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.

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.

Court Reverses Estate’s Award of $850,000 For Insurance Broker’s Creation of “Gap” in Coverage

Brown & Brown, Inc. v. Estate of Edenfield, (Fla. 1st DCA 2010)

An insurance broker appealed a judgment of $850,000 for negligently creating a “gap” in coverage under a $1M professional liability policy issued to a nursing home. A patient at the nursing home died from injuries sustained on the premises in June 2001. The home’s non-renewing, “claims-made” policy expired on September 15, 2001, the home purportedly made a claim on September 17, 2001, and the new policy secured by the home’s broker did not take effect until November 1, 2001. The insurer did not defend the nursing home in the action by the estate and the home eventually settled with the estate for $1M and assignment of any claims against the insurer and insurance broker. It was noted that the insurer did not give the 45 days advance written notice of nonrenewal as required by Fla. Stat. § 626.9201.

The insurer settled with the estate for $150,000. In pursuing its claims against the broker, the trial court awarded the estate the remaining $850,000 of the policy because the broker created a “gap” in coverage during which the claim was made. On appeal, the court held that under Fla. Stat. § 626.9201, the failure of the insurer to provide the 45 days nonrenewal notice resulted in coverage being extended for an additional 45 days. As such, the court reversed because the broker’s failure to procure subsequent coverage until November 1, 2001 did not create a gap in coverage.

Insurer Was Entitled to Electronic Discovery of Insured’s Entire Computer System

Wynmoor Community Council, Inc., et al. v. QBE Ins. Corp., (S.D. Fla. 2012) – Court granted insurer’s discovery of electronically stored information (“ESI”) by a full mirror image of insured’s computer system. The court reasoned that this extreme request was warranted by plaintiffs’ suspicious document shredding and unwillingness or inability to comply with defendant’s requests for production.

Merly Nuñez v. Geico Gen. Ins. Co., (11th Cir. 2012) – Due to a split among Florida courts, the Eleventh Circuit certified the following question to the Florida supreme court: May an insurer require an insured to attend an examination under oath as a condition precedent to recovery of personal injury protection benefits?

 

U.S. District Court Finds that the Factual Origin of an Injury—Not the Theory of Liability—Controls the Coverage Analysis

In Maryland Cas. Co. v. Fla. Atl. Orthopedics, P.L., et al., Case No. 10-CV-80203, 2011 WL 1085184 (S.D. Fla. Feb. 24, 2011), a woman underwent surgery at an ambulatory surgical center.  Shortly after surgery, the woman became unresponsive.  Paramedics arrived and transported the woman to the hospital.  In transporting the woman from the ambulatory center, which was on the second floor, the EMT’s were required to take her down the stairs because the elevator was too small for a stretcher.  The woman died at the hospital a few days later.  The estate and survivors commenced a lawsuit against the ambulatory center for medical negligence, negligent hiring, and premises liability. 

Maryland Casualty sought a declaration that it had no duty to defend or indemnify the ambulatory center based on exclusions for claims “arising out of” services furnished by health care providers and for professional services.  The defendants argued that the premises liability count was not excluded because it was unrelated to the underlying allegations of negligent medical care and treatment.  Specifically, they argued that the inadequate physical dimensions of the elevator did not implicate the  requirements in the exclusions that the injury arise out of medical, surgical, or health treatment.

In granting summary judgment in favor of Maryland Casualty, the court said that the medical negligence and negligent hiring claims were excluded because “[h]iring medical staff and implementing appropriate emergency procedures is an intricate part of the provision of medical services, which is excluded from coverage under the policy.”  In regards to the premises liability count, the court noted that the count incorporated all of the other counts for medical negligence and also alleged that the woman incurred complications from “an elective surgical procedure …  ultimately causing her death.”  Moreover, the court held that “the transportation of patients in the case of an emergency is undoubtedly an integral part of the provision of medical services, particularly when those medical services include surgery.”  It went on to hold that the defendants cannot separate the surgery and the act of transporting someone to the hospital because of complications that occurred during the surgery.  In conclusion, the court found that the alleged factual origin of the injury was medical malpractice during surgery.  Accordingly, although an insurer “would have a duty to defend an ordinary premises liability claim,” it has no such duty “when the alleged factual origin of the bodily injury was something otherwise excluded under the policy.”

It is noteworthy that the court did not merely focus on the factual allegations in the premises liability count.  On the surface, allegations that an injured person was harmed because an elevator was too small to effectively transport the person to a hospital for treatment are allegations that would be covered under most standard CGL policies.  The court here, however, ruled that the injuries arose out of medical or surgical treatment and noted that the theory of liability in the complaint cannot transform uncovered damages into covered claims. 

Practice Note

Even though a claimant can assert theories of liability that would seemingly trigger coverage under a CGL policy, it is not the label assigned to the claim that matters, but the factual allegations regarding the origin of the injury.  Insurers and counsel should check exclusions diligently for words and phrases such as “arising out of” or “because of,” which may indicate that the origin of an injury is the focal point. 

By: Todd Davis