In a unanimous decision, the Mississippi Supreme Court ruled on Feb. 11 that contractors are covered under their commercial general-liability policies for subcontractor work later found to be defective, adding momentum to a national battle being fought over whether insurers are actually providing coverage defined and paid for in those policies.

The ruling has national implications “because the policies being written and enforced throughout the U.S. are identical to the policies the Mississippi court has addressed,” says Mike Kennedy, general counsel of the Associated General Contractors. “The court made it clear that insurance carriers should be held to the terms of the policies that they choose to write, recognizing that carriers are free to write their policies differently if they wish to exclude certain coverages.”

The case pits Architex Association Inc., a now-defunct Atlanta contractor, against Scottsdale Insurance Co., Scottsdale, Ariz. Architex filed a claim under its policy when a Pearl, Miss., hotel owner sought damages for a sub’s work that was later deemed defective. From 1999 to 2001, Architex had paid $11,643 in premiums, specifically for additional subcontractor coverage, but the carrier denied coverage and “put my client out of business,” says Dorsey Carson, an attorney for the firm. Scottsdale officials couldn’t be reached for comment.

“The court made clear that insurance carriersshould be heldto the terms of policies.”
— Mike Kennedy, AGC

A U.S. appeals court in New Orleans ruled, in 2003, in a similar case that because hiring a sub is a deliberate and intentional decision by a general contractor, any subsequent act by the sub must be intentional and not covered under the definition of “occurrence.”

But in what Cheri Gatlin, another Architex attorney, says is a rare move, the Mississippi court rejected that theory. “Appropriate analysis should not be driven by policy justifications, but rather should be confined to the policy language,” the court ruled. “The policy either affords coverage or not, based upon application of policy language to facts presented.”

The state high-court ruling also said the policies “are designed to provide liability protection for the general contractor and their subcontractors for accidental, inadvertent acts which breach accepted duties and proximately cause damage to a person or property.”

Insurance firms market policies expressly offering subcontractor coverage for additional premiums, Carson says. “If the Supreme Court had not ruled our way, we would have had a useless policy,” he adds.

The decision follows previous ones in Texas, Florida and Tennessee. “It’s a problem nationwide, with courts equally split,” says Patrick Wielinski, an attorney who represents developers and contractors. He says other cases are pending, including ones in Arkansas and Indiana courts.