OCIP Liability Insurer Required to Indemnify Florida Contractor for $23M in Property Damage Arising Out of Defective Subcontractor Work

Jeffery R. Mullen, Associate, Pepper Hamilton LLP

Pavarini Construction Co. v. Ace American Insurance Co., 2015 U.S. Dist. LEXIS 151247 (S.D. Fla. Oct. 29, 2015)

This action arose out of a construction project to build a 63-story luxury condominium tower located in Miami, Florida (“Project”). Pavarini Construction Co. (“Pavarini”) was the general contractor for the construction of the Project.  Pavarini hired a subcontractor for the installation of the concrete masonry unit walls and certain reinforcing steel, and a second subcontractor for the supply and installation of reinforcing steel within the cast-in-place concrete columns, beams, and sheer walls. The work performed by both of these subcontractors was deficient. A significant amount of reinforcing steel was either omitted entirely or improperly installed, including within important concrete structural elements, resulting in destabilization throughout the building. This, in turn, caused stucco debonding and cracking on the walls of the building, worsening cracking of cast-in-place concrete elements, and cracking in the mechanical penthouse enclosure on the roof, which led to water infiltration.

In December of 2010, upon becoming aware of the deficiency, the owner served Pavarini with a formal demand to repair all of the damage. Pavarini completed the work, incurring more than $25 million in costs relating to the remediation effort, including amounts paid to: consultants to investigate the damage and design a plan of remediation; install hurricane netting to prevent bodily injury and additional property damage; install a structural steel exoskeleton and a metal panel façade to provide the required structural support in the absence of functional steel beam;, and repair the mechanical penthouse enclosure on the roof.

Pavarini sought indemnification through the Project’s Owner Controlled Insurance Program (“OCIP”) designed to provide the owner, Pavarini and its subcontractors with uniform insurance coverage for claims of property damage and bodily injury. The OCIP included a commercial general liability policy issued by American Home Assurance Company (“American Home”) containing a $2 million per occurrence limit, and a first-layer umbrella policy issued by ACE American Insurance Company (“ACE”) containing a $25 million per occurrence limit. American Home ultimately acknowledged coverage, but ACE refused to pay for any costs associated with the repairs. After accounting for the $2 million recovered from the American Home policy and related salvage efforts, Pavarini brought suit against ACE seeking over $23 million in damages.

The parties filed cross-motions for summary judgment on, among other issues, whether the damage caused by the defective work of Pavarini’s subcontractors was covered under the policy. While the amount was undisputed, the parties disputed the nature and character of the loss. Pavarini claimed that none of the costs included the repair of defective work itself; rather all repairs were of damage to otherwise non-defective building components. ACE countered that much of the repair effort amounted to a de facto repair of the defectively installed steel.

The Court agreed with Pavarini, holding that the property damage caused by the subcontractors’ defective work to other property was covered under the policy.

The policy defined “property damage” as “all physical injury to tangible property, including all resulting loss of use of that property,” and included “[l]oss of use of tangible property that is not physically injured.” The policy excluded from coverage, in relevant part, “[p]roperty damage to ‘your work’ arising out of it or any part of it and included in the products-completed operations hazard.” This exclusion is known as the “your work” exclusion.  However, the “your work” exclusion did not apply “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” Thus, the policy provided coverage for damage to the completed Project caused by subcontractors’ negligent work, but did not provide coverage for the repair of the defective subcontractor work itself.

The question before the Court, therefore, was whether the subcontractors’ defective work caused covered “property damage.” Answering in the affirmative, the Court held that the complete replacement of defective subcontractor work may be covered when necessary to effectively repair ongoing damage to otherwise non-defective work. The Court found that because the subcontractors’ defective work caused cracking in the stucco, collapse of the penthouse enclosure, and cracking in the critical concrete structural elements, Pavarini was entitled to coverage for the repair of that non-defective work. And the Court found that in order to adequately repair the non-defective Project components, the building had to be stabilized. Even if the predominant objective of the repair effort was to fix the instability caused by the subcontractors’ defective work, the Court reasoned that the same effort was required to put an end to the ongoing damage to otherwise non-defective property, e.g., damage to stucco, the penthouse enclosure and critical concrete structural elements.

Consequently, the Court entered partial summary judgment in favor of Pavarini, holding that ACE was contractually required to reimburse Pavarini for the costs incurred.

Article originally posted March 14, 2016 on Constructlaw, an update and discussion of recent trends in construction law and construction, maintained and edited by Pepper Hamilton's Construction Law Practice Group.