No Coverage for Poor Workmanship
August 18, 2014
In Flynn v. United Contractors Ins. Co., D062915, 2014 WL 2459715 (Cal. App. 4 Dist. June 6, 2014) (an unpublished opinion), John Flynn, doing business as Flynn Company, appealed from a judgment entered in favor of defendant United Contractors Insurance Company after the trial court granted United Contractors' motion for summary judgment.
United Contractors provided a general liability insurance policy to Flynn between June 1, 2006, and June 1, 2007. During the policy period and for a period of time after the policy period ended, Flynn worked as a subcontractor providing glass and glazing work for the doors and windows on a residential project for which Oakhurst Builders was the general contractor. Later, Oakhurst Builders sued Flynn as a result of Flynn's work on the project.
On appeal, Flynn contended that the trial court erred in relying on the “ongoing operations” exclusion. Specifically, Flynn asserts that this exclusion was not conspicuous, plain, and was thus unenforceable. Flynn also argued that the “ongoing operations” exclusion, when given the interpretation proposed by United Contractors, created what amounts to illusory insurance coverage because under that interpretation there would be virtually no coverage for any property damage at all, in view of the one-year policy period.
Oakhurst Builders was the general contractor on a residential construction project located in La Jolla, California. Pursuant to a subcontract entered into in August 2006, Oakhurst Builders retained Flynn to supply the glass, perform the glazing work, and install the windows and doors for the project. Flynn began work on the project in March 2007 and continued to work on the project into May 2008.
In December 2009, Oakhurst Builders filed a complaint against Flynn arising from Flynn's work on the project. The complaint asserted five causes of action, including breach of contract, negligence, express indemnity, implied contractual indemnity, and contribution. The complaint generally alleged that Flynn had breached the contract between Oakhurst Builders and Flynn by failing to perform as required under the contract, including by failing to follow the plans and specifications as required under the contract.
Under the second cause of action for negligence, Oakhurst Builders alleged that Flynn failed to use reasonable care in selecting, installing, and assembling the glass and related glazing work, and that, as a proximate result, some of the glass and related work was defective and failed, requiring its repair and replacement, including demolition of areas surrounding Flynn's defective work. Oakhurst Builders further claimed that as a proximate result of Flynn's defective work, it had incurred costs to investigate and repair the subject property and also incurred the loss of use of the property.
Flynn was insured under a general liability policy issued by United Contractors for the period between June 1, 2006, to June 1, 2007. The policy stated: “We have no duty to defend the named Insured or any other Insured against any Suit seeking damages for Bodily Injury or Property Damage to which this insurance does not apply.” In the exclusions section, the following exclusions appear:
j. Damage to Property Exclusion, the Policy excludes from coverage, That particular part of real property on which You or any contractors or subcontractors working directly or indirectly on Your behalf are performing operations, if the Property Damage arises out of those operations; k. Damage to Your Product Exclusion provides that Property Damage to Your Product is excluded from coverage; and “l. Damage to Your Work Exclusion,” the Policy excludes coverage for “Property Damage to Your Work or any part of it included in the products-completed operations hazard.
Flynn did not tender its defense to United Contractors after the complaint was filed. However, in May 2010, Oakhurst Builders tendered the complaint to United Contractors, arguing that it was an additional insured under the policy. Oakhurst Builders sought to have United Contractors “honor the additional insured provisions and the direct, first party claims being made [by Oakhurst Builders].” United Contractors treated the tender by Oakhurst Builders as a tender by Flynn.
United Contractors advised Flynn by letter that it would decline to provide a defense to Flynn in the Oakhurst Builders' action based on the allegations of the complaint.
While an appellate court must review a summary judgment motion by the same standards as the trial court, it must independently determine as a matter of law the construction and effect of the facts presented. Any doubt as to whether the facts establish the existence of the defense duty must be resolved in the insured's favor. A court may conclude that no duty to defend exists only where the underlying complaint cannot raise a single issue that would bring it within the policy coverage.
As various courts have explained, general liability policies for contractors are not designed to provide contractors and developers with coverage against claims their work is inferior or defective. A general liability insurance policy is not designed to serve as a performance bond or an all risk policy. Again, the risk of repairing defective materials used by the contractor or poor workmanship completed by the contractor is to be borne by the contractor, and not passed on to the general liability insurer.
The Court of Appeal noted that there is no allegation in the underlying complaint that Flynn's allegedly defective work caused physical injury to some portion of the residence other than the windows, doors, or related glazing work. Further, no evidence was provided in the defense of the motion for summary judgment that revealed such damage.
Exclusion l. excluded from coverage any property damage to Flynn's own work. Neither the complaint nor extrinsic evidence provided a basis to conclude that the allegation that some of the “glass and related work is defective and has failed” is anything but a direct reference to Flynn's work.
The reference to “demolition of areas surrounding the defective work” alleges the need to demolish parts of the property that were not injured as a result of Flynn's work. Rather, the portions referred to are areas of the property that had to be demolished in order to effectuate the repair and replacement of Flynn's alleged defective work. The damages created by this type of demolition are clearly excluded from coverage under the policy.
Because none of the facts stated or fairly inferable in the complaint suggested a claim potentially covered by the policy, and because there has been no showing that United Contractors knew or discovered other facts that would suggest potential coverage, United Contractors' duty to defend did not arise.
Editor's Note: Liability insurance is designed to protect insureds against damage they do to others. It is not, and can never be, protection against poor workmanship. To do otherwise would raise a moral hazard allowing a contractor to use substandard materials and workmanship, profit from cutting corners on the contract, and then place the obligation to replace and repair the inferior work on an insurer.
By: Barry Zalma, Esq., CFE