Construction projects are often subject to myriad claims. Subcontractors can cause damage to third-parties and their property, the project can be delayed by municipal inspections or citations, workers can get injured, and property can be damaged by fire, collapse or weather. To organize construction projects, sometimes insurance is purchased through a plan. A contractor controlled insurance plan (“CCIP”) provides coverage to all enrolled parties and usually includes all subcontractors. But, by enrolling in a CCIP or even by having your own insurance, not all things that happen on a construction site are covered by insurance. In a recent 4th Circuit opinion, claims by a subcontractor to recover damages it paid to others for its faulty excavation supports that caused damage to adjacent properties was not covered by the CCIP.
In Schnabel Foundation Co. v. National Union Fire Insurance Company of Pittsburgh, PA, No. 18-1782 (4th Cir. Jul. 10, 2019) (Unpublished Non-binding Precedent), a foundation subcontractor installed a support of excavation system to shore up the construction site to protect neighboring properties during construction. Apparently, the subcontractor did a poor job and adjacent buildings were damaged. This caused the municipality to issue a halt work order and it took a year before the support system could be completed properly and construction was allowed to restart.
The general contractor had purchased a CCIP program and the policy in issue here was the umbrella commercial general liability policy (“CGL”) (the primary policy was exhausted). Suits were brought by the neighboring properties and then by the various defendants against each other. Settlements were made and the subcontractor was assigned the rights of the general contractor. The subcontractor then sued the carrier seeking coverage to reimburse it for the settlement payments made for delay damages paid to the owner and the cost of the remediation work paid by the subcontractor to the general contractor. The carrier denied coverage and the district court granted summary judgment to the carrier.
In affirming, the circuit court held that the policy did not cover the subcontractor’s repair damages as a matter of law. The court noted that under New Jersey law, CGL policies cover damages to third-party property, not costs to replace a contractor’s own faulty work. Moreover, the circuit court agreed with the district court that Exclusion D barred coverage for all the claimed damages. Here’s where it gets complicated so if you should read the opinion.
The exclusion precludes coverage if the property is “Impaired Property” or property that has not been physically injured and the property suffers “Property Damage” consisting of “a defect, deficiency, inadequacy or dangerous condition in … Your Work; or … a delay or failure by you or anyone acting on your behalf to perform a contract.” The court agreed that this provision applied to the subcontractor as a party that did work for the named insured under the CCIP and that either the property was impaired or not physically injured (the damage was to adjacent properties and the site was shut down because of the faulty supports) and that the damage was caused by the subcontractor’s faulty work and the delays caused by the faulty work and the need to remediate. The court rejected the subcontractor’s argument that the excavation support system had a sudden and accidental physical injury, finding that there was no physical injury, just defective workmanship (a business risk as the district court put it).