Florida Construction Defect Claims: The “Damage to Your Work” Exclusion Explained

Exclusion L in CGL Policies is commonly referred to as the “Your Work” exclusion.  In the construction defect world, the exclusion has caused much confusion and has been the subject of several recent opinions.

For construction defect cases, the “Your Work” exclusion essentially excludes coverage for those claims where the plaintiff seeks damages for defective construction to parts of the project that are considered the “work” of the insured.  In short, if a contractor’s shoddy work damages only its own “work,” the CGL policy does not provide coverage.  The exclusion generally provides:

L.    Damage To Your Work

“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.

(The italicized language is what is called the “subcontractor exception,” which is sometimes not included in the insurance policy.  Whether the subcontractor exception is or is not included in the policy is extremely important as we will review momentarily.)

There are a number of variables when determining how the “Your Work” exclusion applies.  The first question is, what is considered “Your Work” as it pertains to the specific insured? This often can be answered by the insured’s role; is the insured a general contractor or developer responsible for the entire project, or a subcontractor responsible for merely a small portion of the project.

“Your Work” for General Contractor’s and Developers

For starters, if the insured is a general contractor responsible for the entire project, or the developer, then the entire project will likely be consider “your work.”  See J.B.D. Const., Inc. v. Mid-Continent Cas. Co., 571 F. App’x 918, 925 (11th Cir. 2014) (“Because J.B.D. undertook the construction of the entire fitness center, we agree with the district court’s finding that J.B.D.’s ‘work,’ for the purpose of applying the ‘your work’ exclusion, included ‘construction of the health center building with related and appurtenant improvements to an existing structure.’”).

The entire project will be considered the general contractor or developer’s “work” even if they exclusively hired subcontractors to perform the actual construction itself.  See id.

Accordingly, if the insured is a general contractor or developer responsible for the entire project, and there is no subcontractor exception, the “your work” exclusion will exclude coverage for the insured GC or developer entirely. Trovillion Const. & Dev., Inc. v. Mid-Continent Cas. Co., No. 6:12-CV-914-ORL-37, 2014 WL 201678 (M.D. Fla. Jan. 17, 2014) (excluding coverage under the “Your Work” exclusion for faulty work by a subcontractor because the exclusion did not contain a “subcontractor exception” to the “Your Work” exclusion.).  If the subcontractor exception is not eliminated, the exclusion will not apply to work performed by any subs which, as is often the case, usually includes the entirety of the actual work on the project.

As stated, when dealing with coverage for a GC or developer, it all depends on the subcontractor exception.  This rule began with a statement that many considered dicta by the Florida Supreme Court.  In J.S.U.B., the Florida Supreme Court noted that if an insurer did not want to insure a contractor for its subcontractors’ defective work, all that the insurer needed to do was remove the subcontractor exception to the “Your Work” exclusion. See U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871, 882 (Fla. 2007) (“if the insurer decides that this is a risk it does not want to insure, it can clearly amend the policy to exclude coverage, as can be done simply by either eliminating the subcontractor exception or adding a breach of contract exclusion”).

Until recently, no Florida court had denied coverage based on this portion of the “Your Work” exclusion.  In 2012, the Court in Amerisure Mut. Ins. Co. v. Auchter Co., 673 F.3d 1294, 1310 (11th Cir. 2012) noted the importance of the subcontractor exception:

[F]aulty workmanship to one part of a project (the roof, for example) can lead to damage to another part of the Project (such as stucco walls which may leak from faulty roof construction). In such an example, under Auchter’s CGL policies, the damage to the stucco walls would be “property damage” within the meaning of the policy, but would ordinarily be excluded under the “your work” exclusion, unless the stucco walls had been constructed by a subcontractor, in which case the damage could be covered by the subcontractor exception to the “your work” exclusion.

Amerisure Mut. Ins. Co. v. Auchter Co., 673 F.3d 1294, 1310 (11th Cir. 2012)

In 2014, a Court finally followed the rationale in J.S.U.B. and excluded coverage for a contractor’s work performed by subcontractors under a “Your Work” exclusion that did not contain the subcontractor exception.  In Trovillion Const. & Dev., Inc. v. Mid-Continent Cas. Co., No. 6:12-CV-914-ORL-37, 2014 WL 201678, (M.D. Fla. Jan. 17, 2014), the court held:

However, an insurer is only liable for structural damage caused by a subcontractor’s defective work if the damage occurs during the policy period of a CGL policy that includes the “subcontractor exception” to the “your work” exclusion. See J.S.U.B., 979 So.2d at 891 (observing that an insurer can exclude coverage for damage arising out of a subcontractor’s defective work by eliminating the subcontractor exception to the work exclusion).

