Insurer Must Defend Contractor Against Claims of Faulty Workmanship

Tred R. Eyerly | Insurance Law Hawaii | May 21, 2018

The magistrate judge recommended that the insurer’s motion for summary judgment seeking to determine there was no coverage for claims of faulty workmanship be denied. Greystone Multi-Family Builders v. Gemini Ins. Co., 2018 U.S. Dist. LEXIS 56770 (S.D. Tex. Feb. 26, 2018).

TPG (Post Oak) purchased an OCIP policy to cover construction of an apartment complex. TPG was sued by the contractor, Greystone, after TPG cancelled the construction contract. TPG filed a counterclaim against the contractor, alleging that Greystone had failed to properly perform in building a luxury apartment complex which resulted in monetary damages to TPG. The complaint further alleged that the project was nine months behind its substantial completion date, far from complete, and over budget when TPG cancelled the contract. The cost to fix the mismanagement caused by Greystone was $18.9 million.

The insurer denied coverage for the counterclaim against Greystone. Greystone then sued for a declaration judgment and the insurer cross-moved for summary judgment.

The insurer argued there was no occurrence because Greystone’s actions were not an accident. The court, however, found no allegations in the underlying complaint that Greystone intended its work to cause the damage or that the damage was the natural and expected result of Greystone’s actions. Simply because Greystone paid its subcontractors upfront did not mean Greystone intended the result to be shoddy workmanship. The up-front payments may have been a management failure, but not intentional conduct to cause poor construction of the project. Therefore, the allegations included actions meeting the definition of “occurrence.”

Next, the insurer agreed that there was property damage, but argued most of the complaints were of increased costs of construction due to duplication of effort, purchasing gaps, use of wrong materials, deviations from plans and specifications, code violations, and delays. The court agreed that the counterclaim alleged that Greystone’s shoddy work caused property damage. But there were also allegations that fell within the definition of property damage.

Finally, the court determined that the exclusions did not bar coverage. The insurer relied upon exclusion j (5) which barred coverage to “that particular part of real property on which you . . . are performing operations, if the ‘property damage’ arises out of those operations.” The court noted that it must look not to when the construction defect occurred, but when the property damage itself occurred. Greystone argued that some of the damage could only have occurred after it was no longer working on its particular part of the project. There was no clear allegation in the counterclaim tying the property damage to a particular date. Therefore, exclusion j(5) did not allow the insurer to escape its duty to defend.

Exclusion j (6) was also not applicable. The exclusion barred coverage for “property damage” to “that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” The exclusion did not apply to property damage included in the products-completed operations hazard, i.e., when all of the work called for in the contract had been completed. The exclusion barred coverage only for property damage to parts of a property that were themselves the subject of defective work by the insured. The exclusion did not apply, however, for damage to parts of a property that were the subject of only nondefective work by the insured and were damaged as a result of defective work by the insured on other parts of the property.

The counterclaim alleged that some of Greystone’s work that was non-defective was damaged by defective work. For example, the counterclaim alleged that due to defective structural work, “the floor of the structure began to sag and critical plumbing elements were damaged.” The counterclaim further alleged that the roof was installed defectively, which caused water leaks on the property. The allegations also established that not all of Greystone’s work was completed because the contract was never completed. Therefore, the products-completed operations hazard was inapplicable. Exclusion j (6) did not apply to the extent that the counterclaim alleged that non-defective work was damaged by defective work.

Consequently, the insurer had a duty to defend.

Leave a Reply

%d bloggers like this: