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At What Point Does Work Cease to be “Ongoing”?: Extension of the “Ongoing Operations” Exclusion to Consequential Damages

You do not have to be a Washington lawyer to appreciate the complexity, and sometimes confusing, “ongoing operations” exclusion – j.(5) – in a CGL policy. This installment of the Insurance Commando Blog happily discusses a recent decision in which the Washington Court of Appeals affirmed the trial court’s application of the “ongoing operations” exclusion to a claim for consequential damages. Western Nat. Assur. Co. v. Shelcon Const. Group LLC, 182 Wash.App. 256, 332 P.3d 986 (2014).

In Shelcon, the insured (Shelcon) was a contractor hired by a developer (A-2) to prepare a site to construct 57 single-family homes. In the underlying suit, A-2 alleged that Shelcon improperly prepared the site. A-2 alleged that a geotechnical report said that “the challenge for the site was underlying peat [deposits]” that may have caused property settlement. The report recommended the insertion of markers during site preparation at the location of the peat deposits and leaving them in place so that settlement could be accurately measured. Shelcon correctly placed the markers but then prematurely removed them and placed fill on top of where the markers had been. This rendered it impossible to accurately measure property settlement. A-2 alleged that Shelcon’s failure to prepare the site caused the property’s purchase and sale agreement to be rescinded and result in an approximately $2,000,000 reduction in value of the property.

Shelcon tendered the underlying suit to Western twice, but was denied each time. Western Assurance took the position that the complaint did not allege “property damage” (either physical injury or loss of use), and that the exclusions for damage occurring during Shelcon’s work operations barred coverage. Western then filed a declaratory judgment action against Shelcon; Shelcon filed a counterclaim seeking an order requiring Western to defend and also alleging bad faith. The trial court granted summary judgment in Western’s favor.

On appeal, Shelcon argued that the “ongoing operations” exclusion applied only to the settlement markers. It contended that the exclusion did not apply to consequential property damage caused by removal of the markers. The court disagreed. As an initial matter, the court noted that the exclusion for an insured’s faulty work is one of the primary business risk exclusions in a CGL policy. The court stated that the rationale for such an exclusion is that faulty workmanship is not a fortuitous event but a business risk to be borne by the insured.

The court then cited to earlier cases in which insureds unsuccessfully made similar arguments. In Vandivort Constr. Co. v. Seattle Tennis Club, 11 Wn.App. 303, 522 P.2d 198 (1974), the insured contractor’s work caused an earth slide that damaged the site and resulted in increased construction costs to complete the project. The contractor claimed the exclusion should be limited to the “particular part” of the property on which it was working when the slide occurred. The court in that case rejected the contractor’s argument and held that the unambiguous language of the “ongoing operations” exclusion barred coverage because the insured “was performing operations on the property and the injury here for which damages are claimed arose out of those operations. Vandivort, 11 Wn.App. at 308, 522 P.2d 198.

The Shelcon court also discussed Schwindt v. Underwriters at Lloyd’s of London, 81 Wn.App. 293, 914 P.2d 119 (1996). In Schwindt, property owners argued that the “ongoing operations” exclusion applied only to “the particular item of defective work” and did not extend to consequential damages from the faulty work. 81 Wn.App. at 302, 914 P.2d 119. The court rejected that argument on the grounds that “the exclusion is not limited to the component out of which the damage arose.” Id. at 304, 914 P.2d at 119.

In Shelcon, the court held that the “ongoing operations” exclusion precluded Western’s duty to defend because A-2 “alleged defective performance by Shelcon in removing the settlement markers resulted in consequential damages to the entire site.” The court concluded: “Because the alleged consequential damages arose out of Shelcon’s operations on the site, we hold the unambiguous language of exclusion j.(5) bars coverage.” Shelcon, 332 P.3d at 264-65. Therefore, Western had no duty to defend the contractor.

Shelcon illustrates the exclusion of “property damage” taking place while the insured is working. The ongoing work continues until “products-completed operations” coverage begins. Thus, insureds who are alleged to have performed faulty work cannot escape the consequences of that work simply by arguing that the exclusion only applies to “that particular part” of the property on which the allegedly defective work was performed. Shelcon broadly interpreted the portion of the exclusion that reads “arises out of those operations,” to include consequential damages. Given that exclusions are generally construed against an insurer, and the unfavorable climate for insurers in Washington, Shelcon is an example of a common sense interpretation of the “ongoing operations” exclusion, which preserves the intent of liability coverage.

Vasu Addanki*

*Vasu would like to thank his colleague, Mark Mills, for suggesting the topic of this edition of the Insurance Commando Blog and contributing material for its completion.