What is the effect of a course of construction exclusion (COCE) on coverage for property damage in a phased construction project? The United States Court of Appeals for the  11^th Circuit, in a case of first impression, recently held that the COCE precludes coverage for damage to completed portions of a phased project when all phases are not yet complete.

In Liberty Surplus Insurance v. Kaufman Lynn Construction, JM Family Enterprises hired Kaufman to build its new corporate campus in South Florida. The campus was to consist of three office buildings, a training and conference center, a sports and recreation building, a dining hall, an amphitheater, a central energy plant, a parking garage, and various landscaping and water features. To insure itself and its subcontractors, Kaufman obtained a commercial general liability (CGL) policy as part of the Contractor Controlled Insurance Program (CCIP) from Liberty Surplus Insurance.

Kaufman finished construction on the energy plant and obtained a certificate of completion for the parking garage on March 12, 2020. It received certificates of occupancy for the office buildings and the dining hall on October 9, 2020. JM Family then relocated its employees from the old campus buildings and began using the new buildings.

On November 8, 2020, Tropical Storm Eta hit South Florida, causing water to leak into the completed buildings and resulting in about $3.3 million in damage. At this time, construction of the additional buildings and the demolition of the old buildings had yet to be completed.  Days after the storm, JM Family informed Kaufman that Kaufman was responsible for mitigating the damage. Kaufman filed a lawsuit in Florida state court against several of its subcontractors, including United Glass Systems, alleging that their faulty work contributed to the water damage.

Kaufman also initiated the claims process with Liberty, seeking indemnification for the water damage. Liberty asserted that coverage was barred by the policy’s COCE  which states that coverage does not apply to “[a]ny ‘property damage’ at or to any project insured under this policy during the course of construction until the project is completed.” Kaufman disputed this conclusion, but Liberty ultimately denied and closed the claim in November of 2021. Liberty then filed a declaratory judgment action in the district court against Kaufman and United Glass Systems, seeking a “declaration that the [COCE] extinguishe[d] Liberty’s duty to defend or indemnify . . . any . . . party, from the claims asserted” in Kaufman’s underlying state-court action.

The district court granted Liberty’s motion for summary judgment on its claim for declaratory relief, concluding that the water damage was not covered by the policy because the COCE excluded coverage until the entire project was completed. The 11^th Circuit agreed.

After a brief review of the differences in the risks covered by builders risk insurance and CGL policies, the 11^thCircuit looked at the phrase in the COCE that excluded coverage for property damage “until the project is completed”. The Court grappled with two questions: What was the project? What does completion mean in a phased project? Neither the term “project” not the term “completed” were defined in the CGL policy.

The Liberty policy described the “project” as follows.

Project: Demolition of (5) five existing buildings and New, Ground-Up Construction of (2) two (4) four story steel & concrete office buildings, (1) one (2) two-story dining hall, a 6k square foot, central energy plant, and a (6) six-story precast parking garage, as well as any operations within 1,000 feet of the designated project that are necessary and incidental thereto.

However, on the insurance application, Kaufman described the project as consisting of two distinct phases. Even if the11th Circuit reformed the CGL policy to define “project” the way Kaufman did on the application, the Court was still left with the question of whether the CGL policy covered phases as they were complete or all phases only when the entire project was complete.

In finding that the Liberty policy only covered property damage when the entire project was complete, the 11^thCircuit reasoned as follows.

“[U]ntil the project is completed” means that the COCE precludes coverage until the entire project is finished… Even if the first phase was finished at the time of the water damage, is undisputed that the entire project had not yet been completed. As noted, some remaining buildings for the new campus were still under construction and the old buildings had not been completely demolished.

Briefs filed with the 11^th Circuit on behalf non-parties interested in the outcome of the dispute argued that Liberty used a sleight of hand in the COCE by replacing a deleted property damages exclusion with a more onerous one denying coverage for any property damage occurring during construction operations. In addressing this concern, the 11^th Circuit noted that JM Family was required to obtain builder’s risk insurance pursuant to its contract with Kaufman. The builder’s risk policy, however, was not before the Court, and the Court declined to opine whether Liberty’s COCE created a gap in coverage.

Several recent cases from Texas and other jurisdictions, including the Kaufman case, have pointed to the need for insurance agents and brokers, in-house risk managers, and others to carefully read the entire insurance policy with endorsements before binding coverage. Whether insurers are using sleights of hand or are trying to control risk through redefining terms in exclusionary endorsements, understanding the coverages can assist all parties in better defining, insuring or shifting risk.

The attorneys in our Austin and Dallas office are available to answer any questions you may have. Please contact us at info@gstexlaw.com.

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