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General Contractor Not an Additional Insured for Faulty Workmanship Under Subcontractor’s Policy

Case:
Carl E. Woodward, L.L.C. v. Acceptance Indem. Ins. Co.
Federal Fifth Circuit Court of Appeals (Mississippi Law)
2014 U.S. App. LEXIS 2569 (5th Cir. Feb. 11, 2014)

In yet another opinion weighing in on insurance coverage for constructions defects, the Fifth Circuit Court of Appeals addressed claims related to negligent construction of a condominium project. Pass Marianne, L.L.C. contracted for the construction of condominiums on the Mississippi Gulf Coast with general contractor, Carl E. Woodward. Among the subcontractors was DCM Corporation, L.L.C., who contracted with Woodward to provide the concrete work. In November 2005, DCM procured a CGL policy from Acceptance Indemnity Insurance Co., on which Woodward was named an additional insured. DCM worked on the project from January to October 2006. The entire project was completed in August 2007. In October 2007, Pass Marianne sold the condominiums to Lemon Drop Properties. A year later, Lemon Drop brought suit in Mississippi state court against Pass Marianne and Woodward, seeking rescission, compensatory and punitive damages for breach of contract and gross negligence. Pass Marianne filed a cross-claim against Woodward alleging faulty construction and damages arising out of the construction. The claims were eventually arbitrated. One of the most significant issues in the arbitration was the fault of the concrete subcontractor, DCM.

After Pass Marianne filed the cross-claim, Woodward demanded that Acceptance provide a defense and indemnity to Woodward as an additional insured under the policy purchased by DCM. Acceptance refused to defend Woodward based on language in the additional insured endorsement which stated Woodward was insured “only with respect to liability arising out of ongoing operations” performed for Woodward. The endorsement also contained an exclusion providing the policy did not apply to loss occurring after “all work, including materials, parts or equipment furnished in connection with such work, on the project . . .to be performed by or on behalf of the additional insured(s) at the site of the covered operations has been completed.” Following Acceptance’s denial, the coverage litigation was initiated.

The Fifth Circuit, in considering Acceptance’s duty to defend Woodward, first looked to the allegations of the cross-claim by Pass Marianne against Woodward, which asserted Woodward built the foundation piers of the condominium in non-conformity with plans and specifications and altered the blueprints in an attempt to cover up this problem. The cross-claim further alleged Woodward intentionally and willfully violated their contractual obligations to Pass Marianne in multiple cost cutting and gouging ploys. In addition to providing the cross-claim to Acceptance when demanding coverage and a defense obligation, Woodward also sent a report prepared by Rimkus Consulting Group, which had concluded the concrete subcontractor, DCM, did not comply with the construction drawings or with industry standards, resulting in drainage problems, damage to the exterior walls of the condominium units, problems with the finish of the concrete in the parking garage and unsightly trenches that were cut into the concrete to assist with drainage. In summary, Pass Marianne’s cross-claim that DCM’s work did not conform to specifications was supported by the Rimkus report.

Generally, an insurance company’s duty to defend arises only if a complaint has been filed that contains allegations of conduct covered by the policy. Under Mississippi law, however, if an insurer’s independent investigation establishes facts that would present a claim “which potentially would be covered under the policy, the insurer must provide a defense until it appears that the facts upon which liability is predicated fall outside the policy's coverage.” Auto. Ins. Co. of Hartford v. Lipscomb, 75 So. 3d 557, 559 (Miss. 2011). The Court thus assumed without deciding that the Rimkus report was relevant in determining the duty to defend.

Nonetheless, the Court ultimately concluded, because the allegations of the cross-claim fell outside the coverage of the additional insured endorsement, Acceptance had no duty to defend Woodward. The Court reasoned the alleged breach was that the subcontractor did not build the foundation piers according to plans. According to the Fifth Circuit, that is an allegation that the completed building did not satisfy the terms of the parties’ contractual agreement. Accordingly, even if Woodward’s liability for Pass Marianne's breach of contract claim was causally related to DCM’s concrete work, Woodward's liability did not arise out of DCM's ongoing operations. The Court emphasized the policy specifically excluded liability for property damage occurring after all work had been completed. The damage here, the Court concluded, necessarily arose from the completed construction, when Pass Marianne received the completed building. The Court cautioned, allowing coverage under an endorsement similar to that contained in Acceptance’s policy because of an allegation that the additional insured failed to follow plans and specifications, would effectively convert a CGL policy into a performance bond.

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