Mold Damage to Contractor's Nondefective Work Caused by Subcontractor May
Be Covered under Prime Contractor's Umbrella Policy
January 2010
Costs incurred by a prime contractor to remediate
mold damages caused by subcontractor's defective work may be covered under umbrella
liability policy.
by J.
Kent Holland Jr.
ConstructionRisk.com
LLC
The trial court accepted the insurer's argument that damage caused by the
subcontractor's work did not constitute an "occurrence" that triggered coverage
and therefore granted summary judgment in favor of the insurance company. However,
the U.S. Court of Appeals for the Fourth Circuit held that the language of the
policy did not exclude coverage for the unintended, unexpected spread of mold
from the subcontractor's defective trusses to surrounding nondefective components.
Thus, "any mold damage that spread beyond the defective trusses and the gypsum
firewalls to nondefective components of the townhouses was an unintended accident,
or an occurrence that triggered coverage under the Ohio Casualty policy."
Facts
In Stanley Martin Cos. v. Ohio Cas. Group,
No. 07–2102 (4th Cir. 2008) (unpublished), a subcontractor supplied wood trusses
for 24 duplex townhouses. After the houses were completed, homeowners reported
mold growth in their homes. An investigation revealed that the mold had originated
from defective trusses and surrounding gypsum firewalls. The mold problems led
to lengthy litigation, and the prime contractor incurred over $1.7 million in
remediation costs.
The Insurance Policy
The dispute involved whether an "umbrella insurance policy" issued by Ohio
Casualty Insurance Company to the prime contractor was triggered by the mold
damage as "an accident." The pertinent policy language is as follows:
We will pay on behalf of the "Insured" those sums in excess of the "Retained
Limit" that the "Insured" becomes legally obligated to pay by reason of
liability imposed by law or assumed by the "Insured" under an "insured contract"
because of "bodily injury," "property damage," "personal injury," or "advertising
injury" that takes place during the Policy Period and is caused by an "occurrence"
happening anywhere.
There was also a "your work" exclusion in the policy as follows:
[A]ny property damage … to "your work" arising out of it or any part of
it included in the "products-completed operations hazard"; (but this Subparagraph
(2) does not apply if the damaged work or the work out of which the damage
arises was performed on your behalf by a subcontractor)….
This policy provided excess coverage that supplemented the contractor's commercial
general liability (CGL) policy issued by another insurer (One Beacon Insurance)
with the same effective period.
The Trial Court Decision Granting Summary Judgment
The issue that the trial court decided on the motion for summary judgment
was that the umbrella policy insurer (Ohio Casualty) did not breach its duty
to indemnify the prime contractor when it refused to contribute to the remediation
costs the contractor incurred to address the mold problems.1
The trial court found that the prime contractor failed to show any evidence
of third-party damage beyond the costs it incurred to repair the defective trusses
and gypsum firewalls. In deciding there was no coverage under the policy for
such repairs, the court stated:
As a general contractor, [Stanley Martin] was responsible for fulfilling
the terms of its contracts, and [the subcontractor's] faulty workmanship
falls on [the contractor's shoulders] …. Because [the contractor's] remediation
costs arose out of damage to [the contractor's] own "work" caused by the
faulty workmanship of its subcontractor, the property damage was not "unexpected"
or an "accident." Therefore, this Court will find that under Virginia law
there was no "occurrence," and the Ohio Casualty policy was not triggered.
Reasoning for Appellate Court Reversal
In reversing the summary judgment, the Fourth Circuit rejected the insurance
company's argument that the damages were caused by the initial installation
of defective trusses and did not result from a subsequent occurrence of mold.
The insurer argued that the source of the ensuing damage was the defective trusses
that were already present in the townhouses when they were completed. Any subsequent
spread of mold, argued the insurer, merely represented a further deterioration
of the already defective work rather than a new, unexpected event that would
trigger coverage.
In rejecting this argument, the court stated, "This labored distinction places
more weight on the policy language than it can bear." According to the court,
"The policy's definition of occurrence is broad and inclusive, providing coverage
for any 'accident'—that is, any 'event that takes place without one's foresight
or expectation.'"
The court noted that the insurer was unable to point to language in the policy
that would exclude coverage for unintended, unexpected spread of mold from the
defective trusses to surrounding nondefective components, "nor could we find
any."
Although agreeing with the trial court that the prime contractor's obligation
to repair or replace the defective trusses was not unexpected or unforeseen
and would, therefore, not trigger a duty to indemnify, the appellate court concluded
that:
any mold damage that spread beyond the defective trusses and the gypsum
fire walls to nondefective components of the townhouses was an unintended
accident, or an occurrence that triggered coverage under the Ohio Casualty
policy.
The issue of whether the contractor showed there to be damages beyond the
costs it incurred in repairing or replacing the defective trusses is disputed
by the parties, the court said. Consequently, the court reversed the summary
judgment and remanded the case back to the trial court to determine whether
the subcontractor's defective work caused damage to the prime contractor's nondefective
work, which damage would be covered under the policy.
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