Most states recognize a distinction between the business risk of faulty workmanship (e.g., a poorly constructed roof that requires repair or replacement) and an ensuing liability risk (e.g., a poorly constructed roof that collapses on an innocent bystander). In such a classic case, a claim for repair or replacement of the “work” or “product” of an insured is part of the risk of doing business. However, when the work or product causes bodily injury or damage to the property of a third party, it is within the protections ordinarily provided by a general liability policy.
This distinction was recently examined in the context of a declaratory judgment action in Scottsdale v. Sagona Landscaping. In the underlying case, Sagona contracted to build a retaining wall that eventually collapsed. The property owner demanded that Sagona either repair or replace the wall. Sagona refused and was promptly sued. In response, Sagona tendered its defense to Scottsdale who underwrote Sagona’s general liability policy. Scottsdale countered by denying any duty to defend or indemnify Sagona based on, among other things, the business risks exclusion for damage to “your work” and filed an action for declaratory judgment.
Interestingly, plaintiff got the ball rolling by filing an early motion to dismiss portions of the declaratory judgment complaint. Scottsdale pushed back by filing its own motion for summary judgment arguing that there was no coverage for (1) damage to your work (2) breach of contract or (3) punitive damages. The court noted that there was no claim that the retaining wall caused damage to the person or property of any third party. Thus, the claim for repair or replacement of the wall was excluded as damage to “your work.” In addition, the court held that there was no coverage for the allegation of breach of contract because such a claim did not constitute “bodily injury” or “property damage” caused by “an occurrence.” Finally, there was no coverage for punitive damages as a matter of law.
Insurers should examine closely any construction related claim that sounds suspiciously like a garden variety business dispute between a contractor and its customer. New York courts have found that the standard business risks exclusions are unambiguous and designed to exclude the business risk of faulty workmanship in a purely commercial dispute where a third party’s person or property is not damaged.
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