The U.S. Fifth Circuit Court of Appeals held that there is no duty to defend an additional insured after it completed work where the additional insured endorsement in a CGL policy limits coverage to liability arising out of “ongoing operations.” Carl E. Woodward, L.L.C. v. Acceptance Indem. Ins. Co., 743 F.3d 91 (5th Cir. 2014)
An insurer issued a CGL policy to a concrete subcontractor, who worked on a condominium project. The project was subsequently completed and sold. The purchaser sued the seller and general contractor for rescission, breach of contract and gross negligence, alleging faulty construction and damage from the construction. The claims were arbitrated, and it was established that part of the alleged defects and damage were due to the work of the concrete subcontractor. The general contractor then made a claim as an additional insured under the subcontractor’s CGL policy for the arbitration costs and award. The insurer refused to defend based on an endorsement which limited insureds to “include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of ongoing operations performed for that insured.” Litigation ensued.
The Fifth Circuit held (following Mississippi precedent) that the phrase “ongoing operations” refers to actions “actually in process.” The Fifth Circuit found that if coverage were allowed under the endorsement based on an allegation of failure to follow plans and specifications, the policy would be effectively converted into a performance bond. As there were no allegations in the cross-claim that non-conforming concrete work caused damage during the insured subcontractor’s ongoing operations, there could be no coverage.
The Fifth Circuit further rejected the general contractor’s assertion that a causal link between the subcontractor’s operations and the damage sued for was sufficient, finding that such a conclusion would allow a project owner to assert a breach of contract claim against a contractor for any claim made during the course of construction, regardless of whether the contractor might remedy the problem before completing the project. The Fifth Circuit held no coverage existed under the CGL policy since the cross-claim allegations against the general contractor did not arise out of the ongoing operations of the subcontractor.