Costs to Repair Work on Defective Sewer Pipe Are Not “Property Damage”under CGL Policy

August 31, 2011 | Insurance Coverage

Palm Beach Grading, Inc., a general contractor on the Moody River Project in Florida, contended that the work performed by one of its subcontractors, A-1 Underground Services, Inc., on a sewer system pipe was defective. Palm Beach hired another subcontractor, RDMC, Inc., to repair the work. As a result, Palm Beach incurred $256,208.01 in expenses. 

To recover the costs it had incurred in having the repairs made, Palm Beach sued A-1 Underground and obtained a judgment. Then, in an effort to recover a portion of that judgment, Palm Beach sued the insurance company that had issued a commercial general liability insurance policy to A-1 Underground. The district court granted summary judgment in favor of the insurer, reasoning that applicable Florida law and policy exclusions barred recovery of the repair costs. Palm Beach appealed.

The U.S. Court of Appeals for the Eleventh Circuit found that the repair costs Palm Beach had incurred were not covered under the CGL policy because A-1 Underground’s defective work had not caused “property damage” within the meaning of the CGL policy. The circuit court reasoned that there was a difference between a claim for the costs of repairing or removing defective work, which was not a claim for “property damage,” and a claim for the costs of repairing damage caused by defective work, which could be a claim for “property damage.” The appellate court continued by observing that where there was no damage beyond faulty workmanship or defective work, then there was no resulting “property damage.”

The Eleventh Circuit explained that the problem with Palm Beach’s claim was that the defective pipe did not cause damage independent of the repair and replacement of the pipe. For example, the pipes never burst, caused sinkholes, or caused back-ups. Rather, the claim was solely for the costs of repairing and removing the defective pipe, which was not a claim for “property damage.”

 As a result, the Eleventh Circuit concluded that the district court had correctly decided that the CGL policy did not cover Palm Beach’s repair costs.

The case is Palm Beach Grading, Inc. v. Nautilus Ins. Co., No. 10-12821 (11th Cir. July 14, 2011).

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