On December 18, 2018, the United States District Court for the Middle District of Florida held that the “property damage” requirement and the “Damage to Your Work” and “Exterior Finishing System and Stucco” exclusions were insufficient to relieve an insurer of its duty to defend its insured in a construction-defect action.
In Southern Owners Ins. Co. v. Gallo Building Services, Southern Owners sought a declaration that it had no duty to defend or indemnify its insured, Gallo Building Services, Inc., for claims brought by KB Homes in an underlying construction-defect action. The underlying action arose out of a master subcontract between Gallo and KB Homes for the construction of the Willowbrook Condominium Project in Manatee County, Florida. Upon completion of a turnover study, the Willowbrook Condominium Association identified numerous defects and deficiencies in the project. The Association served KB Homes with a 558 Notice regarding the defects and deficiencies, which KB Homes passed along to its subcontractors. KB Homes investigated and undertook to repair the defects, and it paid to relocate residents during the repairs. After KB Homes’ subcontractors failed to defend it against the damages claimed by the Association, KB Homes filed suit against the subcontractors, including Gallo.
Southern Owners alleged that it had no duty to defend or indemnify Gallo for the claims asserted in the KB Homes complaint because: (1) the underlying complaint did not allege “property damage”; (2) the “Your Work” exclusion precluded coverage for the claims; and (3) the “Exterior Finishing System and Stucco” exclusion barred coverage.
The Court found that the underlying complaint alleged “property damage”
Southern Owners argued that the KB Homes complaint alleged claims only for replacement of a defective component or correction of faulty installation, which does not constitute “property damage” under the Southern Owners policy. The Court disagreed, finding that the complaint alleged “property damage” within the meaning of the policy, as discussed in the Florida Supreme Court case of U.S. Fire Ins. Co. v. J.S.U.B. Inc., 979 So.2d 871 (Fla. 2007). The Court noted that the KB Homes complaint pleaded damages in addition to defective components or faulty installation, including “damage to other building components,” “damage to other property,” “water intrusion,” and loss of use, including “relocation of residents,” which qualified as “property damage” under the policy.
The Court determined that the “Damage to Your Work” exclusion did not preclude coverage
The Southern Owners policy contained a “Damage to Your Work” exclusion, which stated that there was no coverage for “property damage” to Gallo’s “work arising out of it or any part of it and included within the ‘products-completed operations hazard’.”
Southern Owners claimed that the KB Home complaint sought damages due to defects and deficiencies in Gallo’s work, and that the “Damage to Your Work” exclusion precluded coverage for these damages. Southern Owners further argued that there was no meaningful distinction between the work of Gallo, KB Homes, and other contractors, and as a result, the “Damage to Your Work” exclusion precluded coverage for all of the alleged damages.
KB Homes responded that Southern Owners misapplied the “Damage to Your Work” exclusion by reading the exclusion as though Gallo was a general contractor—instead of a subcontractor. The Court agreed with KB Homes, finding that under Assurance Co. of America v. Lucas Waterproofing, Inc., 518 F.Supp.2d 1201 (S.D. Fla. 2008), a subcontractor’s narrow scope of work, unlike the broad scope of work of a general contractor, could not be construed to include the entire construction project. As a result, damage to other parts of the property that were not the subcontractor’s work (for example, other property damage, damage to personal property, damage to other building components or loss of use) could not be excluded under the “Damage to Your Work” exclusion. Because the KB Homes complaint alleged damage to other parts of property unrelated to Gallo’s work, including other building components, other property, loss of use, and relocation of residents, the “Damage to Your Work” exclusion did not preclude coverage for the entire KB Homes complaint, and Southern Owners had a duty to defend Gallo in the underlying action.
The Court concluded that the “Exterior Finishing System and Stucco” exclusion did not relieve Southern Owners of its duty to defend Gallo
The Southern Owners policy contained an “Exterior Finishing System and Stucco” exclusion which stated that the policy did not provide coverage for any claim for “property damage” that is “in any way related to or arising out of an exterior finishing system or exterior stucco application.” Southern Owners argued that Gallo’s entire scope of work was limited to the exterior of the project, including application of an exterior finishing system and stucco, and, as a result, the exclusion applied to bar coverage for Gallo.
KB Homes responded that its complaint alleged that Gallo had multiple scopes of work that were unrelated to the application of an exterior finishing system or stucco. In response, Southern Owners cited cases from Texas, Washington, New Jersey and Oklahoma, in which courts upheld a similar exclusion, even though the damage caused by the insured did not directly relate to the application of an exterior finishing system or stucco. The Court found these cases unpersuasive because, in each case, the parties did not contest that an exterior insulating finishing system (EIFS) was used, but in this case there was no evidence that EIFS was at issue. Further, the Court noted that the exclusions discussed in those cases were broader and extended to property damage from any exterior work, even if the insured did not install the EIFS. The Court concluded that the KB Homes complaint, by contrast, pleaded damages arising out of scopes of work unrelated to the application of an exterior finishing system or stucco. Accordingly, Southern Owners had a duty to defend Gallo.
What does this mean for construction litigation?
The Court’s opinion underscores the importance of drafting a broad yet well-pleaded complaint, which includes all defects and deficiencies on the project, not just damage to faulty components. The opinion provides a succinct explanation of just how narrow the “Damage to Your Work” and “Exterior Finishing System and Stucco” exclusions truly are, and serves as a cautionary tale for insurers who wish to shirk their duty to defend an insured.