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Commercial general liability (“CGL”) insurance policies
insure contractors against unlikely and unforeseen damage
to persons and property caused by their defective work and
the defective work of their subcontractors. Typically, CGL
polices cover damage to structures or properties other than
those under construction by the general contractor, such as
adjacent properties, but do not cover damage to the structure
under construction, because such damage is both foreseeable
and within the control of the general
contractor. However, for some
time it has remained an open question
whether CGL policies apply to
a subcontractor’s defective work
that results in damage to other,
nondefective portions of the general
contractor’s work. A recent
ruling by the Fourth Circuit Court
of Appeals applying Virginia and
Maryland insurance law, Stanley
Martin Companies, Inc. v. Ohio
Casualty Co., 2009 U.S. App. LEXIS 2758 (4
th
Cir. 2009)
answered that question in the affirmative.
Stanley Martin Companies, a general contractor for the construction
of townhouses in Gaithersburg, Maryland, sued its
insurer, Ohio Casualty Company, seeking a declaratory
judgment that the insurer had breached its duty under a CGL
policy to indemnify the contractor for costs that the contractor
incurred in remediating mold damage caused by a subcontractor’s
defective work. There was no question that the
CGL policy did not apply directly to the defective trusses
installed by the subcontractor, which permitted the mold
intrusion. The dispute centered on whether the CGL policy
covered damage to the nondefective portions of the townhouses
caused by the mold intrusion.
The sole issue at the summary judgment stage of trial was
whether the mold growth constituted an “occurrence” that
was covered by the CGL policy. The CGL policy stated, in
relevant part, that Ohio Casualty would pay those sums that
Stanley Martin Companies “becomes legally obligated to
pay by reason of liability imposed… because of… ‘property
damage,’ … that takes place during the Policy Period and is
caused by an ‘occurrence’ happening anywhere.” The policy
went on to define an “occurrence” as “an accident, including
continuous or repeated exposure to substantially the same
general harmful conditions.”
The U.S. District Court for the Eastern District of Virginia,
applying Virginia law, held that “damage caused by the defective
workmanship of the… insured’s subcontractor and
limited to the insured’s work does not constitute an
‘occurrence’ triggering coverage.” A subcontractor’s defective
work, damaging only the contractor’s work, is not an
“accident” and consequently there was no “occurrence” to
trigger the policy. The District Court interpreted the CGL
policy only to apply when property other than the property being constructed by the contractor is damaged. Because it
is frequent that property under construction will be damaged
as a result of a subcontractor’s defective work, such
damage is not “unexpected,” and consequently is not
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an “occurrence.” The District Court granted Ohio Casualty’s
motion for summary judgment on the ground that it was not
required to indemnify the contractor under the terms of the
CGL policy.
The contractor appealed. The U.S.
Court of Appeals for the Fourth Circuit
applied the holding of a recent Fourth
Circuit case, French v. Assurance Co.
of America, 448 F.3d 693 (4
th
Cir.
2006), a construction case with similar
facts. In French, the Fourth Circuit
held that, “by itself, the subcontractor’s
defective work did not constitute an
accident or occurrence under the
[CGL] policy because an insured’s
obligation to repair the defective work ‘is not unexpected or
unforeseen under the terms of the [general] contract.’”
However, in French, the Court of Appeals ruled that the
CGL policy applied because the damage caused by the subcontractor’s
defective work extended to “otherwise nondefective
parts of the building.”
The facts were strikingly similar in Stanley Martin Companies,
Inc. Although the contractor was obligated to repair
the subcontractor’s defective trusses because that defective
work was not “unexpected or unforeseen,” the mold damage
that extended beyond the defective trusses to nondefective
portions of the townhouses was an unexpected, unintended
accident, and thus constituted an “occurrence” under
the terms of the CGL policy. For this reason, the Fourth
Circuit reversed the District Court’s grant of summary judgment,
ruling that the CGL policy would apply if the contractor
could prove that it incurred costs as a consequence
of the mold intrusion.
This case is particularly significant because the language in
the Ohio Casualty policy is identical to most CGL policies
and because, on the issue of Virginia insurance law decided
by the Fourth Circuit, Virginia law does not differ materially
from Maryland law. Contractors and insurers using
CGL policies should be aware of this decision when entering
into insurance contracts, as it will apply throughout the
Fourth Circuit, and would be considered persuasive anywhere
else CGL contracts are used.
continued from page 4
The court concluded that Super Structures’ lien was invalid
because Super Structures’ labor did not actually enhance the
value of the property against which it claimed the lien. The
lesson to be learned is that contractors may not accrue lien
rights until they actually perform work on the property or
their off-site labor enhances the value of the property.
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