In a unanimous decision, the Mississippi Supreme Court ruled February 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 state by state over whether insurers are actually providing coverage defined and paid for in those policies.
“It has implications for the rest of the country 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 the insurance carriers should be held to the terms of the policies that they choose to write, recognizing that the carriers are free to write their policies differently if they wish to exclude certain coverages.”
In the case, Architex Association, Inc. v Scottsdale Insurance Co., the contractor filed a claim under its policy when the owner of Country Inn & Suites in Pearl, Miss. sought damages for subcontractor work that was later deemed defective.
Despite the fact that Architex had (from 1999-2001) paid $11,643 in premiums specifically for additional subcontractor coverage, the carrier denied coverage and “put my client out of business,” says Dorsey Carson, an attorney who represented Architex.
In 2003, the U.S. Court of Appeals Fifth Circuit court decided in favor of Scottsdale, concluding that since hiring a subcontractor is a deliberate and intentional decision by a general contractor, any subsequent act by the subcontractor must be intentional and not covered under the definition of “occurrence.”
The Mississippi Supreme Court overturned that decision, stating, “appropriate analysis should not be driven by policy justifications, but rather should be confined to the policy language. The policy either affords coverage or not, based upon application of the policy language to the facts presented.”
The ruling also states “CGL 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.”
Insurers market and sell 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. If it doesn’t cover the act of construction, it covers nothing.”
The decision follows previous, similar rulings in Texas, Florida and Tennessee.
“It’s a problem nationwide, with courts equally split,” says Patrick Wielinski, an attorney who represents developers and contractors. Several other cases are pending, including ones in Arkansas and Indiana, says Wielinski, who has filed friend-of-the-court briefs on behalf of AGC in several states, including Mississippi.
“Contractors are learning how to better state their cases, and the courts are reading the entire policies, instead of following some general principals,” Wielinski says. “Insurers came in and tried to cut policy off at the knees, stopping at the definition of occurrence rather than providing coverage by virtue of the subcontractor exception.”
Recent rulings like the one in Mississippi provide a “growing body of legal precedent that at some point will be so compelling that we will expect the carriers to be more forthcoming in providing the coverage written into their policies,” Kennedy says.