JULY 2012 BAD FAITH CASES: COURT RULES THAT POLICY LANGUAGE, NOT CARRIER’S INITIAL REACTION TO A CLAIM PRIOR TO INVESTIGATION, CONTROLS THE INSURED’S BAD FAITH CLAIM; SUBCONTRACTOR WORK SUBJECT TO EXCLUSION AS WELL (Philadelphia Federal)
In Neshaminy Constructors, Inc. v. Fed. Ins. Co., the court heard cross motions for summary judgment filed by an insured general contractor and its insurance carrier. The insured claims that the carrier breached its contract and denied coverage under the policy in bad faith.
The case stems from bridge work performed by the insured’s subcontractor. As a result of defective concrete forms the bridge’s beams were damaged, requiring repairs that resulted in cost overruns and delays. The main question for the court was whether the losses were covered or fell under policy exclusions in the insured’s policy.
The policy covered direct physical loss or damage to “project works cause by or resulting from a peril not otherwise excluded.” The term “project works” was defined as materials, supplies, machinery and equipment which you own . . . to be used in and become permanent part of the construction . . . or repair of an insured installation project.” The policy exclusions barred coverage for design defects and faulty or defective workmanship, materials, maintenance or construction.
The insured first argued that the policy was ambiguous because it did not specify to whom the exclusion applies. Given this question as to the scope of the exclusion, the insured argued, it is unclear if the provisions prevented coverage for work performed by a subcontractor, as in this case. The insured also claimed that its expectation when purchasing the policy was that the exclusions did not apply to subcontractors. The court disagreed, finding that the omission of a limitation on the scope of the exclusion supports a conclusion that all design defects and faulty workmanship is excluded, no matter who caused them.
The insured also claimed that the policy was illusory because the exclusions were so broad as to negate any possible coverage under the policy.
The court disagreed, ruling that the policy language covered several “fortuitous events that are not the result of deficiency in design or faulty or defective workmanship and materials.”
The court also rejected the insured’s bad faith claims. Soon after the insured submitted its claim to the carrier, the latter put the insured’s subcontractor on notice of a potential subrogation claim. The insured claimed that this was an admission by the carrier that the claim was covered under the policy and that denying coverage was based upon a bad faith interpretation of the policy. The court refused to accept this argument, finding that the policy language is always controlling, not the carrier’s initial reaction to the insured’s claim.
Therefore, the court granted the carrier’s motion for summary judgment.