In Carl E. Woodward, L.L.C., v. Acceptance Indem. Ins. Co., the U.S. Fifth Circuit Court of Appeals recently addressed additional insured endorsements and a subcontractor’s CGL insurer’s duty to defend the general contractor. In this case, Woodward was retained by Pass Marianne, L.L.C., to construct condominiums and in turn subcontracted the concrete work to DCM Corporation, L.L.C. Presumably pursuant to their subcontract, DCM procured a CGL policy from Acceptance Indemnity Insurance Company which named Woodward as an additional insured by endorsement.
After completion of the condominiums and their subsequent sale by Pass Marianne to Lemon Drop Properties, Lemon Drop sued Pass Marianne and Woodward with Pass Marianne asserting a cross-claim against Woodward as well. Woodward tendered its defense and indemnity to Acceptance based on Pass Marianne’s cross-claim and construction expert report. The District Court for the Southern District of Mississippi found that Acceptance had a duty to defend Woodward and this appeal ensued.
Duty to Defend
On appeal, the Fifth Circuit only addressed Acceptance’s potential duty to defend Woodard under Mississippi law which requires a comparison of the allegations with the policy terms. In performing this analysis, the Fifth Circuit considered the additional-insured endorsement of Acceptance’s policy which provided in relevant part:
A. Section II – Who Is An Insured is amended to include as an insured the person or organization shown in the Schedule [Woodward], but only with respect to liability arising out of your [DCM] ongoing operations performed for that insured [Woodward].
B. With respect to the insurance afforded to these additional insureds, the following exclusion is added:
This insurance does not apply to “bodily injury” or “property damage” occurring after:
(1) All work, including materials, parts or equipment furnished in connection with such work, on the project (other than service, maintenance or repairs) to be performed by or on behalf of the additional insured(s) at the site of the covered operations has been completed. . . .
The Court also noted that Acceptance’s policy was an occurrence policy requiring the alleged damage to occur during the policy period but nevertheless was subject to the additional insured endorsement’s requirement that liability arise out of ongoing operations with the alleged damages occurring prior to completion of all work.
Additional Insured Endorsement Did Not Create Duty to Defend
Upon review, the Fifth Circuit found that Acceptance did not have a duty to defend Woodward under the additional insured endorsement and reversed the District Court’s ruling. The Court found that the allegations pertained to DCM’s alleged failure to comply with the construction specifications in completing the concrete work and not that the alleged non-conformity caused other damage. As noted by the Court, any alleged damages because of failure to follow the construction specifications arose out of DCM’s completed work, not its ongoing operations as required by the additional insured endorsement.
The Court also noted that any alleged damages arising after completion of the work as a result of the non-conformity would also be excluded under the additional insured endorsement. The Fifth Circuit further noted that any allegation that DCM failed to follow the construction specification would more appropriately be covered by a performance bond, a distinct insurance vehicle designed to guarantee completion of the work.
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