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Date:
05/24/2022
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Virginia Federal Court Reaffirms Construction Defect Claims Not Covered by CGL Policies

Third-party claims seeking damages for faulty workmanship that results in property damage are covered under general liability policies in most jurisdictions. Virginia is not one of them. A federal district court recently reaffirmed that Virginia remains in the small minority of states that view construction defect claims as a business risk to be borne by the builder, even when the claims arise out of negligent conduct that results in property damage. Pennsylvania National Mutual Casualty Insurance Company v. River City Roofing, LLC, No. 3:21CV365-HEH, 2022 WL 1185888 (E.D. Va. Apr. 21, 2022) (“River City”).

In River City, Branch Builds, Inc. (“Branch”) was the general contractor on a residential apartment project (the “Project”). River City Roofing (“River”) contracted with Branch to install roofing and siding at the Project. Pursuant to its contract, River warranted its materials and work, agreed to indemnify Branch, and agreed to make Branch an additional insured under its commercial general liability (CGL) policy. After completion of the apartments, Branch discovered defects in roofing and siding that caused damage to the apartments. Branch compensated the owner for all damage to the apartments but was never indemnified by River.

When Branch sued River for breach of contract and breach of warranty, River tendered the lawsuit to its CGL insurer, who in turn filed a declaratory relief action regarding its duties to defend and indemnify River against Branch’s lawsuit. The River City court held that, pursuant to Virginia law, River’s faulty workmanship was excluded by the policy. First, River City held that the policy’s business risk exclusions (”your work” and “impaired property”) precluded coverage for damage to River’s work, or for damage to other components arising out of River’s work. Second, the policy’s “contractual liability” exclusion precluded coverage because all of Branch’s claims arose from River’s contractual obligations to Branch. This means that, even though Branch alleged that River’s work was done negligently, Virginia law holds that the negligent performance of contractual duties is not actionable in tort and is thus not an “occurrence” under a standard general liability policy.

Takeaways

River City confirms Virginia’s place on the short list of states that do not treat construction defect claims as covered under CGL policies. Normally, favorable indemnity agreements with subcontractors can protect against having to rely on additional insured coverage, but that requires a solvent and responsible subcontractor. Builders operating in Virginia should, when possible, negotiate during the procurement process for amended language that broadens coverage, or for favorable choice-of-law provisions. Alternatively, builders may look to manuscripted Owner-Controlled Insurance Programs (OCIPs) specifically designed to provide coverage for construction defect claims.