South Carolina Supreme Court Upholds Court of Appeals Bar Using “Your Work” and Product Replacement Exclusions to Deny Subcontractor Recovery

In Precision Walls, Inc. v. Liberty Mutual Fire Insurance Co., No. 2013-000787 (S.C. Ct. App. July 23, 2014), the general contractor contracted with Precision for the installation of exterior insulation board. Precision, being an approved applicator sold the installation board in question. After Precision completed its work, a masonry subcontractor began construction of the brick veneer wall which came into contact with the Precision product. The joint sealing tape installed by Precision began to come loose due to contact with the masonry contractor’s work product. Full repair could only be accomplished via the removal of brick as it now obstructed Precision’s work. The general contractor deducted the cost of tearing down and rebuilding the brick veneer wall from Precision’s contract. Precision sought reimbursement for this amount from its CGL policy issued by Liberty Mutual. Liberty Mutual denied coverage and Precision filed a declaratory judgment action. The trial court entered judgment for Liberty Mutual determining that the amount sought by Precision failed the “occurrence” requirement of the initial two pronged coverage analysis. The trial court also cited the “your work” exclusion. The Court of Appeals affirmed.

The opinion at issue today is the Supreme Court’s ruling, which affirmed and held that all of the damages fell within the “your work” exclusion. The court largely ignores the “occurrence” aspect of the case, yet ruled further “the defective tape, and all costs associated with its replacement, fall squarely within the exclusion.” The exclusion referenced is “your work”, and I have attached the opinion for further review.


Building On a Rebound | PropertyCasualty360

The following article discusses a resurgent construction industry and the nuances which create more liability for injuries on job sites and defect centered litigation. It seems natural that an increase in construction might lead to an increase in litigation, although this article discusses those not so obvious factors which serve as catalysts for litigation. Building On a Rebound | PropertyCasualty360.

4th Circuit: Substantial Completion Occurs When Your Contract Says It Occurs

C. Clay Olson:

Substantial completion is an often undefined milestone which has been often construed as that time after which a dwelling or commercial building may be occupied. Matt has written an excellent piece which summarizes recent 4th Circuit activity and it’s impact on the construction, insurance, and legal communities.

Originally posted on N.C. Construction Law, Policy & News:

There is no milestone more significant to a commercial construction project than substantial completion.  For an owner, it’s the long-awaited moment it can make beneficial use of its investment.  For prime contractors, it’s the moment the owner’s rights to terminate and/or assess liquidated damages is cut off.  For subcontractors, it’s the moment contractual warranties typically begin to run.  The list goes on and on.

Monday MemoIn light of how many legal rights and defenses are tied to the moment of substantial completion, you would think that contracting parties would take extra care to (1) define what constitutes “substantial completion” and (2) ensure that “substantial completion” is achieved in accordance with that carefully crafted contractual definition.

That’s not always the case, as a 2013 decision from the U.S. Court of Appeals for the Fourth Circuit (which includes North Carolina) reveals.

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Insurance Coverage for Defective Workmanship

For years, some state courts and insurance companies have been telling contractors that the construction defect claims they face aren’t covered by their insurance because faulty work is not an “accident” that insurance is intended to guard against. This situation is rapidly changing, however, as more and more courts are concluding that defective construction is an “accident.” This has opened the way for these claims to be covered by insurance.

We have covered this topic before in the blog.  As in 2011, insurance coverage remains ever evolving as it pertains to construction defect claims.

There are four questions that must be answered to determine if a construction defect claim is covered by a contractor’s standard commercial general liability insurance policy:

• Was the alleged faulty work or breach of care an accident?

• Has the workmanship resulted in tangible property damage?

If the first two items are satisfied, we move to exclusionary language, as well as exceptions to exclusions.

• Is the construction defect expressly excluded from the policy’s coverage?

• If there is an exclusion that applies, is there an exception that restores coverage?

This article will focus on the first question only, which is often referred to as the “accident” prong.  The definition of “accident” varies from jurisdiction to jurisdiction and often hinges on concepts which are lesser understood such as fortuity.

For example, in the recent case of Dusty McBride v. Acuity, the 6th Circuit Court of Appeals denied insurance coverage for claims against a contractor based on structural construction defects because under Kentucky law, construction defects are caused by the builder, or the subcontractors chosen by the builder, and not by a fortuitous or truly accidental event.

Kentucky’s rationale is becoming less and less common, as states are trending toward construing instances of faulty construction as “accidents” in that they are not purposeful acts.

