Duty to Defend Required but not for Additional Insured

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A casino owner unhappy with the quality of construction on its new casino sued its general contractor and others in Maryland state court. The general contractor filed a third-party complaint against a subcontractor, and that subcontractor’s insurer filed suit in the United States District Court for the Southern District of Florida, seeking a declaratory judgment that it need not defend the general contractor and subcontractor. In The Cincinnati Specialty Underwriters Insurance Company v. KNS GROUP, LLC, GM&P Consulting And Glazing Contractors, Inc., Gemini Insurance Company, No. 21-13628, United States Court of Appeals, Eleventh Circuit (October 6, 2022) the Eleventh Circuit entered a Solomon-like decision making some happy and others not.

FACTS

The parties in this case came together to build the Maryland Live! Casino and Hotel in Anne Arundel County, Maryland. Tutor Perini Building Corporation (“Tutor Perini”), the general contractor leading the construction project, hired GM&P to provide exterior glazing for the building. GM&P, in turn, enlisted subcontractor KNS to assist it by glazing glass and installing window walls. The parties signed a contract on June 5, 2017, in which KNS agreed to “take out, maintain, and pay all premiums for” commercial general liability and other types of insurance, and to indemnify GM&P for liability for damages “to person or property caused in whole or in part by any act, omission, or default by the sub-contractor[.]”

KNS acquired commercial liability insurance (“the Policy”) from Cincinnati for the relevant period. The Policy covered losses due to “property damage,” which it defined as “[p]hysical injury to tangible property” or “[l]oss of use of tangible property that is not physically injured.” The Policy “include[d] as an additional insured” any party that KNS, the named insured, provided in writing that it would insure under its policy.

The Policy warned that it would cover those additional insured parties: “only with respect to ‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury’ caused, in whole or in part, by  1. [The named insured’s] acts or omissions in the performance of [its] ongoing operations for the additional insured; 2. The acts or omissions of those acting on [the named insured’s] behalf in the performance of [its] ongoing operations for the additional insured[.]”

THE UNDERLYING ACTION

On June 25, 2020 lawsuit (“the Underlying Action”) brought by PPE Casino Resorts Maryland, LLC (“PPE”), the casino’s owner, against its general contractor and subcontractors in the Circuit Court for Anne Arundel County. The state-court complaint alleged, inter alia, that GM&P installed a defective “Glass Façade” that has “loose gaskets between window panels, damaged sealants and panel frames, and misaligned window wall panels creating the risk of property damage.” PPE asserted that GM&P’s negligent furnishing of materials and negligent installation of the Glass Façade was a breach of GM&P’s duty to PPE to complete the façade “in a safe manner and without causing property damage to PPE or creating the risk of property damage.”

GM&P responded with a third-party complaint in the Underlying Action against KNS and two other third-party defendants that played roles in the construction process. In it, GM&P brought claims against KNS for breach of contract and negligence due to KNS’s alleged defective construction of the casino.

In July 2020 Cincinnati sued in federal district court, seeking a declaratory judgment that it has no duty to defend and no duty to indemnify KNS or GM&P in the Underlying Action.

ANALYSIS

An insurer’s duty to defend an insured in a legal action based on Florida law arises when the complaint alleges facts that fairly and potentially bring the suit within policy coverage and does not require delving into the merits of a case. The Eleventh Circuit analyzes the duty to defend by comparing the allegations in the complaint with the language of the policy.

An insurer need not defend an insured party if a policy exclusion applies. If an insured satisfies its initial burden of showing that policy coverage applies, the burden shifts to the insurer to prove that the loss arose from a cause which is excepted.

NO DUTY TO DEFEND ADDITIONAL INSURED

The court concluded that Cincinnati’s additional insured endorsement does not provide coverage to GM&P. The Policy limits GM&P’s coverage to “bodily injury,” “property damage” or “personal and advertising injury” caused, in whole or in part, by KNS or KNS’s agents. The complaint in the Underlying Action alleges that GM&P was negligent in its furnishing of materials and installation of the Glass Façade. It alleges no negligence by KNS nor any of its agents. Without more, Cincinnati has no duty to defend GM&P in the Underlying Action. Nor, moreover, does Cincinnati have a duty to indemnify GM&P.

There is a clear difference between “caused” and “caused in part by.” The latter term means that even if the complaint alleged KNS was only 1% responsible for causing the faulty workmanship, then Cincinnati would have a duty to defend GM&P.

DUTY TO DEFEND NAMED INSURED

Cincinnati must defend KNS in the Underlying Action because all doubts as to whether a duty to defend exists in a particular case must be resolved against the insurer and in favor of the insured. An insurer is required to offer a defense in the underlying action unless it is certain that there is no coverage for the damages sought by the insured party in the action.

The complaint in the Underlying Action alleges that the “Glass Façade supplied and installed by” GM&P and other entities, including Tutor Perini and C.I. Energia Solar S.A.S. E.S. Windows (“CI Energia”) “is fraught with systemic defects, including loose gaskets between window panels, damaged sealants and panel frames, and misaligned window wall panels creating the risk of property damage.” In turn, GM&P’s third-party complaint, says that, if proven, the alleged property damage was the fault of KNS and/or its agents.

The policy includes a breach-of-contract exclusion that reads:

This insurance does not apply to any claim for ‘bodily injury’ or ‘property damage’ arising directly from or indirectly from breach of express or implied contract, including breach of an implied in law or implied in fact contract. This exclusion does not apply to liability for damages that an insured would have in the absence of the contract.

Cincinnati has a duty to defend this whole suit if any claims fall within its scope of coverage. Because PPE’s complaint in the Underlying Action includes allegations that plausibly fit within the Policy’s definition of “property damage,” and plausibly are not captured by the Policy’s exclusions, Cincinnati has a duty to defend KNS in the Underlying Action.

INDEMNITY ISSUE IS PREMATURE

The district court’s assessment that it is still premature to rule on Cincinnati’s duty to indemnify KNS for any damages that it might be liable for in the Underlying Action was appropriate since indemnity depends on evidence not present in the current set of motions.

Therefore, the Eleventh Circuit concluded that it granted:

summary judgment in favor of Cincinnati on the basis that it has no duty to defend or indemnify GM&P Consulting and Glazing Contractors, Inc. (“GM&P”) in the underlying lawsuit;
summary judgment in favor of KNS on the basis that Cincinnati has a duty to defend KNS; and
affirmation of the trial court’s decision that it is premature to ascertain whether Cincinnati has a duty to indemnify KNS.

The Eleventh Circuit, unlike the litigants, read the full policy (RTFP) and reached the only logical decisions based on the evidence before it. The named insured was entitled to defense because there was property damage and no applicable exclusion. The additional insured was not entitled to defense because the property damage was not alleged to have been caused by the named insured.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.Subscribe and receive videos limited to subscribers of Excellence in Claims Handling at locals.com https://zalmaoninsurance.locals.com/subscribe.Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

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