Construction Firm Prevails In $25 Million Dispute Under New York Law

In predicting that the New York Court of Appeals would follow the nationwide trend and hold that damage arising from a subcontractor’s faulty construction work is an “occurrence” under a CGL policy, the 10th Circuit Court of Appeals overturned a lower court decision, allowing the construction company to seek up to $25 million in excess coverage.

The general fact pattern underlying the decision, Black & Veatch Corp. v. Aspen Insurance (UK) Ltd., was a fairly common one: a general contractor sought coverage for damages caused by a subcontractor’s work.  In this particular case, Black & Veatch subcontracted the engineering and construction of various jet bubbling reactors used at power plants in Ohio and Indiana.  After the work was completed, the project owner alleged that faulty procurement or construction lead to several of the reactors to deform, crack, and sometimes collapse.  B&V settled the underlying lawsuit for more than $225 million, and sought coverage from its insurers.  They were able to recover $4 million for their primary insurer, and then sought coverage from their excess insurer, who had limits of $25 million.

Applying New York law (as required in the contract), the district court in Kansas held that because the damage occurred to the work product itself, the damage did not constitute an “occurrence” under the policy.  On appeal, the 10th Circuit examined the structure of the policy as a whole, in addition to specific policy clauses, including the “your work” exclusion and the “subcontractor exception”, which states that the exclusion for “your work” does not apply if the damaged work was performed by a subcontractor.  Despite the arguments of the insurers, the court distinguished several lower New York court decisions and noted that New York state courts had not directly resolved whether damages from a subcontractor’s work can be deemed an “occurrence” under a CGL policy containing a “subcontractor exception”.

Ultimately, the 10th Circuit held that, “the damages were accidental and resulted in harm to a third-party’s property, thus meeting the policy’s definition of an ‘occurrence.’” Specifically, the court held that the property owner, who was named as an additional insured in the policy, was a third party for purposes of their analysis.  In addition, the Court mentioned how “[s]tate supreme courts that have considered the issue since 2012 have reached ‘near unanimity’ that ‘construction defects can constitute occurrences and contractors have coverage under CGL policies at least for the unexpected damage caused by defective workmanship done by subcontractors.”  They predicted that the New York Court of Appeals would follow this trend, and hold that faulty subcontractor work constitutes an “occurrence.” While not a decision from the New York Court of Appeals, the decision nonetheless deals a blow to insurers who in many cases have contractual clauses which require the application of New York law.

Thanks to Doug Giombarrese for his contribution to this post.