August 2020 Newsletter - CLG Issues

We think nothing would brighten your day like an email on insurance and CGL coverage. Certainly, for me, it is all I need to get through the dark days. While we are often required to disabuse owners and obligees that surety bonds are blanket insurance policies, it does raise the issue of remembering that there are certain insurance products that can help mitigate exposure on a project gone wrong. Most notably, a CGL policy can provide a source of recovery in cases of construction defects and resulting damage. A classic example is a poorly built roof that allows water intrusion, which subsequently damages interior finishes, etc. In such a case, there are good arguments for the carrier covering not only the resulting damage, but in the right case, the defective workmanship to begin with.

A recent case from the Michigan Supreme Court (Skanska v. MAP Mechanical, 2020 WL 3527909) highlights this point. There are three main takeaways from the case:

Defective workmanship absolutely constitutes an accident that gives rise to an initial grant of coverage under a CGL policy. The Court noted that it did not matter that the workmanship was in the control of the party performing the work, as the fact that something was built improperly is almost by definition an accidental occurrence.
As defective workmanship can constitute an accident, this necessarily would then be covered by the CGL policy to the extent that the workmanship was done by a subcontractor of the insured (recognizing the exception to the “your work” exclusion in most CGL policies).

Importantly for sureties, the Court rejected an argument that the CGL policy should not be in play because there was a performance bond on the job. The Court found that even if there is possibility of overlap with the performance bond, that does not take away from the initial grant of coverage provided by the CGL policy itself.
The Michigan Supreme Court is the latest Court to tackle these issues and is coming in line with the more modern approach for what a CGL policy covers. Indeed, states around the Country – including Texas – have found similarly. In that vein, Texas has specifically found that not only can a CGL policy cover defective workmanship, but the carrier may also be required to cover the costs to "rip and tear" good work in order to remedy the bad work. That can be a big number on a project with significant defective work.

Thus, the most immediate practice point for a project with significant defective work is to ensure that an early and effective demand is sent to the insurance carrier to properly trigger the duties to defend and indemnify. While the duty to defend is a lower bar to trigger, we have still seen plenty of instances where it is not done correctly by the principal. Generally speaking, this duty is triggered by the eight corners rule – the four corners of the insurance policy and the four corners of the complaint/lawsuit/claim that gives rise to coverage. When triggered, the carrier will then bear the costs of defense. Although it may be difficult to have the carrier bear the Surety’s own fees as well, defense counsel can take the laboring oar on substantive, overlapping defenses. The duty to indemnify is typically a longer fight, particularly when dealing with some of the issues identified above in terms of bearing costs for defective work, rip and tear, etc. Yet, carriers can be persuaded to cover these costs once they understand better the state of the law and the limits of performance bond coverage.