Siding with AGC of America and the AGC of Alabama, the U.S. Court of Appeals for the Eleventh Circuit has unanimously held that the contractual liability exclusion to coverage under the commercial general liability (CGL) policies sold to AGC members across the country does not deprive these firms of coverage for claims that they are in breach of contract. Consistent with the vast majority of the legal authorities on the subject, the court held that the exclusion is limited to claims for indemnification in accordance with a hold harmless or similar clause.
Many if not most claims for construction defects include claims for breach of contract. If the courts construed the contractual liability exclusion to carve out and exclude coverage for any claim for breach of contract, AGC members would lose much if not most of their current coverage for such defects. In 2010, in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, the Texas Supreme Court came very close to taking that controversial step, and since then, the insurance industry has been encouraging the courts to broadly construe the contractual liability exclusion. The Eleventh Circuit’s decision marks a significant point in the construction industry’s effort to push back.
The name of the case is Pennsylvania National Mutual Casualty Insurance Company v. St. Catherine of Siena Parish. It arose under Alabama law. And it involved contracts to repair and replace two of a church’s roofs. Five years after the contractor completed its work on the first roof, and just months after the contractor completed its work on the second roof, the two began to leak.
After much back and forth, the owner determined that the contractor had not properly fastened the new shingles to the roof decks and had made other mistakes. The owner then sued the contractor in state court, seeking compensatory damages for negligence, wantonness, misrepresentation and breach of contract. The court held the contractor liable for breach of contract, and awarded $350,000 to the owner, but dismissed the other claims.
In an effort to avoid liability to the contractor for the amount of the award, the contractor’s insurance carrier then filed this case for a declaratory judgment in the U.S. District Court for the Southern District of Alabama. The carrier argued that the defective work was not an “occurrence” that had triggered coverage. It also argued that the “your work” and contractual liability exclusions applied to the contractor’s claim.
In April of 2014, and in accordance with what is now the majority rule, the district court held that at least the property damage resulting from the unintended and unforeseen defects in the subcontractor’s work was an “occurrence.” Very quickly, the court also rejected the carrier’s argument that the “your work” exclusion applied, for that exclusion is limited to work that a contractor self-performs, and it was undisputed that the contractor had actually subcontracted the roof repairs to another firm. But the district court ultimately denied coverage, on the theory that the contractual liability exclusion did apply to the owner’s claims for breach of contract.
Shortly thereafter, the parties took their legal debate over the “occurrence” trigger for insurance coverage and the contractual liability exclusion up to the Eleventh Circuit. And now, that court has affirmed that the lower court’s ruling on the first question and reversed its ruling on the second. The court of appeals has agreed that the defects in the subcontractor’s work were an “occurrence.” Citing the “plain language” of the contractual liability exclusion, the court then held that it is limited to a contractual “assumption of liability” under an indemnification or hold harmless clause, and does not apply to a claim for breach of contract.
In July of 2014, AGC of America and the AGC of Alabama jointly filed a friend-of-the-court brief in the Eleventh Circuit in support of the contractor. In that brief, the association argued, as the court later held, that the exclusion only applies to an “assumption of liability” under an indemnification or hold harmless clause.
For additional information on the case, please contact Mike Kennedy at firstname.lastname@example.org.