Construction Law Insights

W. World Ins. v. Air Tech, Inc., 2019 U.S. Dist. LEXIS 53683, 2019 WL 1434666 (W.D. Va. Mar. 29, 2019)

In February of 2015, Air Tech, Inc. (“Air Tech”) entered into a subcontract with Hall’s Construction Corp. (“Hall’s Construction”) to supply a Solvent Recovery Chiller (the “Chiller”) as part of a construction project Hall’s Construction had undertaken for BAE Ordinance Systems, Inc. The Chiller was delivered and installed. Thereafter, the Chiller failed, which resulted in Hall’s Construction having to replace the Chiller. In February of 2017, Hall’s Construction sued Air Tech in state court (the “State Court Action”). In August of 2017, Hall’s Construction amended its complaint to add Johnson Controls, Inc. (“Johnson Controls”) as a defendant. Western World Insurance Company (“Western World”) had issued a commercial insurance policy to Air Tech with

effective dates from June 18, 2016 through June 18, 2017 (the “Policy”). Air Tech made a claim under the Policy for defense in the State Court Action under a reservation of rights. Western World then filed this action seeking a declaration that it has no duty under the Policy to defend or indemnify Air Tech in the State Court Action.

Utilizing the “Eight Corners Rule” (i.e. compare the four corners of the insurance policy against the four corners of the underlying complaint to determine whether coverage exists), the Court held that the State Court Action did not allege an “occurrence,” as defined in the Policy, and there was no insurance coverage. If the underlying complaint alleges facts for which there may be coverage, then a potential for coverage exists and the insurer has a duty to defend. However, an insurer has no duty to defend when it is clear from the initial pleading that the insurer would not be liable under the policy for any judgment based on the allegations.

Under the Policy, an “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Generally, under a commercial general liability policy, when an insured poorly performs its contractual obligations damaging only the insured’s work or product, the resulting contractual liability is expected under the term of its commercial general liability policy. Here, the Policy provides coverage for property damage caused by an occurrence and excludes coverage for property damage that is expected or intended from the standpoint of the insured. Because Hall’s Construction contended in the State Court Action that Air Tech’s failure to perform its obligations under the contract to supply the Chiller only damaged the Chiller, the damages sought in the State Court Action were limited to replacing Air Tech’s purportedly defective work product, which would be expected and not an “occurrence” under the Policy.

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