Once More Into The Breach: Opening The Door For CGL Coverage For Breach Of Contract Claims Against Contractors

One of the basic principles applicable to Commercial General Liability (CGL) policies for contractors is that the policies provide coverage for claims arising out of the contractor’s negligence, but that claims for breach of contract are excluded from coverage unless there is an insured contract. However, a recent Georgia Court of Appeals case, Maxum Indemnity Company v. Jimenez, A12A0992 (Ga. Ct. App. 11/20/2012), establishes that the “contractual liability” exclusion will not apply when a contractor’s obligation to pay is based upon negligent work.

In Maxum, the underlying lawsuit involved construction of a dormitory on the Georgia Southern University campus.  Gill Plumbing Company and Jose Jimenez were hired as subcontractors to install pipes for the project.  A pipe burst occurred which caused damage to several units, including the flooring, carpet and walls.  The jury found Jimenez at fault for negligent pipework and awarded damages.

Following the verdict, the trial court entered a judgment in favor of Gill Plumbing on its claim for indemnity against Jimenez for the property damage. Jimenez’s insurer, Maxum, filed a declaratory judgment action asserting no coverage, contending that the judgment against Jimenez was only for contractual indemnity in breach of contract, which was outside of the scope of the policy’s coverage.

The Court of Appeals found coverage under the policy, noting that the complaint against Jimenez set forth both a breach of contract claim and a tort claim, and both claims were based upon Jimenez’ defective workmanship and the resulting property damage to the dormitory.  As explained in Glens Falls Ins. Co. v. Donmac Golf Shaping Co., 203 Ga. App. 508, 512 (3)(417 S.E.2d 197)(1992), a claim against an insured for defective workmanship on a construction project may be set forth both as a breach of contract claim and a tort claim.

The Court of Appeals noted that Jimenez’ acts constituted “an occurrence” involving “property damage” covered by the CGL policy.  The court also found that the “contractual liability” exclusion does not apply in this case, because Jimenez’ obligation to pay the damages award was not based upon a contractual assumption of liability, but rather, was based upon his tort liability arising from his own negligent pipe workmanship.  To the extent that Jimenez was directly liable in tort for the property damage caused by his negligence, regardless of the contract, the exclusion did not apply.

Also, the “contractor’s limitation endorsement” did not apply because the damage was sustained by third parties as a result of the work on the project, and the exclusion only barred coverage for damages sustained by fellow contractors or subcontractors on the project.  The damage was sustained by Georgia Southern University, not by a contractor on the project; therefore the exclusion did not apply.

Important points from this decision are as follows:

·  The claim against Jimenez set forth a breach of contract claim and a tort claim, and the CGL policy provided coverage for the resulting property damage, but not for replacement of the contractor’s own work;

· The contractual liability exclusion did not apply; and

· The contractor’s limitation endorsement did not apply.

Richard H. Hill, Jr.
404- 248-2882