Construction Law Toolbox : Mississippi Construction Lawyer & Attorney : Biggs, Ingram, Solop & Carlson, PLLC : MS & Southeast Construction Law Toolbox

Less than one week after placing readers on alert about the pending decision of Architex Association, Inc. v. Scottsdale Insurance Company, the Mississippi Supreme Court has issued its decision in that case addressing the following narrow issue with regard to a Commercial General Liability ("CGL") policy:

Whether the intentional act of hiring subcontractors by an insured general contractor precludes the possibility of coverage?

The Court found "that under Scottsdale’s CGL policy, the term ‘occurrence’ cannot be construed in such a manner as to preclude coverage for unexpected or unintended ‘property damage’ resulting from negligent acts or conduct of a subcontractor unless, otherwise excluded or the insured breaches its duties after loss." Slip Op. at page 27. Thus, "[f]aulty workmanship, defective work, et al., may be accidental, intentional, or neither." Slip Op. at page 23.

The United States Court of Appeals for the Fifth Circuit in ACS Construction Company v. CGU, 332 F.3d 885 (5^th Cir. 2003) had previously concluded that since hiring a subcontractor is a deliberate and intentional decision by a general contractor, any subsequent act by the subcontractor must be intentional and not covered under the definition of an "occurrence". The insurance industry has used ACS to deny coverage for defective work by subcontractors, even though many general contractors purchased policies and paid premiums with the understanding that their CGL policy would provide coverage.

The Mississippi Supreme Court’s decision in Architex brings clarity to the issue stating that "[w]hile the alleged ‘property damage’ may have been ‘set in motion’ by Architex’s [the general contractor] hiring of the subcontractor, the ‘chain of events’ may not have ‘followed a course consciously devised and controlled by [Architex], without the unexpected intervention of any third person or extrinsic force.’" In other words, hiring a subcontractor will not preclude coverage under a CGL policy.

Even if the insurer does not unequivocally agree that there is coverage under the CGL policy, the insurer may agree to defend the general contractor under reservation of rights. This means the insurer will pay the general contractor for the cost associated with defending the claim of defective workmanship. This does not mean the insurer gets to select the attorney to defend the claim, it means the insurer must pay for the attorney the general contractor selects to defend the claim. Therefore, it would be wise for the general contractor to select a construction lawyer to defend the claim rather than the insurer’s preferred attorney who is likely to have experience in defending slip and fall cases and car wrecks and not complex construction defect cases.

The Architex decision is good news for general contractors. However, the decision also admonishes general contractors that there are other reasons for denial of coverage such as failure to give timely notice of a potential claim. Slip Op. at page 12, fn. 11. This means that general contractors should place their insurance carrier/agent on written notice of any potential claim for which the CGL policy might arguably provide coverage. Otherwise, coverage may ultimately be denied.

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The Mississippi Supreme Court has decided to retain the case styled Architex Association, Inc. v. Scottsdale Insurance Company; Case No. 2008-CA-01353. The construction industry is hopeful that the Mississippi Supreme Court will provide some clarity in the area of insurance coverage for defective construction under CGL policies. Several years ago, the United States Court of Appeals for the Fifth Circuit in ACS Construction Company v. CGU, 332 F.3d 885 (5^th Cir. 2003) muddied the waters when it held:

Under Mississippi law, Moulton [Allstate Ins. Co. v. Moulton, 464 So.2d 507 (Miss. 1985)] and Omnibank [United States Fidelity & Guaranty Co. v. Omnibank, 812 So.2d 196 (Miss. 1996)]make clear that in a CGL insurance policy which defines an "occurrence" as an "accident," coverage is triggered if the underlying act was intentional and deliberate. These cases also make clear that an "occurrence" defined as an "accident" in a CGL insurance policy does not refer to the unintended consequences of the act. Thus, the district court did not err when it applied Moulton and Ominbank and concluded that ACS’s intent to subcontract with Chamberlin/Southern and its intent to install the waterproofing membrane to the bunker roofs did not constitute an "occurrence" under its CGL insurance policy with CGU to trigger coverage. For the foregoing reasons we AFFIRM the judgment of the district court.

After ACS, the insurance industry became strident in its position that there was no coverage under the CGL policy for defective work by a subcontractor because such defective work did not constitute an "occurrence" thereby triggering coverage under the CGL policy. There are a number of jurisdictions that have confronted the issue with differing outcomes. However, there is currently no definitive Mississippi decision which specifically addresses this issue.

The issues which the Mississippi Supreme Court have been asked to address by the construction industry in Architex are as follows:

Whether unexpected, unforeseen and unintended defects in a subcontractor’s work, resulting in unexpected, unforeseen and unintended property damage, is an "occurrence" as defined in a CGL policy?

Whether a CGL policy written on the 1986 standard form that includes an exception from exclusion for property damage arising out of the work of a subcontractor provides completed operations coverage if that subcontractor’s work proves to be defective and causes property damage?

Amicus briefs have been filed by the Associated General Contractors of America; the Associated General Contractors of Mississippi, Inc.; Associated Builders and Contractors, Inc. Mississippi Associated Builders and Contractors, Inc.; the Mississippi Asphalt Pavement Association, Inc. and the American Subcontractors Association, Inc. and the American Subcontractors Association of Mississippi, Inc. Pursuant to Miss. Code Ann. §9-4-3, the Mississippi Supreme Court is required to render decisions on appeal within 270 calendar days after final briefs are filed, which was June 17, 2009. Accordingly, a decision from the Court should be issued sometime in April 2010. Stay tuned.

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