Expert Commentary

Court Finds No Construction Defect Coverage under CG 20 10

Previous articles have discussed the history of the Insurance Services Office, Inc. (ISO), additional insured endorsements,1 changes to the endorsements, and their purpose and importance.2 This article discusses why the particular language of the endorsements can prove critical and advocates a clearer understanding and specificity on the front end of the construction transaction to avoid the problems of ambiguous contract documents on the back end.3


Construction Liability Insurance
March 2014

Construction agreements routinely require owners and contractors to be included on subcontractors' policies as "additional insureds" without any additional specificity or clarification about what the parties intend to cover. Given the array of additional insured endorsements in the industry and the various endorsements offered by ISO, parties should take additional care on the front end to specify the coverage they are in fact seeking to obtain. A recent case from the Fifth Circuit Court of Appeals demonstrates the problems that can arise from simply requiring that upstream parties be included as "additional insureds."

Fifth Circuit Interprets the Additional Insured Endorsement

Last month, the Fifth Circuit Court of Appeals decided the case of Carl E. Woodward LLC v. Acceptance Indem. Ins., 2014 U.S. App. LEXIS 2569 (5th Cir. Feb. 11, 2014). The facts of this case are common to many construction contracts. Woodward, the design-builder, agreed to build a condominium complex in Mississippi. It entered into a number of subcontracts including one with a concrete subcontractor, DCM, Inc. The subcontracts required each subcontractor to include Woodward as an additional insured on its commercial general liability (CGL) policy.

The condominium project was completed in August 2007 and began experiencing problems in 2008. The owner sued Woodward for defective construction including allegations that the concrete fell below industry standards because the slab was not properly sloped and DCM failed to comply with the construction drawings. Based on the complaint, Woodward filed a cross-suit against DCM seeking a defense under DCM's insurance policy. The parties arbitrated the dispute, and one of the major defects was attributed to DCM.

DCM's insurer, Acceptance Indemnity, denied that it owed a defense to Woodward based on the CG 20 10 additional insured endorsement it had issued naming Woodward as an additional insured. Its CG 20 10 endorsement states that the additional insured is only covered "with respect to liability arising out of [DCM's] ongoing operations performed for [Woodward]."4 Acceptance argued that the CG 20 10 endorsement excludes coverage for "damage discovered after completion of the project."5

The district court rejected Acceptance's argument, explaining, "Acceptance has not identified any property damage that occurred after the project was completed, and the court has not located any evidence of such damage."6 The court reviewed the other exclusions cited by Acceptance and rejected those finding that Acceptance owed a duty to defend Woodward while reserving whether it owed a duty to indemnify it, too.

The Decision

Acceptance appealed the case to the Fifth Circuit Court of Appeals, which disagreed with the district court's opinion and reversed the lower court's holding. The Fifth Circuit focused on the language of the 20 10 additional insured endorsement, finding that "ongoing operations" could only include activities "actually in process" and could not include anything that happened after the activities were completed. The court explained that claims "can be brought after ongoing operations are complete, but the underlying liability cannot be due to the 'completed operations.'"7

The court relied on recent cases from the Mississippi and Colorado courts of appeals in finding that the "ongoing operations" provision of the additional insured endorsement limits coverage to liability caused by the subcontractor's active work at the project and that it does not cover damage or injuries appearing after the subcontractor stops working on the project.

The court also explained that the subcontractor's breach of the construction specifications did not fall within the "ongoing operations" provision of the endorsement. The court held that "[i]t is true that Woodward's liability for the alleged damage is causally related to DCM's operations. Though a causal relation is required, the policy specifically excludes liability for property damage occurring after all work has been completed."8

In short, the court limited liability for construction defects exclusively to completed operations. "Courts have held, quite logically, that liability for construction defects arises out of a subcontractor's completed operations."9 The court concluded that "[t]he breach necessarily arises from the completed construction, which is the point in time when [the owner] received the completed building."10 By its language, the court effectively foreclosed coverage for defect-related causes of action under the CG 20 10 endorsement.

Other Problems

It bears noting that the 2014 amendments could further exacerbate the problem discussed in this article. The 2014 amendments state that coverage does not go beyond the extent required by the parties' contract. Insurers can, and may, argue that if the insureds do not expressly specify completed operations coverage, they should not be required to provide it. Similarly, any limiting language in the construction documents could also be seen as undermining potential coverage.

Conclusion

It is impossible to know at the start of litigation how a court will rule on any particular issue. While insurers, insureds, lawyers, and risk managers can bemoan and lament the opinions of various courts, that time is better spent by preventing issues on the front end. The Woodward case demonstrates that requesting and obtaining completed operations coverage by endorsement can prove essential when seeking coverage for losses related to defective construction.


1Mark M. Bell, "2013 ISO Additional Insured Endorsements: Putting the Changes into Context for the Construction Industry," International Risk Management Institute, Inc.

2Mark M. Bell, "Indemnity and Additional Insured Requirements: Why Am I Demanding Them, Why Do Others Want Them, and What Does It All Mean?" International Risk Management Institute, Inc.

3For an excellent article on another recent construction case involving the contractual liability exclusion, see Patrick J. Wielinkski, "Ewing v. Amerisure: The Rise (and Fall) of the Contractual Liability Exclusion in Construction Defect Coverage?" International Risk Management Institute, Inc.

4Case 1:09-cv-00781-HSO-RHW Docket No. 167-4 (emphasis added).

5Case 1:09-cv-00781-HSO-RHW Docket No. 184 (emphasis added).

6Carl E. Woodward, LLC v. Acceptance Indem. Co., 2011 U.S. Dist. LEXIS 3121 (S.D. Miss. Jan. 12, 2011).

7Carl E. Woodward, LLC v. Acceptance Indem. Co., 2014 U.S. App. LEXIS 2569 (5th Cir. Feb. 11, 2014).

8Id.

9Id.

10Id.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

Like This Article?

IRMI Update

Dive into thought-provoking industry commentary every other week, including links to free articles from industry experts. Discover practical risk management tips, insight on important case law and be the first to receive important news regarding IRMI products and events.

Learn More