Broadened insurance coverage in the context of construction took another step forward recently when the United States Court of Appeals for the Sixth Circuit agreed with a growing number of states in upholding coverage when defective work causes damage to other work. In Fortney & Weygandt, Inc., v. Am. Mfrs. Mutual Insur. Co., No. 05-4031 (Feb. 12, 2010), the Sixth Circuit joined the Fifth Circuit, and several states, by holding that a “your work” exclusion does not apply to the cost of replacing non-defective work that is damaged by defective work. Put simply, even if the policyholder’s defective construction in one portion of the property is the cause of damage in another portion of the property, coverage is available for the non-defective work. The insurance industry has continually asserted that the “your work” exclusion disallows coverage for the cost of repairing or replacing property damaged as a result of defective work. The Sixth Circuit rejected this very restrictive assessment of the coverage provided under a general liability policy.
In Fortney, Frisch’s Restaurants, Inc. contracted with Fortney to build a Golden Corral restaurant in North Canton, Ohio. When the restaurant’s construction was nearly complete, soil shifted around the foundation, breaking underground utility lines. Frisch’s investigated the issue and ultimately determined that the foundation was defective, which required the demolition and reconstruction of the entire restaurant.
Both Frisch’s and the building’s architect brought claims against Fortney, claiming that the defective foundation built by Fortney caused all the damages. Fortney tendered its defense of those claims to its insurers. But the insurance companies refused to defend or indemnify Fortney, arguing that if the damage was caused by the policyholder’s work, then the “your work” exclusion precluded coverage for the cost of replacing or repairing any damaged property. Fortney, however, believed that the “your work” exclusion only barred coverage for repairing or replacing the defective work itself, not other property damaged by the defective work. While the district court sided with the insurance companies, the Sixth Circuit reversed, holding that the “your work” exclusion did not bar coverage for Frisch’s and the architect’s claims.
In overruling the district court, the Sixth Circuit analyzed the specific policy language that allegedly excluded coverage. The exclusionary clause, which is used in insurance contracts throughout the country, excluded coverage for property damage to “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” Relying on the reasoning of the Fifth Circuit in Mid-Continent Cas. Co. v. JHP Dev., Inc., 557 F.3d 207 (5th Cir. 2009), which involved the same “your work” exclusion, the Sixth Circuit focused on the restrictive introductory phrase, “that particular part.” The Fortney court held that because the “your work” exclusion begins with the phrase “that particular part,” the exclusion only applies to the portion of the property that was itself subject to defective work. In other words, the phrase limits the “your work” exclusion from applying to other damaged property that was either not the subject of defective work or that was not worked on by the insured at all. As the Sixth Circuit explained, the phrase “that particular part” is “trebly restrictive, straining to the point of awkwardness to make clear that the exclusion applies only to building parts on which defective work was performed, and not to the building generally.”
Some issues remain unresolved by the Fortney decision, however, as the case only dealt with the duty to defend. Although the reasoning regarding the “your work” exclusion should apply with equal force to the question of indemnity, the Sixth Circuit specifically noted that that issue was not on appeal. Thus, insured general contractors should vigilantly monitor the outcome of this case to determine the issue’s ultimate disposition.
The Fortney ruling adds to the recent trend of increased coverage for general contractors under Commercial General Liability (CGL) insurance policies. In 2008 Florida joined Texas, Tennessee and South Carolina, among others, in holding that a CGL policy provides coverage to a general contractor’s liability for post-completion property damage from a negligent subcontractor’s defective work. Auto-Owners Ins. Co. v. Pozzi Window Co., No. SC06-779 (June 12, 2008). The Pozzi ruling specifically extended liability coverage to a general contractor for the cost of repairing and replacing the defective work itself, so long as the work is damaged by the negligence of the subcontractor and not by a pre-existing defect or flaw in the product (windows in the Pozzi case) that the subcontractor simply installed.
Thus, in jurisdictions that either do or will follow both Fortney and Pozzi, significant coverage may be available for a general contractor. The only property damage that a CGL policy arguably would not cover for a general contractor in those jurisdictions, is the repair or replacement cost of the particular portion of property on which defective work was performed by the general contractor itself. Put simply, coverage may exist for the repair and replacement cost both of property damage generally and, if the negligent work was performed by a subcontractor, of the specific defective work itself.