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Insurance Carrier Required to Defend Contractor for Loss of Use and Equipment-Related Damages, Even Though Caused by "Faulty Workmanship"

    Client Alerts
  • February 26, 2004

Disputes between contractors and their insurance companies over coverage for claims of alleged faulty or poor workmanship have received increased attention from courts in North Carolina. Insurance companies typically reject these claims, and courts support the rejection of both the duty to defend and coverage. There are three principal grounds on which insurance companies and the courts base these opinions: (1) damages caused by faulty workmanship are not caused by an "accident" because the contractor knew or should have expected that the faulty work would have to be repaired, (2) costs to repair the faulty work do not fall within the standard commercial general liability ("CGL") policy’s definition of "property damage;" and (3) claims based on your own poor work are barred from coverage by provisions commonly known as the "business risk" exclusions in the CGL policy.

However, a recent opinion from a federal district court in North Carolina suggests that all claims arising out of faulty workmanship are not necessarily barred from coverage. There are certain circumstances under which an insurance carrier will be required to defend the contractor in litigation.(1) In Wayne Brothers, the owner of a freezer, warehouse and distribution facility hired an engineer to perform design and engineering services for the construction of the facility. The engineer subsequently entered into a subcontract with Wayne Brothers to construct the facility’s concrete floors. After Wayne Brothers completed its work on the concrete flooring, the facility owner became aware of problems with the concrete flooring.

The owner of the facility resolved its dispute with the engineer regarding the costs to repair the concrete flooring. However, the owner filed a lawsuit against the engineer seeking related damages: (1) damages for the loss of its use of the construction facility until the repairs had been done, (2) damages related to the interruption of its business, and (3) damages to certain equipment. The engineer in turn sued Wayne Brothers alleging that Wayne Brothers caused the damages ultimately suffered by the facility owner. Wayne Brothers made a demand on its insurance for coverage and a defense in the engineer’s lawsuit. The insurance carriers denied both the duty to defend and coverage.

The federal district court decided that the insurance carriers had a duty to defend Wayne Brothers in the engineer’s lawsuit and that their refusal to defend was improper. The principal reason was that the facility owner asserted claims for damages above and beyond simply the cost to repair the concrete flooring. Because the facility owner alleged loss of use of its facility, business interruption losses and damages to equipment, the court decided that the damages fell within the standard definition of "property damage" under the insurance policy. In addition, the court determined that the "business risk" exclusions did not apply to bar coverage, because (i) property other than the actual flooring constructed by Wayne Brothers was allegedly damaged, and (ii) the damaged property could not simply be restored to use by repairing the concrete flooring. In other words, even if the concrete flooring had been repaired, the facility owner would still have claims for damages related to the loss of use of its facility, business interruption losses and damage to its equipment. Therefore, the court ruled that the insurance carriers were required to provide a defense to Wayne Brothers in the engineer’s lawsuit.

The Wayne Brothers opinion is significant because it is the first opinion in recent years in which a court in North Carolina has ruled that an insurance carrier had a duty to defend a contractor for specific claims arising out of faulty workmanship. If a contractor is sued for claims arising out of faulty or poor workmanship and claims for damages beyond simply the cost to repair the faulty workmanship are asserted, the contractor can rely on the Wayne Brothers opinion to seek at least a defense from its insurance carrier in the lawsuit. The law on these insurance disputes is continuing to evolve, and the specific facts of the disputes are critical to how they are resolved. The Torts and Insurance Practice Group at Parker Poe has experience in this area. We can assist you in determining whether claims are covered and provide advice on pursuing those claims.

(1) Wayne Brothers, Inc. v. North River Ins. Co., 2003 WL 22213615 (M.D.N.C. August 20, 2003).