Trovillion Const. & Dev., Inc. v. Mid-Continent Cas. Co., No. 6:12-CV-914-ORL-37, 2014 WL 201678, at *7 (M.D. Fla. Jan. 17, 2014).

Compare the outcome in Trovillion to another recent case, Carithers v. Mid-Continent Cas. Co., 782 F.3d 1240, 1250 (11th Cir. 2015).  In Carithers, the policy retained the subcontractor exception.  Thus, the Eleventh Circuit Court was required to parce through facts and allegations to determine which subcontractors performed which exact work.  The ultimate question was whether one subcontractor’s work damaged another subcontractor’s work, constituting property damage.  Ultimately the Court held that a defectively constructed balcony (by one sub) caused damage to the garage (by another sub), which constituted property damage.

In Carithers, had the “Your Work” exclusion eliminated the subcontractor exception, the Court would not have focused on whether one sub damaged another sub’s work.  Without the exception, the entire project would have been considered the insured general contractors’ “work.”  The “Your Work” exclusion would then have eliminated the need for the Court’s debate on what constituted “property damage” (which is generally defined as damage by you to another part of the project that you were not working on).

In short, the rule for GC’s and Developers can be summed up as: (1) there is no coverage for a GC or Developer for construction defects under a CGL policy that has eliminated the subcontractor exception to the “Your Work” exclusion; and (2) If the subcontractor exception is present, the “Your Work” exclusion will not exclude property damage by the subcontractors of the insured general contractor or developer.

“Your Work” for Subcontractors

Just like the GC and Developers, an insured subcontractor’s “work” consists on the work it actually did or is responsible for.  The subcontractor exception analysis applies to a sub-sub as well.  Practically, the subcontractor exception is less important for an insured subcontractor since plaintiffs will likely allege a subcontractor damaged property that was neither its own work, nor the work of any of the subs it hired.

In short, for subcontractors that have hired no sub-subcontractors, the “Your Work” exclusion analysis is essentially the same as the analysis on what constitutes “property damage.”  If an insured subcontractor only damages its own work, such damages will be excluded under the “Your Work” exclusion and will also not be considered “property damage” under the policy in the first place.  Contrarily, if an insured subcontractor damages another portion of the project other than its own, the “Your Work” exclusion will not apply to exclude coverage.

Florida Insurance Coverage Attorney

Davis Law Firm is an Insurance Coverage and Business Law Firm in Jacksonville, Florida

The owners of this website have opened their own insurance coverage law firm in downtown Jacksonville, Florida. Insurance coverage attorney Todd Davis is a former U.S. Appeals Court Clerk and previously worked at a large firm in Miami, Florida representing insurance companies. He now represents claimants and policyholders in disputes against insurance companies.

Although we have “changed sides,” we will keep this site as neutral as it’s ever been by providing updates and analysis on insurance coverage cases across Florida.

Davis Law Firm is located in the Bank of America Tower in Jacksonville, Florida. Below is their contact information:

DAVIS LAW FIRM
50 N. Laura Street
Suite 2500
Jacksonville, FL 32202
904-400-1429 (Phone)
904-638-8800 (Fax)
DavisPLLC.com

Insured Woman Had No Right to $10,000 in Uninsured Motorist Benefits; Money Went to Hospital’s Claim of Lien

GEICO Gen. Ins. Co. v. Hoy (Fla. 2d DCA 2013)

A woman with automobile insurance providing $10,000 in per person uninsured/underinsured motorist coverage (“UM”) was treated at a hospital for injuries she sustained in an automobile accident with an uninsured motorist. The woman was discharged from the hospital owing it $39,000, and the hospital filed a claim of lien in that amount in the public records.

The woman signed a release for the $10,000 UM benefits in favor of her insurer and, in exchange, the insurer issued a check in the amount of $10,000. The hospital advised the insurer that it would agree to accept $5,000 of the $10,000 in UM benefits to permit the woman and her husband to have the remaining $5,000 and to satisfy its claim of lien in full. Although the woman thus collected $5,000, she sued her insurer for fraud in the inducement (among other things), claiming that the insurer had misinformed her about the amount she would receive in exchange for signing the release.

The matter went to trial and on appeal the second district ruled that the trial court should have granted the insurer’s motion for directed verdict since the woman failed to establish the damages element of her claim. The court explained that the woman sustained no loss in reliance on the alleged misrepresentation because the hospital had a lien entitling it to receive the entire $10,000 UM benefit and, therefore, the woman technically received $5,000 to which she had no right.

