Illinois Joins Majority of Courts Holding that CGL Policies Cover Damages from Faulty Workmanship, Acuity Insurance Company v. 950 West Huron Condominium Association, 2019 Il. App. (1st) 180473 (March 29, 2019).

05-8-2019

Illinois Joins Majority of Courts Holding that CGL Policies Cover Damages from Faulty Workmanship, Acuity Insurance Company v. 950 West Huron Condominium Association, 2019 Il. App. (1st) 180473 (March 29, 2019).

A condominium association brought a lawsuit against a builder for defective work resulting in water infiltrating through the building envelope. The builder asserted third-party claims against subcontractors, and one of the CGL insurers for a subcontractor refused to defend the subcontractor and filed a declaratory judgment action seeking a declaration that it owed no duty to defend. A second CGL insurer for that subcontractor defended the subcontractor, settled the claims against the subcontractor, and then intervened in the declaratory judgment action seeking contribution from the non-defending insurer. The trial court ruled there was no duty to defend because there had been no “occurrence” triggering coverage under the CGL policy, and thus, the second insurer had no right to contribution from the first insurer.

Addressing the issue of whether the subcontractor’s CGL policy provided coverage for the construction defect claims, the Illinois Appellate Court proceeded to determine whether the claims alleged property damage from an occurrence. The court recognized that while faulty workmanship alone is not an occurrence under a CGL policy, damage to other property resulting from faulty workmanship does constitute an occurrence. The court further recognized that for a subcontractor working on a project, the damage to other property that triggers CGL coverage can be damage to any property the subcontractor did not construct. In doing so, the Illinois court rejected the reasoning in a federal court decision applying Illinois law which held that damage resulting from defective construction is “the natural consequence of faulty workmanship and not caused by an ‘occurrence’ within the meaning of a CGL policy.”

The decision of the Illinois Appellate Court has no direct impact in South Carolina, but the decision is notable because it represents part of the nationwide trend of courts recognizing that CGL policies cover damages from improper construction. South Carolina experienced legal turmoil in this area with several decisions over many years attempting to resolve the issue and with the issue apparently finally resolved by a statute defining “occurrence” for purposes of CGL policies as including “property damage or bodily injury resulting from faulty workmanship, exclusive of faulty workmanship itself.” S.C. Code Ann. § 38-61-70. The Illinois decision hopefully is one more step towards laying to rest any doubt as to whether a CGL policy covers damages from defective construction.

Tenth Circuit Finds Ambiguous and Interprets in Favor of the Insured “That Particular Part” Language in CGL Policy Exclusions j(5) and j(6), MTI, Inc. v. Employers Insurance Co. of Wassau, 913 F.3d 1245 (10th Cir. 2019).

An insured contractor was engaged to perform repair work on a cooling tower, specifically work to remove and replace anchor bolts used to attach braces supporting the tower. The insured removed the bolts, but because an additional trade was not yet at the site, the insured did not immediately replace the bolts and left the tower overnight without braces. Overnight high winds damaged the tower necessitating the removal and replacement of the entire cooling tower. After a demand by the tower owner that the insured contractor pay the cost of replacing the tower, the insured filed a claim with its CGL insurer. The insurer denied coverage based on exclusions j(5) and j(6) in the policy, and a federal district court granted summary judgment for the insurer on the grounds that the claim was excluded by both exclusion j(5) and exclusion j(6).

Exclusion j(5) operates to exclude coverage for: “That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operation, if the ‘property damage’ arises out of those operations.” Exclusion j(6) operates to exclude coverage for: “That particular part of real property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”

The Tenth Circuit focused on the “that particular part” language as the “key phrase” for purposes of exclusions j(5) and j(6). Courts around the United States are split on whether “that particular part” broadly means the entire property on which the insured was performing work or more narrowly means only that portion of the property on which the insured performed the defective work. See e.g., Fortney & Weygandt, Inc. v. American Manufacturers Mutual Ins. Co., 595 F.3d 308, 311 (6th Cir.2010); Jet Line Services, Inc. v. American Employers Ins. Co., 537 N.E.2d 107, 111 (Mass. 1989);.

The Tenth Circuit found “that particular part” to be ambiguous because it “could be read to refer solely to the direct object on which the insured was operating,” and “[a]lternatively, it could apply to those parts of the project directly impacted by the insured party’s work.” As a result of having found the language ambiguous, the court narrowly construed the language in a manner favorable to the insured and held “that particular part” must be read “to refer to the distinct components upon which work is performed.”

While not necessary for the court’s decision, the court went out of its way to reject the insurer’s argument that reading the language broadly as providing coverage would convert a CGL policy into a performance bond. CGL insurers regularly make this argument, contending that a CGL policy is not intended to serve as a guarantee of the quality of the insured’s work. The court distinguished between the two, stating that a performance claim would be for the cost of replacing the missing anchor bolts, whereas here the claim was for damage caused as a result of the failure to properly install those bolts.

Fourth Circuit Affirms Summary Judgment for Defendants in Product Defect Case on Failure to Show Defect or Causation, Belville v. Ford Motor Co., No. 18-1470 (4th Cir., March 25, 2019)

Plaintiffs brought product defect claims against an auto manufacturer alleging that the manufacturer’s vehicles experience unintended acceleration. The district court granted summary judgment for the manufacturer after excluding the opinions of the plaintiffs’ three experts on the basis that their opinions did not meet the Daubert standard for the admission of expert testimony. The district court then granted summary judgment, concluding that without the expert testimony, the plaintiffs could not show there was a defect in the vehicles and could not show that any defect caused the unintended acceleration.

The Fourth Circuit affirmed the exclusion of the plaintiffs’ experts’ opinions and the grant of summary judgment for the manufacturer. Applying Rule 702 of the Federal Rules of Evidence and the Daubert standard, the Fourth Circuit concluded plaintiffs’ experts’ opinions were not sufficiently reliable and did not meet the standard for a host of reasons, including:

  • The experts did not test any vehicle in “actual conditions” so all of the opinions were “purely theoretical”;
  • The experts did not test any of the plaintiffs’ vehicles or any vehicle in the plaintiffs’ proposed class;
  • The experts did not offer any opinion that the purported defects were the cause of any unintended acceleration experienced by the plaintiffs;
  • The experts relied on unsupported assumptions;
  • The experts’ testing results varied between different vehicles; and
  • The experts’ theories had been rejected by two government agencies as lacking evidence.

The Belville decision does not break any new legal ground and is essentially a standard application of the Daubert standard, but the decision is useful in detailing how expert opinions can fail to be sufficiently reliable so as to be admissible. The case serves as a reminder that plaintiffs’ experts need to make sure all of the basic criteria are met before offering an opinion. Did the expert actually examine the product at issue? Does the expert have an explanation as to how a defect in the product caused the problem? Does the expert have support for any assumptions used in arriving at the expert’s opinion?

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