Insurance Coverage - Construction Defects

Coverage for Construction Defects Barred By Exclusion j (5)

Tred R. Eyerly | Insurance Law Hawaii
April 15, 2015

   The Texas Court Appeal reversed a trial court judgment which found coverage in favor of the contractor based upon exclusion j(5). Dallas Nat'l Ins. Co. v. Calitex Corp., 2015 Tex. App. LEXIS 2002 (Tex. Ct. App. March 3, 2015).

   Turnkey Residential Group, Inc., was the contractor to construct a twelve-unit townhome complex in Dallas. The owner of the project was Calitex Corporation. Construction began on November 2006. The project was to be completed by Turnkey by October 27, 2007.

   Calitex filed suit against Turnkey and some of its subcontractors in February 2008. Calitex alleged problems with Turnkey's work included: (1) the stone exterior was not properly treated and leaked, and some areas were left uncovered with stone; and (2) windows leaked. It was further alleged that the quality of materials, labor and craftsmanship did not meet the standards of the contract and resulted in damages. Turnkey submitted a notice of claim to its insurer, Dallas National Insurance Company (DNIC). Coverage was denied.

   In the underlying case, the jury ultimately found Turnkey was liable and awarded Calitex $500,000 in damages. 

   Calitex then sued DNIC, alleging it was a third party beneficiary of Turnkey's policy. DNIC answered by relying on exclusion j (5), contending that damages in the underling litigation were excluded from coverage to the extent there was property damage to that particular part of real property on which Turnkey was performing operations if the property damage arose out of those operations. 

   DNIC filed a motion for summary judgment. It argued that when it received notice of the claim, the construction project was still underway, implicating several business risk exclusions under the policy. Specifically, coverage for the repair or replacement of defective workmanship or substandard goods and services while construction operations were still ongoing were precluded. 

   Calitex cross-moved for summary judgment. The court granted summary judgment to Calitex. The trial court granted Calitex's motion to award $500,000 as indemnification for the underlying judgment and attorneys' fees of $193,000.

   On appeal, DNIC argued that even if the defectively installed stone veneer and waterproofing was "property damage," much of the damage to the building occurred during ongoing operations and was therefore excluded under exclusion j (5). The court of appeals agreed that the exclusion applied. At least some of the damage proved by Calitex in the underlying lawsuit constituted damage to a "particular part of real property" on which Turnkey was "performing operations" and arose out of those operations. Therefore, DNIC met its burden to show exclusion j (5) was applicable to some of the damage proven in the underlying lawsuit.

   The court next determined that Calitex had the burden to segregate covered damage from non-covered damage in order to recover from DNIC. There was no reasonable basis to estimate the amount of damage or the proportionate part  of the damage caused by a risk covered by the policy. Therefore, the trial court erred in granting Calitex's cross-motion for summary judgment as to the amounts awarded to Calitex against Turnkey in the underlying judgment.

The content of this article is intended to provide general information and as a guide to the subject matter only. Please contact an Advise & Consult, Inc. expert for advice on your specific circumstances.

SOURCE: www.insurancelawhawaii.com

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