Amy B. Briggs, Christine Spinella Davis and David B. Killalea | Manatt Phelps & Phillips LLP | December 4, 2015
Why it matters: A Florida federal court ruled that an insurer owes $23 million in indemnification to its insured, a general contractor, for repairs made to fix deficient subcontractor work at a luxury condominium tower because the repairs addressed ongoing damage to nondefective property. The court held that even though the CGL policy does not provide coverage for the repair of defective work itself, it does require coverage for repairs if the work causes damage to an otherwise nondefective completed property, which was evident in this case. The court reasoned that even if the predominant objective of the repair effort was to fix the instability caused by the defective subcontractor work, it is undisputed that the same effort was required to put an end to ongoing damage to otherwise nondefective property, e.g., damage to stucco, penthouse enclosure, and critical concrete structural elements.
Detailed discussion: Pavarini Construction Company was the general contractor for construction of a large condominium complex in Florida. Pavarini hired a subcontractor for the installation of concrete masonry unit walls and certain reinforcing steel and a second subcontractor for the supply and installation of reinforcing steel within the cast-in-place concrete columns, beams, and sheer walls.
The work performed by both subcontractors was seriously deficient. A significant amount of reinforcing steel was either omitted entirely or improperly installed throughout the building, including within important concrete structural elements, resulting in destabilization throughout the building. Stucco debonded and cracked on the walls, concrete elements cracked, and the penthouse enclosure on the roof also cracked, leading to water intrusion.
When the building owners served Pavarini with a formal demand to repair all of the damage, the company turned to American Home Assurance Company and ACE American Insurance Company. ACE denied coverage. American Home ultimately chipped in $2 million.
Pavarini incurred more than $25 million in costs relating to the remediation efforts. Pavarini argued that none of the costs included the repair of defective work itself but were for damage to otherwise nondefective building components. In response, ACE told the court that the bulk of the repair work was a repair of the defectively installed steel.
The U.S. District Court agreed with Pavarini.
The policy defined “property damage” as “all physical injury to tangible property, including all resulting loss of use of that property,” and includes “[l]oss of use of tangible property that is not physically injured.” It also excluded from coverage “[p]roperty damage to ‘your work’ arising out of it or any part of it and included in the products-completed operations hazard.” The “your work” exclusion did not apply, however, “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”
The question, therefore, was whether the subcontractors’ defective work caused covered “property damage,” the court stated, answering in the affirmative. “[I]f the defective work causes damage to otherwise non-defective completed product, i.e., if the inadequate subcontractor work caused cracking in the stucco, collapse of the penthouse enclosure, and cracking in the critical concrete structural elements, [Pavarini] is entitled to coverage for the repair of that non-defective work.”
In the case of the condominium building…