Is Your CGL Carrier Obligated to Indemnify You for Your Costs to Address Third-Party Property Damage Claims?...Maybe

A common inquiry among contractors is whether costs incurred to address third-party property damage claims such as inspection costs, personnel costs, overhead costs and attorneys’ fees are recoverable under Commercial General Liability (“CGL”) policies. Unfortunately, there is no clear-cut answer—coverage for these costs is unique to each policy and each jurisdiction’s interpretation of those policies. Traditionally, unless the out-of-pocket expenses qualify for coverage under a policy provision such as a “Supplementary Payments” provision or the insurer has breached its duty to defend, these types of costs are generally not covered by the standard CGL policy. This issue was addressed in Lennar Corp. v. Great American Ins. Co., 200 S.W.3d 651, 679-680 (Tex. App. Houston, 14 Dist. 2006), which is a case stemmed from the insured’s application of Exterior Insulated Finishing Systems (“EIFS”) to residential homes. Allegedly, the EIFS trapped moisture that caused damage to some of the homes. Lennar presented three types of claims to its CGL carrier for reimbursement: (1) the costs to repair the damage; (2) the cost to remove and replace EIFS as a preventive measure; and (3) overhead costs, inspection costs, personnel costs, and attorneys’ fees to assess damage in the homes—claiming that these costs and fees constituted “damages because of” property damage within the meaning of the policy’s insuring clause and, thus, should be covered. But the Texas appeals court disagreed, citing the “legally obligated to pay” language in the insuring agreement. The court held that “legally obligated to pay” means “an obligation imposed by law, such as an obligation to pay pursuant to a judgment, settlement, contract, or statute,” and that Lennar was not legally obligated to pay these costs as “damages because of . . . property damage.”

But in Desert Mountain Properties v. Liberty Mutual Fire Ins. Co., 1 CA-CV 08-0802 (Ariz. App. 8-3-2010), the Arizona Court of Appeals ruled exactly opposite. Desert Mountain involved soils movement resulting in damage to 50 residential homes in North Scottsdale. Desert Mountain was the developer of the community and paid an average of $200,000 per home to have the soil issues corrected and the damage repaired. Citing the same “legally obligated to pay” language used by the Texas Lennar court to reject the insured’s indemnity claim, Arizona’s Court of Appeals used it to hold that Desert Mountain was legally obligated to repair the soil issues and damages and, therefore, Liberty Mutual was obligated to indemnify Desert Mountain for its out-of-pocket expenses incurred to address the third-party property damage claims.

The moral of the story—as usual—is not to assume coverage or non-coverage, but to immediately read the insuring agreement and/or consult counsel to make sure that you understand all of your indemnity and defense rights.

For more information contact Jared M. Scarbrough at jscarbrough@holmwright.com or (480) 477-8589.