Tenth Circuit Reverses District Court’s Ruling that Contractor Entitled to a Defense

    After the district court granted the insured contractor's motion for judgment on the pleadings on the duty to defend, the Tenth Circuit found there was no coverage and reversed. Owners Ins. Co. v. Greenhalgh Planning & Development, Inc., 2023 U.S. App. LEXIS 20137 (10th Cir. Aug. 4, 2023). 

    Greenhalgh remodeled a house and barn for Michelle and Steven Pickens. After completion of the project, the Pickens sold the property to Teague and Michelle Cowley. The Cowleys later sued the Pickenses asserting various fraud and breach of contract claims. The complaint alleged that the Pickenses misled them into reasonably believing that the barn was a habitable structure, even though it did not qualify as such under the applicable building code because it lacked a fire-sprinkler system. 

    The Pickenses, in turn, filed a third-party complaint against Greenhalgh for breach of contract. Greenhalgh tendered to its insurer, Owners, who agreed to defend, but filed a declaratory relief action seeking a determination it had no duty to defend. The district court granted Greenhalgh's motion for judgment on the pleadings and determined Owners owed a duty to defend.

    On appeal, Owners agreed that the alleged inablity to use the barn as a habitable structure becuase it lacked a fire-sprinkler system was a loss of use that could constitute property damage. But Owners contended that the alleged property damage was not caused by an "occurrence."

    The Tenth Circuit agreed with Owners. Because the natural and expected consequence of the alleged negligent construction was that the barn could not be used as a legally habitable structure, the alleged property damage was not caused by an occurrence.

    Greenhalgh argued that Owners should defend because a subcontractor may have caused the damage. A federal district court had predicted that the Utah Supreme Court would hold property damage from faulty or negligent subcontractor work would constitute an "occurrence." The Tenth Circuit rejected this argument. The underlying complaint asserted that it was Greenhalgh, as the general contractor, who was responsible for ensuring code compliance.

    Further, the your work exclusion barred coverage even if a subcontrator performed work on Greenhalgh's behalf.