Triggering Coverage Part B in the Construction Defect Dispute: A Theory Now Proven
Category | Briefing Papers
Mark is a Chambers USA rated Construction Lawyer, A Fellow of the Construction Law Society of America, and a former Chair of the Construction Section of the Minnesota State Bar Association. Mark may be reached at mbecker@fwhtlaw.com, or 612.359.7620.
All construction contractors and subcontractors have either faced a legal proceeding involving claims of construction deficiencies or will likely face such a proceeding in the future. When that day comes, the commercial general liability (“CGL”) insurance policy is one of the most important tools available for the construction contractor and subcontractor to mitigate their risk. Thus, every construction company should know a few things about how the CGL policy works and the coverages it affords.
If your CGL insurer hires an attorney to defend a claim against your construction company, that attorney has a conflict preventing him or her from advocating on your behalf with your insurer for maximum coverage under the policy. It is thus wise to have a knowledgeable construction lawyer experienced in insurance coverage issues in your corner to serve as independent coverage counsel to help you obtain all of the coverage benefits to which you are entitled. This paper discusses a significant victory achieved on behalf of a contractor client to secure CGL coverage for a contractor under the personal injury coverage afforded under Coverage Part B of the standard CGL policy. This victory is believed to be the first of its kind in Minnesota and possibly nationally, and demonstrates the value that skilled independent coverage counsel can provide to contractors and subcontractors in dealing with their insurers.
For decades, the battle for CGL coverage for construction disputes has been fought exclusively over Coverage Part A of the standard policy. Coverage Part A provides coverage for “bodily injury” or “property damage.” In the typical case, the general contractor or subcontractor who is facing claims involving construction defects seeks coverage for the alleged “property damage”. A CGL insurer might deny coverage or defend under a reservation of rights in response to the tender. CGL insurers rarely if ever accept coverage without a reservation of rights in a construction defect case, and typically assert a lengthy array of coverage positions including that there has been no “occurrence”, that the “your work”, and “your product” exclusions may apply to bar or limit coverage. Each of these arguments against coverage raises unique issues that independent coverage counsel can help navigate.
Almost no reported cases involving allegations of construction defects have invoked the “personal injury” coverage available under Coverage Part B, which nominally covers “personal and advertising injury.” Perhaps Coverage Part B has been overlooked because the word “advertising” is used in the title or due to the similarity of the terms “personal injury” and “bodily injury.” However, there is very significant coverage afforded for “personal injury” under Coverage Part B with broad application to construction defect cases. This coverage applies to protect the insured from liability for the “wrongful eviction from, wrongful entry into or invasion of the right to private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor,” which is one of the definitions of “personal and advertising injury.”
How many construction defect cases involve a situation where a person’s right to occupy a room, dwelling, or premises has been impacted in some way, shape or form? Would you agree that a lot of them do? How about a claim involving construction defects that are alleged to breach the implied warranty of habitability rendering the home, apartment, or condominium uninhabitable? How about a situation where a balcony railing system in a condominium or apartment does not meet code and needs to be cordoned off for safety reasons until repaired? How about a claim involving a structural defect rendering a commercial office structure unsafe to occupy until repaired? How about a claim involving a process facility where alleged construction defects cause process water vats to overflow causing the production floor to be out of commission for a period of time while the flooding is abated? How about drywall damaged by water intrusion forcing a family to move temporarily while the damage is abated? All of these kinds of situations appear to involve at least some impact on or invasion of the right to occupy rooms or premises, for which Coverage Part B should apply.
The CGL policy does not define what an “invasion” of the right of occupancy is or how long it needs to last, but a reasonable interpretation is a physical circumstance that is present that should not be, such as a crack, leak, flooding condition, structural defect, or similar circumstance. An army invasion such as the Allied invasion of Normandy in World War II surely is not required.
For Coverage Part B to apply, the loss of occupancy needs to be “committed by or on behalf of its owner, landlord or lessor”. Nearly all work by a construction contractor or subcontractor can reasonably be considered to involve work performed “on behalf of” the owner of the project. The owner, after all, contracts for the work to be performed and is the party who is supposed to pay for the work. The contractors and subcontractors are present at the invitation of the owner and are the owner’s business invitees. Where the work is defectively performed, the latent defect surfaces and results in a later circumstance that adversely affects the right to occupy the premises. Nothing in the definition of personal injury requires the circumstance affecting the right to occupy to happen simultaneously with the work performed on behalf of the owner. Thus, there appears to be no reason why a latent defect manifesting several years after substantial completion should not be covered as long as the original work giving rise to the later impairment of the right to occupy was performed on the behalf of the property’s owner at the time it was performed.
