March 22, 2013
On March 21, 2013, the Second Circuit issued a decision in Scottsdale Ins. Co. v. R.I. Pools, et al. No. 11-CV-3529 (2d Cir. March 21, 2013), in which it held that under certain circumstances a contractor may have insurance coverage for defective work under a commercial general liability policy ("CGL"). Briefly, Scottsdale involved claims for defects in swimming pools installed by the contractor/policyholder. The insurer sought a declaration that it had no obligations under a CGL policy with respect to suits brought by homeowners against the contractor for leaks, flaking and similar defects in their pools.
By its terms, the CGL policy covered damage and/or injury caused by an "occurrence," which was further defined within the policy as "an accident." Applying Connecticut law, the District Court held that the insurer had no duty to defend or indemnify the insured because defects in an insured's work are not "accidents" and therefore, do not fall within the policy's coverage. Moreover, the District Court issued an order requiring that the contractor return all of the defense costs which the insurer had paid on its behalf.
The contractor then appealed. In reversing the District Court's decision, the Second Circuit looked carefully at the precise terms of the policy. In particular, the Court looked at the "your-work exclusion" within the CGL policy, and the "subcontractor exception" to that exclusion. The your-work exclusion eliminates coverage for damage to the policyholder's work. However, the exclusion is modified by the subcontractor exception to restore coverage where the damage arises from work performed by a subcontractor. In light of the interplay of these clauses, the Second Circuit reversed the lower court's decision and remanded the case for a factual determination as to whether the defective work in question falls within the subcontractor exception.
As the Scottsdale case shows, the question of whether a particular construction defect is covered by an insurer is a very fact specific inquiry focused on the terms of your policy, as well as any policy under which you might be an additional insured.
If you have any questions, please contact Mike Donnelly at mdonnelly@murthalaw.com or 860.240.6058.
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