Chiropractic Clinic is Withheld Insurance Benefits for Failure to Comply with Florida Health Care Clinic Act (FHCCA)

State Farm Fire & Cas. Co. v. Silver Star Health & Rehab (11th Cir. 2013)

An insurer paid a chiropractic clinic $151,000 for treatments provided to its insureds, but withheld an additional $86,000 on the basis that the clinic’s failure to comply with the licensing requirements of the Florida Health Care Clinic Act (“FHCCA”) rendered the treatments unlawfully provided.  The insurer then prevailed in a suit for declaratory relief and unjust enrichment.  The clinic appealed, but the Eleventh Circuit affirmed, ruling, inter alia, that a court in a civil action may determine whether there has been a violation of a FHCCA licensing requirement.

Florida Construction Defect Insurance Coverage Conference

HarrisMartin is holding a construction litigation conference on October 25, 2013 at the Fontainebleau hotel on Miami Beach.  In addition to being held at one of the most breath-taking hotels you’ll ever visit, the majority of the conference will be focusing on insurance coverage for construction defect litigation. 

This little-understood area of insurance coverage in Florida is probably THE biggest topic in the coverage world at the moment.  Even if you don’t practice in coverage, if you deal with construction litigation at all, then you need to know the basics of coverage for construction defect claims.  

Here is the info for the conference.  See you there!

South Carolina Supreme Court Expands Definition of “Occurrence” – Auto Owners Ins. v. Rhodes

Just last week, the South Carolina Supreme Court issued a significant ruling regarding its state’s occurrence law.  In Auto-Owners Ins. Co. v. Rhodes, No. 2009-143546, 2013 WL 5348381 (S.C. Sept. 25, 2013), the Court enlarged South Carolina’s already expansive view of “occurrence” in property damage cases but, at the same time, may have placed limitations for calculating the number of occurrences.  To summarize their ruling, the Court held that the expansive view of “occurrence” applies to “progressive” property damage cases where the damage is further removed from the conduct of the insured.  The facts of the case help clarify the ruling.

In Rhodes, the insured constructed three outdoor advertising billboards.  One billboard fell across Interstate 77 causing significant property damage to a landowner’s property.  Shortly thereafter, the insured was ordered by the SCDOT to remove the two remaining billboards.  The SCDOT also  revoked the landowner’s permit to maintain signs on the property as a result of the accident.  As could be expected, the landowner sued the insured for damages resulting from the fallen billboard as well as the removal of the two other billboards and revocation of its permit.  The insured tender the complaint to Auto Owners Insurance Company for coverage under a commercial general liability (CGL) policy.  Auto Owners filed a declaratory action for a determination of whether there was coverage under the policy.

In the declaratory action, Auto Owners conceded that the fall of the first billboard was an “occurrence” under the policy but argued that the removal of the other two billboards was not since the removal was a separate, unrelated incident.  The South Carolina Supreme Court disagreed.  The Court used an expansive “but for” test and held that, “but for” the fallen billboard, the SCDOT would not have required that the other two signs be removed. Accordingly, the Court viewed the entire situation as one occurrence with “progressive” damage.  Specifically, the Court held that “we view the fallen sign and the removal of the remaining two signs under a continuum of an ‘occurrence,’ as this is analogous to the CGL cases involving ‘continuous or repeated exposure to substantially the same general harmful conditions.’”  As a result, Auto Owners was required to indemnify the insured for the entire complaint.

Interestingly, Rhodes will likely have positive effects for both insurers and insureds in South Carolina.  The positive effects for insureds is obvious, there will likely be an influx of “progressive” damage type claims where damages are far removed from the original accident.  In other words, more alleged damages by insureds will likely be covered.

Conversely, however, there may be a silver lining for insurers from this case.  Notably, the Court held that the falling of the first billboard and the subsequent removal of the other two billboards was a “single occurrence” because the signs were simultaneously constructed.  As most insurers recognize, insurance policies often have different per occurrence and aggregate policy limits that apply depending on the number of occurrences.  Usually, the more occurrences, the higher the limits are.  Thus, in situations that involve high-dollar damages with obvious coverage and potential multiple occurrences, insurers will be able to point to Rhodes to argue that subsequent damages are all part of one related incident and, thus, only one occurrence.

You can read the entire case here.

