CGL Coverage for Breach of Contract
June 20, 2016
This case involves two questions of law certified to the Supreme Court of Arkansas by the United States District Court for the Eastern District of Arkansas. This case is Columbia Insurance Group v. Cenark Project Management Services, 2016 Ark. 185 (2016).
The homeowners in this case acquired seven lots on which to construct homes in Arkansas. They retained Cenark, an engineering firm, to design the building pads for the houses that were to be built on the lots. The homeowners also entered into a contract with Arkansas Infrastructure (AII) to construct the pads.
After the houses were built, the homeowners discovered cracks and/or separation in the foundations, patios, and other structures in the homes. After the cracks and separations worsened, the homeowners had an investigation conducted and discovered that the fill material under the foundations was not of the quality and quantity specified in the plans, the critical drains had not been installed in the foundation pads by AII, and that other aspects of the engineer's plans and specifications were not followed by AII. The homeowners sued Cenark and AII seeking damages in the loss of contract price paid to AII and Cenark, plus additional damages for the cost of work required in the past and that will be required in the future to repair, replace, or remediate the faulty work done by AII.
Columbia Insurance Group was the insurer for AII and it did provide a defense during the discovery period, but subsequently filed a declaratory judgment action seeking a determination that it did not have a duty to defend or indemnify the insured in this instance. The action was filed in the U.S. District Court but that court certified two questions to the Supreme Court of Arkansas for its consideration. The two questions were: whether faulty workmanship resulting in property damage to the work of a third party (as opposed to the work of the insured) constitutes an occurrence; and if such faulty workmanship constitutes an occurrence and an action is brought in contract for property damage to the work of a third person, does any exclusion in the insurance policy bar coverage.
The Supreme Court of Arkansas considered the certified questions and said that the questions rested on the premises that the underlying claim asserted by the homeowners involves defective workmanship on the part of AII. The court said that it does not. The court decided that the claim was one for breach of contract. In deciding this point, the court then ruled that the CGL form does not cover breach of contract claims. The court listed court cases from Arkansas, Pennsylvania, Georgia, Illinois, Missouri, and New Jersey in support of its position that breach of contract claims are not covered by the CGL form.
Based on the ruling that breach of contract claims are not covered by the CGL form, the court held that since there is no coverage for the claim, the certified questions are moot. The court declined to address the questions as answering them would constitute an improper advisory opinion.
Editor's Note: This case is cited for the use by the Arkansas Supreme Court of courts' rulings from various states pertaining to the lack of coverage under the CGL form for breach of contract claims. The court also listed court rulings that were in opposition to this point, these courts holding that there is no distinction between contract claims and tort claims when evaluating coverage under the CGL form.