The South Dakota Supreme Court found that the general contractor was entitled to a defense against the homeowners' claims of defective workmanship. Lowery Constr. & Concrete, LLC v. Owners Ins. Co., 2017 S.D. LEXIS 107 (S.D. Aug. 30, 2017). 

    After the homeowners moved into the home built by the insured, they sued for breach of contract, breach of implied warranty, and negligent construction. They alleged there were cracks forming in the walls, ceilings, and windows; several doors and windows would not open, and their frames were cracked; and the basement floor heaved near the walkout entrance. The homeowners alleged that a drain should have been installed in one corner of the foundation. Without the drain, water reached the expanding soil beneath the house, which caused the heaving and resulting damage.

    Owners initially defended the general contractor, but withdrew its defense after determining several exclusions in the CGL policy applied. The general contractor filed an action for declaratory judgment seeking a declaration that Owners had a duty to defend. The trial court granted summary judgment to Owners, finding that, as a matter of law, Owners had no duty to defend Lowery.

    The two exclusions relied upon by Owners for 2 (j) (6) and 2 (j) (7). Those provisions excluded coverage for:

"property damage" to:

 . . .

(6) That particular part of real property on which an insured or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the "property damage" arises out of those operations; or

(7) That particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.

The general contractor argued that the phrase "that particular part" limited the application of the exclusions to work that was itself performed in a defective manner. The exclusions did not apply to otherwise nondefective work that was nevertheless damaged by another defective component of a larger construction project. Owners argued the general contractor was contractually obligated to deliver a completed house and failure to do so was a breach of contract, not a coverage issue under the CGL policy.

    The court agreed with the general contractor that exclusion 2 (j) (6) applied only to the immediate area involved in the operations actively being performed at the time of property damage. The exclusion did not apply to property damage to other, non-defective parts of the insured's work.

    The language of exclusion 2 (j) (7) meant that the exclusion applied to property damage only to parts of the property that were themselves the subjects of the defective work.

    The homeowners did not allege that the concrete, walls, ceilings, or windows were defective themselves (exclusion 2 (j) (7)) or that the general contractor was presently working on those areas when the damage occurred (exclusion 2 (j) (6)). Therefore, Owners had not met its burden of establishing that the damage to the home clearly fell outside policy coverage. Thus, Owners had a duty to defend.