Don’t Call an Argument “Ridiculous” Unless You’re Right; A Pedestrian that Was Struck by a Vehicle Deemed an “Occupant”

Although not a Florida case, I found this case from the Sixth Circuit very interesting for two reasons.  First, the claimant made a very creative argument in order to be entitled to first-party coverage.  Second, the case highlights the fact that you never want to call someone else’s argument “ridiculous” because you might draw the ire of the court.

In Bennett v. State Farm (6th Circuit 2013), a pedestrian was struck by a vehicle covered by State Farm auto insurance.  The parties stipulated that after the pedestrian was struck, she landed on the hood of the car where she sustained further injuries.  In making a very creative argument, the issue came down to whether the pedestrian was an “occupant” of the vehicle—as that term is defined by State Farm’s policy—at the time she was on the vehicle’s hood.  The policy defined “occupying” as “in, on, entering or alighting from.”

Counsel for State Farm called the claimant’s unique argument “ridiculous.”  The U.S. Court of Appeals for the Sixth Circuit did not agree and, further, did not appreciate counsel’s uncivil tone.  Specifically, the court held that the definition of “occupying” clearly covered the pedestrian that was “on” the car’s hood when she was injured.   It stated:

Here, as a matter of ordinary English usage, one might be skeptical that Bennett was an “occupant” of the Fusion during the time she was on its hood. Occupants are normally inside vehicles, not on them. But the parties to a contract can define its terms as they wish; and State Farm has done so here. Its policy for the Fusion defines “occupying” as “in, on, entering or alighting from.” And the parties have stipulated that Bennett was on the Fusion—specifically, on its hood—and that she “suffered further bodily injuries” while she was there.

Further, the court chastised State Farm’s attorney for calling the argument ridiculous because, simply, she was wrong.

There are good reasons not to call an opponent’s argument “ridiculous,” which is what State Farm calls Barbara Bennett’s principal argument here. The reasons include civility; the near-certainty that overstatement will only push the reader away (especially when, as here, the hyperbole begins on page one of the brief); and that, even where the record supports an extreme modifier, “the better practice is usually to lay out the facts and let the court reach its own conclusions.” But here the biggest reason is more simple: the argument that State Farm derides as ridiculous is instead correct.

Boom.  The opinion can be viewed in its entirety here.

Insurance Company and Insurance Agent Were Deemed Same Entity Regarding Notice Requirements

In Siguenza v. Citizens Prop. Ins. Corp. (Fla. 3d DCA 2013), the insurer, Citizens, denied a claim based on late notice and insured sued for breach of contract, testifying that she gave prompt notice directly to insurance company.

Citizens contradicted testimony through affidavit, prompting insured to file affidavit clarifying that she gave prompt notice to insurance agent. The court granted summary judgment in insurer’s favor, finding the insured’s subsequent affidavit in contradiction with her testimony. Appellate court reversed, ruling a material question of fact existed regarding timeliness of loss since insured considered the insurance company and the insurance agent to be the same entity and since the policy provided that prompt notice could be given to either one.

The “your product” Exclusion Applies if the Product is not Fundamentally Changed

Recently, in Liberty Mut. Fire Ins. Co. v. MI Windows & Doors, Inc. (Fla. 2d DCA 2013), the Court relied on a “your product” exclusion of a CGL policy to partially reverse summary judgment that was entered in favor of insured window and door manufacturer and against insurer.  The court ruled that the exclusion applied since the fact that a third party added transoms to the insured’s sliding glass doors did not fundamentally change the nature and function of the doors, thus the doors remained the insured’s product.

Florida Supreme Court: Ambiguities in Insurance Policies Interpreted in Favor of Coverage for Policyholder

Recently, I told you about a case handed down by the Florida Supreme Court regarding ambiguities in insurance policies.  I co-authored an article on InsuranceDay.com expanding on the case, titled “Insurers Lose the Safety Net of Extrinsic Evidence for Ambiguities.”  Here’s the link to the article (which requires a subscription) and the body is reproduced below:

Insurers Lose the Safety Net of Extrinsic Evidence for Ambiguities

Recently, the Florida Supreme Court handed down a notable victory for policyholders regarding the rules for resolving disputes over policy interpretation.  In a nutshell, in Washington Nat. Ins. Corp. v. Ruderman, No. SC12-323, 2013 WL 3333059 (Fla. July 3, 2013), the Court held that when a “policy is ambiguous it must be construed against the insurer and in favor of coverage without resort to consideration of extrinsic evidence.”  To simply summarize the ruling, if the policy is deemed ambiguous, the insurer loses—period. The ruling has implications for the industry and means that underwriters and insurers have to exercise extreme diligence when drafting insurance policies in Florida.

