Nearly all construction jobs require that the contractor purchase insurance. Commercial general liability insurance (“CGL”) is often what is purchased. CGL policies also typically have an exclusion for property damage to “your work.” In a recent case, the Ninth Circuit Court of Appeals addressed this exclusion in a case of damage caused by beetle-infested logs used to build a log home. What would Abe Lincoln say?
In Northland Casualty Co. v. Mulroy, No. 19-35085 (9th Cir. Dec. 27, 2019) (Not for Publication), the appellate court affirmed the district court’s grant of summary judgment in favor of the insurance company and against the policyholder (actually the property owner as assignee of the contractor’s rights after settlement) based on the exclusion for property damage to “your work.” The coverage dispute started after a property owner contracted with a builder to build a log home and renovate a guest log home. The contractor purchased logs from a log broker, but did not treat the logs for insects. Several years later, the owner noticed signs of a beetle infestation (powderpost beetles), which caused substantial damage to both homes.
The owner asserted a claim against the builder and the builder tendered the claim to its insurer. The insurer notified the builder that the CGL insurance policy did not cover the damages. The owner sued the builder in state court and, without the insurance company’s consent, the owner and builder settled. The builder assigned all rights under the CGL insurance policy to the owner.
The insurance company brought a coverage action and the parties moved for summary judgment. The district court granted summary judgment to the insurance company.
In affirming the district court, the appellate court held that the district court correctly applied the exclusion because there was property damage to the builder’s work. By failing to treat the logs, the builder installed untreated, beetle-infested logs. According the court, the damage arose from those acts, even if the damage also arose partly because the log supplier selected beetle-infested longs.
The exclusion barred coverage for “`property damage’ to `your work’ arising out of it or any part of it and included in the `products-completed operations hazard.” It “does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a sub-contractor.” The court held that the subcontractor exemption did not apply because under any reasonable interpretation of the term, the log supplier was merely a materials supplier and not a subcontractor.
Finally, the court rejected the “reasonable expectations” doctrine argument, holding that the policy clearly excluded coverage and no other factor suggested that the policyholder reasonably expected coverage. As simply put by the court, “[c]overage is unavailable in this case only because the damages were to the work itself (rather than to a bystander), the project had been completed, and the log supplier was not a subcontractor.