No contract? If not, do the "Economic Loss Rule" or CGL Exclusions bar recovery
by Stites & Harbison, PLLC
Damage caused by negligent or defective “Work” is often discovered long after a construction project is completed. You, the claimant, have no contract with the company causing the damage. The question as to whether your damage is recoverable is a question which has been raging throughout many states over the past several decades. The result has been less than uniform. Resolution of the question depends on the state in which the construction took place and whether such state applies the so-called “Economic Loss Rule” to negligent construction claims. It also depends upon insurance coverage carried and against whom the claim is made. Even if you do not have a contract with a contractor, you could have an insured claim for negligent construction (or design).
Insurance is generally intended to cover sudden, unexpected, and accidental occurrences. Intentional or negligent “Work” is held not to fall into such category, or be an “occurrence,” by many states. Most insurance policies exclude claims for an insured’s own “Work” thereby, excluding, for example, damage to water proofing caused by a water proofing subcontractor’s own acts or neglect. The general contractor’s “Work” is uniformly held to be all, or the totality, of the construction of the entire project. Accordingly, the general contractor’s “Work” includes the “Work” of all subcontractors, suppliers, material men and laborers on the project. For this reason, and others, most general contractors require their subcontractors to carry “completed operations” coverage. Most general contractors carry (or should carry) such coverage themselves.
“Completed operations” coverage does not insure, or pay for, damage to the “Work” of the insured. Importantly, and significantly, it does pay for the damage caused by the insured’s “Work.” If, for example, due to the waterproofing subcontractor’s negligence (defective “Work”), damage is caused by leaks and water damage to the interior of a project, the waterproofing subcontractor’s completed operations coverage covers damage caused to the concrete, flooded carpets, electrical work, or any other damage due to the negligent waterproofing installation.
Contractors and design professionals served with a negligent or defective construction lawsuit or claim, should notify your carrier in writing. You are contractually required to do so by your insurance policy. The carrier has a duty to defend you against claims made, and must determine if there is insurance coverage for the claim. They may/may not cover defense costs even when coverage is denied.
If you are a claimant, no contract exists, and no insurance coverage is available, recovery for defective construction (design) claims depends upon whether the courts in the state where the project is located have held that the “Economic Loss Rule” precludes claims for negligent construction (or design).
The “Economic Loss Rule” is a judicially created doctrine establishing the conditions under which a claim for negligence, or defect, can be made if the damage at issue is economic loss, such as lost rent income, increased interest carry, cost of repair and the like -- and not personal injury, death, product liability or other tort type of damage. The Economic Loss Rule has been held by courts in many states, including Kentucky, Virginia and Indiana, to preclude suits against general contractors, subcontractors and architects, for construction defects arising from negligent construction or design. See, e.g., Cincinnati Ins. Companies v. Staggs & Fisher Consulting Engineers, Inc., 2013 Ky. App. Unpub. LEXIS 227 (Ky. Ct. App. 2013); Long Trail House Condo. Assn. v. Engelberth Construction, Inc., 2012 VT 80, 2012 Vt. Lexis 76 (Vt. 2012); Indianapolis – Marion County Public Library v. Charlier Clark & Linard, P.C., 929 N.E. 2d 722 (Ind. 2010); Sensenbrenner v. Rust, Orling & Neale Architects, Inc., 236 419, 374 S.E. 2d 55 (Va. 1988). Other state courts, such as Florida, Georgia and Tennessee, limit the application of the Economic Loss Rule to product liability cases, as those cases are the origin of the “Rule.” Negligent construction claims arising in those states are permitted and are not precluded by the “Economic Loss Rule”. See, e.g., Tiara Condo. Assn. v. Marsh & McClennan Companies, 607 2013 Lexis 343 (Fla. 2013); Rowe v. Akin & Flanders, Inc., 240 766, 525 S.E. 2d 123 (Ga. App. 1999); John Martin Co. v. Morse Diesel, Inc., 819 S.W.2d 428 (Tenn. 1991).