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Georgia Court of Appeals Examines CGL Coverage Exclusions

In several prior posts, we have discussed the availability of CGL insurance to cover certain property damages arising from defective construction.  A recent Georgia case examines several arguments of a CGL insurer’s attempt to avoid such coverage. 

Background

Owner hired Contractor to construct a dormitory for Georgia Southern University.  Contractor hired two subcontractors to install the pipes for the project.  After the dormitory was occupied by students, a pipe burst and caused damage to several units, including damage to flooring, carpeting, and walls.  Lawsuits ensued to recover against Contractor, which brought claims against Subcontractor for indemnification and contribution.  A jury returned a verdict against Subcontractor for $191,382.01 in damages.

Subcontractor purchased a CGL policy that provided standard coverage for property damages arising from an “occurrence.”  CGL Insurer brought a declaratory-judgment action seeking an order from the court that the policy provided no coverage for the damages at issue.  The opinion from this declaratory-judgment is the basis of this blog post.

CGL Insurer’s Arguments

–        Property Damage Caused by an Occurrence

In an attempt to exclude coverage, CGL Insurer argued that the damages were not property damages arising from an occurrence.  The court summarily dismissed this argument because such arguments “have been decided adversely by the precedents” of Georgia cases.  These cases reveal that property damage resulting from faulty workmanship that “causes unforeseen or unexpected damage to other property constitutes an ‘occurrence’ under a CGL policy.”

–        Contractual-Liability Exclusion

Next, Insurer argued that coverage was excluded because the claim was based on contractual indemnity and breach of contract.  But the underlying claims were based on both a breach of contract and a tort claim.  Both claims were based on defective workmanship.  At least in Georgia, such a claim may arise as a breach-of-contract claim as well as a claim for negligent construction.  Accordingly, Insurer’s argument was unsuccessful.

–        Contractors-Limitation Endorsement

Finally, Insurer argued that the claim was excluded because the Contractors-Limitation Endorsement excluded claims for “Contracted Persons” – or persons who contracted with the insured or any insured for services.  The court recognized that such an endorsement excludes coverage “for damage sustained by fellow contractors or subcontractors on the project.”

But the claim was for property damage to Owner (Georgia Southern University), not by a contractor on the project.  To hold otherwise, “would be repugnant to the coverage terms or render the CGL policy illusory.”  Accordingly, the Contractors-Limitation Endorsement did not apply to exclude coverage.

Conclusion

This case demonstrates the importance of carefully reviewing CGL policies – both before contracting and after a CGL insurer denies coverage.  It is important before contracting to ensure the CGL policy complies with the applicable contract (including upstream insurance provisions that flow down).  And insureds want to ensure they have adequate coverage in case the unexpected happens and claims of defective construction are asserted.

It is also important to review CGL policies after claims have been denied by CGL insurers.  Some CGL insurers may be unaware of the law of Georgia and its impact on recovery for property damage arising from defective construction.  At a more skeptical level, denial of claims may not be based on an accurate interpretation of the policy’s terms.  Thus, insureds should carefully review CGL policies to ensure they are not forfeiting coverage for which they have paid good money.

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