Consider the following cases from 2013:

The Connecticut Supreme Court, in Capstone Building Corp. v. American Motorist Ins. Co.; the Supreme Court of Georgia, in Taylor Morrison Serv. Inc. v. HDI-Gerling America Ins. Co.; and the Supreme Court of North Dakota, in K&L Homes Inc. v. American Family Mutual Ins. Co., reached the conclusion that defective construction is an accident.

The decisions by these courts provide evidence of a rapidly growing trend in which courts have rejected arguments advanced by insurance companies to avoid covering construction-defect lawsuits. But there are still many states in which this question has not been answered.

Still, states remain undecided or, as in Utah, conflicted.  In that state judges in the U.S. District Court have come to opposite conclusions: one, that construction defects aren’t accidents under Utah law, and another, that they are.

However, given the strength of the national trend in the courts and resulting appeals decisions, an insurance company’s denial of coverage for a construction defect claim on the basis that the defective construction was not an accident likely will not be upheld in future cases.

Senate Bill 474 Changes the Rules for Indemnity Between a General and a Subcontractor

C. Clay Olson:

California Law and Indemnity Shifts

Originally posted on Law Offices of Robert L. Bachman:

The California Legislature and Governor Brown recently approved California Senate Bill 474, which general provides that in all construction contacts for private commercial project entered on or after January 1, 2013 any indemnity obligations (including cost to defend) arising out of the active negligence or willful misconduct  of the indemnified party are void and unenforceable.

The new law affects risk allocations in construction projects and may lead to insurance related litigation. California developers and general contractors typically use what is referred to as a “Type 1″ indemnity proviso in construction contracts. “Type 1″ indemnity allows one party (usually owners, developers, and general contractors) to require the other party (typically subcontractors) to indemnify them for their own active negligence or fault.

Senate Bill 474:

  • Does not apply to design professionals.
  • Includes contracts for renovations and utility, water, sewer, oil and gas lines under construction contracts.
  • Cannot be avoided by the…

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Owners and Contractors Protective Liability Coverage Form

I intend to devote several upcoming posts on Owner Controlled Insurance Policies (“OCIP”) or “WRAP” coverage due to its continued emergence in the construction, insurance, and legal industries.  In an effort not to confuse, this article deals (“OCP”), which is an acronym for Owners and Contractors Protective Liability insurance coverage.  Coverage for Operations of Designated Contractors (CG 00 09 12 07) is,  as suggested by the title, intended to protect certain owners and contractors, but only for operations performed for the named insured by the “designated” contractor.  The Designated Contractor is listed on the Declarations Page to the policy.   


In addition to being limited to certain tasks performed by a specific contractor, OCP coverage is further narrowed to protect the interests of a party other than the policyholder.  Consider the following hypothetical to illustrate the “protective” nature of OCP coverage.  Protective policies are designed quite differently than most liability insurance policies purchased by contractors.  Consider a construction agreement between Owner and Contractor which requires Contractor to purchase and carry OCP for the benefit of the Owner.  The plain language within the policy will list Owner as the policy’s named insured.  Despite purchasing and paying the premium, Contractor is not a named insured and, thus, not protected by the policy.    

While helpful to Owner, OCP coverage is not as broad as the sweeping coverage provided by traditional CGL policies.  In almost all circumstances, the Owner is protected by the OCP policy in just two factual circumstances.  These relate to incidents of (a) vicarious liability and (b) supervisory liability which might be imputed upon the Owner for the acts or omissions of Contractor.  Plainly stated, the Owner is not protected or indemnified for the active negligence or omissions created via its own making.


Since coverage is limited to the vicarious liability of the named insured, coverage applies only to liability imposed on the named insured as a result of the designated contractor’s acts and not as result of the named insured’s own acts or failure to act.  Courts have also allowed coverage for acts and omissions resulting from a subcontractor’s work.  Although the OCP does not use the phrase “vicarious liability,” one court stated:

“… the courts must construe the “arising out of [the subcontractor's work]” provision as one providing coverage in cases                                       where the alleged liability is vicarious.”  [Emphasis added.]  See St. Paul Fire & Marine Ins. and Hardin Constr. Grp., Inc. v. Hanover Ins. and Travelers Ins., 187 F. Supp. 2d. 584 (E.D.N.C. 2000)

However, conventional wisdom to the contrary, one who engages an independent contractor is usually not vicariously liable for the acts or omissions of the independent contractor.


