No Duty to Defend Where Contractor's Operations Caused Underlying Property Damage

As readers of this blog can corroborate, construction is often a risky business.  Defending against a lawsuit is just one potential hazard that contractors, in particular, must bear in mind when carrying out a project.  As with many classes of risk, contractors can attempt to avoid this burden by purchasing insurance-such as a Commercial General Liability (CGL) policy-and shifting the responsibility to someone else.

This does not mean, however, that insurance companies are willing to defend against any and all lawsuits on behalf of their insureds.  Most CGL policies contain language that limits or excludes coverage under certain circumstances.  Although a CGL policy might generally cover property damage, for instance, it may not cover property damage to the construction site resulting from the operations of the contractor.  The rationale behind this particular exclusion is that faulty workmanship on the part of the contractor is a business risk that the contractor itself should bear.[1]  Thus, a contractor whose faulty operations result in property damage and a lawsuit will likely have to bear the costs of litigation defense on its own.

A recent decision by the Court of Appeals of Washington illustrates what can happen when a contractor fails to understand the terms of its CGL policy.  In Western National Assurance Company v. Shelcon Construction Group, LLC, the owner sued Shelcon for property damage it alleged had been caused by the contractor’s work operations.  2014 WL 1828993 (unpublished opinion).  Shelcon had removed settlement markers that were being used to verify soil compaction. The owner argued that this removal resulted in the loss of a sale worth $4 million and a reduction in the value of the property.  Pursuant to its CGL policy, Shelcon tendered the defense of the lawsuit to its insurer, Western National.  The insurance company refused to step in and defend Shelcon, arguing-among other things-that coverage was excluded because the lawsuit arose from damage to the property caused by Shelcon’s own operations.  Shelcon eventually prevailed in the lawsuit against the owner, but got no help from its insurance company in the process.

After it won the lawsuit, Shelcon turned around and sued the insurer for not stepping in as it believed the policy required.  The insurance company again argued-this time before a judge-that the policy’s terms excluded coverage because Shelcon had caused the damage to the property through its own operations.  Shelcon countered that the exclusion only applied to the damages directly caused by the removal of the markers and not to the other consequential damages claimed by the owner.

The court agreed with the insurer.  Holding that the CGL policy did not impose on the insurer a duty to defend, the court reasoned that coverage was barred because the insured “was performing operations on the property and the injury for which damages are claimed arose out of those operations.”  In the end, Shelcon could have saved itself the additional cost and headache of suing its insurer had it better understood the limitations of its CGL policy.

Comments: Commercial General Liability policies are commonplace in the construction industry.  Contractors should recognize the double-edged nature of these policies.  On one hand, the policies can help contractors avoid the costs of litigation.  On the other hand, a misunderstanding of the policy’s terms can result in a legal struggle beyond what the contractor originally contemplated.  Knowing how the policy applies to different circumstances could mean the difference between the former and the latter.

[1] See Mut. Of Emunclaw Ins. Co. v. Patrick Archer Const., Inc., 123 Wn.App. 728, 733, 97 P.3d 751, 755 (2004).

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