In Carl E. Woodward, L.L.C. v. Acceptance Indem. Ins. Co., 2014 WL 535726, No. 12–60561 (5th Cir. Feb. 11, 2014) the 5th Circuit Court of Appeals held that, when analyzing coverage under an additional insured endorsement that excludes completed operations, the focus of the inquiry is when the additional insured’s liability arose, not when the damage occurred.
In Woodward, Pass Marianne contracted with a general contractor, Woodward, for the construction of condominiums on the Mississippi Gulf Coast. Woodward subcontracted with DCM for the concrete work. Pass Marianne sold the condominiums to Lemon Drop Properties and, a year after purchasing the condominiums, Lemon Drop brought suit against Pass Marianne and Woodward asserting claims for rescission, breach of contract and gross negligence. Pass Marianne filed a cross-claim against Woodward alleging faulty construction of the condominiums.
The claims were eventually arbitrated and one of the significant issues in the arbitration was the fault of DCM. After Pass Marianne asserted its cross-claims, Woodward demanded that DCM’s commercial general liability carrier, Acceptance Indemnity Corporation, provide a defense and indemnity. Acceptance denied the tender. As a result, Woodward and its insurer filed suit against Acceptance. The Acceptance policy provided that Woodward was an additional insured, but only with respect to liability arising out of DCM’s ongoing operations performed for Woodward. Additionally, the additional insured endorsement excluded coverage for property damage occurring after all work to be performed by or on behalf of Woodward at the site had been completed.
Woodward and its insurer moved for summary judgment. The district court held that Acceptance had a duty to defend and Acceptance appealed. On appeal, the 5th Circuit focused on the portion of the additional insured endorsement that excluded coverage for property damage occurring after all work had been completed. While noting that Mississippi’s highest court had not addressed the issue, the 5th Circuit concluded that, under the terms of the endorsement, claims for liability can be brought after ongoing operations are complete, but the underlying liability cannot be due to the completed operations. The court explained “that liability for construction defects, while created during ongoing operations, legally arises from completed operations.” Accordingly, the court reasoned that the issue was not whether DCM failed to comply with plans and specifications during ongoing operations, but whether Woodward’s liability arose out of those ongoing operations. “It did not. Woodward’s liability for breach of contract, if any, flows from defects in the completed construction project.”
Accordingly, the court held that, even if it accepted the district court’s factual finding that damage had occurred during ongoing operations, the liability for such damages arose out of completed operations for which Woodward was not an additional insured under the policy. As a result, Acceptance had no duty to defend Woodward.