Normally, an insurance company has no duty to defend a contractor under a construction general liability (“CGL”) policy against breach-of-contract and negligence allegations. Not this time. This time, in the Western District of Texas, the insureds won against the insurance company. The court held the breach of contract exclusion did not apply because the contractor’s subcontractor, not the contractor, could be responsible for a construction defect.

A municipality hired the general contractor to construct a sports complex that included a swimming pool, baseball and softball fields, and parking lots. The contractor hired two subcontractors – one to design and build the swimming pool, and another to do all the dirt work, grading, and storm drainage for the entire complex.

At the beginning of 2017, a contractor employee saw cracks beginning the pool and parking lot after completion of the pool and most of the sports complex. The contractor put the pool subcontractor on notice to fix the cracks. About three months later, a contractor employee noticed the cracks were worse. The contractor and the pool subcontractor were unable to agree on how to fix the pool. By the end of the year, more cracks and other defects had appeared. The city, contractor, and subcontractors could not agree on how to solve these problems.

The city sued the contractor for breach of contract and negligence. The contractor notified its insurance company and, relying on its CGL policy, asked its insurance company to defend it against the city’s lawsuit. The insurance company refused. It sued the contractor requesting a judgment declaring that it had no duty to defend the contractor in the lawsuit filed by the city based on the CGL exclusion clause.

The insurance company relied on language in its policy that specifically denied coverage to the contractor for property damage caused by the contractor. In it its lawsuit against the contractor, the city had specifically alleged that work performed by the contractor and its subcontractors was defective. The insurance policy’s exclusion did not apply to work performed by a subcontractor. The court held that, because the city’s allegations included the possibility that subcontractor alone had created the defects at issue in the city’s lawsuit, the insurance company had a duty to defend the contractor.

Mt. Hawley Insurance Company v. Slay Engineering, Texas Multi-Chem and Huser Construction, LLC, No. 5:2018cv00252 – Document 19 (W.D. Tex. 2018). You can read the entire Memorandum and Order at Justia US Law here: https://bit.ly/2wul7ka. -CCE