In Ruderman, the Court considered whether the “Automatic Benefit Increase Percentage” provision in a home health care coverage policy was ambiguous as it applies to the daily benefit amount or the per occurrence maximum benefit and the lifetime maximum benefit amount.  The Court found that the way the policy was drafted, language that the “Benefits increase by 8% each year” could apply to the daily benefit, but could also be read to apply to the per occurrence maximum benefit and the lifetime maximum benefit amounts.  Needless to say, the Court found that the policy could be reasonably interpreted in two separate ways, each of which affected the outcome of the coverage inquiry.

In the 4-3 decision, the Court made—or “reiterated,” depending on how previous caselaw is interpreted—two fundamental rules regarding the interpretation of insurance policies in Florida.  First, the Court held that, when there is a potential ambiguity in an insurance policy, no extrinsic evidence will be allowed to clarify the potential ambiguity.  Second, in the instance that there is an ambiguity in an insurance policy, the policy must be “strictly construed against the insurer.”  Stated differently, ambiguities will be liberally construed in favor of finding coverage for the insured.  Although the rules arose in the narrow context of home health care coverage for the elderly, it now applies to the construction of all insurance policies under Florida law.

In a well-reasoned dissent, Justice Polston pointed out that precedent disallowing extrinsic evidence applied in situations where an ambiguity had not been declared.  If extrinsic evidence is available to clarify the ambiguity, it serves the parties’ interests that the ambiguity is resolved with all of the available tools of construction, including extrinsic evidence.  Further, he reasoned, the rule regarding construing the language of the policy against the insurer should be used as a last-resort principle, not as a general rule of policy construction as the majority held.   In sum, the dissent proposed that, if a policy is clear, extrinsic evidence should not be allowed, but, in the instance that an ambiguity is present that could be clarified, the rule of construing the policy against the insurer should be the last resort, not a default.  The majority’s holding, he argued, segregates insurance policies from other types of contracts by placing the notion of interpreting an insurance policy against the drafter before basic rules of policy construction.

The majority’s opinion is harsh.  Even when reference to outside evidence is available, the majority suggests courts should turn a blind eye to factors that may easily glean the intent of the parties, including factors as simple as referring to course and custom between the policyholder and the insurer, previous negotiations with an insured, or even some consideration for the level of an insured’s sophistication.

In addition to being a primer on policy interpretation in Florida, Ruderman holds implications for all insurers and underwriters that issue policies in Florida.  Because Florida courts may only view the actual terms of the insurance policy to determine whether there is an ambiguity, insurers must draft policies with a deft eye. It is impossible to anticipate every factual situation that may render a policy subject to more than one reasonable interpretation, but the burden is nonetheless on underwriters to get it right.

The Court did not address policies that include express warranty provisions or policies that include expansive “application” language that essentially incorporates all of the policy negotiating into the four corners of the insurance contract.  If the policy consists of underwriting material, so the argument would go, it cannot be argued that the material is extrinsic but rather it is a part of the policy no different than the insuring agreement, the definitions, or exclusions.

The Court certainly had pointed drafting tips for insurers, including:

[W]here an insurance policy is drawn in such a manner that it requires the proverbial Philadelphia lawyer to comprehend the terms embodied in it, the courts should and will construe them liberally in favor of the insured and strictly against the insurer to protect the buying public who rely upon the companies and agencies in such transactions. We recognize that unless restricted by statute or public policy, insurance companies have the same right as individuals to limit their liability and impose conditions upon their obligations.

Id. at *6. (internal quotations and citations omitted).

Although the Court’s quip that interpreting an insurance policy should not require the intellect of the “proverbial Philadelphia lawyer” was a playful reference to the complicated language of some policies, there is some truth in its jest.  Interpreting an insurance policy can often be a daunting task, which explains the recent trend in policy drafting towards plain language.  In essence, when it comes to insurance policies, the Florida Supreme Court wants insurers to keep it simple.

What insurers and policyholders can take from Ruderman is essentially one firm rule and one rule that is not quite settled.  The firm rule is that the use of extrinsic evidence is prohibited when it comes to interpreting an insurance policy.  To that, there is no debate. The unsettled rule is whether policies are to be interpreted against the drafter in general or only in instances of ambiguity.  The dissent suggests that the rule is now the former.  Yet, the majority implies both throughout its opinion.  What we do know is that underwriters are now more vulnerable and, when it comes to interpreting policy language, they will not get the benefit of the doubt.