Does CGL policy cover breach of contract?
In contemplation of retirement, several home owners who were related by blood or marriage acquired seven lots on which to construct six houses in a subdivision on a lake in Van Buren County, Arkansas. The home owners retained CENARK Project Management Services, Inc., an engineering firm, to design the building pads for each residence that was to be built on the lots. The home owners subsequently entered into a contract with Arkansas Infrastructure, Inc. (AII), to construct the pads. The contract contained a provision stating that AII agreed to perform the work in accordance with the plans, specifications, and drawings developed by CENARK. By separate agreement with the home owners, CENARK agreed to oversee the work of AII in constructing the building pads.
In June 2012, the home owners filed a complaint against AII for breach of contract, asserting that AII had failed to construct the pads in accordance with the engineering plans and specifications designed by CENARK. The home owners also asserted that David Barron of AII had admitted that AII had failed to follow the plans, specifications, and drawings developed by CENARK during the performance of the contract.
The home owners sought damages in the loss of the contract price paid to AII and CENARK, plus additional damages for the cost of work required in the past and that would be required in the future to repair, replace, or remediate the faulty work done by AII.
At all relevant times, AII was insured by a commercial general liability policy issued by Columbia Insurance Group, Inc. Columbia provided a defense to AII during discovery, but it subsequently filed a declaratory judgment action in federal court for a determination that it did not have liability under the policy. AII filed a motion for summary judgment on its counterclaim that Columbia had breached its duty to defend it in the underlying lawsuit. The home owners also filed a motion for summary judgment, contending that coverage existed under the “products–completed operations hazard” provision of the policy.
On September 23, 2015, the federal court ruled that Columbia had an obligation to defend AII in the underlying lawsuit. The court denied Columbia’s and the home owners’ motions for summary judgment and subsequently certified the aforementioned issues to the Arkansas Supreme Court.
The court noted that, under the initial grant of coverage in AII’s policy, Columbia was required to “pay those sums that the insured becomes legally obligated to pay as damages because of … ‘property damage’ to which this insurance applies.” In relevant part, the policy provided that the insurance applied to “property damage” only if the “property damage” was caused by an “occurrence.” Thus coverage was provided for “property damage” caused by an “occurrence.”
The term “property damage” was defined in the policy as “[p]hysical injury to tangible property, including all resulting loss of use of that property,” and “[l]oss of use of tangible property that is not physically injured.” As stated in the policy, “occurrence” meant “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The term “accident” was not defined in the policy.
The first certified question of law presented to the court asked whether AII’s defective workmanship that resulted in property damage to the work or work product of a third party constituted an “occurrence.” The court concluded that the question rested on the premise that the underlying claim asserted by the home owners involved defective workmanship on the part of AII. According to the court, it did not. Rather, the claim was for breach of contract and was not covered under the CGL policy.
The court said that in light of its conclusion that there was no coverage under the policy, both the first and second certified questions became moot, and the court declined to address them.
Columbia Insurance Group, Inc., vs. CENARK Project Management, Inc., Arkansas Infrastructure, Inc., and home owners-Supreme Court of Arkansas- April 28, 2016-No. CV–15–804.