Business risk exclusion prevents coverage for defective workmanshipArticle added by David Thamann on July 6, 2010
David Thamann

David Thamann

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A Georgia Court of Appeals handled a dispute between the insurer and the insured over coverage for a claim of defective workmanship. The trial court had denied the insurer's motion for summary judgment and this appeal followed. This case is QBE Insurance Company v. Couch Pipeline & Grading, Inc., 2010 WL 1136193 (Ga.App.).

Couch contracted with Georgia Maintenance and Contracting to perform certain grading and pipe work during the construction of an office building; QBE issued a commercial liability insurance policy to Couch at this time. Georgia Maintenance refused to pay the full amount of the bill from Couch because it alleged that some of the grading work was defective. It maintained that instead of removing unsuitable soil, Couch covered the soil with good soil and because of the bad soil, the building pad was unable to be compacted 95 percent, the compaction ratio required by the contract. Both parties sued each other over this dispute. QBE filed a declaratory judgment action, contending that it had no duty to defend or indemnify Couch.

QBE contended that the claims against Couch do not constitute an occurrence because an occurrence is defined in the policy as an accident. Here, the insurer said, the insured intentionally placed a layer of good soil over the building pad that contained unsuitable soil and compacted the pad. Thus, there were no unexpected happenings; rather there was an event that was reasonably to be expected. The appeals court rejected this argument.

The court said that although QBE alleges that Couch performed its grading work in exactly the manner intended and expected, it has pointed to no evidence that Couch intended to prevent the building pad from being suitable for compaction. The damage was caused by an accident, an occurrence, because Couch did not intend the damage to occur.

QBE also asserted that because the damage was limited exclusively to Couch's work and there is no evidence of consequential property damage flowing from that work, the business risk exclusions preclude coverage. The court agreed with this argument. The court, noting the exclusions in the policy, found that Georgia Maintenance claimed damages in the amount it cost to repair Couch's defective work; it did not claim damages to other property flowing from Couch's work. Georgia Maintenance contended that the work itself was defective and had to be redone, so the damage was only to the defective work of the insured.

The judgment of the trail court was reversed.

*Note: In its decision, this appeals court discussed the business risk exclusions in the CGL form. The court's words are worth repeating in order to help in understanding the purpose of these exclusions.

Business risk exclusions are designed to exclude coverage for defective workmanship by the insured builder causing damage to the construction project itself. There are two kinds of risks that are incurred by a contractor. The first is the business risk borne by the contractor to replace or repair defective work to make the building project conform to the agreed contractual requirements. This type of risk is not covered by the CGL form and the business risk exclusions make this clear.

The second kind of risk is the risk that defective or faulty workmanship will cause injury to people or damage to other property. Because of the potentially limitless liability associated with this risk, it is the type for which commercial general liability insurance is contemplated. The risk intended to be insured is the possibility that the work of the insured, once relinquished or completed, will cause bodily injury or damage to property other than to the completed work itself, and for which the insured may be found liable.

The insured may be liable as a matter of contract law to make good on products or work that is defective or otherwise unsuitable for use. This may even extend to an obligation to completely replace or rebuild the deficient product or work However, this liability is not what the insurance coverage under a CGL form is designed to protect against.

Notification to Loss Payee Upon Policy Expiration

This is an appeal from a circuit court's ruling that the insurer had improperly cancelled an automobile policy without giving notice to the insured and to the loss payee. The case is Putnam Bancshares, Inc. v. T.C.'s Used Cars, LLC, 2010 WL 1408107 (W.Va.).

Daniel purchased a car from T.C.'s Used Cars and financed that purchase with a loan from Putnam County Bank. A requirement of the loan was that Daniel was to maintain an insurance policy sufficient to cover any physical damage to the vehicle and was to list Putnam County Ban as the loss payee. Progressive Insurance Company issued the policy to Daniel according to these requirements.

Before the policy was to expire, Progressive offered to renew the policy by sending a renewal invoice to Daniel. This notice had a declarations page that expressly noted that the policy was effective only if Daniel paid the renewal premium. Daniel did not do so and the policy expired.

After this, Daniel had an accident and the car was declared a total loss. The following day, Daniel paid the minimum of the premium amount required to renew the policy and in accepting the premium, the insurer noted that the policy would renew with a lapse in coverage; the renewal effective date was one day after payment was made. Later, Putnam Bank, as the loss payee, made a claim with Progressive to recover for the loss of the car and Progressive denied the claim. Putnam filed a lawsuit against the insurer.

When the case arrived at the appeals court, that court said it was presented with issues as to what notice, if any, is required where an existing auto policy expires on its own terms after the insured failed to accept an offer to renew and did not pay the required renewal premium.

The first issue, the court said, was whether West Virginia code requires that an insurer send a notice of cancellation of a policy where the original policy has expired on its own terms. The court found no statutes requiring this procedure.

The second issue was whether the codes required the insurer to send a notice of cancellation when an insured fails to accept an offer to renew an expiring policy by paying the required renewal premium by the due date. The answer here was also "no".

The third issue was whether the law required Progressive to notify the loss payee. The state law required that an insurer notify a loss payee regarding coverage only when the insurer notifies an insured that it is cancelling a policy or is refusing to renew the policy. It was clear in this case that neither of those circumstances were present and so, the court ruled that where an insurer has extended an offer to renew an auto policy and the insured does not accept that offer, there is no duty on the insurer to provide notice to the loss payee.

The final issue addressed by the court was whether Daniel's payment of the renewal premium one day after the accident obligated the insurer to provide coverage for the accident. The court found that while Daniel was entitled to reinstatement of the expired policy, a lapse nonetheless occurred. This lapse and the lack of coverage for the lapse is expressly provided for by West Virginia law. A reinstated policy begins a new coverage period.

The judgment of the circuit court was reversed and the matter was remanded for entry of summary judgment in favor of Progressive.

*Note: This case is presented to show that, while loss payees are usually entitled to notice of a policy cancellation by law, there is no requirement (in West Virginia, at least) for a notification of the insured's decision to not accept a renewal offer. The standard personal auto policy, PP 00 01, does not mention the loss payee; the rights of a loss payee for notice are listed on an endorsement, PP 03 05, that can be attached to the policy. However, this endorsement does not have a requirement to notify the loss payee if the insured has declined a renewal offer.

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