(Article from Insurance Law Alert, February 2018)
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The Tenth Circuit predicted that the New York Court of Appeals would find that damage caused by a subcontractor’s negligence would constitute a covered occurrence under a liability policy containing a subcontractor exception. Black & Veatch Corp. v. Aspen Ins. (UK) Ltd., 2018 WL 843284 (10th Cir. Feb. 13, 2018).
The dispute centered on whether Aspen Insurance was obligated to reimburse Black & Veatch (“B&V”), an engineering and construction company, for the costs it incurred due to damaged reactor equipment constructed by one of its subcontractors. A Kansas federal district court ruled that there was no coverage under Aspen’s policy, reasoning that there was no occurrence because the only damages involved were to B&V’s own work product. The Tenth Circuit vacated the district court’s determination and remanded the matter for further consideration.
The Tenth Circuit held that the damage to the reactors constituted an occurrence for two reasons. First, B&V did not expect or intend the subcontractor to cause damage. Second, there was damage to third-party property because the reactors were the property of another subcontractor (American Electric Power) that had also been hired to work on them. The court rejected the argument that American Electric Power’s listing as an Additional Insured under the policy meant that the reactors were not third-party property.
In addition, the court ruled that its occurrence holding comports with New York’s rule against surplusage. The court explained that if subcontractor-related damage was not a covered occurrence, several policy provisions would be rendered meaningless. In particular, the court reasoned that the “subcontractor exception” to the “Your Work” exclusion would be rendered superfluous if the initial grant of occurrence-based coverage did not encompass property damage caused by a subcontractor’s negligence.
The court distinguished New York appellate case law in which courts found no coverage for similar claims, citing several distinctions, including the following: (1) the policies at issue did not include a subcontractor exception; (2) the policies at issue predated the 1986 standard form revisions; and (3) the underlying claims alleged faulty work by a contractor, rather than a subcontractor. Finally, the court noted that state supreme courts that have considered this issue in recent years have reached “near unanimity” that property damage caused by subcontractor negligence can be a covered occurrence under a liability policy issued to a contractor.