Property Damage not Covered Due to Exclusions on the CGL Policy
August 12, 2014
The insured brought a declaratory judgment action against the general liability insurer seeking a determination that the CGL policy provided coverage for damages caused by the insured's subcontractor. This case is Bennett & Bennett Construction v. Auto Owners Insurance Company, 747 S.E.2d 426 (2013).
Bennett & Bennett, a general contractor, was engaged by a homeowner to remove synthetic stucco cladding from her home and replace it with a decorative brick face. Bennett & Bennett hired a subcontractor, M&M Construction, to install the brick. After the work was finished, Bennett & Bennett inspected the work and discovered mortar and slurry dried onto the face of the brick in a few areas. M&M was informed of this and that company hired a subcontractor to clean the brick.
The subcontractor used a pressure washer and acid solution that discolored some of the bricks and removed the decorative finish. After several attempts to repair the appearance of the brick face failed, Bennett & Bennett instructed M&M to remove the brick and replace all of it. M&M ceased all communication with Bennett & Bennett, which then replace the brick face at its own expense.
Bennett & Bennett filed a lawsuit against M&M and sent a notice to M&M's insurer, Auto Owners. The insurer did not respond or appear to defend the lawsuit and a default judgment was granted in favor of Bennett & Bennett. Bennett & Bennett then brought this action against Auto Owners seeking a declaratory judgment that M&M's CGL policy provided coverage for the damages caused by M&M's subcontractor. The circuit court ruled in favor of Bennett & Bennett and the insurer appealed.
The Supreme Court of South Carolina stated that it faced two issues: did the circuit court err when it ruled that exclusion (j)(5) on the CGL form did not apply to bar coverage; and did the court err when it ruled exclusion (n) did not bar coverage.
Auto Owners claimed that exclusion (j)(5) applied because M&M's work was not completed. The Supreme Court said that the exclusion unambiguously excluded coverage whenever the insured or a person acting on the insured's behalf causes damages in the course of working on the property, regardless of whether the insured's work has been completed. The court said the exclusion removes coverage when a subcontractor is performing operations, if the property damage arises out of those operations; that was the case in this instance, according to the court.
The Supreme Court stated that the trial court held that the subcontractor was not performing operations when the damage occurred, but this ruling was based on a time period in the CGL policy that does not affect the applicability of the exclusion, but only governs which coverage limitation applies. The court said that the policy language regarding when “your work” is completed is relevant only to the products/completed operations hazard coverage that applies to damage incurred after “your work” is completed, and this coverage has a separate aggregate limit from the general aggregate limit.
The court held that exclusion (j)(5) applied because the damage occurred while the subcontractor was improperly cleaning the brick
As for exclusion (n), the Supreme Court noted that the exclusion applied to damages claimed for any loss, cost, or expense incurred for the repair or replacement of the named insured's work if that work is withdrawn from use because of a known or suspected defect or deficiency. In this instance, the insured's work was replaced because of a deficiency in that the aesthetic characteristics of the brick were damaged by the work of the subcontractor.
The ruling of the circuit court was reversed. The Supreme Court held that the plain language of exclusions (j)(5) and (n) each independently exclude coverage when the subcontractor acting on behalf of the insured directly damaged the insured's work, necessitating its removal and replacement.
Editor's Note: The Supreme Court of South Carolina rules that the phrase “are performing” found in the CGL policy's exclusion (j)(5) indicates that the temporal limits of the exclusion are coterminous with the performance of the acts. In other words, if the damage occurs while the insured is performing the work, the exclusion applies. What is interesting in this decision is that, even though the damage was done after M&M's work (installing the brick) was completed, the court ruled that the actual damage occurred while the work of M&M's subcontractor (cleaning the brick) was ongoing, and so, the exclusion applied.