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 (11th 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.
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.
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.
- 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.
Please contact David Adelstein at email@example.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.