General contractor, Architex, was hired by business partnership (hereafter called CIS) to build a Country Inn and Suites hotel in April 2000. Besides purchasing a performance bond (provided by Hanover Ins. Co.), Architex also carried a Comprehensive General Liability policy from Scottsdale Insurance.
In 2002, Architex filed a lien exceeding $250,000 against CIS. Later in 2002, CIS sued both Architex and Hanover for breach of contract, negligent construction and slander. The charge of slander arose from Architex’s filing the lien. CIS’s allegations against Architex consisted of charges that the builder did not perform the job according to plans, included building code violations, its work was defective and that the builder abandoned the project. CIS’s charge against Hanover was for its failure to act to force Architex to conform to the contract.
In 2004, Architex notified Scottsdale of a claim by CIS. The notification was triggered by the builder receiving an new allegation from CIS that claimed the hotel foundation installed by the builder’s subcontractors, did not include sufficient reinforcing materials. Specifically, CIS alleged that no rebar was installed in the hotel foundation and the building was considered a total loss. Architex reported the action to Scottsdale with a loss date of 9/30/04, the date of the CIS allegation. It reported the claim to Scottsdale on 10/5/04. Event documents indicate that Architex did not previously report a claim because it had been treated the incident as a fee dispute. Regarding CIS latest allegation, Architex denied supplying faulty work.
Later in October, 2004, Scottsdale notified the contractor that it received the claim notice, that it had NOT received any paperwork concerning CIS’s allegations and mentioned that it would reserve its rights as it investigated the claim. In Spring of 2005, the insurer received a copy of CIS’s 2002 allegations. In the Fall of 2006, Scottsdale contacted Architex, stating it was denying the claim as well as any legal defense against the claim. In the Summer of 2006, Architex filed several complaints involving contract breach against Scottsdale and the insurer filed a motion asking for declaratory relief that it neither owed a coverage or legal defense obligation to Architex since, in its opinion, the incident did not involve an occurrence (as defined in its CGL policy).
Editor’s Note: Scottsdale issued policies with CGL coverage for three policy periods, between 1999 and 2002, which would include the time of the Architex-CIS Contract and CIS’s ’02 allegations. All three policy terms were written and rated using contractor and sub-contractor classes, Also of relevance, the policies were Insurance Services Office form, with their standard language with regards to the following
• BI and PD Liability Insuring Agreement – with regard to providing liability coverage and a legal defense
• Expected or Intended Injury, damage to an insured's work and damage to impaired property exclusions
• Definitions of "Occurrence" "Your Work" and "Completed Operations"
• Exclusion exceptions involving an insured's property, work or impaired property involving recalls or impairments involving known or suspected defective work
In early 2008, Architex filed a motion arguing that the damages claimed by CIS qualified as an eligible occurrence since they were not intentional (from the standpoint of Architex).
The circuit court that evaluated the cross motions focused upon how the policy defined “Occurrence”. Based upon its review, the court ruled that the defective and unfinished work involving Architex and its sub-contractors arose from intended acts and decisions. In May, 2008, that court ruled in favor of Scottsdale, finding that the damage arising out of deliberate actions failed to qualify as a covered event. Therefore Scottsdale owed neither an obligation to cover or defend the contractor against CIS’s claims.
After Architex appealed the circuit court ruling, the Mississippi Supreme Court reviewed the matter. The higher court analysis focused on a number of cases it found relevant, including cases cited by the circuit court in rendering its decision. The court also studied the policy language and the way that the applicable policies were rated. The court found it significant that the policies made a separate premium charge that appeared to take into account the exposure presented by the use of subcontractors. It also found that the policy language was structured in a manner that appeared to grant coverage, restrict coverage (via exclusions) and then return coverage (via exclusion exceptions).
The high court ultimately found that, from the standpoint of the insured, Architex, a loss had occurred due to acts that, while were intended by the subcontractors (defective work), were accidental (as they were unintended and unexpected by the general contractor). In its opinion, coverage for this incident could be construed both from an unambiguous reading of the entire policy and from an understanding of the policy premium involving a specific charge for subcontractors. It dertemined that, it could be inferred that the policy’s exclusions and exceptions with regard to defective work meant that coverage did exist in the initial coverage grant (via the insuring agreement) and that damage that was not directly nor intentionally caused by an insured could qualify as an occurrence. In the high court’s opinion, the lower court erred by interpreting the policy language on too narrow a basis and in using too narrow a scope of review. The higher court reversed the decision in favor of Architex and remanded it back for hearing in light of its finding.
Architex Association, Inc., Appellant V. Scottsdale Insurance Company, Appellee. Supctmi, No. 2008-Ca-01353-Sct Filed
