“Your Work” Exclusion Bars Coverage for Tearing Down & Rebuilding Wall

The S.C. Court of Appeals recently applied the “your work” exclusion in a declaratory judgment action arising out of a construction defect suit to find the policy did not provide coverage. In Precision Walls v. Liberty Mutual Fire Insurance Co., Op. No. 5250 (S.C. Ct. App. filed July 23, 2014), the insured subcontractor contracted to provide certain work, including taped and sealed blue board insulation on exterior, and installation of door frames. The exterior insulation was to be sealed to prevent air infiltration. The insured used Seam & Seal tape to seal the joints of the blue board insulation. After the insured installed the insulation, the mason began constructing a brick veneer wall. However, prior to the completion of the wall, the general contractor (GC) noticed the tape was losing adhesion and coming loose.

The GC directed the insured to comply with its contract to provide sealed joints, and required the mason to remove the portion of the brick wall in place and build a new one once the existing tape was removed and joints sealed with new tape. The GC deducted the cost of tearing down and rebuilding the brick veneer from the insured’s contract. The insured sought coverage under its CGL policy, issued by Liberty Mutual. Liberty Mutual denied the claim, resulting in a declaratory judgment action.

The policy excluded coverage for “property damage” to “any property that must restored, repaired, or replaced because ‘your work’ was incorrectly performed on it.” “Your work” was defined as “(1) work or operations performed by you or on your behalf; and (2) material, parts or equipment furnished in connection with such work or operations.”

The Court of Appeals found the “your work” exclusion barred coverage:

The exclusion applies to property that must be restored, repaired or replaced. The exclusion specifically includes materials furnished in connection with such work. Here, the contract between SYS and Precision [the insured subcontractor] required Precision to “correct the affected work and all cost incurred as a result of [a] breach of warranty…” We find the defective tape, and all cost associated with its replacement, falls squarely within the exclusion.

In light of the finding that the “your work” barred coverage, the Court of Appeals declined to address the insured’s remaining challenges to the trial court’s findings regarding “property damage” occurrence.

An interesting aspect to this case is that of the cases to which the Court of Appeals cited, one was a decision in which a divided S.C. Supreme Court found a “your work” exclusion applied, and another was a decision of the Court of Appeals for which the S.C. Supreme Court just accepted a petition for writ of certiorari.

In Bennett & Bennett Construction, Inc. v. Auto Owners Insurance Co., 405 S.C. 1, 747 S.E.2d 426 (2013), a homeowner hired a contractor, Bennett & Bennett, to replace stucco cladding on her home with brick. The contractor hired a subcontractor to install the brick, which had a sandy finish, and instructed the subcontractor not to pressure wash or acid wash the brick. The brick subcontractor hired a brick cleaner who damaged the brick by using a pressure washer and acid solution. After the brick installer refused the general contractor’s request to remove and replace the brick, the general contractor replaced the brick at its own expense, and then sued the brick installer for breach of contract, obtaining a default judgment. The general contractor then sued the brick installer’s liability insurer to collect the damages. The circuit court found in favor of coverage.

On appeal, the S.C. Supreme Court first found Exclusion j(5), which barred coverage for “‘property damage’ to [t]hat particular part of real property on which you or any contractors or subcontractors . . . are performing operations, if the ‘property damage’ arises out of those operations. . . .” applied and excluded coverage. The court concluded the damages arose out of the operations performed by the insured or its subcontractor(s), and exclusion j(5) excluded coverage when the insured’s subcontractor damages the work product while performing operations, regardless of whether ‘your work’ is complete under the policy.

Although “unnecessary to the analysis,” the S.C. Supreme Court also found Exclusion (n), which excluded coverage for damages for any loss or expense incurred to repair or replace “your work” if such work was withdrawn from use due to a known or suspected defect, applied and excluded coverage. The court found the brick face was replaced because of a deficiency or inadequacy, thus, coverage was barred, concluding: “As we have repeatedly explained, a CGL policy does not insure the insured’s work itself but consequential risks that stem from the insured’s work.”

The opinion was authored by Justice Pleicones, and concurred with by Chief Justice Toal. Justice Beatty concurred in result only. Justices Hearn and Kittredge concurred in part, agreeing only that Exclusion (n) barred coverage. Interestingly, the Supreme Court recently granted certiorari on another opinion relied on in part in the Precision Walls opinion, Walde v. Association Insurance Co., 401 S.C. 431, 737 S.E.2d 631 (Ct. App. 2012), petition for cert. filed, (S.C. Apr. 12, 2013), cert. granted, (S.C. June 25, 2014).

In Walde, the plaintiff property owners began construction of a barn which included an apartment. The builder assured the property owners that he obtained the proper variance from the zoning board. After the builder completed 80% of the building, the zoning authority notified the builder that the barn did not comply with the variance requirement, and required the Waldes to remove the apartment from the structure. After the partial demolition of the structure, the Waldes filed an arbitration claim against the builder. The claim was settled prior to hearing; as part of the settlement, the insured assigned to the Waldes its rights under its CGL insurance policy issued by Association Insurance Company (“AIC”).

The Court of Appeals found the Waldes raised the possibility of “property damage” – loss of use of tangible property – caused by an “occurrence” – the builder’s negligent representation that the building complied with zoning laws. However, the Court of Appeals held Exclusion (j)6 , that particular part of any property that must be restored, repaired, or replaced because “your work” was incorrectly performed on it, excluded coverage because the Waldes alleged “property damage” not included in products-completed operations hazard, and therefore the exception to the exclusion did not apply. The Waldes argued their claims were not excluded because the defective work occurred before the zoning board rather than in the construction of the barn, i.e. Johnson negligently performed the permitting work and did not negligently build the barn. The Court of Appeals rejected that argument. A number of other issues were also argued by the Waldes and rejected by the Court of Appeals. Therefore, a reversal of the Walde opinion does not necessarily weaken the Precision Walls decision. However, it is a development which should be monitored.