Exclusions Bar Coverage of Homeowners’ Claims against Contractor, West Virginia’s Highest Court Rules

November 1, 2015 | Insurance Coverage

The West Virginia Supreme Court of Appeals has ruled that exclusions in a commercial general liability (CGL) insurance policy issued to a contractor precluded coverage of claims brought by two homeowners against the contractor.

The Case

In July 2009, Fred Hlad signed a contract to build a house for Travis and Teresa Nelson. The agreement provided that Mr. Hlad would complete work on the house by November 2009 and that he would withdraw funds from the Nelsons’ construction loan account to pay for supplies and labor.

The Nelsons later alleged that Mr. Hlad had withdrawn $257,200 from their construction loan account but had failed to pay various suppliers and subcontractors. They also contended that he had lied to his suppliers and subcontractors about the reason for his non-payment, falsely stating that the Nelsons had not provided funds to him. In addition, the Nelsons claimed that Mr. Hlad had charged them overages without explanation. Finally, the Nelsons maintained that Mr. Hlad had missed his deadline to complete construction of the house and that he had performed his work negligently.

The Nelsons sued Mr. Hlad in a West Virginia state court. They asserted nine causes of action, including breach of contract, various intentional torts, and negligence in constructing their house.

Nationwide Mutual Insurance Company, which had issued a CGL policy to Mr. Hlad, sought a declaratory judgment that it had no obligation to defend or indemnify him in the Nelsons’ action.  It lost.  The trial court held that Nationwide had a duty to defend and indemnify Mr. Hlad for any damages that might be recovered against him in the Nelsons’ lawsuit.

Nationwide appealed to West Virginia’s highest court, the Supreme Court of Appeals.

The West Virginia Supreme Court’s Decision

The court reversed, finding that Nationwide had no duty to defend or indemnify Mr. Hlad.

The court first found that the defective workmanship and defamation causes of action triggered coverage under West Virginia law.  The remaining seven causes of action did not. But it also found that coverage for those two causes of action was precluded by the policy’s “clear and unambiguous exclusions.”

First, the court pointed out that the “your work” exclusion precluded coverage for the defective workmanship of an insured contractor. It then observed that the Nelsons had alleged that “Mr. Hlad, individually and d/b/a Allstate Construction” had been negligent in selecting the location for the foundation of the house; in framing the house; and in installing water drainage systems, vinyl siding, doors, and kitchen appliances. According to the court, the Nelsons had not alleged, and had not even implied, that a subcontractor had performed any of the allegedly defective work, that Mr. Hlad could be held vicariously liable for any misconduct by a subcontractor, or that Mr. Hlad had negligently supervised any subcontractors’ work on the Nelsons’ house. Moreover, the court noted, the Nelsons had not named a subcontractor as a defendant. Accordingly, it ruled, the Nelsons sought damages exclusively for Mr. Hlad’s allegedly defective workmanship as a contractor. Their defective workmanship claim was not covered under Nationwide’s policy.

Second, the court ruled that the Nelsons’ defamation claim was precluded by the policy’s exclusion for oral or written publication of material done by or at the direction of the insured with “knowledge of its falsity.” The court observed that the Nelsons claimed that Mr. Hlad, “individually and d/b/a/ Allstate Construction, and his employee(s) have made these [defamatory] statements to suppliers and subcontractors knowing at the time that the statements were false.” (Emphasis added). Accordingly, the court concluded, the Nelsons’ defamation claim was not covered under Nationwide’s policy.

The case is State of West Virginia ex rel., Nationwide Mutual Ins. Co. v. Wilson, No. 15-0424 (W.Va. Oct. 7, 2015).

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