If you thought that getting your company identified as an additional insured on your subcontractor’s insurance policy was sufficient to provide you with the same insurance coverage that the subcontractor is getting, think again. Depending on the policy language, the general contractor or “additional insured” may not have any coverage for construction defects, as illustrated in the recent decision by the United States Court of Appeals for the Fifth Circuit in Carl E. Woodward, LLC v. Acceptance Indemnity Insurance Company, Inc. which was decided on February 11, 2014.

This case arose out of construction defect claims asserted by the owner of a condominium project in South Mississippi against the general contractor, Carl E. Woodward, LLC (“Woodward”). The condominium project began in 2006 and was completed in August, 2007. The claims against Woodward were asserted by the owner in October, 2008. After putting its own insurance carrier on notice of the claim, Woodward submitted the claim to the insurance carriers for each of the involved subcontractors asserting that Woodward was an additional insured under each of the subcontractors’ insurance policies. After prevailing at the trial court level and obtaining a judgment of approximately one million dollars against Acceptance, both parties appealed the issue to the Fifth Circuit Court of Appeals. On appeal, the Court ruled that Acceptance had no duty to defend Woodward under its policy, reversing the judgment in favor of Woodward.

The Court of Appeals decision analyzed the language of the additional insured endorsement in the Acceptance policy, which was as follows:

“Section II – Who is An Insured is amended to include as an insured the person or organization shown in the schedule [Woodward], but only with respect to liability arising out of your ongoing operations performed for that insured.

The Court of Appeals, applying Mississippi law, concluded that the additional insured provision did not limit coverage to claims made during the ongoing operations, but rather, only required a causal connection to the ongoing operations. The Court’s analysis of this provision turned on the use of the words “arising out of” rather than “arising during” to reach it decision that coverage was not limited to claims asserted while the construction operations were still active.

In addition to the additional insured definition, the policy in question excluded coverage for additional insureds for property damage claims occurring after the work on the project was completed. The policy provided,

This insurance does not apply to “bodily injury” or “property damage” occurring after:

  1. All work, including materials, parts or equipment furnished in connection with such work, on the project… to be performed by or on behalf of the additional insured(s) at the site of the covered operations has been completed;…

The Court concluded that this exclusion limited coverage to claims arising out of ongoing operations. In other words, if the liability arises out of completed operations, then there is no coverage under this policy. For example of claim that a subcontractor’s excavation work damaged an adjacent building arises from the ongoing operations, and the policy would provide coverage even if the claim were not asserted until after the project was completed. In contrast, a claim of damage from water intrusion brought by the property owner well after the project was completed is a liability that arises from the completed operations – there was no damage caused prior to completion; so, in this instance the policy would not provide coverage for the claim of water intrusion.

Take Away: Unless specific attention is given to the “Additional Insured” provisions in subcontractor insurance policies, the policy may not provide coverage to the general contractor for construction defects asserted after the project is completed. This will be particularly problematic for latent defect claims such as moisture intrusion and foundation problems.