Contractual Liability Exclusion Defeats General Contractor’s Bid Against Six Insurers for Defense and Indemnity in West Virginia

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West Virginia’s highest court recently handed down a well-articulated decision on the scope of a CGL policy’s insuring agreement and exclusion for contractual liability, which could be influential to other courts who struggle with these commonly-litigated issues.

On May 1, 2019, the West Virginia Supreme Court of Appeals unanimously upheld summary judgment to six insurance companies in a declaratory judgment action relating to a property developer’s suit against its general contractor over construction defects at a shopping center. The insurers had issued a series of primary, umbrella, and excess liability policies to the general contractor. In the underlying action, the developer asserted two breach of contract claims against the general contractor, as well as claims for breach of warranty and indemnification for losses stemming from the purported construction defects. 

The insurance companies asserted that the developer’s contract-based claims against the insured did not constitute “property damage” caused by an “occurrence,” as required by each policy.  Further, even if there was “property damage” caused by an “occurrence,” the insurers argued that policy exclusions precluded coverage. Applying Tennessee law, the court upheld six trial court orders granting summary judgment to the insurers, and held, first, that the policies did not cover the developer’s claims that only sought damages for the mere replacement or correction of faulty workmanship itself. 

More importantly, the court also held that, to the extent the developer sought damages for other injury to property that resulted from the alleged faulty workmanship, coverage for those claims was barred primarily because of a contractual liability exclusion, present in all of the policies.  This exclusion precluded coverage for claims of bodily injury or property damage for which the insured was “obligated to pay damages by reason of the assumption of liability in a contract or agreement.” The property developer was “only seeking to have [the insured] pay damages by reason of [the insured’s] alleged assumption of liability in their construction contracts,” and was not alleging any tort claims, so the insured would not be liable for the alleged damages in the absence of the contract. This put the claims directly into the purview of the contractual liability exclusion. 

The case joins well-settled Tennessee precedent that commercial general liability insurance is simply not intended to cover contract claims for strictly economic losses caused by an insured’s failure to properly do work it had agreed to perform under a construction contract.