they failed to meet, the Eleventh Circuit reversed any damage awarded associated with the brick.

(2) The Tile and Mud Base

The trial court found that defective adhesive and an inadequate base caused damage to the tile. The trial court awarded damage to replace the tile and mud base. Similar to the brick, the issue turned on whether the installation of the tile and mud base was done by the same subcontractor or different subcontractors. And, similar to the brick, no evidence was offered on this point so the Eleventh Circuit reversed any damage awarded associated with the tile and mud base.

(3) Balcony

The trial court found that defects in the construction of the balcony resulted in damage to the garage. However, because the balcony had to be rebuilt in order to repair the garage, the trial court held that this work was resulting damage covered by the CGL policy. The Eleventh Circuit agreed with the trial court holding that the cost of repairing damage resulting from defective work is covered and since repairing the balcony was part of repairing the garage, these costs would be covered.

Important take-aways:

This case provides strong arguments to an insured when its CGL carrier denies coverage, specifically based on the argument that its policy was never triggered. Remember, the duty to defend is broader than the duty to indemnify so any doubts must be resolved in favor of the insured.

Don’t forget about the injury-in-fact theory to trigger CGL coverage. If you have evidence, such as an expert opinion, as to when the damage started to occur, this theory can be valuable if the owner discovered the latent defects after the expiration of your CGL policy. This helps an owner maximize CGL coverage and a general contractor maximize coverage under its CGL policy.

Make sure to meet your burden of proof to establish resulting damage or other damage caused by faulty workmanship. Make sure to prove that the resulting damage was work performed by a different subcontractor and not the subcontractor that performed the faulty workmanship. And, to this point, make sure to include appropriate language in the consent judgment.

Make sure you know how to couch your coverage arguments to an insurer in order to maximize insurance coverage.

If your insurer denies coverage, consider entering into what is known as a Coblentz agreement with the claimant where a consent judgment is entered against you and rights under your policy are assigned to the claimant. The benefit is that in consideration of the consent judgment and assignment of rights, the claimant gives up any rights to collect that judgment against you.