In Forrest Construction, Inc. v. The Cincinnati Insurance Co., No. 11-6262, 2013 U.S. App. LEXIS 722 (6th Cir.), the United States Court of Appeals for the Sixth Circuit held that an insurer breached its policy with an insured contractor when it declined to defend the contractor from a counterclaim for defective workmanship asserted by the contractor’s former customer. The case arose out of the contractor’s construction of a house for the customer. The contractor filed suit against the customer, following a dispute over the amount owed for the house. The customer counterclaimed, alleging there were defects in the workmanship of the house. In particular, the customer alleged there was a substantial amount of cracking in the foundation, which caused “a potentially deadly collapse of the residence.” Though the customer did not specifically allege that any particular subcontractors were responsible for the defective workmanship, the counterclaim broadly alleged that the contractor “recklessly performed, or caused to be performed” the defective work.
The contractor maintained a CGL insurance policy and tendered the counterclaim to its insurer for a defense. The insurer, however, declined to provide a defense, taking the position that, though the policy provides coverage for “property damage,” coverage is excluded for damage to “your work.” Though the policy’s "your work" exclusion did not apply “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor,” the insurer contended that the counterclaim did not specifically allege damage caused by a subcontractor and that this exception was therefore inapplicable.
The contractor subsequently sued the insurer for breach of contract, declaratory judgment, bad faith, and violation of the Tennessee Consumer Protection Act. Applying Tennessee law, the Sixth Circuit held that the insurer had a duty to defend the contractor. The court noted that, “[f]or a duty to defend to arise, the underlying complaint must make sufficient allegations concerning the nature of the damages sought to trigger the duty to defend, or, keeping in mind that ambiguity is construed in favor of the insured, to alert [the insurer] to further inquire if the allegations are not clear.” The court found that the allegations in the counterclaim put the insurer on notice that there was an “occurrence” resulting in “property damage.” Moreover, the allegations put the insurer on notice that the work was possibly done by an entity other than the contractor, as the counterclaim alleged that the work was not only performed by the contractor, but was alternatively “caused to be performed” by that contractor. The court noted that the only way work could be “caused to be performed” to the house would be through the use of a subcontractor. Accordingly, the counterclaim sufficiently alleged facts indicating that the “your work” exclusion did not apply, and the insurer owed the contractor a duty to defend.
The insurer alternatively pointed to the Tennessee Supreme Court’s decision in Travelers Indemnity Co. v. Moore & Associates, Inc., 216 SW.3d 302 (Tenn. 2007), claiming that, to constitute “property damage” under a policy, the damage at issue must go beyond the mere replacement of a defective component or correction of a faulty installation. The court found that Travelers was not an impediment to a finding of a duty to defend, interpreting that case as only clarifying existing law to provide that “‘property damage’ occurs when one component (here, the faulty foundation) of a finished projected (the house) damages another component.” Though the counterclaim’s allegations as to the extent of damage were admittedly “ambiguous,” the allegations clearly implied that the faulty foundation caused damage to other parts of the house, triggering a duty to defend.