The Subcontractor's Leaky Membrane
Delta Commercial Builders was general contractor on a 60,000-square-foot retail build-out in Baton Rouge. Its subcontractor, Pelican Waterproofing, applied a fluid-applied membrane to the roof deck and exterior planters. Two rainy seasons later, water intruded through failed membrane seams, ruining $210,000 of finished drywall, millwork, ceiling tile, and the tenant's inventory; it also cost $85,000 to remove and redo the membrane itself. The owner sued Delta alleging breach of contract, breach of warranty, negligent supervision, and negligent construction, and demanded $295,000 plus penalties. Delta's CGL is an occurrence-form policy with a $1,000,000 each-occurrence limit and standard 'your work,' 'impaired property,' and contractual-liability exclusions. Pelican's own CGL carries $1,000,000 and names Delta as an additional insured. Delta tendered the suit.
1. Delta's insurer says the suit is 'a construction defect case, not an occurrence' and declines. Evaluate the defense obligation.
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Reasoning:
- The duty to defend is broader than the duty to indemnify. The test is whether the allegations, taken at face value and compared with the policy (the four corners), state a claim potentially within coverage. Extrinsic facts are generally not considered to defeat the duty.
- The complaint does not allege only defective workmanship. It alleges negligent construction and negligent supervision, which are accidental in nature and can constitute an occurrence, and it alleges resulting damage to property other than the defective membrane - drywall, millwork, ceiling tile, tenant inventory. That is property damage caused by an occurrence.
- Contract and warranty allegations alone would not be covered (no occurrence; contractual liability exclusion), but a mixed complaint triggers a defense of the entire suit until the only remaining claims are clearly excluded - and even then, the insurer generally must defend until it obtains a ruling or the pleadings are amended.
- Delta is also an additional insured on Pelican's policy. Tender to both carriers in writing, and note that the additional-insured grant may be limited to Delta's liability arising out of Pelican's ongoing operations - check the endorsement wording and any contractually required primary/non-contributory language.
Conclusion: The declination is not supportable. The carrier owes a defense; indemnity is a later question decided on the actual damages proved.
2. Analyze coverage for the $85,000 cost to remove and replace the failed membrane itself.
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Reasoning:
- Start with what 'property damage' means: physical injury to tangible property. Repricing defective work is not injury to other property - it is the cost of making the insured's own work correct.
- The 'your work' exclusion bars property damage to "that particular part of any property that must be restored, repaired or replaced because your work was incorrectly performed on it." 'Your work' includes work performed by subcontractors on the insured's behalf. That language squarely targets the $85,000.
- The exclusion also bars damage to "that particular part of real property on which you or any subcontractor are performing operations, if the property damage arises out of those operations." The membrane is that particular part.
- The subcontractor exception to the 'your work' exclusion restores coverage for damage to other property caused by a subcontractor's defective work - it does not convert the cost of correcting the work itself into covered damage.
- Tear-out costs follow the underlying treatment: if the membrane itself is not covered, the cost of removing and replacing it is not covered either.
Conclusion: The $85,000 is not covered. Watch for a narrow exception if the tear-out was necessary to repair otherwise-covered damage to other property - that portion of the removal cost can follow the covered damage.
3. Analyze the $210,000 of damage to drywall, millwork, ceiling tile, and the tenant's inventory.
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Reasoning:
- Is there property damage to property other than the insured's work? Yes: finished drywall, millwork, ceiling tile, and - importantly - a tenant's inventory, which is third-party property Delta never worked on.
- Did it arise from an occurrence? Yes - an accidental event (water intrusion) that was neither expected nor intended from Delta's standpoint, caused by a subcontractor's work.
- Does the 'your work' exclusion bar it? Property damage to other property is outside the "particular part" language, and the subcontractor exception to the 'your work' exclusion restores coverage where the damage arises out of work performed by a subcontractor on the insured's behalf.
- Does the 'impaired property' exclusion apply? It bars loss of use of property that is not physically injured because it incorporates your product or work and can be restored. Physically injured drywall, millwork, and inventory fall outside it.
- Contractual liability exclusion: the breach-of-contract count is not itself covered, but that does not defeat coverage for tort-based property damage.
- Allocation remains an issue if a portion of the damage is truly to the membrane's own substrate; the insurer will want a line-by-line split.
Conclusion: The $210,000 is covered, subject to the $1,000,000 occurrence limit being shared by all damages from one occurrence. Pursue Pelican's policy as additional insured as well.