Oregon District Court Finds No Coverage to Remove and Replace an Insured's Defective Work
In Shilo Inn, Seaside Oceanfront, LLC v. Grant, et al., 2009 U.S. Dist. LEXIS 75255 (D. Or. Aug. 24, 2009), the District Court of Oregon granted summary judgment to an insurer, ruling that an exclusion for property damage to “[t]hat particular part of any property that must be restored, repaired, or replaced because ‘your work’ was incorrectly performed on it” barred all coverage for the costs of replacing the insured contractor’s defective work.
Shilo had contracted with the insured, James Grant, to install various granite components in its hotel. However, Shilo initiated arbitration proceedings after it determined that the granite tub surrounds had not been properly installed. The arbitrator agreed that much of Grant’s work was “defective and faulty” and that water intrusion had occurred, but he also found the evidence insufficient with respect to the scope of water intrusion. The arbitrator awarded Shilo damages for the cost to remove and replace the improperly installed granite.
After converting the arbitration award into a judgment, Shilo filed a Writ of Garnishment in an attempt to collect insurance proceeds from Maryland Casualty Company, which had insured Grant. However, upon Maryland Casualty’s Motion for Summary Judgment, the Court agreed that the only damages awarded to Shilo in the arbitration fit within the exclusion for property damage to “[t]hat particular part of any property that must be restored, repaired, or replaced because ‘your work’ was incorrectly performed on it.”
Although Shilo has filed a notice of appeal to the Ninth Circuit and, therefore, the ultimate result in this case could change, the District Court’s decision serves as a reminder of the importance of distinguishing between mere construction defects on one hand and actual damage caused by construction defects on the other. Where no resulting damage is proven, the coverage terms and exclusions of many general liability policies may be sufficient to defeat coverage. Moreover, even when resulting damage is proven, coverage may be limited to the cost to repair the resulting damages. Because correcting defects is often more expensive than repairing damages, this limitation can be significant and should not be overlooked.
