SW Legal studies in Business

Defective Workmanship Exclusion Narrowly Applied
Description

Appeals court held that an insurer had to cover the loss suffered by a general contractor when a new building the contractor built had to be demolished because a subcontractor built a defective foundation. The defective workmanship exclusion in the policy only applied to the value of the workmanship in the defective foundation, not to the value of the rest of the building.

Topic Insurance
Key Words

Commercial General Liability; Defective Workmanship

C A S E   S U M M A R Y
Facts

Fortney contracted with Frisch's Restaurants to build a Golden Corral restaurant for it. Shortly before the restaurant was ready to open, soil shifting caused the foundation to move, breaking the building's underground utility lines. The foundation work had been done for Fortney by a subcontractor. Investigation showed the foundation to be defective. Frisch's had no choice but to demolish the building and start over. In the litigation that resulted, Frisch's argued that the loss was because Fortney's foundation was defective. Fortney turned its defense over to its insurer, for commercial general liability, AMICO. It refused to defend Fortney, claiming the problem was due to defective workmanship, which was not covered by the policy. Fortney then sued AMICO, but the district court agreed with AMICO and dismissed the suit. Fortney appealed.

Decision

Reversed. To defeat coverage, the insurer must establish that the policy is capable of the construction, or reading, that the insurer favors. The insurer must also show that such an interpretation is the only one that can be fairly placed on the language in the policy that is in question. Frisch's claim that the defective foundation caused the damage was covered as "property damage" arising out of "occurrence" within the meaning of the policy. That triggered AMICO's duty to defend Frisch's against claims. The policy's exclusion of defective workmanship applied only to the cost of replacing distinct components of the building that suffered from defective work, but not building parts on which the insured performed non-defective work that had to be replaced due to other defects.

Citation

Fortney & Weygandt v. American Manufacturers Mutual Insurance Co., ---F.3d--- (2010 WL 481296, 6th Cir., 2010)

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