February 11, 2016 Articles

Is There Coverage for Defective Work? A Short Question with a Long Answer

A trigger of coverage under the contractor’s commercial general liability policy not only affords the contractor a defense at the cost of its insurer, but also can provide an available source of funds to resolve the owner’s claim and/or pay an adverse judgment

by David B. Applefeld

In the context of construction defect litigation, one area where the interests of contractors and owners often align is the ability of the contractor to obtain insurance coverage through its liability insurance carrier for alleged defective work. Virtually all business entities maintain commercial general liability insurance coverage (CGL). CGL coverage is also required in all major form construction contracts, including the American Institute of Architects A201-2007. A trigger of coverage under the contractor’s CGL policy not only affords the contractor a defense at the cost of its insurer, but also can provide an available source of funds to resolve the owner’s claim and/or pay an adverse judgment.

The case of French v. Assurance Co. of America, 448 F.3d 693 (4th Cir. 2006) demonstrates this point. In French, homeowners filed suit against a general contractor seeking to recover for damage to their house caused by a subcontractor’s failure to properly install synthetic siding. After the contractor’s general liability carrier denied coverage for the loss and refused to provide a defense, the general contractor consented to the entry of a judgment and assigned the homeowners its claims against the insurer in exchange for payment of a small sum and a release. The homeowners then filed suit against the insurer as the contractor’s assignee.

On appeal, the U.S. Court of Appeals for the Fourth Circuit applied Maryland law and concluded that although coverage was not available to correct the subcontractor’s defective work, coverage was available to pay for property damage to the general contractor’s otherwise non-defective work caused by the subcontractor’s negligence (such as the interior framing and other components of the house).

This article will analyze the current state of Maryland law with respect to coverage: that is an insurer’s duty to defend and indemnify an insured contractor, in the context of a construction defect claim. Because the 1986 ISO form CGL insurance policy is the CGL policy form most commonly used in today’s insurance market, I will focus on the policy language, definitions and exclusions contained therein.

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