Finding various exclusions inapplicable, the Federal District Court ruled that the insurer owed a defense to the general contractor based upon Texas law. Mt. Hawley Ins. Co. v. Slay Engineering, 2018 U.S. Dist. LEXIS 139363 (W.D. Texas Aug. 15, 2018).
Huser Construction had a CGL policy issued by Mt. Hawley Insurance Company. Huser contracted to design and construct a municipal sports complex with the City of Jourdanton. The project consisted of four baseball fields, a softball field, parking lots and swimming pool. Huser subcontracted with Cody Pools, Inc. to design and build the swimming pool. Huser also subcontracted with Q-Haul, Inc. to perform earth work, grading and storm drainage work at the site.
After substantial completion of the project, a Huser employee noticed cracks in the pool and parking lot paving. Cody Pool began repair work, but the problem was not cured. The City later notified Huser of several alleged deficiencies involving the swimming pool structure, asphalt paving, concrete flatwork and curbing, and overall drainage. When repairs were not performed to the satisfaction of the City, it sued Huser alleging breach of contract and negligence.
Huser notified Mt. Hawley. Coverage was denied based on certain exclusions. Mt. Hawley then filed suit seeking a judgment that it had no duty to defend or indemnify Huser. Mt. Hawley relied upon the Your Work Exclusion which precluded coverage for "property damage to your work arising out of it or any part of it and included in the products-completed operations hazard." The policy further stated that the exclusion did not apply "if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor." The policy included a separate endorsement that excluded coverage arising out of a breach of "express or implied contract, breach of express or implied warranty . . . regarding the formation, terms or performance of a contract."
The parties both moved for summary judgment. The court rejected Mt. Hawley's argument on the breach of contract exclusion. Merely because Huser may ultimately be liable for certain of the City's economic losses under a breach of contract theory did not mean that all of the alleged property damage was causally attributable to Huser's alleged breach of its contract with the City. The fact that all claims contained in the underlying suit have some relation to Huser's contract with the city or that Huser was sued for breach of contract were not enough to trigger the exclusion. To accept Mt. Hawley's argument, the facts alleged in the underlying suit would have to demonstrate that there were no other independent, coverage (non-excluded) "but for" caused of the alleged property damage.
The underlying suit alleged that "work performed by [Huser], its subcontractors and suppliers, was defective." Therefore, the underlying suit alleged that entities other than Huser were responsible for the allegedly defective work and the resulting damage. Accordingly, the allegations left open the possibility that the property damage may have occurred even in the absence of a breach of contract or implied duty by Huser.
Mt. Hawley argued that the subcontractor exception to the Your Work Exclusion was irrelevant because it was overridden by the endorsement containing the Breach of Contract Exclusion. But it was not natural to interpret the Breach of Contract Exclusion to encompass all work incidentally related to the project regardless of the party that performed the work or the capacity in which it did so. The court rejected the sweeping interpretation asserted by Mt. Hawley and instead found that the policy should be interpreted such that the subcontractor exception to the Your Work Exclusion still had meaning. Therefore, Mt. Hawley had a duty to defend.
Mt. Hawley's motion as to the duty to indemnify was also denied because it was premature to determine whether it had such a duty.