Is a roofing contractor absolved of liability if the property owner allegedly fails to procure a proper builder’s risk insurance policy? The United States District Court for the Eastern District of Texas recently answered the question, no.

In Taccoa, Ltd., v. North American Roofing Services, LLC, a warehouse owner, Taccoa, Ltd. filed suit against a number of defendants following damages its warehouse sustained in an August 2020 thunderstorm. Toccoa first entered a contract with North American Roofing Services (NAR) in January 2020 for the construction of a new roof on an existing warehouse. Toccoa’s insurer, American Zurich Insurance Co., issued the company a $1.5 million builder’s risk policy for the construction. The policy excluded coverage for the existing structure.

In August 2020, in the midst of the roof construction by NAR and its subcontractor, DAREV Contracting Services (DAREV), a thunderstorm hit Beaumont, and rainwater flowed into the warehouse. Zurich denied payment for the damage, saying the policy only insured the construction of the new roof, and the roof damage did not exceed the policy’s $45,000 wind and hail deductible. The denial prompted Toccoa to sue NAR, DAREV, Zurich and roofing material manufacturer Firestone Building Products Co. for breach of contract, negligence, and acting in bad faith.

NAR filed a motion for summary judgment, arguing that the contract between it and Toccoa required Toccoa to purchase “all-risk builder’s risk insurance for the full completed value of the Work”.  The contract further provided that the builder’s risk insurance “is to cover the Work at the construction site” against the perils of “fire, flood, earthquake, theft vandalism and malicious mischief”.

The Court denied NAR’s motion, observing that Toccoa only sought to recover damage caused by the storm to the building’s interior, specifically the floors, interior walls and ceiling. The contract defined “Work” as “all labor, material, equipment, supervision…services and other items necessary for the installation of a new roof and decking where needed”.  Using that limited definition, the Court held that floors, interior walls, and ceiling were not part of the “Work” and also that the thunderstorm was not a peril requiring coverage under the contract.

On different grounds, the Court later granted Zurich’s motion for summary judgment against Toccoa.  As to Toccoa’s breach of contract claims against Zurich, the Court held that the builder’s risk insurance policy expressly excluded coverage for existing structures.  The floors, walls and ceilings that Toccoa claimed were damaged were all part of the existing structure.

The Court also dismissed Toccoa’s bad faith claim. Toccoa had argued that the insurance agent had failed to procure a policy that covered interior portions of the warehouse, and that Zurich should be vicariously liable for the agent’s mistake. Adopting the magistrate judge’s recommendation, the Court held that Toccoa could not succeed on a theory based on an injury independent of the policy claim because Toccoa sought damages that were predicated on its builder’s risk policy. Where the insured’s breach of contract claim fails because the policy did not cover the claim, the insured’s bad faith claim generally must fail too.

The Court’s decision is yet another reminder to owners and contractors to understand coverages afforded by different insurance products and to negotiate provisions in construction contracts to address liability in the event of uncovered claims.

The attorneys in our Austin and Dallas offices have significant experience representing many different participants in the construction industry, including owners, developers, design professional and general contractors, and are available to answer any questions you may have.  Please contact us at info@gstexlaw.com.

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