Does General Liability Insurance Provide Defense Against Defective Work?

By John S. Mrowiec

Participants in the construction industry generally understand that commercial general liability insurance will provide defense and indemnity from claims for bodily injury or damage to property other than the work being constructed.

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Does commercial general liability insurance defend or indemnify from claims of damages for defective construction work?

The traditional answer was that commercial general liability insurance policies "are intended to protect the insured from liability for injury or damage to the persons or property of others; they are not intended to pay the costs associated with repairing or replacing the insured's defective work and products, which are purely economic losses. Finding coverage for the cost of replacing or repairing defective work would transform the policy into something akin to a performance bond," Traveler's Ins. Co. v. Eljer Mf'g, Inc., 197 Ill. 2d 278, 314, 757 N.E.2d 481, 503 (2001); Accord Amerisure, Inc. v. Wurster Construction Co., 818 N.E.2d 998, 1003 (Ind. Ct. App. 2004); Hawkeye-Security Ins. Co. v. Davis, 6 S.W.3d 419, 426 (Mo. Ct. App. 1999); and Bulen v. West Bend Mutual Ins. Co., 125 Wis. 2d 259, 264-65, 371 N.W.2d 392, 394 (Ct. App. 1985).

A recent Wisconsin case illustrates that traditional view in Tweet/Garot-August Winter, LLC v. Liberty Mutual Fire Ins. Co., 2007 U.S. Dist. LEXIS 9262 (E.D. Wis. Feb. 7, 2007).

Lambeau Field Project

Tweet/Garot Mechanical Inc. and August Winter & Sons Inc. formed a limited liability company that won a Lambeau Field Redevelopment subcontract. The subcontract was to procure and install pipes and valves in the heating and cooling systems in the stadium's indoor areas.

After construction was complete, the installed valves leaked, causing damage to carpet, couches, seats and drywall. The piping subcontractor removed and replaced 13 of the valves and had the removed valves tested. The laboratory concluded the valve manufacturer had improperly coated the valves and that all the valves were defective.

The owner and general contractor ordered the piping subcontractor to remove and replace the remaining more than 300 valves although none had leaked.

Many of the valves were behind walls and required costly tear-out and repair.

There was an Owner Controlled Insurance Program on the project which provided insurance to subcontractors. The piping subcontractor submitted a claim for "property damage" to the OCIP's commercial general liability insurer, Liberty Mutual Insurance Co.

The piping subcontractor's insurance claim was not for the damage to property from the leaking valves but for the cost of replacing the valves and tear-out. The piping subcontractor sued the valve manufacturer, distributor and marketer.

The insurer initially advised the piping subcontractor that it would assume the prosecution of the suit against the valve manufacturer and others. Two weeks later, the insurer reversed its position and formally denied coverage.

The piping subcontractor sued the insurer in federal district court. The insurer moved for summary judgment asking the court to declare there was no coverage.

The Tweet/Garot court reviewed the policy and granted summary judgment for the insurer. The court concluded that "replacement costs for defective vales do not constitute 'property damage' under [the insurer's commercial general liability] policy" Tweet/Garot, 2007 U.S. Dist. LEXIS 9262 at * 23.

Moreover, according to the Tweet/Garot court, even if the replacement costs for the defective valves had constituted 'property damage,' under the policy, two exclusions applied: the "your work incorporated in impaired property" and "withdrawn from use" exclusions, Tweet/Garot, 2007 U.S. Dist. LEXIS 9262 at * 26-28.

In this case, there was no exception of "sudden and accidental physical injury" to the exclusions because the destruction of walls necessary to replace the valves was deliberate. Tweet/Garot, 2007 U.S. Dist. LEXIS 9262 at 27. The insurer prevailed.

Similar Case Involving a House

Yet, in another recent case in our readership area, a court held that a commercial liability insurer was required to defend a contractor from a new homeowner's claim of negligent construction, Country Mutual Ins. Co. v. Carr, 2007 Ill. App. LEXIS 292 (4th Dist. March 19, 2007).

Carr Construction was the general contractor for a house. The homeowner sued the general contractor for "negligence," alleging in two counts that the general contractor and its backfill and grading subcontractor negligently placed inappropriate backfill around the completed basement walls and then negligently operated heavy earthmoving equipment near the walls causing damage to the walls and other portions of the residence. In a third count, the homeowner alleged breach of an implied warranty for the same damage and for failing to construct other work in a good and workmanlike manner.

The general contractor filed an insurance claim with its commercial general liability insurer, County Mutual, for defense and indemnification from the homeowner's suit. The insurer denied coverage and sued for a declaration of no coverage.

The insurer argued that there was no "occurrence" within the meaning of the policy. The trial court agreed and granted summary judgment to the insurer.

The general contractor appealed.

On appeal, the Carr appellate court first noted that an insurer's duty to defend is broader than the insurer's duty to indemnify; the court need not determine a duty to indemnify until after the insured incurs liability on the underlying claim, Carr, 2007 Ill. App. LEXIS 292 at * 7-8. Even if only one of several theories in the underlying action is within potential coverage of the policy, liberally construed in favor of coverage, the insurer has a duty to defend on all theories raised by the underlying claimant, Carr, 2007 Ill. App. LEXIS 292 at * 7.

Definition of 'Occurrence' Key

The policy defined "occurrence" as an "accident." Under Illinois law, an "accident" is where the person performing the act did not intend or expect the result, Carr, 2007 Ill. App. LEXIS 292 at * 11 citing United States Fidelity & Guaranty Co. v. Wilkin Insulation Co., 144 Ill. 2d 64, 77-78, 578 N.E.2d 926, 932 (1991).

The Carr court found that the underlying suit alleged not merely "intangible property losses, such as economic loss," not usually considered "property damage," but also "physical injury to tangible property, their basement walls.

This falls within the broad definition of 'property damage' given by the policy," Carr, 2007 Ill. App. LEXIS at * 12. Thus, because there allegedly was an "accident" resulting in "property damage," Carr held that the underlying suit was within the general coverage provisions, Carr, 2007 Ill. App. LEXIS 292 at * 13.

Regarding whether permitting coverage would make the general liability insurance policy "akin to a performance bond," the Carr court noted that the policy contained numerous exclusions.

However, because the insurer had relied only on the argument that there had been an "occurrence" under the policy, the court noted that the insurer would have to demonstrate in the trial court that an exclusion applied, Carr, 2007 Ill. App. 292 at * 14.

The insurer cited a number of Illinois cases holding that damage to the property being constructed from defective construction was not an insurable "occurrence." The Carr court viewed these cases as "relevant" but "not determinative."

At any rate, according to the Carr court, those cases addressed only underlying claims of breaches of contract or warranty, not "negligence," Carr, 2007 Ill. App. 292 at * 15. Carr then remarked that "This is not to say that a breach-of-contract claim can never allege an 'occurrence,'" Carr, 2007 Ill. App. LEXIS 292 at * 16. The Carr appellate court reversed the trial court's judgment.

John S. Mrowiec is a partner with Chicago-based Conway & Mrowiec, a construction and public contracts law and litigation practice. He may be reached at (312) 658-1100. For information, go to the firm's Web site at www.cmcontractors.com.