Here is a great opinion and insurance coverage dispute about the interaction between a CGL policy, and particularly one provided under an Owner’s Controlled Insurance Program, and a subcontractor default insurance policy / subguard policy.
In Pavarani Construction Co. v. Ace American Insurance Co., 2015 WL 6555434 (S.D.Fla. 2015), a general contractor constructed a high-rise condominium project. The general contractor and subcontractors were enrolled in the Owner’s Controlled Insurance Program (“OCIP”). This meant the general contractor and the subcontractors had the same CGL insurer. In addition, and outside of OCIP, the general contractor had subcontractor default insurance which is insurance a general contractor maintains to insure the risk of subcontractor default (and, really, catastrophic subcontractor default).
Post-construction, it was discovered that that the structural shell subcontractors the general contractor hired to (a) install the concrete masonry units and (b) the cast-in-place concrete, performed their work defectively. Specifically, reinforcing steel required to be installed within the concrete masonry units or cast-in-place concrete was omitted or improperly installed. These deficiencies resulted in excessive movement of building components. This movement caused stucco to debond, cracking in the walls, cracking of cast-in-place columns, beams, and shearwalls, and cracking in the mechanical penthouse enclosure on the roof that then resulted in water intrusion.
Upon discovering the deficiencies and/or resulting damage, the owner of the Project put the general contractor on notice. The general contractor notified its subcontractors. The general contractor (and subcontractors) sought indemnification under the CGL policy within OCIP. (Remember, with an OCIP policy, it is the same CGL insurer that covers all enrolled entities.) The CGL carrier, however, denied coverage. This resulted, applicable to the case, in the concrete masonry unit subcontractor defaulting on its subcontract because it was unable to perform repairs to its deficient work and cover the resulting damage without the CGL insurance proceeds. As a consequence, the general contractor submitted a claim to its subcontractor default insurance policy to recover money to fund the repairs that were in excess of $25 Million. The general contractor also worked out a deal with its subcontractor default insurance policy that it would pursue the CGL carrier for reimbursement.
The general contractor then sued the CGL insurer for indemnification by asserting a breach of contract claim and a declaratory relief claim against the insurer.
RESULTING DAMAGE
The insurer argued that there was no coverage because there is no coverage under the CGL policy for the general contractor repairing defective work. This is true, BUT “if the defective work causes damage to otherwise nondefective completed product, i.e., if the inadequate subcontractor work caused cracking in the stucco, collapse of the [mechanical] penthouse enclosure, and cracking in the critical concrete structural elements…[the general contractor] is entitled to coverage for the repair of that non-defective work.” Pavarani, supra, at *4. In other words, while repairing the defective work would NOT be covered, repairing damage resulting from the defective work WOULD be covered.
In discussing coverage for resulting damage, the court relied on a recent Eleventh Circuit Court of Appeals case, Carithers v. Mid-Continent Casualty Co., 782 F.3d 1240 (11th Cir. 2015). This case is actually a very important case because it held “the complete replacement of defective subcontractor work may be covered when necessary to effective repair ongoing damage to otherwise non-defective work.” Pavarani, supra, at *4. (Please review the specifics of this case here). Basically, if replacement of potentially defective work is necessary to repair resulting damage, then such replacement of the defective work would be covered under the policy. For instance, if you had to remove (or rip-and-tear out) defective work in order to fix the resulting damage, then such removal would be covered.
Here, it was clear that the defective work caused resulting damage triggering the CGL policy’s obligation to indemnify the general contractor and applicable subcontractors.
“OTHER INSURANCE” PROVISION
The CGL policy contained an “Other Insurance” provision. This provision means that the policy will operate as excess (not primary) insurance over any other available insurance. This provision is in virtually every CGL policy and in many other types of insurance policies such as a subcontractor default insurance policy. The “Other Insurance” provision applies “when two or more insurance policies are on the same subject matter, risk and interest.” Pavarani, supra, at *5.
The CGL insurer argued that based on this “Other Insurance” provision, the general contractor’s subcontractor default insurance should operate as the primary insurance with it serving as any excess insurance. The court correctly dismissed this argument since a CGL policy and subcontractor default insurance policy insure completely different business risks. Besides, the subcontractor default insurance policy insures the general contractor for a subcontractor default and does not insure a subcontractor for its default.
Furthermore, the court held:
Courts disregard ‘Other Insurance’ provisions where, as here, there is a contractual right of indemnification between the parties insured by the relevant policy. Here, AWS [concrete masonry subcontractor] contracted to indemnify Plaintiff [general contractor] for damages resulting from its work and Defendant [CGL insurer] insured AWS [per OCIP] for claims of property damage. Therefore, Defendant cannot utilize the ‘Other Insurance’ provision to shift the loss.
Pavarani, supra, at *5 (internal citation omitted).
ATTORNEY’S FEES
Florida Statute s. 627.428 authorizes attorney’s fees against an insurer in an insurance coverage case. Since the general contractor (insured) prevailed, it was entitled to its reasonable attorney’s fees.
Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.