In a recent case decided in the Southern District of Texas, the court entered summary judgment, holding that the insurer’s “construction [and] workmanship” exclusion excluded coverage as a matter of law. The claim, brought by a contractor against a subcontractor’s insurer, arose out of allegedly defective work related to pipe fabrication.
The contractor agreed to fabricate, construct, and install pipes for a construction project in Corpus Christi, Texas. The contractor then hired a subcontractor to fabricate piping for the project. “As a pipe fabricator, [the subcontractor] was responsible for creating or customizing pipes for the Project so that they fit its exact requirements.” “In connection with its work,” the subcontractor obtained a property insurance policy, which covered the workshop where it welded the components to fit the project’s needs.
The contractor eventually discovered that some of the subcontractor’s work was defective, and asserted that the subcontractor missed “delivery times and production standards for the [p]roject.” The contractor eventually pursued a claim under the subcontractor’s policy.
The insurer denied the claim, asserting: (1) the pipes were not “covered property”; (2) the damages to the pipes did not occur at a “covered location”; and (3) the damages to the pipes did not constitute “physical loss.” The insurer also relied on “Exclusion ‘f,’” which barred coverage “for loss resulting from the design, specification, construction, workmanship, installation, or maintenance of property[.]” In response, the contractor filed suit, alleging breach of contract (as subrogee to the subcontractor’s rights), and extracontractual claims for violations of Sections 541 and 542 of the Texas Insurance Code.
The court analyzed the policy language, which provided coverage for “direct physical loss to covered property at a ‘covered location’ caused by a covered peril.” It concluded, “[b]ased on this, there are three elements to coverage: (1) the loss must occur at a ‘covered location’; (2) the loss must be to ‘covered property’; and (3) the loss must be caused by a ‘covered peril.’” Because the policy “cover[ed] risk of direct physical loss unless the loss is limited or caused by a peril that is excluded,” the court analyzed Exclusion (f).
The court focused on Exclusion (f)’s exclusion for damages arising out of “construction” and “workmanship”. It applied plain meanings to the terms of Exclusion (f) and found that “constructing” means “to make or form by combining or arranging parts or elements” and “workmanship” means “the quality imparted to a thing in the process of making.” It noted that the Fifth Circuit has likewise observed:
“A defect in workmanship is a defect in the way some part of the (insured property) is constructed . . . .” [T]he [defective-workmanship] clause excludes coverage for damages “resulting from defects in the product caused by faults in the construction process . . . It is the quality of the product which is excluded from coverage, and not damage to the product caused by negligence during the construction process.”
U.S. Indus., Inc. v. Aetna Cas. & Sur. Co., 690 F.2d 459, 462 (5th Cir. 1982) (first quoting Equitable Fire & Marine Ins. v. Allied Steel Constr. Co., 421 F.2d 512, 514 (10th Cir. 1970); and then quoting City of Barre v. N.H. Ins., 396 A.2d 121, 122–23 (Vt. 1978)). The “negligence” referenced there is “fortuitous damage to construction property extraneous to the construction of the product itself,” not damage resulting from part of the construction process. Id. (emphasis added).
After analyzing the contractor’s alleged damages, the court found that each of the damages “plainly relate[d] to (1) construction (i.e., the process, art, or manner in which the fabricated pipes were made or formed); or (2) workmanship (i.e., the quality imparted to the fabricated pipes in the process of making them).” Relying on its analysis of Balfour Beatty Construction, LLC v. Liberty Mutual Fire Insurance Co., 968 F.3d 504 (5th Cir. 2020), the court also found that even though Exclusion (f) contained an “ensuing-loss” exception, the damages in this case were “the direct and unmediated result” of the subcontractor’s defective construction and workmanship. As a result, the ensuing loss close could not “reinstated coverage” for any damage to the individual pipe components or any loss that followed.
Because the contractor’s breach of contract claim failed, the insurer argued, so too must the contractor’s extracontractual claims. The court agreed: “The general rule is that an insured cannot recover policy benefits for an insurer’s statutory violation is the insured does not have a right to those benefits under the policy.” USAA Tex. Lloyds Co. v. Menchaca, 545 S.W.3d 479, 490 (Tex. 2018). Continuing, the court explained, “Texas courts have ‘yet to encounter’ a successful independent-injury claim[,]” Mechaca, 545 S.W.3d at 499-500, and the contractor failed to demonstrate it should be the first. Accordingly, the court entered summary judgment in favor of the insurer on the contractor’s breach of contract and extracontractual claims.
Decided by U.S. District Judge Drew B. Tipton, the case is Corval Builders & Erectors, Inc. v. Markel American Ins. Co., 4:21-cv-01268.