The Second Circuit's recent decision in Scottsdale Insurance Company v. R.I. Pools, Inc., Case No. 11-3529, 2013 WL 1150217 (2d Cir. March 21, 2013) should be welcome news for Connecticut contractors insured under CGL policies with Broad Form Property Damage Coverage, seeking coverage for losses to their work caused by their subcontractors. In RI Pools, the Second Circuit vacated the district court's grant of summary judgment in favor of an insurer, including a ruling that the insurer was entitled to a return of funds it spent on the insured's defense, after concluding that the district court erred when it ruled that a swimming pool contractor's liability for cracked concrete could not be covered by its insurance. The district court relied on the "your work" exclusion, but in doing so, it read the "subcontractor exception" out of the policy. The Second Circuit put it back in.
RI Pools is a swimming pool installer that uses subcontractors to supply and shoot concrete into the ground. In 2009, nineteen different customers complained of cracking, flaking and deteriorating concrete in pools installed by RI Pools in 2006. RI Pools tendered to its CGL carrier, Scottsdale, which initially furnished a defense. Scottsdale later filed suit seeking a declaration that it had no duty to defend or indemnify and seeking reimbursement for defense costs already expended.
Relying on the Second Circuit's 1992 decision in Jakobson Shipyard, Inc. v. Aetna Casualty & Surety Co., 961 F.2d 387 (2d Cir. 1992), the district court reasoned that the cracks in the concrete were defects in the insured's work that could not be "accidents," and thus the loss could not be covered and the insurer had no duty to defend or indemnify. In a subsequent ruling the district court ordered the insured to reimburse the insurer for defense costs the insured had paid.
The policy form at issue covers loss caused by "an occurrence," defined as "an accident" and includes a "your-work exclusion" with a "subcontractor exception" to the "your-work exclusion." The district court construed the policy form not to afford coverage for the loss from the cracked concrete. In doing so, according to the Second Circuit, the district court "essentially read the subcontractor exception out of the policies."
In Jakobson, the court ruled that loss defective steering mechanisms in tug boats built and sold by an insured shipyard was not caused by occurrence, and thus not covered under the insured's CGL policies. But, as the RI Pools court reports, because the policy in Jakobson did not include a subcontractor exception to the "your work" exclusion, the reasoning there does not apply here. Rather to the court, the inclusion of the subcontractor exception in the policy signals that defective work can be an occurrence and that the loss may be covered:
Whereas Jakobson held that the insured's faulty workmanship could not be a covered occurrence under the policy, the present policies expressly provide that in some circumstances the insured's own work is covered. As coverage is limited by the policy to "occurrences" and defects in the insured's own work in some circumstances are covered, these policies, unlike the Jakobson policy, unmistakably include defects in the insured's own work within the category of an "occurrence."
Id. at *3. Ultimately, "the question whether the insured's liability for defects in its own work is covered turns on whether the subcontractor exception applies." Because the district court never considered this "crucial question," the court vacated the judgment and remanded the case.
Additionally, the court determined that Scottsdale was not entitled to any reimbursement for the defense costs it previously expended. This was so because, in light of the subcontractor exception to the your-work exclusion, it was "apparent that the damage to the pools caused by the cracked concrete 'falls...possibly within the coverage" of the policies.'" Id. The duty to defend being broader than the duty to indemnify, that possibility of coverage was enough to trigger Scottsdale's duty to defend, which duty exists "up until the point at which it is legally determined that there is no possibility for coverage under the policies."
For another recent decision regarding the recoupment of defense costs, see National Surety Corp. v. Immunex Corp., Case No.86535-3, March 07, 2013. In National Surety, the Supreme Court of Washington last month ruled that Washington law does not allow an insurer to recoup defense costs incurred prior to a determination of non-coverage.