Eleventh Circuit Affirms No Coverage for Cost to Repair Damage Caused by Subcontractor's Defective Work

The Eleventh Circuit Court of Appeals continues to find favorably for commercial general liability (CGL) carriers on coverage for damage to the completed project caused by the defective work of subcontractors. On July 11, 2014, the Eleventh Circuit decided J.D.B. Construction, Inc. v. Mid-Continent Casualty Company, No. 13-10138 (11th Cir. Jul. 11, 2014) (view the JDB Construction opinion). The case involved the construction of a fitness center to be attached to an existing building in the Tampa area.

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The owner, Sun City, furnished components of the fitness center, including the shell, slab, block, and concrete flooring, which were incorporated into the addition by the general contractor, J.D.B. Construction, Inc. The property suffered continuous leaks after completion, causing damage to components of the fitness center, including the roof, windows, and doors. The owner made a claim against J.D.B. for the cost to investigate and repair the defective work of the general contractor and its subcontractors, for damages to the components supplied and installed by subcontractors, and for damages to components supplied by the owner. J.D.B. demanded a defense and indemnity from Mid-Continent, who denied coverage. A coverage lawsuit ensued, and the trial court found in favor of the carrier, holding it had no duty to defend or indemnify its insured.

The contractor appealed, and the Eleventh Circuit Court of Appeals affirmed on the duty to indemnify. Perhaps the most important part of the decision is the holding that the policy did not cover damage caused by a subcontractor's defective work to the work of other trades or to the owner-supplied materials. Central to the decision was the absence of the "subcontractor exception" to the "Your Work" exclusion in the Mid-Continent policy. That exception was critical to the J.S.U.B. v. U.S. Fire Insurance Company decision (view the JSUB Opinion). The initial policy included the exception, but it was deleted from subsequent policies.

The appellate court found that the entirety of the general contractor’s scope was the "work" contemplated by "Your Work" exclusion. Without the subcontractor exception, there was no completed operations coverage for damage to any portion of the work, even when one subcontractor's work damaged the work of other trades or owner-supplied materials.

The J.D.B. Court cited its prior decision in Amerisure Mutual Insurance Company v. Auchter Company, 673 F.3d 1294 (11th Cir. 2012) (view the Auchter opinion), in which coverage was denied for the cost to replace a roof when some defectively installed tiles dislodged and damaged other properly-installed tiles. The Auchter court found it important that the owner made a claim for a complete roof replacement, rather than a claim for the cost to repair only the tiles damaged by the dislodged tiles, and that the claim did not involve damage to "any other components of the building, other than the roof."

The J.D.B. opinion does not bind Florida state courts. The Florida Supreme Court has not specifically addressed the issue of whether the "Your Work" exclusion without the "subcontractor exception" bars coverage for damage to the work of other trades, owner-supplied components, or the work of the general contractor. Though the history of the ISO Forms arguably suggests that the intent of the standard CG 001 is to provide this coverage, the Florida federal courts have taken a much narrower view of the legal effect of the standard policy language.

The parties will almost certainly move for a rehearing, so the final chapter has not been written on this decision. However, the decision underscores the importance of the "subcontractor exception" to limiting the scope of the "Your Work" exclusion on completed projects.

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