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January 18, 2012

Court Examines Faulty Workmanship Exclusion Under Builders' Risk Policy

On October 3, 2011, the United States District Court for the Southern District of New York issued a decision construing the faulty workmanship exclusion under a Builders' Risk policy. 1765 First Associates, LLC vs. Continental Casualty Company, 2011 U.S. Dist. Lexis 117100 (S.D.N.Y.), mot. to reconsider denied, 2011 U.S. Dist. Lexis 133042.

First Associates, LLC ("First Associates") sought a declaratory judgment from the District Court determining that it was entitled to reimbursement for losses sustained under a Builders' Risk insurance policy issued by Defendant, Continental Casualty Company ("Continental").

On May 30, 2008, a tower crane collapsed at a construction site in Manhattan. Continental ultimately reimbursed First Associates for certain costs and clean up of the construction site, but refused to cover First Associates for costs caused by construction delays resulting from the crane collapse.

Continental relied upon the "Faulty Workmanship Exclusion" contained in the policy which provided that:

[T]his Policy does not insure against physical loss or damage caused by or resulting from the following; however, if physical loss or damage from a peril not excluded herein ensues, then this policy shall cover only for such ensuing loss or damage:

a. Errors or defects in design or specification, errors in processing or manufacture, faulty workmanship or faulty materials; coverage for damage from an ensuing peril not otherwise excluded shall apply to covered property other than work or construction of the Insured***

First Associates argued that the policy excluded losses arising from errors or defects in the subject of the construction, and not losses such as delays or clean up costs arising from equipment failure on the construction site. Continental argued that the faulty workmanship of First Associates' subcontractors is excluded by the faulty workmanship exclusion.

The Court analyzed holdings from New York state courts which held that "faulty workmanship" refers to work done by the insured, or its agents, to the insured property itself, not work done by a manufacturer of tools or equipment used on the premises, citing 242-44 East 77th Street, LLC vs. Greater N.Y. Mut. Ins. Co., 815 N.Y.S.2d 507, 512 (1st Dep't. 2006) ("The only reasonable explanation of the negligent work exclusion is that it applies to negligent work by or on behalf of the insured in planning, designing or constructing the insured building, which results in damage to the building.")

The District Court held that the faulty workmanship exclusion "does not apply to losses related to accidents or equipment malfunctions during construction," and noted that similar provisions have been interpreted to exclude only losses arising from defects in the property after construction is completed. The Court held that since the exclusion applies to losses attributable to the quality of the constructed property arising from defects in materials used by the insured or its agents, the provision does not exclude losses arising during construction from a crane collapse.

This is an example of the narrow interpretation of the Faulty Workmanship Exclusion in a claim for damage caused by the negligent acts of others on a construction site.

If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members of the Practice Area.


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