By David A. O’Neill, Director of Investigations, PolicyFInd
The ruling of the United States District Court for the Northern District of Indiana’s March 16, 2011 on a motion for summary judgment from the Lake County Superior court case styled General Casualty Insurance v. Compton Construction, Inc. and Mary Ann Zubak could have profound effect on contractors’ need to locate and maintain their historical insurance policies.
A claim against a contractor for the negligent acts of its subcontractor some 7 years earlier was found to be covered under the contractor’s general liability insurance policy. The allegations in this case were that defendant Mary Ann Zubak was damaged by the negligent acts of the subcontractor hired by general contractor, Compton Construction Co. to excavate and set the foundation for her new home. When the house shifted and buckled, Ms. Zubak brought a claim against Compton Construction, who tendered the claim to its general liability insurance company, General Casualty Insurance. After General Casualty declined to defend Compton, Ms. Zubak filed suit in Superior Court against Compton, alleging negligence, breach of contract and breach of warranties.
While this suit was pending, General Casualty filed suit in the U.S. District Court, seeking a declaration that it had no duty to defend or indemnify Ms. Zubak for claims brought against its insured. At issue were the following parts of the general liability policy issued to Compton Construction:
2. Exclusions
This insurance does not apply to:
……….
k. Damage To Your Product
“Property damage” to “your product” arising out of it or any part of it.
l. Damage To Your Work
“Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.” This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.
General Casualty argued in support of its motion that it had no duty to defend or indemnify Compton since Zubak’s allegations did not establish an “occurrence” as defined in the policy. Alternatively, it argued, the allegations fell within the “your product” and “your work” policy exclusions.
In considering General Casualty’s motion for declaratory judgment, the District Court found it necessary to review the Indiana Supreme Court’s 2010 ruling in Sheehan Construction Inc. v. Continental Casualty Co., 935 N.E. 2d 160 (Ind. 2010). In Sheehan, the Indiana Supreme Court had considered policy terms identical to the policy terms in the General Casualty policy issued to Compton.
In Sheehan, the Indiana Supreme Court had reversed a summary judgment by the lower court and held that faulty workmanship can constitute an accident under a CGL policy and that defective subcontractor work could provide the basis for a claim under a CGL policy. The Sheehan Court had found its rule in the persuasive Wisconsin Supreme Court opinion in Am. Family Mut. Ins. Co. v. Am. Girl Inc., 673 N.W. 2d 65, 76 (Wisc. 2004) which stated that: “CGL policies do not generally cover contract claims arising out of the insured’s defective work or product, but this is by operation of the CGL’s business risk exclusions, not because a loss actionable only in contract can never be the result of any ‘occurrence’ within the meaning of the CGL’s initial grant of coverage.”
The U.S. District Court found that Indiana’s Sheehan decision was precedent in the case before it in General Casualty Insurance v. Compton and therefore determined that it could not provide the insurer with the Summary Judgment it sought.
Given this new development in Indiana’s construction defect law created by the Sheehan decision, as given credence by the Federal court, it can be expected that contractors throughout the state will need to assemble their historical general liability insurance policies. As long-tail claims are brought against them for construction defects caused by the negligence of subcontractors in years past, they will need to pass these claims along to their insurers. An insurance archeology firm such as PolicyFind would be of great value to these Indiana general contractors in locating and assembling these valuable historical insurance policies.