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Commercial Insurance – Contractors Need A Blueprint For Coverage

Liability insurance policies sold to businesses, and individuals, are often “occurrence”-based policies that provide coverage for specific events, or “occurrences,” that take place during a covered period (regardless of when a lawsuit based on those events is filed). This seems easy enough on the surface, but “occurrence” policies have given rise to legions of legal opinions concerning arguments as to whether a coverage-triggering “occurrence” or “occurrences” took place, and if so, when the “occurrence(s)” took place. As most businesses purchase commercial policies of relatively short duration, one or two years, policyholders oftentimes argue that separate occurrences took place over multiple consecutive policy periods – in order to “trigger” coverage under multiple policies. Insurers typically respond, if the facts support such a response, that there was no “occurrence” at all, and therefore coverage is not triggered under any of the potentially applicable policies – or alternatively, that there was only one “occurrence,” triggering coverage under only one policy.

Time and again courts have been asked to identify whether one or more “occurrence(s)” have transpired, and then to place those occurrence(s), should they be found to exist, into one or more policy periods. These tend to be thorny issues in commercial insurance cases, particularly when construction companies or related entities are seeking insurance coverage. The kaleidoscope of caselaw interpreting “occurrence”-based liability policies in the construction context has been built brick by brick (my apologies), or opinion by opinion. Just last month, the Fifth Circuit laid additional foundation for certain of these claims, holding that protection for “ongoing operations” does not cover defects that cause damage after work is completed.

This recent opinion, Woodward v. Acceptance Indem. Ins. Co., 2014 WL 902575 (5th Cir., Feb. 11, 2014), concerns a subcontractor’s commercial general liability (“CGL”) policy. The subcontractor’s policy provided additional insurance for the general contractor, but only with respect to liability arising out of “ongoing operations” performed for the subcontractor. The policy also excluded coverage for bodily injury or property damage “occurring after … [a]ll work, including materials, parts or equipment furnished in connection with such work, on the project … to be performed by or on behalf of the additional insured(s) at the site of the covered operations has been completed[.]”

The insurer cited to these coverage limitations in refusing to provide a defense to the general contractor against allegations of faulty construction based on the general’s alleged intentional, unauthorized cost-cutting changes to the construction work. The allegations of faulty construction extended to the subcontractor as well, who allegedly failed to adhere to the design/build agreement. The federal district court held that the insurer had a duty to defend the general contractor, but the Fifth Circuit saw it differently.

The Fifth Circuit began with the premise that the insurer’s occurrence-based policy covered the general contractor for liability arising during the subcontractor’s “ongoing operations.” The Court found that Mississippi insurance law draws a bright line in defining the term “ongoing operations” to include actions that are “actually in progress,” and to exclude “completed operations.” Therefore, the Fifth Circuit reasoned, the general contractor would be entitled to a defense if its liability arose during the subcontractor’s performance of its work, but not if the liability arose from the completed work. The Court believed this construction of the term (apologies again) was also a good fit with the policy provision excluding coverage for property damage occurring after the completion of work.

Partially driving the Court’s framework for analysis was the distinction between CGL policies and performance bonds. CGL policies, the Court noted, typically cover accidents that occur during construction, not intentional acts committed by the insured contractors; performance bonds, however, are used to guarantee the completed project. In other words, under the CGL policy, once the project was done, any liability for the general contractor arising after that isn’t the insurer’s problem.

The only remaining question for the Fifth Circuit, therefore, was whether the general’s liability arose from the subcontractor’s work during its “ongoing operations” or at some point after the work was completed. Surveying both state and federal precedent, the Court found that contractor liability for construction defects generally attaches only after completion of the project. The reasoning for this rule is that the construction contract is an agreement to provide a completed project, so there is no breach of the contract unless there’s a problem after the project is done. Here, the claims against general stated that the completed building had improperly constructed floors and balconies, which damaged exterior walls (after, of course, it had been completed).

The Fifth Circuit found it irrelevant that the general’s liability was alleged to have arisen from acts and omissions committed by the subcontractor during the sub’s “ongoing operations.” The general contractor had no liability under the contract until it handed over the botched job. Since the operations had concluded, and were thus not “ongoing” at the time that the job was completed and liability attached, the liability-causing event was not an “occurrence” that triggered coverage under the subject policy.

The clear takeaway message from the Woodward opinion is that general contractors, and all companies in the construction industry, must take great care to understand the scope of the coverages that they purchase. This is not always an easy task, and it takes a little legal know-how to defend your interests, either before, during, or after the project is done. Luckily, we’ve got expertise where you need it – contact Bill Sinclair, head of STSW’s commercial litigation group, at 410-385-9116 or to assist you in preparing a blueprint to address your construction insurance issues.

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