Insurance might not protect GCs from subs' defective work, materials

A general contractor may not be covered under a general liability insurance policy for property damage caused by defective materials supplied by a subcontractor.

The case
In Stanley Martin Cos. v. Ohio Cas. Group, 2007 U.S. Dist. LEXIS 73587 (E.D. Va. 2007) a general contractor constructed 24 duplex townhouses in Maryland. The general contractor contracted with a subcontractor to supply wood trusses for use in construction of the townhouses. The subcontractor warranted that the trusses were free of mold and other defects and agreed to indemnify the general contractor accordingly.

Prior to commencing construction, the general contractor obtained insurance for the project, which included an umbrella general liability policy providing coverage for property damage or injuries caused by an occurrence, exceeding the general contractor's primary commercial general liability policy.

As the townhouses were built and sold, homeowners began reporting problems with mold growing on the wood trusses and fire walls of their new homes and demanded that the general contractor fix the problem. The general contractor provided notice of the homeowners' claims to its insurance carriers and hired a contractor to undertake the extensive mold remediation effort. The cost of the mold remediation ultimately exceeded the general contractor's commercial general liability policy limits.

The general contractor looked to its umbrella policy carrier to provide coverage for the overage. When the carrier denied coverage, the general contractor filed suit seeking indemnification for the costs incurred in remediating the mold damage to the construction project.

The umbrella policy covered the general contractor for property damage or injuries caused by an "occurrence," defined under the policy as an accident, including continuous or repeated exposure to substantially the same general harmful condition. The policy excluded from coverage property damage to "your work," defined as work performed by or on behalf of the insured, including materials furnished in connection with such work. The carrier argued that the GC could not demonstrate that an "occurrence" within the meaning of the policy caused the GC's remediation costs.

The GC argued that nothing in the policy specifically excluded accidents or general harmful conditions arising as a consequence of the negligence of a subcontractor or general contractor. The general contractor further argued that coverage should have been triggered because third-party property, other than the general contractor's own work, sustained damage. Supporting its assertion that third-party property incurred damage, the general contractor noted that the homeowners were removed from their homes during the remediation process and that several homeowners complained of bodily injury resulting from the contaminated air inside their homes.

The Court first noted that other courts construing Virginia law find that, under standard general liability policies like the umbrella policy at issue in this case, damage caused by the defective workmanship of the insured or the insured's subcontractors does not constitute an "occurrence" triggering coverage under the policy.

The decision
The Court ruled that, normally, a GC is responsible for fulfilling the terms of its contracts, including the work of its subcontractors. In this case, the GC assumed responsibility for constructing the townhouses and for the subcontractor's faulty workmanship in providing the moldy trusses and firewalls. As such, because the GC's remediation costs arose out of the faulty workmanship of its subcontractor, the GC could not claim the property damage as unexpected or as an accident. Therefore, the Court held that as no "occurrence" happened under the policy, the insurer owed no contractual duty to provide coverage.

The Court noted in its decision that removing the homeowners and remediating the poor air quality inside the townhouses were merely components of the cost of remediating the damage to the townhouses and did not constitute independent damage to third parties. Accordingly, the Court ruled that the terms of the umbrella policy did not provide coverage as the general contractor's remediation costs were all related to repairing its own work.

The impact
This case illustrates an important limitation on a general contractor's insurance coverage as it relates to subcontractors. As a result of this case, general contractors should be aware that their insurance may not provide coverage for property damage or injuries resulting from defective work performed or materials provided by its subcontractors.

Gerald I. Katz is an attorney specializing in construction law throughout the United States with Katz & Stone LLP, Suite 600, 8230 Leesburg Pike, VA 22182.