Insured Ignores Conditions & Loses

Russell Blodgett appealed an order of the Superior Court granting summary judgment in favor of the plaintiff, Cincinnati Specialty Underwriters Insurance Company (CSU). Blodgett argued that the trial court erred by concluding that the terms of a commercial general liability policy issued by CSU clearly and unambiguously excluded coverage for Blodgett’s damages in a separate personal injury action against CSU’s insured resulting from Blodgett’s fall from an alleged negligently constructed staircase.

In Cincinnati Specialty Underwriters Insurance Company v. Best Way Homes, Inc., No. 2021-0280, Supreme Court of New Hampshire (April 27, 2022) the Supreme Court read the full policy and resolved the issues raised by the parties.

FACTS

CSU’s insured, defendant Best Way Homes, Inc. (Best Way), is a general contractor. In May 2012, Best Way entered into a contract with a homeowner to perform renovations at his residence (the property). The project included constructing a deck with an attached staircase. Pursuant to an oral agreement, Best Way subcontracted the construction of the deck and staircase to Bob Wood Construction, which completed the project in 2012.

In 2017, the homeowner hired Blodgett to perform plumbing services at the property. Blodgett was injured when the staircase separated from the deck as he was descending it, causing him to fall approximately ten feet and suffer injuries. Blodgett sued alleging claims against the homeowner for negligence and against Best Way for negligent failure to inspect, warn, and remove hazards, as well as a separate claim against Best Way for negligent hiring and supervision. At the time of the injury Best Way was the named insured under the CSU policy, which was in effect from June 29, 2016 to June 29, 2017. The CSU policy covered bodily injuries caused by an “occurrence” that happened during the policy period. The policy also contained an exclusionary provision, which provided:

Section IV – Commercial General Liability Conditions is amended to include the following language:

As a condition to and for coverage to be provided by this policy, you must do all of the following:

Obtain a formal written contract with all independent contractors and subcontractors in force at the time of the injury or damage verifying valid Commercial General Liability Insurance written on an “occurrence” basis …

This insurance will not apply to any loss, claim or “suit” for any liability or any damages arising out of operations or completed operations performed for you by any independent contractors or subcontractors unless all of the above conditions have been met. (emphasis added)

CSU sued for declaratory judgment, seeking a declaration that it had no duty or obligation to defend or indemnify Best Way with respect to Blodgett’s negligence claims. CSU also moved for summary judgment, arguing that Best Way did not obtain a formal written contract from the subcontractor and thus did not satisfy the conditions precedent to coverage set forth in the exclusionary provision. CSU argued that, as a matter of law, the claims against Best Way were excluded from coverage by the unambiguous terms of the exclusionary provision. The trial court granted CSU’s motion for summary judgment.

ANALYSIS

Blodgett does not dispute that Best Way failed to satisfy the requirements for coverage set forth in the policy’s exclusionary provision. Nonetheless, Blodgett argued that the exclusionary provision does not preclude coverage in this case. Blodgett asserted that, based upon the plain meaning of its terms, the exclusionary provision does not apply to negligent acts that occurred before the policy’s effective date. He therefore argues that, because the subcontractor constructed the stairs in 2012 – approximately four years before the policy became effective – the exclusionary provision does not apply in this case.

An occurrence policy, like that issued by CSU, covers all claims based on an event occurring during the policy period. Here, it is undisputed that the CSU policy is an occurrence policy, which covered “bodily injury” or “property damage” that “occur[red] during the policy period.”

In Cincinnati Specialty U/W Ins. v. Milionis Const., 352 F.Supp.3d 1049, 1055 & n.5 (E.D. Wash. 2018) the USDC, interpreted an identical exclusionary provision and concluded it required the insured to meet “three explicit, unambiguous conditions” and noted that the provision was “subject to only one reasonable interpretation” and, therefore, enforced the exclusion.

The Supreme Court interpreted the present tense language in the exclusionary provision as having “no temporal reference” and meaning simply that CSU must have satisfied the preconditions to coverage in order for coverage to apply to the claim. That the conditions precedent employ present tense language does not mean that the exclusionary provision is limited to injuries resulting from the subcontractor’s work performed during the policy’s coverage period. Rather, it merely indicates that the insured must meet the conditions precedent at the time it seeks coverage in order for the policy to cover the damages. Therefore, when considered in the appropriate context, no reasonable person in the position of the insured could have construed the conditions precedent of the exclusionary provision as having a temporal reference.

Moreover, other language in the exclusionary provision not included in the conditions precedent – written in the past tense – indicate that the provision applies to negligent acts committed before the policy’s inception. Specifically, the exclusionary provision states that the CSU policy will not apply “to any loss, claim or ‘suit’ for any liability or any damages arising out of operations or completed operations performed for you by any independent contractors or subcontractors’ unless all of the conditions have been met.” (Emphasis added.)

Accordingly, the Supreme Court concluded that the exclusionary provision unambiguously applied whenever Best Way seeks coverage under the CSU policy, regardless of whether the acts or omissions that caused the damages occurred prior to the policy’s effective date.

As the trial court noted, the Supreme Court has consistently construed the term “arising out of” broadly to mean “originating from or growing out of or flowing from.” Merrimack School Dist. v. Nat’l School Bus Serv., 140 N.H. 9, 13 (1995) (quotation omitted). Ultimately, the damages alleged by Blodgett – his physical injuries – arose from the subcontractor’s allegedly negligent construction of the staircase that led to its collapse. As the trial court observed, there would be no claims against Best Way but for the alleged negligence of the subcontractor. The claims against Best Way – including those based upon its subsequent omissions after the construction of the staircase – flow from the subcontractor’s alleged negligence and establish a causal connection between the subcontractor’s work and Blodgett’s claims against Best Way. Therefore, all claims against Best Way arose out of the work of the subcontractor and the exclusionary provision precludes coverage in the underlying litigation.

Liability insurance is a risk spreading device. To limit the premiums charged insurers issuing CGL policies transfer the risk they take by requiring a contractor insured to require that each subcontractor maintain insurance protecting the insured contractor. The subcontractor was not insured and did not protect the risk and as a result the insured contractor breached a material condition of the policy and had no insurance for defense or indemnity.

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.

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