A leaky roof leads to a multi-year legal struggle.
After the American Subcontractors Association told a U.S. appeals court that construction insureds ought to be able to rely on their liability insurance to protect themselves from property damage arising out of inadvertent and alleged construction defects, the appeals court agreed and reversed a district court ruling that threatened the coverage for which subcontractors pay substantial premiums.
“This case is another big win for ASA, subcontractors, and the construction industry,” said Eric Travers, Kegler, Brown, Hill & Ritter, Columbus, Ohio, general counsel for ASA. “By affirming that unexpected and unintended property damage is an ’occurrence,’ this common sense decision puts [the U.S. Court of Appeals for] the 11th Circuit solidly in the growing majority of states who are increasingly rejecting insurance companies’ attempts to use narrow policy exclusions to deny basic coverage for the very claims and damages that subs are told and expect will be insured when they buy that insurance.”
In their amici curiae brief to the U.S. appeals court in July 2014 in the case of Pennsylvania National Mutual Casualty Insurance Company v. St. Catherine of Siena Parish, ASA, the Associated General Contractors of America, and the Alabama AGC noted: “Only a few months ago, the Alabama Supreme Court issued its opinion in Owners Ins. v. Jim Carr, a case that confirmed coverage for construction defects under Alabama law. The district court’s application of the Contractual Liability Exclusion supports a back door circumvention of that coverage through an unwarranted over-extension of the Contractual Liability Exclusion. Taken to its logical end, that over-extension will result in the elimination of the coverage preserved in Jim Carr. Therefore, Amici Curiae request the court reverse the district court and render judgment in favor of St. Catherine’s ...”
In the underlying case, the dispute involved a project by the parish to replace the roof on two of its buildings with a 40-year roof shingle. The parish contracted with Kiker Corporation for the work, and Kiker obtained a commercial general liability policy through carrier Penn National. The policy provided coverage to claims for property damage caused by an “occurrence” and defined an occurrence as “an accident.” The policy also contained the standard “your work” and “contractual liability” exclusions.
Kiker subcontracted the roofing portion of the work and work was completed in March 2004 on one building and in February 2005 on the second building. The second building almost immediately began leaking and two years later the first building also began to leak, causing extensive damage to the gypsum substrate of the roof as well as the interior and ceiling of the buildings. Despite repair efforts, the problems were not fixed and the parish hired a roof inspector, who investigated and claimed the leaks were caused by installation errors, construction defects, and other breaches by Kiker. The parish sued and, though Penn National defended Kiker, it did so under a reservation of rights, claiming there would be no coverage under the policy for damages caused by a breach of contract or breach of warranty.
At trial, the jury awarded the parish $350,000 in compensatory damages for breach of contract. After the verdict, Penn National initiated a declaratory judgment action in federal court asking the U.S. District Court for the Southern District of Alabama to determine whether it was responsible to indemnify Kiker and pay the verdict. Penn National argued it had no such obligation because a breach of contract claim was not an “occurrence” under the policy and even if such claims were an occurrence, the contractual liability and/or “your work” exclusions would bar recovery.
The U.S. District Court for the Southern District of Alabama held that there was coverage for the property damage caused by the leaks because an “accident” meant an unintended and unforeseen injury and the allegedly faulty workmanship led to damage to other areas of the structure and thus damage beyond simply the cost to replace the defective roof. The court held that the “your work” exclusion did not bar recovery for the cost of the defective roof replacement because the subcontractor had performed the roofing work. However, the court used the “contractual liability” exclusion to deny coverage of any claims arising from a breach of contract, stating “under binding Alabama law the breach of contract claim and the implied warranty claim are excluded from coverage under the contractual liability exclusion.” Kiker petitioned the 11th Circuit Court of Appeals asking it to reverse or certify the question of the breach of the contractual liability exclusion to the Alabama Supreme Court.
In their brief, ASA, AGC and the Alabama AGC wrote: “The proposition that an insurer should not be obligated to pay claims that are outside the coverage of the policy is not astounding. However, some insurers are extremely adept at finding reasons, some would say excuses, to deny what otherwise appear to be claims more than arguably within the coverage of the policy. This is particularly true as to claims involving allegedly defective workmanship by insured contractors under their commercial general liability policies, and if the position advocated by Pennsylvania National is adopted by this Court, insurers will invariably have yet another excuse to deny legitimate claims.”
ASA, AGC and the Alabama AGC further argued in their brief that “applying the Contractual Liability Exclusion to property damage to an insured contractor’s work simply because that property damage may breach its contract has a profoundly negative effect on CGL coverage for the construction industry. It is nothing short of a radical departure from the means by which CGL coverage has traditionally been marketed and provided by the insurance industry to contractors.”
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