In a recent opinion the U.S. District Court for the Eastern District of Louisiana found coverage of a negligence claim arising from allegedly defective construction work barred by a breach of contract exclusion found in the contractor’s CGL policy. Hanover Insurance Company v. Plaquemines Parish Government, C/A 12-1680, 2015 WL 1268314 (E.D.La. March 19, 2015) arose from a project to construct a community center in Boothville, Louisiana. The project descended into litigation when the Parish refused to make final payment to the general contractor, citing a number of issues with the quality of work performed. Eventually the matter ballooned into what the court termed an “avalanche of litigation” with over 90 pleadings and 30 parties. Specifically before the court were the claims of the Parish against the stucco subcontractor on the job and the subcontractor’s general liability insurer alleging the subcontractor negligently installed the stucco on the building and breached its contract to install the stucco.
The subcontractor never answered the suit and a default was taken in early 2015. The insurer answered the suit and filed a Motion for Partial Summary Judgment arguing, among other things, that neither of the Parish’s claims were covered under the CGL policy issued to the subcontractor by virtue of a breach of contract exclusion contained in the policy. The Parish did not dispute the exclusion applied to its breach of contract claim, but argued the provision did not apply to the negligence claim. Indeed, how could it? The exclusion’s language only barred coverage for damages for bodily injury, property damage, personal injury and advertising injury arising from “breach of contract, breach of an implied in law or implied in fact contract.” Judge Milazzo of the Eastern District disagreed.
Relying on the U.S. Fifth Circuit’s opinion in Looney Ricks Kiss Architects, Inc. v. State Farm Fire & Cas. Co., 677 F.3d 250 (5th Cir. 2012), the court found that where the damages sought by the negligence claim would not have arisen but for the breach of contract, the breach of contract exclusion would preclude coverage of the negligence claim. This is known as the “but for” test, which is applied in a number of jurisdictions. Applying the test to the facts at hand the court ruled that the duties which were alleged to have been breached were all personal to the Parish in its capacity as owner of the building and would not have arisen but for the contract at issue. Therefore the breach of contract exclusion would apply to the Parish’s negligence claim as well as its breach of contract claim.
It will be interesting to see how the breach of contract exclusion and the “but for” test will be treated by subsequent courts. Such exclusions are found in many CGL policies and most construction defect suits allege both breach of contract and negligence claims. Following the Hanover court’s rationale, there would be no coverage for claims against a contractor in any construction defect action where the contractor’s CGL policy contained a breach of contract exclusion.
Author: Tripp Dubose