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Black & Veatch Corp. v. Aspen Ins.

Issue Discussed: Insurance Coverage for Underlying Construction Defect Claims

Submitted by Robert W. DiUbaldo, Carlton Fields Jorden Burt

Date Promulgated: February 13, 2018

Black & Veatch Corp. v. Aspen Ins. (UK) Ltd, et al., No. 16-3359 (10th Cir. 2018)

Court: U.S. Court of Appeals for the Tenth Circuit

Issues Decided:  Is an insured general contractor entitled to indemnity coverage under a CGL insurance policy for amounts it paid to resolve a claim seeking damages caused by the deficient workmanship of subcontractors retained by the insured to work on a project?

Black & Veatch Corporation (“B&V”), a global engineering, consulting and construction company, entered into certain engineering, procurement and construction (“EPC”) contracts with American Electric Power Service Corporation (“AEP”) to engineer, procure and construct several jet bubbling reactors (“JBRs”).  For certain of the JBRs, B&V subcontracted the engineering and construction of the internal components to Midwest Towers, Inc. (“MTI”), although B&V retained supervisory responsibility for the project.  Deficiencies in the components procured by MTI and constructed by MTI’s subcontractors caused internal components of the JBRs to deform, crack and sometimes collapse.  After work on several of the JBRs was complete, and while construction of another was ongoing, AEP alerted B&V to the damage arising from MTI’s negligent work product.  AEP and B&V ultimately settled the issues related to the property damage, with B&V paying more than $225 million in costs associated with repairing and replacing the damaged internal components of various JBRs.

Aspen Insurance (UK) Ltd. and Lloyd’s Syndicate 2003 (collectively, “Aspen”) issued a manuscript first-layer excess CGL insurance policy to B&V.  The Aspen policy provided coverage for sums B&V has a legal obligation to pay as damages for “bodily injury” or “property damage” caused by an “Occurrence”.  The policy defined “Property Damage” as “physical injury to tangible property of a ‘Third-Party’ including all resulting loss of use of that property of a ‘Third-Party’” and  “Occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions, that results in ‘Bodily Injury’ or ‘Property Damage’ that is not expected or not intended by the ‘Insured’”.  The Aspen policy also contained various “business risk” exclusions common to standard domestic CGL insurance policies.  For example, the “Your Work” exclusion in the Aspen policy barred coverage for “property damage” to “Your Work” arising out of it or any part of it and included in the PCOH.  “Your Work” was defined as “work operations performed by you [B&V] or on your behalf”, the latter of which facially encompasses work performed by subcontractors retained by B&V.  However, the “Your Work” exclusion contained the “subcontractor exception”, such that the exclusion did not apply (as in this case) if the damaged work or the work out of which the damage arises was performed on B&V’s behalf by a subcontractor.

Although the relevant primary insurer indemnified B&V for the AEP settlement, Aspen denied coverage.  Litigation followed in the U.S. District Court for the District of Kansas.  On cross-motions for summary judgment, the District Court ruled in Aspen’s favor, holding that the damages arising from MTI’s faulty workmanship did not constitute “property damage” caused by an “occurrence” under New York law, which governed the construction of the Aspen policy.  The District Court’s finding was premised on the fact that the damages for which B&V sought indemnification related only to its own work product –the JBRs and construction services B&V agreed to provide under the EPC contracts – even though the defective work which damaged the internal components was done by its subcontractor MTI.

Applying a de novo review, the Tenth Circuit reversed in a 2-1 decision marked by a pointed dissent.  In so ruling, the majority of the court disregarded and/or distinguished more than a dozen New York state and federal court decisions which applied New York law in the same manner as the District Court, on the grounds that those decisions involved different factual circumstances and/or policy language, or simply did not consider certain arguments the Tenth Circuit found persuasive.  See, e.g., George A. Fuller Co. v. United States Fid. & Guar. Co., 200 A.D.2d 255, 259 (1st Dep’t 1994) (a CGL policy does not insure for damage to the work product itself, it insures “faulty workmanship in the work product which creates a legal liability by causing bodily injury or property damage to something other than the work product.”) (emphasis added); Illinois National Ins. Co., et al. v. Tutor Perini Corp., et al., 2012 WL 5860478, at **5-6 (S.D.N.Y. Nov. 15, 2012) (collecting cases) ((“it is well-settled under New York law that even damage to a property resulting from work performed by contractors does not transform a non ‘occurrence’ into an ‘occurrence’” under a CGL policy “because a general contractor is ‘responsible for the entire project’ and all work done by subcontractors is done on the general contractor’s behalf”); National Union Fire Ins. Co. of Pittsburgh, PA v. Turner Construction Co., 119 A.D.3d 103, 107 (1st Dep’t 2014) (applying New Jersey law, but citing New York law for this proposition in the insured general contractor/subcontractor context).  Predicting how the New York Court of Appeals would resolve the issue – given the absence of a specific decision from this court – the Tenth Circuit held that damages to the internal components of the JBRs, which were caused by subcontractor MTI’s faulty workmanship, constitute “property damage” caused by an “occurrence” under the Aspen policy, because such damages were accidental from B&V’s standpoint and harmed a third party’s property (AEP).  In reaching its holding, the Tenth Circuit considered both the “rule against surplusage” applied by New York courts in construing insurance contracts, as well as historical changes to the CGL ISO insurance forms.  The Tenth Circuit found that adopting the District Court’s interpretation of the Aspen policy’s insuring clause and “business risk” exclusions would violate the rule against surplusage and be inconsistent with the revisions to the ISO forms.

Aspen’s petitioned for a Rehearing En Banc before the Tenth Circuit, which was denied on procedural grounds, although the dissenting judge voted in favor of a rehearing.  In subsequent filings with the Tenth Circuit, Aspen has indicated it intends to file a Petition for a Writ of Certiorari to the U.S. Supreme Court that seeks to unwind the majority’s ruling on both Erie and federalism grounds or, alternatively, requests that the Tenth Circuit certify the case to the New York Court of Appeals for determination.  Among other things, Aspen will likely argue that the Tenth Circuit’s decision flouts approximately fifteen New York state and federal court decisions (as well as decisions from other courts applying New York law) which have consistently ruled – either explicitly or arguably implicitly — that damages for which an insured contractor may be liable due to defective or faulty workmanship on a project by its subcontractor do not constitute “property damage” caused by an “occurrence” under a CGL policy’s insuring clause, because defective/faulty workmanship in this context lacks the requisite fortuity mandated by N.Y. Ins. Law § 1101(a) (defining a “fortuitous event” as “[a]ny occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party”).  New York courts have held that “fortuity” under Ins. Law § 1101(a) is a necessary element of liability insurance policies based on an “accident” or “occurrence” and that an insured bears the burden of establishing the same in order to demonstrate coverage in the first instance.