In Auto Owners Insurance Co. v. Gay Construction Co.,[1] a general contractor brought a claim as an additional insured under a sub-subcontractor’s commercial general liability (“CGL”) policy seeking to recover costs it sustained repairing the sub-subcontractor’s defective work and resulting property damage. The court denied the general contractor’s claim, finding that the business risk exclusions included in the policy barred coverage.
In this case, Gay Construction Co. (“GCC”) entered into a subcontract with Gunby Construction (“Gunby”) for certain elevated concrete work, and Gunby subcontracted with Dai-Cole Waterproofing Company (“Dai-Cole”) to provide waterproofing to prevent water migration through the elevated slabs. Pursuant to project requirements, Dai-Cole obtained commercial general liability (“CGL”) coverage from Auto Owners Insurance Company (“Auto Owners”) which contained the following relevant standard terms:
- the insurance applied to property damage only if such damage is caused by an “occurrence”;
- property damage was defined as “physical injury to tangible property” or “loss of use of tangible property that is not physically injured”; and
- an “occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
The policy also included several business exclusions, which excluded from coverage:
- loss or damage caused by faulty, inadequate, or defective design, specifications, workmanship, repair, construction or renovation;
- “damage to your work” – property damage to “your work” arising out of it or any part of it; and
- property damage to impaired property or property that has not been physically injured arising out of a defect, deficiency, inadequacy, or dangerous condition in “your product” or “your work.”
After project completion, the owner complained of water leakage through Gunby’s elevated slabs which damaged interior spaces. GCC’s investigation determined that the leakage was caused by improperly installed waterproofing. When GCC was unsuccessful in getting Dai-Cole to make repairs, GCC performed the repairs itself.
In its capacity as an additional insured, GCC filed a first-party claim under Dai-Cole’s CGL policy seeking reimbursement for the costs it sustained repairing the defective elevated concrete slab. Auto Owners denied coverage and GCC filed suit alleging, among several claims, breach of the insurance contract, seeking reimbursement for money spent repairing Dai-Cole’s faulty waterproofing.
Auto Owner’s moved for summary judgment, which the trial court denied concluding GCC’s claim was for property damage, was not excluded by the policy’s business risk exclusions, and therefore, was covered by the policy. The trial court interpreted the business risk exclusions to encompass only work tasked to Dai-Cole and rejected Auto-Owner’s argument that the exclusions applied to all work for which GCC was responsible as general contractor.
On appeal, the Court of Appeals reversed. The court recognized that in Georgia, generally, 1) the business risk exclusions of a CGL policy exclude from coverage costs sustained by a contractor repairing or correcting defective work it performed, but 2) payment of amounts that result from negligent acts causing damage above and beyond the original contract obligations or to other property is not excluded by the business risk exclusions.
In contrast to the trial court, the Court of Appeals found that GCC’s claim sought reimbursement of costs associated solely with the repair and correction of faulty workmanship by Dai-Cole and that there was no claim for damage to non-defective property not covered by GCC’s or Dai-Cole’s scope of work. Thus, the question of coverage turned on whether the business risk exclusions contained in the Dai-Cole’s applied to GCC’s claim.
In prior cases, Georgia’s courts looked to the general contractor’s scope of work when determining whether CGL policy exclusions applied to a general contractor’s claim against its own insurer. Likewise, the courts consider a subcontractor’s scope of work when considering a subcontractor’s first-party claim under its CGL policy.
In this case, however, the court considered a general contractor’s (GCC’s) claim for first-party coverage as an additional insured under its sub-subcontractor’s (Dai-Cole’s) CGL policy, and concluded that general contractor’s scope of work as the relevant scope for the purpose of applying the business risk exclusions. On the basis of this reasoning, the court rejected GCC’s claim because the business risk exclusions expressly exclude from coverage property damage to the work of the named insured arising out of its work.
Under this reasoning, except for damage to property outside the project scope itself, it is difficult to envision a circumstance in which a general contractor can recover as an additional insured when it has sustained costs repairing property damage arising out of defective work performed its project. This reasoning also likely severely limits the ability of any additional insureds, in addition to the general contractor, that occupy superior positions in the chain of contractual privity on construction projects. Thus, the takeaway from this case is, when seeking coverage under a CGL policy for property damage arising out of construction defects, contractors and subcontractors should file their claims under their policies, not as additional insured on policies provided by other contracting parties.
[1] 332 Ga. App. 757 (2015), cert. denied.