Paying The Ultimate Premium: Does Your Insurance Cover Property Damage Or Will You Be Left Holding the Bag?

A recent decision by the Eleventh Circuit (the federal appeals court supervising trial courts in Florida, Georgia, and Alabama) sheds light on at least one way that insurers with complicated policies (and a host of exclusions) may avoid providing coverage and defense resources to insured material suppliers whose products are the focus of defect claims. In Morgan Concrete Company v. Westfield Insurance Company, Morgan Concrete (“Morgan”) agreed to supply ready-mix concrete to Georgia Concrete for Georgia Concrete’s work on a multilevel building at Clemson University. The specifications for the job required that concrete for Georgia Concrete’s scope have a specific strength (measured in PSI). During pours for the second level of the structure, Georgia Concrete encountered strength deficiencies which it attempted to remedy by ordering a higher strength ready-mix to achieve the specified PSI.

However, the strength deficiencies continued, and Georgia Concrete blamed its supplier Morgan – ultimately withholding payment and prompting Morgan to cease further deliveries and file a lien on the property. In response, Morgan asserted that the strength issues with its concrete were the result of Georgia Concrete mishandling the concrete, exposing it to high ambient temperatures, and not sampling and maintaining it in accordance with industry standards.

During this period of time, Morgan held an insurance policy through Westfield Insurance Company which included coverage for sums Morgan became legally obligated to pay as damages because of “property damage . . . caused by an occurrence.” A common phrase in CGL policies, Westfield defined “property damage” as “physical injury to tangible property, including all resulting loss of use of that property[.]”  The policy excluded property damage to the concrete itself, “property damage” to Morgan’s work, and “damages claimed for any loss, cost or expense incurred by Morgan or others for the loss of . . ., inspection, repair, replacement, [or] adjustment of Morgan’s product,. . . [or] its work.” The policy included a defense and indemnity provision, and Morgan tendered its defense of this dispute to Westfield.

Though Westfield initially provided defense for Morgan under a reservation of rights, it later withdrew because it determined there was no alleged “property damage” under the policy. Morgan sued Westfield in federal court seeking, among other things, a determination that Westfield had a duty to defend Morgan in its state court suit with Georgia Concrete. The federal court, applying Georgia law, agreed with Westfield, explaining that the alleged “property damage was [only] to [Morgan’s] concrete and not to any other component parts of the Level 2 slab or to the structure as a whole.” On appeal, the Eleventh Circuit agreed finding that Georgia law defined property damage “as damage to property that was previously undamaged” and “damage beyond mere faulty workmanship.”  As a result, the Eleventh Circuit determined that there was no trigger under the policy for Westfield to provide a defense.

This “win” for insurers highlights how crucial it is for the construction industry to understand the nuances of coverage provided under policies and actively negotiate the necessary coverage parameters.  Contractors and suppliers should understand what types of damages will trigger coverage for “property damage.” A few other principles to consider when analyzing coverage as it relates to upcoming work:

1. Think big picture. There is a tendency to only look inwards when evaluating damages. It is important to analyze damages to other project elements and other contractors’ work– those impacts may need to be raised with the insurer.
2. Strike a balance. It is important to defend your work and materials. It is also important toidentify and explain all potential exposure to an insurer for purposes of coverage.
3. Reassign Risk. If there are concerns about your insurance not covering certain property damage, consider ways of reassigning that risk elsewhere in the project cycle: contract provisions, estimating factors, negotiations with suppliers/subs, waiver documents, etc.
4. Explore with your broker buying product defect insurance.

What is or is not “property damage” in any given construction dispute will depend on the specific policy, the project, the jurisdiction, and the players, but all contractors and suppliers should be considering the above principles when contracting for insurance or claiming coverage.