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CGL Insurer that Refused to Defend, Pay Claim Penalized, Held Liable
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February 14, 2011
By John Fedun
Piedmont Construction Group, LLC contracted with the Board of Regents of the University System of Georgia to renovate an historic building on the campus of Middle Georgia College. During the renovation, a plumbing subcontractor soldering pipes accidently ignited a wood wall stud, which destroyed the roof and the entire second floor of the building and caused extensive damage to the rest of the structure.
The Board of Regents sued Piedmont for the damages, and Piedmont sought coverage under its comprehensive general liability insurance policy issued by Transportation Insurance Co. Transportation denied both coverage and a defense, and Piedmont filed a third party claim against the insurer. The trial court granted summary judgment in favor of Piedmont on the issue of coverage and awarded damages, attorney fees and bad faith penalties. Transportation appealed. The Court of Appeals affirmed and imposed frivolous appeals penalties on Transportation. Transportation Insurance Co. v. Piedmont Construction Group, LLC, 301 Ga.App. 17, 686 S.E.2d 824 (2009).
On appeal, Transportation argued that the “business-risk” exclusion in its policy applied to the claims against Piedmont. The exclusions relied on by Transportation stated:
2. Exclusions
This insurance does not apply to:…
(j)(5) That particular part of real property on which you 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
(6) That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.
Transportation argued that the phrase “that particular part of real property” referred to the entire building that was being renovated because work was being performed throughout the building. Piedmont responded that its renovation was limited to less than one-fifth of the building and that the damage was not due to “defective workmanship” resulting only in damage to the contractor’s work, a contract claim, but an “unforeseeable accident” resulting in damage to other property, a claim sounding in tort.
The appeals court affirmed the trial court’s ruling that the term “that particular part” in the exclusions referred not to the building as a whole but only to the room and the plumbing on which the subcontractor was working before the fire started. The court noted that the case involved damages to portions of the building on which Piedmont had not contracted to perform any work. The appeals court quoted from the trial court’s opinion:
In short, the court asks itself, “Will the payment of insurance proceeds effectively cause an insurance company to guarantee the contractor’s work?” If the answer is yes, the business-risk exclusions apply and the claim is denied. However, if the court finds that the payment of proceeds results from a negligent act causing damage above and beyond the original contractual obligations or to other property, the business-risk exclusions do not apply and the insurance company should pay the claim.
The appeals court agreed with the trial court’s conclusion that the damage to the rest of the building resulted from an unpredictable business accident that caused work beyond the original contractual scope. The court stated: “Transportation’s proposed interpretation of the business-risk exclusion ‘would make coverage for such actions merely illusory, despite the fact that such coverage is expressly provided for in the policy.’ ” The appeals court characterized Transportation’s position as “novel and radical.”
The appeals court also upheld the trial court’s ruling that Transportation was liable for bad faith penalties and attorney fees for refusing to defend Piedmont and for failing to indemnify Piedmont on the sole basis of its meritless reliance on the business-risk clauses of the policy. The appeals court noted that Transportation had not even tried to resolve the coverage issue by defending under a reservation of rights while pursuing a declaratory judgment action on coverage. The appeals court wrote that the insurer had forced Piedmont to bear the cost of defending the university system’s lawsuit, of suing Transportation for coverage and of repairing the fire damage and agreed with the trial court that this burden would have bankrupted a smaller company. However, the appeals court held that the trial court’s determination of the amount of those damages was inappropriate under the applicable statute, which required the amount of such damages to be determined by a jury.
Finally, the appellate court assessed frivolous appeals penalties against Transportation. The trial court previously had warned Transportation that this was not a “close case,” and the appeals court agreed.
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