By Scott Turner
The Supreme Court of South Dakota recently issued its decision in Swenson v. Auto-Owners Ins. Co., 831 N.W.2d 402 (S.D. 2013), holding that the Care, Custody & Control, Performing Operations Exclusion, and Incorrectly Performed Work Exclusion eliminate commercial general liability (CGL) policy coverage for property damage to an insured contractor’s own work and stored building materials during its ongoing operations.
The building materials suffered water damage from unprotected exposure to the elements during an extended halt in construction before they were built into the project.
The uncompleted home suffered two forms of property damage: one form involved property damage from use of the damaged materials; the other form involved water damage as a result of the general contractor’s failure to protect the partially built home from rain and snow.
The court held that the Care, Custody & Control Exclusion eliminated coverage for any liability for damage to the unprotected building materials, as the general contractor exercised control over them.
The court then held that the Performing Operations Exclusion applied to eliminate coverage for both forms of property damage to the home itself because the property damage occurred while the general contractor was performing its operations (i.e., before completion) and the property damage arose out of those operations.
The court held that the Incorrectly Performed Work Exclusion also independently applied to eliminate coverage for both forms of property damage to the home because the home needed to be “restored, repaired, or replaced” because of incorrectly performed work.
The opinion fails to mention whether the building materials were the property of the owner or the general contractor at the time of the weather damage to them. Most construction contracts provide that the contractor will provide the materials it uses. If that was the case here, the materials remained owned by the general contractor at the time of the damage and could have no liability for damage to its own property. Therefore, the exclusion probably should not have been applied and should not apply in most future cases like this.
The opinion also fails to consider and discuss the “that particular part” limitation found in both the Performing Operations Exclusion and the Incorrectly Performed Work Exclusion. This limitation is intended to preserve coverage for property damage to those parts of a policyholder’s work that are not defective. So, these two exclusions should only apply to eliminate coverage for those parts of the policyholder’s work that are bad. For example, the removal of the weather-damaged framing here probably required the removal of what was correctly performed electrical and plumbing work. If so, the exclusion only should have applied to the bad framing, not to the good electrical and plumbing work. So, this approach to coverage should remain an open issue in future cases before this court, even under the identical facts.
The same applies to the water-damage experience from the general contractor’s failure to adequately protect the project from the elements while it was being built. Again, good parts of its work were damaged by a bad “part” of its work (the work of protecting the project from the elements).
The ConstructionPro Network member version of this article includes a link to the opinion for this case. To sign up for a membership, click here.