A recent decision from the Eleventh Circuit (the federal appeals court overseeing trial courts in Florida, Georgia and Alabama) highlights at least one way insurers with complicated policies (and a host of exclusions) may avoid providing coverage and defense resources to insured material suppliers whose products are subject to defect claims. In Morgan Concrete Company v. Westfield Insurance Company, Morgan Concrete (“Morgan”) has agreed to supply ready-mixed concrete to Georgia Concrete for Georgia Concrete’s work on a multi-level building at Clemson University. The job specifications required the concrete for Georgia Concrete’s span to have a specific strength (measured in PSI). During pours of the second level of the structure, Georgia Concrete encountered strength deficiencies which it attempted to remedy by ordering a stronger ready mix to achieve the specified PSI.
However, the strength defects continued, and Georgia Concrete blamed its supplier Morgan—eventually withholding payment and prompting Morgan to cease deliveries and file a lien on the property. In response, Morgan claimed that the strength issues with his concrete were the result of Georgia Concrete’s improper handling of the concrete, exposing it to high ambient temperatures, and not sampling and maintaining it to industry standards. industry.
During this period, Morgan held an insurance policy through Westfield Insurance Company that included coverage for amounts Morgan was legally obligated to pay as damages due to “property damage”. . . caused by an event. A common phrase in CGL policies, Westfield has defined “property damage” as “physical damage to tangible property, including any resulting loss of use of such 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] it’s work.” The policy included a defense and indemnity clause, and Morgan presented his defense of that dispute to Westfield.
Although Westfield initially provided Morgan’s defense under a reservation of rights, he later withdrew because he 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 his lawsuit with Georgia Concrete. The federal court, applying Georgia law, agreed with Westfield, explaining that the “alleged property damage was [only] for [Morgan’s] concrete and not to any other component of the Level 2 slab or to the structure as a whole. On appeal, the Eleventh Circuit agreed that Georgia law defines property damage “as damage to property not previously damaged” and “damage beyond mere defective workmanship.” As a result, the Eleventh Circuit determined that there was no trigger within the policy allowing Westfield to provide a defense.
This “victory” for insurers highlights how crucial it is for the construction industry to understand the nuances of coverage provided by policies and to actively negotiate the necessary coverage parameters. Contractors and suppliers need to understand what types of damage will trigger “property damage” coverage. A few other principles to consider when analyzing coverage for future work:
- Think big. There is a tendency to only look inward when assessing damage. It is important to analyze damage to other elements of the project and the work of other contractors – these impacts may need to be reported to the insurer.
- Find a balance. It is important to defend your work and your materials. It is also important to identify and explain any potential exposure to an insurer for hedging purposes.
- Reallocate risk. If you are concerned that your insurance may not cover certain property damage, consider ways to reallocate that risk elsewhere in the project cycle: contractual provisions, estimating factors, negotiations with suppliers/subcontractors, waiver documents, etc.
- Explore with your broker the purchase of product defect insurance.
What is or is not “property damage” in any given construction dispute will depend on the specific policy, project, jurisdiction and actors, but all contractors and suppliers should consider the above principles when take out insurance or claim coverage.