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A general contractor may not be covered under a general
liability insurance policy for property damage caused by
defective materials supplied by a subcontractor. This point is
illustrated in the case of Stanley Martin Cos. v. Ohio Cas.
Group, 2007 U.S. Dist. LEXIS 73587 (E.D. Va. 2007).
In this case, a general contractor constructed twenty-four
duplex townhouses in Maryland. The general contractor
contracted with a subcontractor to supply wood trusses for
use in construction of the townhouses. The subcontractor
warranted that the trusses were free of mold and other defects
and agreed to indemnify the general contractor accordingly.
Prior to commencing construction, the general contractor
obtained insurance for the project, which included an umbrella
general liability policy providing coverage for property
damage or injuries caused by an occurrence, exceeding
the general contractor’s primary commercial general liability
policy.
As the townhouses were built and sold, homeowners began
reporting problems with mold growing on the wood trusses
and fire walls of their new homes and demanded that the
general contractor remediate the problem. The general contractor
provided notice of the homeowners’ claims to its
insurance carriers and hired a contractor to undertake the
extensive mold remediation effort. The cost of the mold
remediation ultimately exceeded the general contractor’s
commercial general liability policy limits.
The general contractor looked to its umbrella policy carrier
to provide coverage for the overage. When the carrier denied
coverage, the general contractor filed suit seeking indemnification
for the costs incurred in remediating the mold
damage to the construction project.
The umbrella policy covered the general contractor for property
damage or injuries caused by an “occurrence,” defined
under the policy as an accident, including continuous or
repeated exposure to substantially the same general harmful
condition. The policy excluded from coverage property
damage to “your work,” defined as work performed by or on
behalf of the insured, including materials furnished in connection
with such work. The carrier argued that the general
contractor could not demonstrate that an “occurrence”
within the meaning of the policy caused the general contractor’s
remediation costs.
The general contractor argued that nothing in the policy specifically
excluded accidents or general harmful conditions arising as a
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consequence of the negligence of a subcontractor
or general contractor. The general contractor further
argued that coverage should have been triggered because
third-party property, other than the general contractor’s own
work, sustained damage. Supporting its assertion that third-party
property incurred damage, the general contractor noted
that the homeowners were removed from their homes during
the remediation process and that several homeowners complained
of bodily injury resulting from the contaminated air inside
their homes.
The Court first noted that other courts construing Virginia
law find that, under standard general liability policies like
the umbrella policy at issue in this case, damage caused by
the defective workmanship of the insured or the insured’s
subcontractors does not constitute an “occurrence” triggering
coverage under the policy.
The Court ruled that, normally, a general contractor is responsible
for fulfilling the terms of its contracts, including
the work of its subcontractors. In this case, the general contractor
assumed responsibility for constructing the townhouses
and for the subcontractor’s faulty workmanship in
providing the moldy trusses and firewalls. As such, because
the general contractor’s remediation costs arose out of the
faulty workmanship of its subcontractor, the general contractor
could not claim the property damage as unexpected
or as an accident. Therefore, the Court held that, as no
“occurrence” happened under the policy, the insurer owed
no contractual duty to provide coverage.
The Court noted in its decision that removing the homeowners
and remediating the poor air quality inside the
townhouses were merely components of the cost of remediating
the damage to the townhouses and did not constitute
independent damage to third parties. Accordingly, the
Court ruled that the terms of the umbrella policy did not
provide coverage as the general contractor’s remediation
costs were all related to repairing its own work.
This case illustrates an important limitation on a general
contractor’s insurance coverage as it relates to subcontractors.
As a result of this case, general contractors should be
aware that their insurance may not provide coverage for
property damage or injuries resulting from defective work
performed or materials provided by its subcontractors.
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