The U.S. District Court for the District of Nevada has held that the phrase “legally obligated to pay as damages” in a general contractor’s policy is ambiguous and could be construed to cover damages the insured is required to pay under a contract.

Big-D Const. Corp. v. Take it for Granite Too, 2:11-CV-00621-PMP, 2013 WL 222260 (D. Nev. Jan. 22, 2013)

On January 22, 2013, the U.S. District Court for the District of Nevada predicted that the Nevada Supreme Court would find that a CGL carrier can owe a duty to indemnify a contractor for damages caused by defective construction even if the contractor was never been sued and the duty to defend was never triggered. The court found that the term “legally obligated to pay as damages” contained in the standard CGL insuring agreement is ambiguous and could be construed to cover damages the insured is contractually required to pay.

Big-D Construction Corporation (“Big-D”) was hired as the general contractor for the remodeling of a building. Big-D subcontracted out some of the work, including tiling and stonework. During the tiling and stonework, several large stone tiles, each weighing 25 to 40 pounds, fell from the exterior stone walls. One of the stone tiles fell near the building’s main entrance. Due to the safety risk, Big-D put up scaffolding around the stone tiles, closed the area around the main entrance, and directed people to use a side entrance. Big-D determined that it could not guarantee that another tile would not fall off. Its expert also concluded that the only way to remedy deficiencies in the tiling and stonework subcontractor’s work – and avoid potential safety issues – would be to remove and replace all of the tiles. The building owner directed Big-D to replace all of the work done by the tiling and stonework subcontractor.

Although Big-D attempted to repair the tiling and stonework, the building owner was dissatisfied with the work and did not allow Bid-D to complete the repair. The building owner and Big-D agreed to settle outstanding claims and Big-D was never sued. Nevertheless, Big-D’s direct insurer notified the subcontractor’s insurers of potential construction defect claims by the building owner against Big-D and asserted that Big-D qualified as an additional insured under the subcontractor’s CGL policies. One of the insurers, Century, denied coverage. Big-D filed suit against the subcontractor, Century, and another insurer seeking a declaration of coverage under the policies issued to the stonework subcontractor.

Among other defenses, Century argued in a motion for summary judgment that it had no duty to defend Big-D because there was no suit filed against Big-D. Century reasoned that the duty to defend was broader than the duty to indemnify, so if there was no duty to defend then there could be no duty to indemnify. Century also argued that it had no duty to indemnify Big-D in the absence of a court judgment that Big-D was legally obligated to pay damages to the building owner.

Big-D conceded that it never made a claim that triggered Century’s duty to defend. But Big-D argued that the lack of a duty to defend had no bearing on Century’s duty to indemnify. Big-D argued that Century’s duty to indemnify was triggered because Big-D had a legal obligation to the building owner under its construction contract and Big-D paid damages arising out of that legal obligation in the form of the settlement and the remediation work.

The Century policy contained a standard CGL insuring agreement requiring Century to indemnify the insured for “those sums that the insured becomes legally obligated to pay as damages.” The court acknowledged that some courts outside Nevada have found that the term “legally obligated to pay as damages” requires a final judgment or a settlement as a result of a suit. However, the court predicted that the Nevada Supreme Court would follow those courts that hold that a legal obligation to pay a sum as damages would include sums due as a legal obligation under a contract. The court reasoned that the phrase “legally obligated to pay as damages” is ambiguous. The court explained that to one trained in the law, the words “as damages” might signify an amount ordered by a court. But a lay person might conclude that the words “as damages” would include coverage for sums due to fulfill a legal obligation under a contract. The court denied Century’s motion for summary judgment on this issue, finding there was a genuine question of material fact as to whether Big-D was legally obligated to pay sums associated with remediation and repair as damages, and consequently whether Century owed a duty to indemnify.

It is often said that the duty to defend is broader than the duty to indemnify. Consequently, it is sometimes assumed that there can be no duty to indemnify absent a duty to defend. However, this general principal is subject to some exceptions, in particular where there is no suit pending against the insured. The Big-D decision demonstrates that the phrase “legally obligated to pay as damages” can be interpreted to include damages incurred outside the context of a lawsuit. According to the court in Big-D, an insured may be “legally obligated to pay” under a contract and the amount it must pay can be characterized “as damages.” Where such an approach is adopted, the maxim that “the duty to defend is broader than the duty to indemnify” does not preclude a duty to indemnify in the absence of a duty to defend.

For more information on the issues discussed above, or any other insurance coverage questions, please contact Adam H. Fleischer, AFleischer@BatesCarey.com or Michael Passman, MPassman@BatesCarey.com.