Mississippi Court Rules on CGL Coverage for Subcontractors

February 22, 2010

A general contractor’s hiring of a subcontractor does not necessarily preclude coverage under its commercial general liability (CGL) policy for shoddy work performed by the subcontractor, Mississippi’s highest court has ruled.

The insurer had argued that there was no coverage because the general contractor intentionally hired the subcontractor. Since it knowingly hired the subcontractor, the subcontractor’s defective work was neither unintended nor unexpected as was required for it to be considered an “occurrence” that would trigger coverage, according to the insurer.

But the Mississippi Supreme Court on Feb. 11 reversed a lower court, holding that interpreting the term “occurrence” categorically to preclude coverage for the simple negligence of a subcontractor “subverts the plain language and purpose of the CGL part” of these policies.

In 2000, the general contracting firm Architex had contracted with Vikram Parshotam and CIS Pearl, Inc. to construct a Country Inn and Suites hotel. Architex used multiple subcontractors to build the inn. It has commercial insurance policies from Scottsdale Insurance Co.

In September 2004, CIS alleged in a communication to Architex that testing had revealed serious rebar deficiencies in the foundation of the inn and other faulty workmanship. On Oct. 5, 2004, Architex first notified Scottsdale of that claim.

Scottsdale denied Architex’s demand for defense and indemnity, stating that there had not been any “occurrence which would trigger” coverage.

The policies specified that coverage did not apply to damage that was “expected or intended from the standpoint of the insured.” The policies defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Architex argued that the property damage resulted from acts that were not intended or expected by it and, therefore, there was an occurrence that triggered its policy with Scottsdale.

Scottsdale prevailed in the Circuit Court of Rankin County, which held that there was no “occurrence” and thus no coverage. The circuit court concluded that whatever work was defective was nevertheless the result of intended action by the insured, Architex, which intentionally subcontracted the work to others. While Architex did not intend for any of those subcontractors to do defective work, the hiring of those subcontractors was not an “accident, including continuous or repeated exposure to substantially the same general harmful conditions” as the definition of “occurrence” sets out in the insurance policy.

Additionally, the circuit court said that hiring of the subcontractors was a “course consciously devised and controlled by [the insured]” which undeniably set in motion the “chain of events leading to the injuries complained of.”

Architex appealed that ruling. The state Supreme Court agreed to consider whether the circuit court erred in concluding that the intentional act of hiring subcontractors by the insured general contractor precluded coverage.

Architex claimed that Scottsdale has “accepted premium payments for subcontractor coverage for years,” but “now attempts to deny Architex the benefit of its bargain by claiming that defective subcontractor work is intentional, and contending that a subcontractor’s work becomes the general contractor’s work, i.e. ‘your work,’ which is excluded under the contract.”

Scottsdale contended that there was no “occurrence” because “failing to install rebar in a building is not an accident. Defective construction work that causes mold, rust, or water leaks likewise is not an accident.”

Scottsdale also maintained that Architex’s overall premium had been reduced because the subcontractors had their own insurance.

The high court said the circuit court erred in not considering the language of the policy as a whole. The court said there was no “clear and unambiguous language” limiting coverage for worked performed by subcontractors. In fact, the court held, the policy unambiguously extended coverage to Architex for subcontractors by not specifically excluding them with other terms.

The fact that subcontractors had their own insurance coverage did not, in itself, determine whether Architex had coverage, the court added. Also, the premium payments by Architex supported coverage as to work performed by a subcontractor.

The Supreme Court said the circuit court further erred because the only conduct it considered was the hiring of subcontractors. It failed to consider whether the underlying acts of the insured or the subcontractors were negligent or intentional or were otherwise excluded by policy language. While the alleged property damage may have been set in motion by Architex’s intentional hiring of the subcontractors, the high court noted that the “chain of events” may not have been controlled by Architex.

Only when property damage is proximately caused by an inadvertent act does an “occurrence,” as defined by the policy, trigger coverage. But the court said the record before it was insufficient to answer that question with certainty.

The court concluded that under Scottsdale’s CGL policy, the term “occurrence” could not be construed in such a manner as to preclude coverage for unexpected or unintended property damage resulting from negligent acts or conduct of a subcontractor, unless otherwise excluded or the insured breaches its duties after loss.

The court cited, as an example, a roofing subcontractor who negligently caused a roofing tile to fall, injuring a passerby. “Would such an inadvertent act on the part of the subcontractor automatically defeat coverage simply because the subcontractor was intentionally hired by the insured-general contractor?” the court asked. The resulting bodily injury could not be said to expected or intended from the standpoint of the insured, the court answered. The court added that even if there has been property damage caused by an occurrence, coverage is not automatic. It also must be ascertained, under the facts specific to each case, if any other exclusions and/or exceptions to exclusions apply.

A number of parties filed amicus briefs in this case, Architex Association, Inc. v. Scottsdale Insurance Co. Amicus briefs were filed in support of Architex’s position by the Mississippi Department of Finance and Administration, Bureau of Building, Grounds and Real Property Management; Mississippi Insurance Department; Mississippi Department of Transportation; and Attorney General Jim Hood; as well as the Associated General Contractors of America and the Associated General Contractors of Mississippi

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