United States: General Contractors Beware: Coverage Under Additional-Insured Endorsement To Subcontractor’s CGL Policy May End When Subcontractor’s Work Is Complete

Within the past four months, two courts interpreting Mississippi law have held that an additional-insured endorsement to a subcontractor's commercial general liability (CGL) insurance policy did not obligate the insurer to defend and/or indemnify a general contractor additional insured for liability arising after the subcontractor completed its work. See Carl E. Woodward, LLC v. Acceptance Indem. Ins. Co., --- F.3d ----, 2014 WL 535726 (5th Cir. February 11, 2014) (the Fifth Circuit is currently considering a petition for rehearing filed by Woodward); Noble v. Wellington Assocs., Inc., --- So.3d ----, 2013 WL 6067991 (Miss. Ct. App. Nov. 19, 2013) (the Mississippi Court of Appeals is currently considering a petition for rehearing filed by Noble). These holdings may impact any general contractor's reliance on insurance coverage under an additional-insured endorsement to a subcontractor's CGL policy, and may require a more proactive insurance approach before a project begins.

Although Carl E. Woodward involved the construction of condominiums and Noble arose out of the construction of a home, each case exemplifies how Mississippi courts are interpreting particular additional insured endorsements to CGL policies. In both cases, the general contractor sought insurance coverage from the CGL carrier, which issued a CGL policy to the particular subcontractor. And in each CGL policy, the additional-insured endorsement provided coverage only for liability arising out of the "ongoing operations" of the subcontractor.

   A. Carl E. Woodward, LLC v. Acceptance Indem. Ins. Co., --- F.3d ----, 2014 WL 535726 (5th Cir. February 11, 2014)

In Carl E. Woodward, Carl E. Woodward, LLC ("Woodward"), the general contractor on a project for the construction of condominiums, hired subcontractor DCM Corporation, LLC ("DCM") to perform the concrete work. The additional insured endorsement to the CGL policy that DCM obtained, which named Woodward as an additional insured, states that Woodward was an insured, "but only with respect to liability arising out of [the subcontractor's] ongoing operations performed for that insured" (i.e., Woodward). The policy went on to exclude coverage for "'property damage' occurring after: (1) All work . . . on the project . . . to be performed by or on behalf of the additional insured(s) at the site of the covered operations has been completed."

The underlying claims at issue in the case involved allegations by the owner of condominiums that construction of the foundation piers was defective. In determining whether the claims gave rise to coverage under the additional-insured endorsement of the CGL policy, the Fifth Circuit described "the central issue [as] whether Woodward's liability arose out of [the subcontractor's] ongoing operations or its completed operations." Viewing the plaintiff's claims as alleging a construction defect and not as alleging any other damage occurring during construction, the court held that the liability, if any, necessarily arose out of the subcontractor's completed operations. As such, the court held that the general contractor did not have coverage under the additional insured endorsement to the CGL policy.

   B. Noble v. Wellington Assocs., Inc., --- So.3d ----, 2013 WL 6067991 (Miss. Ct. App. Nov. 19, 2013)

In Noble, a case on which the Fifth Circuit relied in Carl E. Woodward, Noble Real Estate ("Noble") hired subcontractor Harris Construction Company ("Harris") to perform dirt work and site preparation on a new home project. The additional-insured endorsement to the CGL insurance policy that Harris obtained, which named Noble as an additional insured, provided coverage for "liability . . . caused in whole or in part by [Harris'] ongoing operations performed for [Noble]" but excluded, in part, coverage for "'property damage' occurring after":

Harris completed its work in March of 2006, Noble then built a house on the site, and the home was purchased in September of 2007 The purchasers eventually sued Noble, alleging that foundation issues related to faulty dirt work caused cracks in the home. Noble sought coverage under the additional-insured endorsement, but the insurer denied coverage. Noble then commenced suit against the insurer.

The Mississippi Court of Appeals affirmed the trial court's order granting the insurer's request to dismiss Noble's suit before trial, finding that "the endorsement protected Noble against lawsuits arising out of accidents occurring during the time Harris performed dirt work—it was not a performance bond guaranteeing Harris's dirt work." The court's holding rested on its interpretation of the phrase "ongoing operations" in the endorsement. Noting that neither the policy nor the endorsement defined the phrase and no Mississippi appellate court had interpreted it, the court of appeals looked to other jurisdictions for support.

In doing so, the court of appeals concluded that "in order for 'ongoing operations' to have any meaning, it cannot encompass liability arising after the subcontractor's work was completed." Accordingly, the court found that "[b]ecause the endorsement was clear that it only covered liability that arose from 'ongoing operations,' and because the homeowners' damage did not arise until well after Harris had completed its operations, the homeowners' claims against Noble did not trigger coverage under the additional-insured endorsement."

   C. A Causal Connection to the Subcontractor's Ongoing Operations Is Not Enough.

Both courts addressed and rejected arguments that because the alleged damage was causally related to the subcontractor's ongoing operations, coverage was required. The Noble court opined that accepting that argument would "read the word 'ongoing' out of the endorsement and find that Noble is covered for liability caused by Harris's operations—active and completed." The court went on to illustrate the type of accident it believed would be covered by such an endorsement: "Had Harris accidentally knocked over a neighbor's tree with a bulldozer or cut a gas line while performing dirt work, Noble would be covered for any resulting liability."

Similarly, the Fifth Circuit in Carl E. Woodward stated that "[t]hough a causal relation is required [and exists in this case], the policy specifically excludes liability for property damage occurring after all work has been completed."

   D. How Do These Decisions Affect a General Contractor's Business Practices?

So, what can a general contractor or other entity or individual take away from these decisions when seeking coverage through another's CGL policy? First, be aware that if such policy contains language restricting coverage to liability caused by the subcontractor's "ongoing operations" and excluding coverage for "completed operations," your coverage may be limited only to property damage or bodily injury that occurs while the subcontractor is actively working on the project.

Second, you should protect your future, potential liability by attempting to obtain coverage for property damage caused by the subcontractor's "completed work" rather than "ongoing operations." To ensure coverage is in place, you may want to request to see a copy of the endorsement or endorsements being considered by the subcontractor. Remember that a certificate of insurance alone does not establish coverage. And, depending on the project and potential exposure, you may want to be more involved in discussions with the insurance agent or broker.

Finally, care should be taken when selecting the language to be included in the subcontract regarding the subcontractor's obligations to provide insurance coverage. The intent of the parties to the subcontract should be clearly stated.

Originally posted 4/1/14

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