The identification and selection of necessary insurance coverages requires thought and consideration of an unforeseen future. If a business does not have the correct insurance coverage, it could find itself facing a substantial uncovered loss.
One case which illustrates this situation is Arizona Civil Constructors, Inc., v Colony Insurance Co., 2:20-cv-00010 (August 25, 2020). In that case, the U.S. District Court for the District of Nevada dismissed a lawsuit against an insurance company seeking coverage because there was no “occurrence” under the terms of the policy to trigger coverage for “property damage” and, even if there was an occurrence, the alleged damages are exclusions from coverage.
The underlying facts involved an existing nightclub in Las Vegas. The nightclub hired a construction company to remodel its building. The relationship deteriorated and the construction company sued the nightclub seeking payments for the work done. The nightclub business countersued alleging the work was substandard and required remediation amongst other allegations. The construction company submitted the counterclaim to its carriers for indemnity and defense but they denied coverage. The construction company ultimately settled its suit against the nightclub and was required to pay more than $500,000.00
The construction company then sued its carriers seeking reimbursement alleging their failure to defend and indemnify was a breach of contract and the implied covenant of good faith and fair dealing. The carrier, Midwest Family Mutual Insurance, filed a motion to dismiss arguing the allegations in the Complaint by the nightclub business did not allege an “occurrence” within the meaning of the policy and, even if an occurrence, the exclusions precluded coverage because the alleged damages were allegedly the result of work by the construction company. Midwest defined an “occurrence” as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The policy excluded “damage to your work” or “damage to impaired property” by “your work” including when property can be restored by repair or removal of “your work.”
In analysis of the motion to dismiss, the U.S. District Court stated that under cited Nevada law, an insurer “bears a duty to defend its insured whenever it ascertains facts [that] give rise to the potential of liability under the policy.” United Nat’l Ins. Co. v. Frontier Ins. Co., 99 P.3d 1153, 1158 (Nev. 2004). While all doubts as to coverage are “resolved in favor of the insured,” the “duty to defend is not absolute.” Id. “A potential for coverage only exists when there is arguable or possible coverage” and “[d]etermining whether an insurer owes a duty to defend is achieved by comparing the allegations of the complaint with the terms of the policy.” Id.
The Court then concluded that while it is true the Midwest policy did not clarify what an accident is, no court has ever concluded that alleged faulty workmanship, on its own and without other, independent damage has been found to be an insurable occurrence. Secondly, the allegations that the construction company caused damage to the nightclub business due to its workmanship fall squarely within the language of the policy exclusions. Finally, the mere denial of coverage is insufficient to establish a breach of a covenant of fair dealing. Based on the totality of the circumstance, the Court granted the Motion to Dismiss in favor of the insurer without prejudice so that, if the construction company can come up with a new theory, it can file another Complaint.
Thus, the construction company had no insurance coverage to pay for the alleged property damage to the nightclub under the Midwest policy because alleged faulty workmanship is not an occurrence; and the alleged property damage to the nightclub are exclusions from coverage because of the alleged faulty workmanship.
When evaluating potential insurance coverage, it is imperative to consider all aspects of potential liability by way of complaint and/or counter claims. This analysis may require the assistance of an attorney in the field in which the company is operating to ensure all potential and anticipated claims are considered.