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Determining Duty to Defend Under Insurance Policy



By Laura Murray

A construction company was hired to build a house, and a dispute arose over the amount the new homeowners owed the company. The company filed a complaint in state court against the homeowners, and, in response, the homeowners filed a counterclaim, alleging defects in the workmanship of the construction. Specifically, the homeowners alleged there was a significant amount of cracking in the foundation of the house, which created an unsafe condition, possibly resulting in the collapse of the residence.  The construction company requested its insurer under its commercial general liability policy defend it in the action filed by the homeowners. The insurer refused to defend the insured due to a purported exclusionary clause in its policy.  

Specifically, the insurer relied on the exclusion which precludes coverage if the alleged damage arises as a result of the work solely performed by the insured and not as a result of work performed by a subcontractor. In making its assessment, the insurer concluded that the allegations only referenced defects with the insured’s work and not any other entities, such as subcontractors, so the insurer had no duty to defend against the homeowners’ claim. The construction company defended itself in state court and was held liable for the construction defects.

After losing in state court, the construction company filed a suit against the insurer in the Federal District Court for the Middle District of Tennessee, which found in favor of the construction company. The insurer appealed the decision.

Allegations alone trigger duty to defend
The Sixth Circuit Court of Appeals noted whether the duty to defend is triggered is determined solely by analyzing the allegations in the underlying complaint. The Court noted that even if one of the allegations is covered by the policy, the duty to defend is triggered. In addition, the Court noted that ambiguous allegations in the underlying complaint will be resolved in favor of the insured.

Turning to the facts, the Court found an allegation in the homeowners’ complaint against the construction company stated the company “‘recklessly performed, or caused to be performed, work of such poor workmanship that it created an unsafe condition, causing a potentially deadly collapse of the residence.’” The Court found that the specific allegation implies that a subcontractor may have performed the poor quality of work alleged, as the usual way a contractor would “cause” work to be done is by hiring a subcontractor. This specific allegation was critical because the insurer denied coverage based upon the absence of allegations that any other entity performed the allegedly defective work, which could have resulted in potential coverage under the subcontractor exception.

The Court explained that regardless of whether a subcontractor did or did not perform the work, because it can be inferred from the allegations in the complaint that a subcontractor could have performed the poor work, the exclusion clause in the insurance contract does not apply. Therefore, the Court held the insurance company had a duty to defend the insured.  

Practice points
When determining whether there is a duty to defend its insured, the insurance company should examine the pleadings in the complaint filed against its insured.  If it is absolutely clear from the allegations that the claims against the insured are not covered under the insurance policy, then the insurance company can refuse to defend its insured.  It is important to remember that defending an insured is separate from a duty to indemnify.  Due to the fact that pleadings and policies are construed in favor of the insured, the prudent action would be to defend the insured if it is unclear whether a duty exists and request a court decide whether the insurance company has a duty to defend given the nature of the insurance policy and the allegations of the complaint.

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