While a declaratory judgment action was pending to decide whether a CGL insurance carrier owed a duty to defend and indemnify a contractor against claims by its client, a marina, for damages arising out of defective work, the contractor and marina entered into what is called a Miller-Shugart settlement agreement, whereby the defendant may agree to permit a claimant to enter judgment against him for a sum collectible only from the insurance policy. After entering into that settlement, litigation was brought against the carrier to collect the settlement amount. Appellate court found that although there was “property damage” and an “occurrence” as defined by the policy, the “your work” exclusion was applicable to at least a portion of the total damages claimed, and the settlement agreement was, therefore, unreasonable and unenforceable because it failed to allocate liability between covered and non-covered losses. King’s Cove Marina, LLC. V. Lambert Commercial Construction, LLC, 937 NW. 2d 458 (Minnesota, 2019).
In this case, the contractor confessed judgment in the marina’s favor in the amount of $2 million. The settlement agreement was expressly limited to damages for work performed by the prime contractor. It did not include any damages attributable to subcontractor work. This means that none of the damages agreed to under the settlement agreement pertained to the concrete work performed by a subcontractor, which contributed to the Marina’s overall claim for $5.2 million.
The type of settlement agreement involved here is what is called in Minnesota, a Miller-Shugart settlement. As explained by the court, “In a Miller-Shugart settlement, the insured, having been denied any coverage for a claim, agrees claimant may enter judgment against him for a sum collectible only from the insurance policy. To be binding on the insurer if policy coverage is found to exist, the settlement amount must be reasonable.” The trial judge determined that the settlement was reasonable and enforceable against the carrier, but this was reversed on appeal for the reasons explained herein.
There was Covered Property Damage
The court explained:
“An independent investigation into the causes of the construction defects at the property concluded that construction deficiencies ‘allow[ed] significant interior moisture laden air to infiltrate into the walls or attics.’ Because the moisture could not dry completely, the trapped moisture in the insulated spaces ‘create[d] several problems, including staining, dripping, degradation of the thermal performance and the effective service life of the insulation system and corrosion of metal components.’ Additionally, the defects potentially caused “undesirable microbial problems such as staining that appeared to be organic growth and odors.’ The investigation also uncovered cracks in the concrete floors as ‘a result of shrinkage during the initial drying process” caused by ‘the omission of control joints and welded wire fabric reinforcement in the concrete.’ We discern no error in the district court’s determination that the marina suffered “property damage” as defined by the terms of the insurance policy.”
There was an insured “Occurrence”
“United Fire argues that the property damage arose as a result of Lambert’s failure to perform its work completely and properly. Lambert acknowledged that it did not finish certain aspects of the construction work, including work related to the window trim. United Fire argues that Lambert’s failure to complete its work does not constitute an “accident,” and therefore cannot be an “occurrence.” Minnesota courts define the term “accident” under a commercial general liability policy as an “unexpected, unforeseen or undesigned happening or consequence.” (citations omitted).
The district court’s opinion was informed by the Remodeling Dimensions case, which held that moisture damage resulting from “continuous or repeated exposure” to water intrusion into a building constitutes an “occurrence” under a commercial general-liability insurance policy similar to the policy at issue here. 819 N.W.2d at 611. Applying Remodeling Dimensions to undisputed facts of this case, the district court found that the “occurrences” at the marina’s main building “were the result of ‘continuous or repeated exposure to substantially the same general harmful conditions.’ ” The district court rejected United Fire’s argument that the damages were caused by Lambert’s “intentional deviation” from the construction plans, noting that there was no evidence that Lambert intended to cause harm or property damage to the marina’s main building.
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The district court determined that “[a]s it is undisputed that Lambert did not intend to cause property damage to the building, there are ‘occurrences’ as defined by the policy.” Because the district court found that there were “occurrences” resulting in “property damage,” it concluded that United Fire’s insurance policy provided coverage for the marina’s damages. We discern no error in this determination.”
The “Your Work” Exclusion
Exclusion L of the CGL policy excludes coverage for damages associated with the contractor’s work. This provision excludes coverage for:
“Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.”
This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.
Comment: Thus, any costs associated with repairing or replacing the contractor’s work are barred by exclusion L. But there is an exception to this exclusion for damages resulting from work performed by a subcontractor. The exception reads as follows: “[t]his exclusion does not apply if the damaged work, or the work out of which the damage arises was performed on your behalf by a subcontractor.”
The Problem with the Settlement Agreement
“It is uncontested that Lambert’s work included supplying and installing the exterior metal roof and metal wall paneling, as well as supplying the metal insulation, vapor barrier, steel girders, and wood flooring. Lambert also framed window openings and installed trim materials around exterior windows. The record establishes that Lambert—rather than its subcontractors—performed this work. Further, the Miller-Shugart settlement agreement states that “Lambert performed all Roofing and Siding work and operations on the project,” and the “[t]otal cost of repair damages related to the Roofing and Siding work by Lambert, as opposed to work and operations by any other defendants, is determined by taking the Roof and Siding damage amounts plus a proportionate share of the general damages.” As it is uncontested that the marina’s claimed damages arose at least in part out of Lambert’s work, any damages associated with repairing Lambert’s work are excluded from insurance coverage under the plain language of exclusion l. See Corn Plus Coop., 516 F.3d at 680. The district court erred by failing to apply exclusion l to bar coverage for this aspect of the marina’s claims.”
The appellate court found the settlement agreement specifically excluded damages from the concrete work performed by the only subcontractor on the job. That means the subcontractor exception to exclusion L doesn’t apply to the claims at issue in the settlement agreement. In addition, the district court didn’t distinguish between damages directly caused by the contractor’s work versus those damages arising from the contractor’s work that were not part of the scope of work the contractor was hired to perform.
In conclusion, the appellate court held that the district erred by failing to apply the “your work” exclusion to at least some of the marina’s claims and damages, and found that since the settlement agreement didn’t distinguish between covered and non-covered damages, it couldn’t be enforced against the insurance carrier.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 22, No. 4 (April 2020).
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