Applying Virginia law, a federal district trial court in the Eastern District of Virginia recently held that an umbrella liability contract does not provide coverage to a general contractor to correct a subcontractor’s defective workmanship. Stanley Martin Cos., Inc. v. Ohio Cas. Group, No. 1:06cv1035(JCC) (E.D.Va. Oct. 2, 2007).
Factual and Procedural Background
This construction defect insurance coverage dispute resulted from the installation in a townhouse development of wood trusses allegedly containing mold. Stanley Martin Companies, Inc., the general contractor, contracted with Shoffner Industries, Inc., to supply the wood trusses. Shoffner warranted the wood trusses would be free of mold. The trusses were not mold-free. As a result, Stanley spent $1.7 million to remediate the mold. Several of the townhouse owners also sued Stanley for alleged damage caused by the wood trusses.
Stanley sought coverage from its primary and umbrella general liability carriers for the remediation costs and for the lawsuits. Stanley’s primary carriers agreed to defend and eventually settled the lawsuits. After filing a declaratory judgment action, Stanley’s primary carriers and one of its umbrella carriers settled and agreed to pay a portion of the remediation costs. Ohio Casualty Insurance Company, one of Stanley’s umbrella insurers, refused to settle or pay any remediation costs.
Stanley filed a second declaratory judgment action against Ohio Casualty in the United States District Court for the Eastern District of Virginia. Stanley and Ohio Casualty filed cross-motions for summary judgment.
The federal district court granted summary judgment to Ohio Casualty on the basis that there was no occurrence.
In its summary judgment motion, Ohio Casualty argued that the remediation costs were not the result of an accident. The Ohio Casualty umbrella policy provided that it would pay those sums imposed by law against Stanley for “‘bodily injury, ‘property damage’….caused by an ‘occurrence.’” “Occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” “Accident” was not defined. Based on these provisions, Ohio Casualty argued that there was no coverage.
The district court agreed with Ohio Casualty. The court stated that “[w]hile the Supreme Court of Virginia has not ruled on this precise issue, courts construing Virginia law have generally found that, for standard general liability policies….damage caused by the defective workmanship of the insured or the insured’s subcontractor and limited to the insured’s work does not constitute an ‘occurrence’ triggering coverage.” See Hotel Roanoke Conference Comm’n v. Cincinnati Ins. Co., 303 F.Supp. 2d 784, 786 (W.D. Va. 2004), aff’d 119 Fed. Appx. 451 (4th Cir. Jan. 6, 2005); Pulte Home Corp. v. Fid. & Guar. Ins. Co., No. CH02- 127 (Vir. Cir. Ct. Feb. 6, 2004).
The district court also stated that “[w]hile ‘accident’ is not defined in the policy, the Virginia Supreme Court has defined ‘accident’ in insurance policies as ‘an event that takes place without one’s foresight or expectation; an undesigned, sudden, and unexpected event.’ ” The court explained that Stanley’s work was the construction of the townhouses. Stanley contracted with Shoffner to provide the wood trusses. The court reasoned that as a general contractor, Stanley “was responsible for fulfilling the terms of its contracts, and Shoffner’s faulty workmanship falls on [Stanley’s] shoulders.” The court held that because the remediation costs arose out of damage to Stanley’s “own ‘work’ caused by the faulty workmanship of the subcontractor, the property damage was not ‘unexpected’ or an ‘accident.” In other words, there was no occurrence.
The court rejected two arguments raised by Stanley. First, the court rejected Stanley’s argument that “nothing in the plain language of the contract excludes accidents….‘arising as a consequence of negligence by a subcontractor or general contractor.’ ” To support its argument, Stanley claimed that the “your work” exclusion, which contains an exception for work performed by a subcontractor, would be rendered “meaningless” if a subcontractor’s defective workmanship was not an occurrence. The court explained that Stanley was wrong because Virginia law interprets an “occurrence” to include injury or damage to other than the insured’s work. What Virginia law does not include, according to the court, “is defective workmanship resulting in property damage to the insured’s work.” Thus, the court concluded that the “your work” exclusion cannot “grant coverage where the policy terms do not otherwise do so.”
Next, the court rejected Stanley’s arguments that there was injury or damage to other than Stanley’s own work. Stanley claimed that the relocation of the homeowners during the remediation process, the contamination of the air inside the homes, and the bodily injury allegedly sustained by some homeowners triggered Ohio Casualty’s coverage. The court disagreed. The court explained that the homeowners’ relocation, which Stanley characterized as a loss of use, was “merely a component of the cost of repairing damage to the townhouses -- [Stanley’s] own ‘work.’ ” As to the alleged contaminated air and bodily injuries, the court explained that there was “scant evidence” that the remediation costs extended beyond Stanley’s obligation to repair its own defective work.
This decision confirms that Virginia remains among those jurisdictions that does not permit a general contractor to obtain coverage for its faulty work caused by the defective work of a subcontractor. Additionally, any damage that is merely a component of repairing the policyholder’s defective work, such as allegations of loss of use, will not transform an uncovered claim into a covered one.