A benefit of Coverage Part B is that the “occurrence”, “your work”, “your product” and other arguments and exclusions under Coverage Part A are not applicable to Coverage Part B, which has its own set of narrower exclusions that are largely inapplicable to a construction defect scenario. Thus, the typical barrage of coverage defenses presented by insurers focusing on property damage coverage under Coverage Part A, should not affect a claim under Coverage Part B.
Hopefully, you are now convinced that Coverage Part B has application to construction defect claims, at least theoretically. Lawyers normally look for support for legal theories in reported decisions. Because there are virtually no reported decisions on the issue, the theory that Coverage Part B provides coverage for construction defect claims has had to be tested in other ways.
Accordingly, over the last several years I have added this Coverage Part B argument as a central piece of my coverage advocacy on equal footing to the traditional Coverage Part A arguments. But, these cases settled before any rulings on the issue.
Looking for further constructive feedback, on November 7, 2018, I gave a seminar to the Construction Section of the Minnesota State Bar Association presenting the Coverage Part B argument discussed in this paper. Interesting discussion was had, and feedback from many practitioners was positive.
On November 27, 2019, the court in Triad Construction, Inc. Triad Construction, Inc. v. Grinnell Mutual Reinsurance Company, Todd County, Minnesota, Case No. 77-CV-19-416 issued a written decision verifying, on behalf of our client, that Coverage Part B does indeed arguably provide coverage in construction defect cases and triggers the insurer’s duty to defend. Thus, at least one court has accepted the theory that Coverage B arguably provides coverage in construction defect. It is anticipated that more decisions in the future will provide further evidence of the viability of Coverage Part B in construction defect cases.
Triad Construction, Inc. involves claims of alleged construction defects regarding a steel cattle barn structure erected on a concrete foundation system furnished by the owner. The owner of the project commenced an action against our client, the steel structure contractor, claiming alleged deficiencies, which the contractor denies. The owner of the building included claims for “loss of use and enjoyment” of the cattle barn in its complaint.
The steel contractor tendered to its insurer, who denied coverage citing coverage arguments and exclusions based on Coverage Part A. On behalf of the steel contractor, we commenced a dec action seeking to establish that the insurer owed a duty to defend both under Coverage Part A and Coverage Part B. With respect to Coverage Part B, the Court ruled:
Additionally, the underlying complaint alleges that the Kraemers were personally injured from the ‘loss of use and enjoyment’ of the cattle barn. This part of the complaint is not subject to the ‘your product’ or ‘your work’ exclusions, and arguably falls within the scope of Coverage B.
The Court also found that Coverage Part A provided coverage and triggered the duty to defend. And, the Court also awarded the contractor its attorneys’ fees in commencing and pursuing the declaratory relief action against the insurer. The Court allowed the attorneys’ fees claim based on a rule that holds where an insurer breaches it duty to defend the insured, and the insured proves the insurer owes a defense, the insured is liable for the insured’s attorneys’ fees to enforce the duty to defend in an action for declaratory relief. Morrison v. Swenson, 142 N.W.2d 640, 647 (Minn. 1966).
Very few cases across the country have had the opportunity to evaluate the application of Coverage Part B to construction defect cases, and it is believed that the Triad Construction, Inc. ruling may be the first of its kind, certainly in Minnesota, and potentially nationally. In briefing, we cited two unpublished opinions that we believed supported the application of Coverage Part B and were similar enough to a construction defect claim to warrant citation. In Continental Casualty Co. v. Sycamore Springs Homeowners Association, Inc., 2010 WL 3522955 (S.D. Ind. Aug, 31, 2010), a homeowner’s association complained that defects in a storm water drainage system caused extensive flooding of common areas. A claim was made that the general liability insurance policy provided coverage for “wrongful eviction from, wrongful entry into, or invasion of the right to occupy a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor.” The court determined that the policy provided coverage for the flooding stating that the flood “falls squarely within the policy’s definition of ‘personal injury,’” but eventually denied coverage because the flood occurred outside of the policy period.
