Related Practices
Hamlet Analyzes a Construction Exclusion
The Zelle Lonestar LowdownOctober 9, 2024
“Coverage or no coverage—that is the question in this insurance dispute,” began the Court with Shakespearean flair, in Corval Builders & Erectors, Inc. v. Markel American Insurance Company. The court considered whether the insurer was entitled to summary judgment on the basis of an exclusion in a first-party property policy for loss resulting from an act, error, or omission relating to the construction or workmanship of property, even though the exclusion contained an ensuing-loss clause. The court found the exclusion applied and the ensuing-loss clause did not, then granted summary judgment to the insurer.
The insured in this case, Paragon, was a subcontractor hired to fabricate piping (that is, manufacture and assemble pipe components) for the contractor and plaintiff, Corval. However, some of Paragon’s work was defective, allegedly resulting in Corval being fired and fined over a million dollars by the client. Corval submitted a claim to the insurer, Markel American—though Corval was not the insured—because Paragon was in bankruptcy. Corval obtained an order from the bankruptcy court permitting it to make insurance claims on Paragon’s policies, though the court stated that nothing in the opinion would deprive the insurer of any defense against liability under the policy. The insurer denied the claim based on the construction exclusion, among other reasons.
The court first considered whether the construction exclusion applied. The court held, based on the dictionary and case law, that the ‘“construction . . . of property’ means the process, art, or manner in which the property was made or formed, and the ‘workmanship . . . of property’ means the quality imparted to the property in the process of making it.” The court then found the damage all resulted from the subcontractor’s defective construction and workmanship. This was true regardless of whether the damage was to the fully assembled pipes Paragon fabricated or to the pipe components it received to fabricate. In either case, the application of the exclusion was clear.
The court then considered whether the exclusion’s ensuing-loss clause applied to reinstate coverage. That clause provided that “if a defect, error, or omission . . . results in a covered peril,” the insurer “cover[s] the loss or damage caused by that covered peril.” The court applied Fifth Circuit and Supreme Court of Texas case law holding that an ensuing loss provision is only triggered when the ensuing loss is distinct from the excluded loss, such as a construction defect that causes a fire or flood. The court rejected application of the ensuing-loss provision because “the damage to the individual pipe components was the direct and unmediated result of Paragon’s defective construction and workmanship of the fabricated pipes.”
The answer to the question, then, was no coverage. The damage was the direct result of defective construction and workmanship, placing it within the exclusion and outside of the ensuing-loss clause. The court therefore granted summary judgment to the insurer on breach of contract and bad faith, because the latter was derivative of the former.
______________________________________
The opinions expressed are those of the authors and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
