A lot has been written lately – both by judges and observers – about the so-called “business risk” exclusions and their applicability to construction defect claims. (We’ve previously discussed them here, for example.) Some judges have ruled that faulty workmanship can never constitute a covered “occurrence” under a general liability policy. Lately, though, more and more courts (for example, in West Virginia and Connecticut) are holding (properly, in my view) that, under certain circumstances, faulty workmanship can lead to a covered loss.
As for the judges that side with the insurance industry on this issue, I pose a couple of questions:
- Isn’t “faulty workmanship” a form of negligence, and isn’t negligence covered under liability policies?
- Why would “business risk” exclusions remove (at least in part) coverage for faulty workmanship, if faulty workmanship weren’t a covered occurrence in the first place?
I think that a lot of confusion would be removed on this issue if insurance coverage questions were approached in a logical order, rather than conflating exclusions with the coverage grant, which is what many judges do. The logical order is as follows:
- Does the claim stem from a covered “occurrence” such as a negligent act?
- Is there an exclusion that removes coverage for that “occurrence”?
- Is there an exception to the exclusion that reinstates coverage under certain circumstances?
The better-reasoned decisions are easy to follow and understand, because they follow that construct. But just when I thought that judges were starting to understand insurance, along comes the recent Eighth Circuit decision in Spirtas Company v. Nautilus Ins. Co. (I knew I was in trouble with this one when I read the following statement in the case: “Because the policy exclusions preclude coverage, it is unnecessary to address the coverage issues.” Huh?)
The Spirtas case asks the following unusual question: Can a river be considered “your work”?
Facts: Spirtas is a demolition company that got hired to take down the bridge over the Seneca River in Illinois. Spirtas subcontracted the blasting and demolition of the longest span to Dykon Explosive Demolition Corporation.
It’s never good when the Court’s opinion says in part: “The operation did not go as planned.” Apparently the charges malfunctioned and part of the bridge fell into the river in what the Court describes as a “mangled mess.” Divers had to come in to identify the pieces of the bridge and cut them apart. Then the debris had to be removed from the river. Spirtas obviously incurred additional unbudgeted costs as a result of having to clean up the mishap, and filed a claim with Nautilus, its liability carrier. Nautilus denied the claim.
Nautilus relied in part upon an exclusion removing coverage for “that particular piece of real property on which you or any subcontactors or contractors working on your behalf are performing operations, if the ‘property damage’ arises out of those operations.” The Court approved the denial, writing: “Dropping the bridge span into the river was an integral part of demolition. Therefore, both the bridge and the river were the ‘particular part of real property’ on which Spiritas’s operations occurred.”
Now, wait a minute. “Real property” is generally defined as land and fixtures. Click here to read the legal definition. A river is most definitely not “land” or a “fixture.” I respectfully suggest that this Court, like many, applied an exclusion by pounding a square peg into a round hole, because of the “faulty workmanship is never covered” rule apparently taught in judge school.
As further evidence of the square peg/round hole problem, an endorsement to the policy provided coverage for “property damage” arising out of the “inadvertent or mistaken demolition of property resulting from the insured’s demolition or wrecking operations.” Nautilus contended that this clause applied only when an incorrect structure is demolished. The Court agreed. But the endorsement, by its terms, does not bar coverage for “demolition of mistaken property”; rather it bars coverage for “mistaken demolition of property.” That is a distinction with a difference. Dictionary.com defines “mistaken” to include “erroneous; incorrect; wrong: a mistaken answer.” (Emphasis in original.) This case arose from “incorrect” demolition. The Court here did not bother to refer to the dictionary, instead accepting the insurance company’s unilateral definition of what the exclusion actually meant.
The decision cites other exclusions as well, and I don’t mean to suggest that it’s entirely wrongheaded (although, since I’m on the policyholder side, you can pretty well guess what I think). The real trouble is that if a given number of Courts (or even claims personnel) were faced with a claim like this one, their answers as to whether coverage exists would vary. It’s very difficult to do risk management planning if you’re unsure whether the insurance company will pay. The sad truth is that many Courts and claims personnel don’t look to find coverage; they look only to find exclusions that can erase coverage.
Here’s a quote from a 1983 Travelers manual for its claims personnel, from a section captioned “Analysis of Liability Coverage”: “[There is] a requirement to meet the duty of good faith to the insured. The most positive way to do that is to look for coverage in our policies, and not to look for ways to deny coverage.”
I guess times have changed.
You can read the full Spirtas decision here.