A federal court in North Carolina recently held that there was no duty to defend an additional insured in an underlying litigation alleging breach of contract because there was no causal connection between the breach of contract at issue and any property damage and thus the underlying claim did not trigger coverage. Westfield Insurance Company v. Nautilus Insurance Company, 2016 WL 81485 (M.D. N.C. Jan. 7, 2016).

A general contractor contracted with the State of North Carolina to construct a school building. After the school suffered damage from water intrusion, the general contractor contracted with a remediation contractor, which sued the general contractor for its fees. The general contractor tendered the suit to a subcontractor’s insurer under whose policy the general contractor was an additional insured, which rejected the demand contending that there was no coverage for the claim because it did not state an “occurrence” resulting in “property damage” and thus did not trigger coverage.

The general contractor’s insurer filed a declaratory judgment action against the subcontractor’s insurer to recover amounts it paid in defending and settling the remediation contractor’s suit, and argued that although the lawsuit was labeled a “breach of contract” claim, it is the nature of the underlying action and not the label that determines whether there is a duty to defend. The court agreed with the general principle that the label does not control the duty to defend, but held that the damages sought arose out of the general contractor’s “non-accidental failure to honor its contractual obligations.”

The court found no causal connection between the water intrusion event and the alleged breach of contract. Accordingly, the court concluded that the breach was a separate and independent act which severed the causal connection with the rain event that caused the water intrusion at the school and therefore did not trigger coverage.