Vetting commercial general liability protection against construction defect claims
There is nothing new about general contractors including terms in their subcontracts that require subcontractors to name the general contractors as additional insureds on their commercial general liability (CGL) policies. Such provisions typically require that a subcontractor provide endorsements that identify the general contractor as an additional insured for both ongoing operations and completed operations. Confirming that the endorsements, exclusions, and coverages provided by a CGL policy actually comply with the requirements of the subcontract is tedious and sometimes confusing work. But not all endorsements or exclusions are the same. Contractors would be well-served to make sure subcontractors obtain the coverage identified in the subcontract. In a recent opinion, the Fifth Circuit Court of Appeals validated the importance of having the right coverage for contractors seeking to protect themselves from liability for the defective work of their subcontractors.
THE CASE
In Carl E. Woodward v. Acceptance Indemnity Insurance Company, Case No. 1Z-60561, the Fifth Circuit found that a subcontractor’s insurance carrier had no duty to indemnify or defend a general contractor in an action based on construction defect claims. In Woodward, a developer had contracted with a general contractor, Carl E. Woodward (Woodward), for the construction of condominiums on the Mississippi Gulf Coast. After the construction was completed, the developer sold the condominiums. Following the sale, the purchaser found problems within the condominiums and brought suit against the developer and general contractor for breach of contract and gross negligence. A report provided by the developer’s consulting group implicated the work of a concrete subcontractor as defective. Because the subcontractor had named Woodward as an additional insured on its CGL policy, Woodward turned to the subcontractor’s insurance carrier for indemnity and defense.
Although the CGL policy identified Woodward as an additional insured, it also limited its coverage to “liability arising out of [the subcontractor’s] ongoing operations performed for [Woodward].” Further, the policy contained an exclusion which stated that the insurance did not apply to bodily injury or property damage occurring after all work on the project had been completed. Based on the limitation and exclusion, the subcontractor’s insurance carrier denied coverage for Woodward’s claim, asserting that it had no duty to defend the general contractor because the claim arose from the subcontractor’s completed operations and from property damage after the project was completed. Woodward filed suit against the insurance carrier, claiming it failed to defend and indemnify Woodward. After an initial judgment against the insurance carrier, the case was sent to the Fifth Circuit on appeal.
The appeal turned on the trial court’s conclusion that the carrier had a duty to defend Woodward. The Fifth Circuit cited the established rule that “liability for construction defects arises out of a subcontractor’s completed operations,” rather than from its ongoing operations. Here, the subcontractor’s alleged breach was its failure to perform its scope of work in compliance with the project’s plans and specifications. In other words, the court noted, the allegation is “that the completed building did not satisfy the terms of the parties’ contractual agreement.”
THE ISSUE
In the policy at issue, there was an exclusion for additional insured coverage for completed operations. Specifically, the policy excluded bodily injury or property damage occurring after “…the covered operations have been completed.” The appellate court determined that the exclusion applied and that claims for liability could be brought against the carrier for ongoing operations only. The Fifth Circuit reviewed the case law and analysis that establishes construction defect claims as arising from completed operations. Because the claim arose from the completed construction of the project, rather than from the subcontractor’s “ongoing operations,” coverage was negated by the policy’s language. As a result, the Fifth Circuit reversed the trial court and found that the carrier owed no duty to indemnify or defend Woodward for construction defect claims based on the allegation that the subcontractor failed to perform the work in compliance with the plans and specifications.
On appeal Woodward had argued that it was entitled to indemnity and defense because the subcontractor failed to perform its scope of work in compliance with the project’s plans and specifications, and that these failures occurred during the subcontractor’s ongoing operations. But even if Woodward’s argument were correct, it would not have changed the outcome. Liability for construction defects arises from completed operations, and no coverage existed for matters arising from completed operations.
THE OUTCOME
The opinion did not address the consequences of the subcontractor’s failure to procure additional insurance coverage for its completed operations, or whether such coverage was even required by the subcontract. The case illustrates that not all endorsements are created equal. Many general contractors rely on their subcontractors to provide adequate coverage in the event of future claims. The difference between coverage for ongoing operations and completed operations is critical when addressing construction defect claims. Often, the exclusions contained in the policy or in the endorsements are overlooked by project personnel who are focused on meeting deadlines. But as the Woodward opinion illustrates, a general contractor’s failure to require its subcontractors to purchase coverage for both ongoing and completed operations can prove to be a costly error. General contractors that require coverage for both ongoing operations and completed operations would be well-served in reviewing copies of all policy exclusions and endorsements. Ensuring that risk management and legal departments have processes in place to identify inconsistencies between the coverage required under the subcontract and the coverage actually provided by the subcontractor could save the general contractor valuable time and money in the event defects are discovered after the project is completed. ■
About the Author: Gene Blanton is a construction attorney and shareholder in the Dallas office of Ford Nassen which is nationally recognized in the industry and is one of the largest construction law firms in Texas. He oversees the firm’s E-discovery practices and his practice involves preparing contract documents and counseling on business and legal issues that arise during construction projects, as well as risk management and dispute resolution through negotiation, mediation, arbitration, or litigation. He can be reached at peblanton@fordnassen.com or 214.523.5118.
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Modern Contractor Solutions, April 2014
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