Courts have provided some guidance as to what it considered to be “general supervision.” In Union Electric v. Pacific Indem., 422 S.W.2d 87 (Mo. App. 1967), an employee (Palmer) of the subcontractor (Davey) was seriously injured when he came into contact with an uninsulated power line when trimming trees around the line pursuant to a contract with Union Electric. Palmer brought a complaint against Union Electric, alleging Union Electric was negligent in failing to warn Palmer of inadequately insulated power lines. Union Electric’s insurer contended that Union Electric’s alleged liability did not result from Union’s supervision of Davey in that Union supervised only the result of the work did not supervise the method, manner, or means of performance of the work.

The court ruled:

The factual situation presented shows the insured’s contract with Davey required the insured [Union Electric] to designate the areas along the distribution and transmission lines of the insured where Davey would cut and trim trees. … we hold that the words “general supervision” as used in the policy in question do not mean supervision of the method, manner, and/or means employed by Davey…We hold that the words mean supervision of the work of Davey only to the extent necessary to see that the work was done in accordance with the contract…and to provide the area of the transmission lines where Davey would cut and trim the trees. Palmer’s claim fell within the coverage of the policy. Insured’s failure to warn Palmer arose out of its supervisory function. [Emphasis added.]


The premium for the OCP policy is based on the contract price between the named insured and the designated contractor (usually with a rate per $1,000 of the contract price). Thus, a separate OCP can be several thousand dollars of premium (or more) depending on the size of the project, the limits required, etc.

The OCP policy excludes coverage for bodily injury or property damage if such injury or damage takes place after the earlier of when the operation has been completed or put to its intended use by anyone other than another contractor or subcontractor working for the Designated Contractor on that project.


An OCP policy can reduce disputes between insurance companies concerning which policy should be the first policy to respond to a claim (i.e. which policy will be considered primary). For example, when an owner is a named insured under its own CGL policy and an additional insured under the contractor’s CGL policy, the two insurance companies have to determine which of their respective policies is primary. This often leads to disputes because each carrier argues that the other’s policy should be considered primary. An OCP policy minimizes these disputes because an OCP carrier agrees that its insurance policy provides primary coverage to the owner and that it will not seek contribution from the owner’s own insurance policy or from the CGL policy of the contractor that purchased the OCP policy.


A contractor must be careful when negotiating his or her construction contract with the owners. Contractors must understand the unintended consequences that arise when the owner requires the contractor to purchase the OCP policy and to indemnify the owner for personal injury and property damage arising from the contractor’s negligence in performing its work. In practice, if an accident occurs during construction—an employee of a subcontractor is injured, for example—the employee will sue both the contractor and the owner. The owner will respond by seeking coverage under the OCP policy. The contractor, in turn, tenders to its own CGL carrier, expecting that the OCP carrier will defend the owner and that the contractor’s GL carrier will defend the contractor.

What occurs is the attorney appointed by the OCP carrier to defend the owner asserts a claim against the contractor for contractual indemnification and demands that the contractor (Contractor’s CGL carrier) defend and indemnify the owner pursuant to the indemnification provision in the construction contract. Under these circumstances, not only does the contractor have to pay for an entirely separate OCP policy for the owner, but once coverage under the OCP policy is triggered, the OCP carrier circles back and tenders the claim on the contractor’s CGL policy through the construction contract’s indemnification provision. Simply put, the contractor pays for the OCP policy and then faces increased CGL premiums because of the costs associated with responding to the contractual indemnification obligation.

Contractors (and owners) must understand the interplay between an OCP policy and a contractual indemnification provision. To the extent that an owner is demanding that a contractor purchase an OCP policy, the contractor should attempt to negotiate the elimination of any contractual indemnification provision that requires the contractor to defend and indemnify the owner for claims for personal injury and property damage that are covered by the OCP policy.



Texas Supreme Court Cleans Up Fifth Circuit’s Mess

C. Clay Olson:

Texas decision limits contractual obligation exclusion. See attached article discussing important construction defect coverage decision.

Originally posted on Green Building/Construction Law:

Construction In a decision released about seven weeks ago (sorry, I’ve had things to do!), the Texas Supreme Court held that a general contractor’s contractual obligation to perform its work in a good and workmanlike manner would not trigger the contractual liability exclusion in its policy. Ewing Const. Co. v. Amerisure Ins. Co. , ___ S.W.3d ___, No. 12-0661, 2014 WL 185035, *1 (Tex., Jan. 17, 2014). Apologies in advance, as this post will only be of interest to the lawyers (even that may be optimistic)…

Background: Ewing Construction Company entered into a contract with a school district. The school district eventually filed a construction defect action in Texas state court. Amerisure, Ewing’s insurer, denied Ewing’s request for a defense and indemnification, relying on the policy’s contractual liability exclusion, which stated there would be no coverage for “‘property damage’ for which [Ewing] is obligated to pay damages by reason of the…

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