American Ins. Co. v. Liberty Surplus Ins. Corp., No. 5:11-CV-03159-LHK, 2012 WL 3361527 (N.D. Cal. Aug. 13, 2012), involved a class action lawsuit by tenants of an apartment who alleged harm due to construction of additions to the complex. The complaint alleged that the new addition changed the development “from being a serene, peaceful, and green environment to an outrageously noisy, dusty and unattractive work site.” The court held that the insurer owed a duty to defend under Coverage Part B because the allegations that the tenants were physically displaced from the community recreation center and the parking facility, as well as the disturbance caused by dust and other construction materials, all of which invaded the tenants’ right to private occupancy.
Coverage Part B has potentially far reaching application to construction disputes beyond the construction defect context. A reasonable argument can be made that it applies to construction delay, disruption, and loss of efficiency cases that result from the tortious conduct of the insured. Think along these lines. A construction contractor is hired to prepare a critical path schedule to manage the work of the subcontractors. The critical path schedule assigns the activity sequences and durations in a logical manner so that all of the work can be completed in a timely manner.
The contractor is a business invitee of the owner for the purpose of performing the work. The contractor thus has a right to occupy the premises to perform the work. Examined through the lens of property law and the right to occupy premises, the construction schedule can be considered the contractor’s allocation of the right to occupy the premises in a particular order to perform the work.
Subcontractors also are persons with a right to occupy premises as business invitees of the owner and the contractor. In a well-planned schedule, the subcontractors have the right to occupy the space for the duration allocated in the schedule free of interference from the tools, equipment, dust, debris, and work-forces of other subcontractors.
Sometimes due to schedule compression or delays resulting from tortious conduct, a subcontractor may face an unanticipated situation called “trade stacking” where other trades are working at the same time in the same place on the project when that wasn’t planned. This trade-stacking leads to delay, inefficiency, and interference with the subcontractor’s right to occupy the premises in accordance with the planned schedule. Subcontractors may seek to assert claims against the contractor and potentially other subcontractors for the damages caused by the trade-stacking, typically in the form of increased labor costs. The theory of negligent supervision, tortious interference, or other forms of tortious conduct may be asserted, particularly in jurisdiction without a strong economic loss rule. Contractors facing this risk typically seek to mitigate it by passing through the subcontractors’ claims to the Owner, to other subcontractors, with contract language, or a combination of the foregoing. However, there are situations where these risks cannot be fully mitigated using normal methods, and an insurance coverage solution may be a needed option.
It is a reasonable assessment that a subcontractor as a business invitee has a right to occupy the premises in accordance with the critical path schedule issued by the contractor. Indeed, the subcontractor may have liability to the contractor if it does not work in accordance with that schedule. If that right to occupy is invaded by other subcontractors in an unanticipated trade stacking situation, it would appear that Coverage Part B applies to afford coverage to the contractor for the exposure it faces to a subcontractor’s claim. The contractor and subcontractor are both working on behalf of the owner, so the invasion can be said to have occurred by or on behalf of the owner. The next time a contractor faces exposure to a subcontractor’s under a negligent supervision or tort-based claim for damages due to trade-stacking or other delay type claims involving denial of access to the site, the contractor should consider whether Coverage Part B affords coverage for the claim to mitigate the contractor’s risk along with other standard risk management techniques such as passing the claim along to the Owner, or invoking contract language, where applicable.
The reverse situation may also apply where a subcontractor tortiously extends the duration of its work and therefore impacts the right of the contractor, owner, or other subcontractors to occupy the premises while the subcontractor is delayed due to its tortious conduct. Where the subcontractor is the party facing exposure, the subcontractor may consider whether Coverage Part B affords coverage for the claim against it.
The Triad decision should be seen as a trend-setting decision of national importance in the insurance coverage arena. It clearly and succinctly illustrates that Coverage Part B has stepped out of the shadows and now plays a central role in the effort to obtain insurance coverage in construction defect claims. Going forward, coverage arguments under Coverage Part B should be reviewed and considered where an insurance coverage solution is needed. The law is developing in this area, so we close with a request: if any readers have had experience with Coverage Part B with different or similar results, please let the author know.
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