CGL Coverage Denied For Defective Concrete as a "Business Risk"
December, 2004
In Bonded Concrete, Inc. v. Transcontinental Ins. Co., 784 N.Y.S.2d 212, the New York Appellate Division reviewed an issue that should be well settled but continues to be the subject of persistent litigation – whether the damages resulting from the poor quality work of the insured are covered under a commercial liability policy. It has long been established as a general rule that poor quality work, faulty workmanship or the poor craftsmanship of an insured are “business risks” and not risks contemplated in the insurer - insured relationship.
Facts
In Bonded Concrete, the general contractor for a school renovation project sued the insured for allegedly supplying defective concrete for use in sidewalks. The insured tendered the pleadings to its insurer and demanded defense and indemnification. The insurer investigated the claim and advised the insured that there was no coverage for the claim because the delivery of defective concrete did not constitute a covered “occurrence.” The insurer also relied upon a number of exclusions in the policy in denying the insured’s tender, including the exclusion for property damage to “your product.”
The insurer filed suit seeking a declaration that it had no duty to defend or indemnify. The trial court granted summary judgment to the insurer and the insured appealed.
Analysis
The appellate court affirmed the grant of summary judgment to the insurer, basing its decision on the well-settled rule that a CGL insurer is not a surety for a construction contractor’s defective work product. New York courts and those of most other jurisdictions have repeatedly held that the poor quality work of an insured is not covered if the damages relate to the correction, replacement or removal of the insured’s work. If, on the other hand, the insured’s work causes damage, either property damage to another or bodily injury to another, there may be a covered “occurrence.” This clear coverage line can be blurred where the insured’s work is incorporated into a larger project, becoming an integral part of that project. In such a situation, it can be argued that replacing the whole due to damage from a sub-part is covered. Because in Bonded Concrete the insured provided defective concrete and the damages sought were simply the costs of correcting the defect – as opposed to damages to property other than the completed work itself – there was no coverage. The court rejected the insured’s argument that the case fell into the blurred area of products incorporated into a larger whole because the concrete was not a component of any other larger structure, but instead was itself the insured’s product, i.e. the sidewalk.
Learning Point:
When a tender is received from an insured for coverage related to its product or work, three general classifications may exist: (1) covered, (2) uncovered and (3) the blurred damage to the whole arena. If the damage is to the product of the insured and no other property or person, it may be classified as poor quality work and not potentially covered. If there are allegations of damage to another person or property, it may be classified as a potentially covered loss for the damage other than to the insured’s product. In the third classification, a line must be drawn somewhere between the insured’s poor quality work causing damage to property or person and the insured’s poor quality work causing damage to part of a larger whole. In the former, there is no coverage for the insured’s product and the cost of repairing or replacing that product falls in the first classification and remains a “business risk.” In the latter, since the property that is damaged is not the insured’s work or product, the damage is potentially covered as an “occurrence.” If the insured’s product keeps its own use, identity or function, it is likely not part of a larger whole. If, on the other hand, the insured’s product is integrated into a larger whole such that it no longer retains its identity or a separate function, it is possible that damage to the whole or to the value of the whole beyond the value of the insured’s product may fall in the third classification of damage by a component to a larger whole and it may be covered under a liability policy.
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