Insurance Coverage Repair Reimbursement not covered under Indiana law


A recent decision from the Sixth Circuit illustrates the fact that insurance policies and the interperatation of CGL language is certainly state specific. The Cincinnati Insurance Company v. Beazer Home Investments, LLC decision ruled that a homebuilder (Beazer) may not recoup proceeds spent for repairing its own work, even if the work repaired is performed by subcontractors. While the decision may not be binding and applicable to similar circumstances in other jurisdictions, it is clear that contractors need to implement risk transfer practices such as additional insured endorsements and indemnity clauses.

FACTS AND PROCEDURE
The Cincinnati Insurance Company (CIC) sued Beazer Homes Investments, LLC in a declaratory-judgment action to establish that CIC was not obligated to cover the costs that Beazer incurred in repairing water damage to several houses that Beazer had built as the general contractor.

Homeowners notified Beazer that their homes were experiencing moisture damage, and needed immediate repair. Beazer notified its insurer, CIC, and acted on the homeowner complaints. Beazer investigated the claims, established a remediation protocol, and began repairing the alleged construction defects. Beazer then submitted claims to CIC for houses with closing dates between December 1998 and July1, 2002, that have incurred damage as a result of water intrusion.

The damage was allegedly caused by faulty workmanship on the part of Beazer’s subcontractors. CIC argued that there was no coverage because, according to applicable Indiana state law, defects in construction do not constitute “accidents” and thus are not “occurrences” under the applicable policy provisions. Rather, claims for faulty workmanship arise from the homeowners’ contractual relationship with the builder. Next, CIC argued that there was no “property damage” as defined by the policies and as interpreted under Indiana law.

In 2007, a South Carolina state court issued a declaratory-judgment ruling against CIC and in favor of Beazer, interpreting South Carolina law to hold that water damage to properly constructed parts of a house, which was caused by faulty construction on other parts of the house, was property damage caused by
an occurrence under Beazer’s policies with CIC. See Crossmann Cmtys. of N.C., Inc. v.
Harleysville Mut. Ins. Co., No. 2004-CP-2600084 (S.C. Ct. Com. Pl., May 3, 2007). The Sixth Circuit declared that the South Carolina decision, while involving similar issues and identical parties to suit, had no bearing on the present case, and was not barred by res judicata.

The South Carolina State court found that the term “accident” was an ambiguous definition in the policy. Indiana courts are very clear that faulty workmanship can never be considered an “accident”, as that term is used in commercial general liability policies. See, e.g., Amerisure, Inc. v. Wurster Const. Co., Inc., 818 N.E.2d 998, 1004 (Ind. Ct. App. 2004). As far as Indiana law is concerned, there apparently is no ambiguity as to the meaning of the word “accident” in a CGL policy when the alleged “accident” is faulty workmanship.

Beazer sought relief from Indiana precedent cited above by referring to subcontractor exemption from the ‘your work’ exclusion. The “your work” provision excludes coverage for damage to “work performed by [the policyholder] or on [its] behalf.” But the exclusion does not apply “if the damaged work or
the work out of which the damage arises was performed on your behalf by a subcontractor.”
Beazer argues that the interpretation of “property damage” adopted by the Indiana courts
renders superfluous the Policies’ “your work” exclusion and that exclusion’s subcontractor
exception.

Because Indiana has determined that the home is a product in its entirety, and, therefore, the general contractor’s “work”, there is no coverage and the insurer is not obligated to reimburse for repairs performed by subcontractors that causes damage to component parts, which are not even within the definition of a subcontractors labor.

This case is significant for many reasons. First, it illustrates the complexities faced by both builders and insurers alike when evaluating risks. It seems clear that the court would have been much more favorable to Beazer if these repairs were made in another jurisdiction. Because Indiana law prevailed and its definitions of “your work” are very broad, there is no coverage under the insuring agreement.

RISK TRANSFER AND THE ADDITIONAL INSURED SUBCONTRACTOR
The implemenation of a risk transfer protocol should be implemented by all builders, no matter where they choose to build. Both AIA and AGC construction contracts provide optional clauses that require subcontractors to add the GC as an “additional insured” party under the subcontractor’s policy. In order to be compliant, contractors and subs need to implement the contractual provision, which asks that the subcontractor provide a certificate of insurance which names the General Contractor or Residential as an additional insured party under the Subcontractor’s insuring agreement with its insurance underwriter.

Had this occurred in the present set of circumstances, Beazer could have forced its subcontractors to put their carriers on notice, and Beazer would, thus, be insured by the policies possessed by the subcontractors responsible for the allegedly defective work.

While I have no direct knowledge as to the quality, or non-quality, of the subcontractors used in erecting the Beaumont homes that were the subject of this initial litigation, it is abundantly important for contractors to use quality subcontractors when beginning any project. Employing highly skilled subcontractors will not serve to bar homeowners from filing suits, although it will certainly reduce the likelihood.

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3 thoughts on “Insurance Coverage Repair Reimbursement not covered under Indiana law

  1. If Indiana statute/rules hold that ‘defective work’ can never be an ‘accident’ or therefore a covered occcurrence, why would the GC have had coverage under the subcontrator’s policies if the GC had been named an “Additional insured”? It seems to me that it would have made no difference since ‘defective work” is not a covered event or occurrence under CGL per Indiana rules.

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    1. The event might not have been a covered event in Indiana in any context. My point remains the same, however, as a general contractor that employs a) strong contractual indemnity language and b) additional insured requirements for subcontractors should never be burned for work, whether it is defective or not. Your hypothetical seems to indicate that, had Beazer employed proper risk transfer mechanisms, it would not have mattered because the subcontractor performing defective work would not have coverage under Indiana law. I am sure you are right about that. In the same situation, however, it would be the subcontractor’s problem, and not Beazer’s, as indemnity language as well as other clauses would shift the risk to the subcontractor and its insurance carriers. If the subs insurance did not cover the loss, then the sub would have had to file the suit for coverage against its carrier. Beazer would be long gone and this would not be there problem.

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