Applying Montana law, the federal district court found there was no coverage for a subcontractor who was sued by the contractor for breach of the subcontract. Phoenix Ins. Co. v. Ed Boland Constr., Inc., 2017 U.S. Dist. LEXIS 6654 (D. Mont. Jan 18, 2017).
Northbank was the general contractor on a project to repair a bridge for the Federal Highway Administration (FHA). Ed Boland Construction, Inc. (EBC) was the subcontractor to perform drilling and pile installation. After beginning its work, EBC ran into difficulties with unforeseen conditions at the work site. The FHA informed Northbank that it had concerns over EBC's ability to complete the work. The FHA alleged that EBC had brought equipment to the work site that differed from the equipment it had represented would be used.
Northbank issued EBC a three day notice to cure, informing EBC that it had three days to gather the equipment that the FHA had requested or be declared in default under the terms of the subcontract. When EBC did not comply with the notice, Northbank terminated EBC from the project. The project was delayed while Northbank was hiring replacement contractors. Some construction equipment incurred downtime during the delay.
Northbank then sued EBC for breach of contract and negligence. EBC tendered under its CGL policy with Phoenix Insurance Company. A defense was afforded under a reservation of rights. Phoenix then filed a declaratory judgment suit against EBC. The magistrate found there was no coverage. There was no property damage, no occurrence, and policy exclusions barred coverage.
Before the district court judge, EBC argued that Northbank alleged "loss of use" damages because it sought damages for loss of use of a hydraulic crane, roadway equipment, and work trucks that sat idle while Northbank was securing a replacement contractor. But to constitute "loss of use," the property had to have actually been rendered useless as opposed to merely being unused.
There was no occurrence because there were no unforeseen conditions. The primary contract between Northbank and FHA anticipated that the contractor may encounter unforeseen site conditions. The primary contract specifically anticipated the possibility of unforeseen site conditions with a provision for payment and adjustment of price. Therefore, the discovery of unforeseen site conditions by EBC was not an unexpected happening or accident. As a result, there was no occurrence. Nor, under Montana law, did alleged defective workmanship constitute an occurrence.
Finally, the policy exclusions did not apply. Exclusion (a) precluded coverage for property damage "expected or intended from the standpoint of the insured." The subcontract contained provisions with remedies available to Northbank if EBC failed to supply adequate materials or to complete its work. Northbank's three-day notice put EBC on notice that its failure to cure would result in a default of the subcontract. EBC made the intentional business decision to default on the subcontract by not curing the alleged deficiencies. EBC made this decision with knowledge of the consequences of the result.
Exclusion (j) (6), precluding coverage for the repair or replacement of an insured's faulty workmanship, and Exclusion (m), barring coverage for a defect or deficiency in one's work, were also applicable here. Therefore, the court adopted the magistrate's Findings and Recommendations.