Business Risk Exclusions Upheld
The insurer filed a motion for summary judgment seeking adjudication that its insurance policy did not provide coverage for a property damage claim against its insured. This case is David Lewis Builders, Inc. v. Mid-Continent Casualty Company, 720 F. Supp. 2d 781 (2010).
The insured, Lewis Builders, was sued by the Blakes for failing to properly construct the Blakes' house. Specifically, the Blakes complained about hairline cracks in the garage floor and in the exterior areas that worsened and extended into other areas. The contention was that Lewis used faulty design and construction in such a way that the house was subject to deflection by reason of expansion of the soil under the foundation. Lewis turned the complaint over to its insurer, Mid-Continent, and the insurer declined coverage and sought summary judgment that it did not owe coverage to Lewis.
Mid-Continent grounded its refusal to indemnify or defend Lewis on three points. First, the insurer contended, the contractual liability exclusion excluded coverage. Next, the exclusions in the policy that precluded coverage for damage to property on which the insured was working that must be restored or replaced because the work was incorrectly performed prevented coverage. And finally, the policy exclusion pertaining to property damage to Lewis's work causes there not to be coverage for the claim. Lewis responded that none of the exclusions are applicable.
The United States District Court examined each of the exclusions upon which the insurer relied as the grounds for its motion.
The court opined that there is a reasonable interpretation of the contractual liability exclusion that would cause it to prevent coverage for Lewis. However, the court also pointed out that Texas court rulings and Fifth Circuit opinions have said that there is another interpretation of the exclusion that is at least as reasonable that causes the exclusion to not be applicable. Therefore, since under Texas law, if language of an insurance policy is subject to more than one reasonable interpretation, the interpretation most favorable to the insured must be adopted. The contractual liability exclusion was held to be not applicable in this instance.
The court then analyzed the policy exclusions pertaining to damage to property on which the insured was working at the time of the damage. Summary judgment evidence established that the damage alleged by the Blakes commenced before the construction was completed and before the house was occupied by the Blakes. Thus, the court found that exclusion (j.6) in the general liability policy was directly applicable: several parts of the building constructed by Lewis had to be repaired because its work was incorrectly performed on the property and the work did not fall under the completed operations definition. As for exclusion (j.5), the court said that Lewis was performing operations on real property (the building on the land owned by the Blakes) at the time of the damage, the damage was to the building (that particular part of the real property on which Lewis was working), and the damage arose out of that work. Thus, exclusion (j.5) also applied to the property damage claim.
As for the “damage to your work” exclusion, the court noted that this exclusion applies to completed operations, and since the claim was not one based on the completed work of the insured, the court declined to rule on the exclusion's applicability.
The ruling of the court was in favor of the insurer. By reason of the applicability of exclusions (j.5) and (j.6), the court found that Mid-Continent had no duty to indemnify or defend Lewis.
Editor's Note: Exclusions (j.5) and (j.6) are among the most disputed exclusions in the CGL form. The U.S. District Court used the factual evidence in this case to find that the exclusions unambiguously applied to this property damage claim.
Applying exclusion (j.6) is understandable since the facts proved that the work of the insured was incorrectly performed and that the damage occurred while the work was ongoing.
As for exclusion (j.5), the court added its interpretation of “that particular part” to the multitude of rulings that exist today around the country. The court held that the whole house was “that particular part”, possibly focusing on the fact that the property the insured was working on at the time of the loss was a self-contained unit, a single, unified, homogenous piece of property.