Construction projects often involve work performed by subcontractors. While this makes sense given the varying expertise and equipment required, it can create some difficult issues from an insurance perspective when things go awry. Imagine, for example, a general contractor who performs non-defective work on one part of a construction project while a subcontractor performs defective work on another part of the project. What happens if the general contractor’s work is damaged by the subcontractor’s defective work? Is the general contractor covered under its commercial general liability (“CGL”) insurance policy for this type of damage? The United States Court of Appeals for the First Circuit recently said no and held that the insurance company had no duty under the CGL insurance policy to indemnify or defend the general contractor against this type of claim.
The controversy arose when the property owner filed a state court action against the general contractor and others alleging property damage caused by defective work (“State Court Action”). The property owner did not allege, however, that the general contractor was negligent or that the general contractor caused the property damage. The parties determined through the discovery process that a subcontractor’s defective work caused the property damage.
In response to the State Court Action, the general contractor sought defense and indemnity under its CGL insurance policy. The insurance company denied coverage, however, concluding the property owner’s allegations did not constitute an “occurrence” under the policy. The insurance company also concluded that, even if it did, an exclusion to coverage would apply. After “some back and forth letters,” the insurance company filed a separate action in the United States Federal District Court for the District of Massachusetts to determine whether it had a duty to defend or indemnify the general contractor in the State Court Action (“Federal Court Action”).
There are three steps to this analysis. The court first determines whether the damages alleged are caused by an “occurrence” and therefore fall within the scope of coverage provided under the insurance policy. If so, the court must then determine whether any exclusions to coverage apply. Finally, if an exclusion to coverage does apply, then the court must determine whether any exceptions to the exclusions apply. Interestingly, the burden of proof shifts between the insured and the insurer at each of these stages.
Ultimately, the First Circuit bypassed the initial step and thornier question as to whether negligent work performed by a subcontractor constitutes an “occurrence” under the general contractor’s CGL insurance policy. The First Circuit acknowledged that there is sharp split of authority on this question, and were hesitant to predict which way the Massachusetts Supreme Judicial Court would decide the issue. Instead, the First Circuit determined that there was an applicable exclusion regardless. The First Circuit reasoned that “the purpose of a general liability insurance policy is for tort liability to physical damages to others and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained.” In other words, the purpose of a general liability policy is to protect against unforeseeable and accidental damage, not to protect against inherent business risks.
