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By: Seth Kirby and Bart Gary
The Georgia Court of Appeals recently decided a case concerning whether a home builder was entitled to coverage under a commercial general liability policy for damages sustained by the homeowner due to construction errors. In keeping with recent precedent, the Court held that the insurance policy did not provide coverage for the costs incurred to repair the builder’s defective installation of flashing on the home’s exterior. The policy did, however, provide coverage for all other damage caused by the defective flashing. Thus, the damages awarded to the homeowner to repair and replace walls, flooring, electrical wiring and other parts of the home damaged by water intrusion was covered by the policy. In other words, the majority of damages awarded to the homeowner was paid for by the builder’s insurer.
The rational of the Court of Appeals in making their decision in Builders Insurance v. Tenenbaum is not novel. It is a recognition that unintentional damage to other property caused by the defective work of a builder is an accident caused by an occurrence and therefore covered by a commercial general liability policy. What is notable about the decision is the Court’s rejection of the carrier’s alternative late notice defense for failure to reserve its rights on that issue in its initial reservation of rights letter. The Court held that the insurance carrier knew or should have known that it might have a defense to coverage based upon the builder’s failure to timely notify the carrier of the claim at the time the complaint was submitted for coverage. This conclusion was apparently drawn from the fact that a demand letter to the builder that predated the suit by over a year had been attached to the complaint but had not been provided to the carrier until suit was filed. The insurer did not raise this issue with the builder in its offer to provide a defense under reservation of rights, and consequently it could not rely upon late notice to deny liability following trial. A mid-representation supplemental reservation of rights did not save the defense for the insurance company as the Court deemed it to be untimely.
Also of note is the fact the Court did not address the potential application of business risk exclusions contained in typical commercial general liability policies. It would seem that those exclusions, which bar coverage for any damages caused to “your work” or “your product” would bar coverage to a home builder for any damages caused to the home which he built. Instead, this builder essentially got a “do over” at the expense of his insurance carrier. Why the exclusions were not addressed in this case is presently unknown. It is possible that the defenses were also waived for failure to specifically raise then in the original reservation of rights or were not argued before the trial or appellate court. In any event, the case serves as an important reminder to carriers of the need to carefully and fully evaluate all aspects of coverage before a defense is provided and to specifically and clearly discuss all defenses to coverage that may exist in the initial reservation of rights. For our construction clients, understanding the limitations of coverage provided by your insurance is essential when evaluating your exposure to builder’s risk. If involved in a lawsuit, a full analysis of any reservation of rights issued by the carrier or carriers that potentially provide you with coverage for the suit should be a top priority.