Construction Law: The Scope and Limits of a Commercial General Liability Policy

construction-structural1If you are a residential contractor, you know that claims for defective construction are far too common. If faced with such a claim, you likely expect your general liability insurer to defend you. Unfortunately, there are instances where coverage may not apply or the right to a defense under your commercial general liability policy may not exist. Moreover, as demonstrated in a recent opinion by the U.S. Court of Appeals for the Sixth Circuit, insurers sometimes misinterpret defective construction claims and then mistakenly or wrongfully refuse to provide a defense to their insured.

In Forrest Construction, Inc. v. The Cincinnati Insurance Company, 3:09-cv-1036 (6th Cir., Jan. 11, 2013), the Sixth Circuit clarified the duty of an insurer to defend under a commercial general liability policy. The facts of this case are straightforward. The plaintiff, Forrest Construction, Inc., a residential general contractor, maintained a commercial general liability (“CGL”) policy with Cincinnati Insurance Company. Forrest was hired to construct a home in Brentwood, Tennessee. A dispute arose over the amount owed by the homeowners, and Forrest filed suit against the homeowner in Tennessee state court. The homeowners then filed a counterclaim against Forrest for alleged defects in the workmanship of the home. Forrest notified its insurer, Cincinnati Insurance, of the counterclaim and requested a defense under its GCL policy. That is, Forrest requested that Cincinnati hire and pay for an attorney to represent it in the lawsuit.

However, based on the “your work” exclusion contained in Forrest’s CGL policy, Cincinnati refused to defend Forrest in the lawsuit. Forrest was forced to pay for its own lawyer. As part of the lawsuit, Forrest was ultimately required to pay the homeowners over $150,000 in damages for faulty construction. Forrest then filed suit against Cincinnati Insurance for breach of contract, bad faith refusal to provide a defense under the CGL policy, and violations of the Tennessee Consumer Protection Act.

The policy at issue was a standard CGL policy. The policy, as all standard CGLs, excludes from coverage any damage to “your work.” That is, the insurance policy does not cover the contractor’s own faulty work. It does, however, cover bodily injury or other property damage caused by the faulty work. For example, under the “your work” exclusion, the policy would not cover the improper installation and replacement of windows by a contractor; however, the policy would cover damage caused to wood floors caused by water intrusion from the faulty installation. The “your work” exclusion has an important exception, commonly known as the subcontractor exception. That is, the “your work” exclusion does not apply if the damages arise out of work performed by the insured’s subcontractor.

In Forrest’s lawsuit against Cincinnati, the parties filed competing motions for summary judgment. The U.S. District Court for the Middle District of Tennessee granted summary judgment in favor of Forrest, finding that Cincinnati had, in fact, breached its contract of insurance. Cincinnati appealed.

The United States Court of Appeals for the Sixth Circuit affirmed the decision of the district court, finding that the homeowners’ Complaint against Forrest contained sufficient allegations to trigger a duty to defend by Cincinnati Insurance under the CGL policy. The court emphasized that an insurer’s duty to defend under a CGL policy is to be construed broadly. In this case, the homeowners asserted that the defective construction was performed by entities other than Forrest. The Complaint asserted that the Forrest performed “or caused to be performed” certain work that was defective; thus, implying that a subcontractor performed the work. While these allegations were not very specific, the Sixth Circuit found that they were specific enough to trigger the insurer’s duty to defend under the subcontractor exception and that Cincinnati should not have denied coverage.

This case is an example of a national trend among courts that are tending to side with contractors/policyholders that a construction defect claim constitutes an occurrence under a CGL policies. Those in the construction industry, especially general contractors, must understand the scope and limits of a CGL policy.

Knowing the details of your CGL policy and how courts in your jurisdiction define the terms of your policy can make all the difference when facing a construction defect claim. With this awareness, you will not only know when your insurer must provide you with a lawyer and coverage, but also you can determine if you have enough coverage and whether you should secure additional or different types of insurance policies/coverage. If you have questions about your insurance coverage or other important aspects of construction law, such as mechanics’ or materialmen’s liens, it is important to have the right team of legal advisors on your side, including a commercial real estate attorney with experience in this area and a construction litigation attorney.