On May 5, 2014, the Washington Court of Appeals issued an unpublished opinion in Western National Assurance Co. v. Shelcon Construction Group, LLC, Wash. Ct. of App., Div. 1, No. 70143-6-I (May 5, 2014), which addressed an insurance company’s duty to defend in the context of a lawsuit alleging defective performance of construction work. The insurance company denied the contractor’s tender of the defense on the ground that the loss was “economic,” and did not constitute “physical” damage to the property. The Court of Appeals affirmed the trial court’s grant of summary judgment that the insurer did not have a duty to defend, finding that the policy did not cover consequential damage to the entire construction site that was allegedly caused by the contractor’s defective work.
The case concerned a development company, A-2 Venture, LLC, that contracted with Shelcon Construction Group, LLC to perform certain construction work on a subdivision development. A-2 Venture sued Shelcon based on allegations that its defective work caused soil settlement and compaction issues at the development, which significantly reduced the value of the property as a whole. The construction site included a number of peat deposits. The geotechnical engineer retained by A-2 Venture recommended that the contractor use soil to compact the peat deposits and insert settlement markers to verify soil compaction. A-2 Venture alleged that Shelcon placed the markers in accordance with the specifications, but removed the markers which made it “impossible” to measure settling. The lawsuit alleged that the defective work resulted in a reduction of the value in the property of approximately $2 million.
Shelcon was insured under a commercial general liability (CGL) policy with Western National. Shelcon tendered defense of the A-2 Venture lawsuit to Western National pursuant to the CGL. Western National denied Shelcon a defense because the complaint alleged an “economic loss” and not “property damage” as defined in the CGL. In addition, Western National stated that even if the complaint asserted “property damage,” the claim was excluded under the terms of the insurance policy. Shelcon tendered defense a second time along with additional information concerning the lawsuit. Western National reiterated its denial stating that the underlying complaint did not allege physical injury to the land or loss to tangible property, and again citing the exclusions from coverage.
Following the lawsuit, Western National filed a declaratory judgment action alleging that it did not have a duty to defend Shelcon in the A-2 Venture lawsuit. The trial court granted Western National’s motion for summary judgment and denied Shelcon’s cross-motion for summary judgment. Shelcon appealed the trial court ruling.
The Court of Appeals focused on the CGL provision excluding coverage for property damage to the “particular part of real property on which you … are performing operations, if the ‘property damage’ arises out of those operations.” Shelcon argued that the provision applied only to the settlement markers, and not to consequential property damage caused by removal of the settlement markers. The Court of Appeals rejected Shelcon’s interpretation of the language citing the holdings in Vandivort Construction Co. v. Seattle Tennis Club, 11 Wn.App. 303, 522 P.2d 198 (1974), and Schwindt v. Underwriter’s at Lloyd’s of London, 81 Wn.App. 293, 914 P.2d 199 (1996). In particular, the Court of Appeals found that in the A-2 Venture lawsuit, like in Vandivort and Schwindt, the complaint alleged defective performance by Shelcon in removing the settlement markers resulted in consequential damages to the entire site. Because the alleged consequential damages arose out of Shelcon’s operations on the site, the unambiguous language of the policy excluded coverage and Western National did not have a duty to defend Shelcon in the A-2 Venture lawsuit.
MLR has represented clients dealing with duty to defend issues in Washington and Oregon. Please contact us with any questions or concerns regarding the Western National matter addressed above, or with respect to any matter you see on the Insurance Coverage Blog.