Circuit Court Finds that Additional Insured Endorsement Limiting Coverage to Ongoing Operations Did Not Afford Coverage for Construction Defect Claim

February 28, 2014 | Insurance Coverage

The U.S. Court of Appeals for the Fifth Circuit, reversing a district court’s decision, has ruled that an additional insured endorsement that limited coverage to ongoing operations did not afford coverage for a construction defect claim, arising out of completed operations, asserted against a general contractor who was an additional insured on a subcontractor’s commercial general liability (“CGL”) insurance policy.

The Case

Pass Marianne, L.L.C., contracted for the construction of condominiums on the Mississippi Gulf Coast. The general contractor was Carl E. Woodward. Among the subcontractors was DCM Corporation, L.L.C., which entered into a contract with Woodward for the concrete work. DCM obtained a commercial general liability (“CGL”) insurance policy from Acceptance Indemnity Insurance Company.

After the project was completed, Pass Marianne sold the condominiums to Lemon Drop Properties. A year later, Lemon Drop sued Pass Marianne and Woodward, seeking rescission and actual and punitive damages for breach of contract and for gross negligence. Pass Marianne filed a cross-claim against Woodward alleging faulty construction and damage arising out of the construction.

Woodward, who was an additional insured under the CGL policy that Acceptance had issued to DCM, sought a defense and indemnity from Acceptance.

Acceptance disclaimed coverage, explaining that the policy limited coverage for Woodward as an additional insured “to liability arising out of your ongoing operations performed for that insured” and that work on the project had been completed. Acceptance also pointed out that the policy stated that it did “not apply to ‘bodily injury’ or ‘property damage’ occurring after [all work] to be performed by or on behalf of the additional insured(s) at the site of the covered operations has been completed,” noting, once again, that work on the project had been completed.

Woodward sued. The district court entered a final judgment in favor of Woodward, and Acceptance appealed.

The Circuit Court’s Decision

The circuit court reversed.

In its decision, it explained that clauses in the policy’s additional-insured endorsement established the broad parameters of the coverage as matters “arising out of [DCM’s] ongoing operations” and then specifically excluded property damage that occurred after all the work at the site of the “covered operations have been completed.”

The circuit court then found that Pass Marianne’s key claim – that Woodward’s subcontractor, DCM, had not built the foundation piers according to the plans and specifications – was a claim of a construction defect. Because liability for construction defects arose out of completed operations, the Fifth Circuit concluded that Woodward’s alleged liability did not arise out of DCM’s ongoing operations, the alleged breach necessarily arose from the completed construction, and there was no coverage.

The case is Woodward v. Acceptance Indemnity Ins. Co., No. 12-60561 (5th Cir. Feb. 11, 2014).

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