Insurance Policy Interpretation

Customers in Grand Prairie, Arlington, Mansfield, Fort Worth, Hurst, Euless, Bedford, Saginaw, Haslet, Rhome, and other places in Texas would have a hard time trying to read and interpret an insurance policy. This is when the advice of an experienced Insurance Law Attorney is most helpful.
The United States District Court, Southern District of Texas, Houston Division, issued an opinion on October 5, 2011. This opinion deals with policy interpretation. The case arises from a declaratory judgement lawsuit filed by the insurance company, RLI Insurance Company, and the partial motion for summary judgment filed by the insured, Willbros Construction (U.S.) LLC, et al.
The court ruled in favor of the insureds. Her is some factual background.
This case concerns whether a particular exclusion in an insurance policy precludes coverage of the value of line pipe that the insureds attempted to install under a river. RLI issued a policy to the insured that was in effect during all relevant times. The insureds had been retained to construct a natural gas pipeline (“the project”). The insureds subcontracted with Southeast Directional Drilling, LLC (SEDD) to drill the pipeline hole. While SEDD was installing the line pipe by pulling it through a hole drilled underneath a river, the line pipe became lost and damaged. A replacement hole was drilled, and the insureds purchased replacement line pipe. They submitted a claim under the policy for $1,567,530.09, to recover the cost of the replacement line pipe, which RLI denied. This lawsuit resulted.
RLI contends that the insureds’ loss was caused by faulty construction or workmanship excluded from coverage by the “Defects, Errors, and Omissions” exclusion to the policy, because the hole through which the pipe line was to be installed was defectively drilled. It maintains that the “ensuing loss” provision does not extend coverage to the insureds’ claim because there was no separate and independent “covered peril” beyond the faulty construction that caused the loss.
The insureds contend that the policy covers the pipe’s value, and that even if the hole was defectively drilled, the resulting damage to the line pipe is a covered loss that is not otherwise excluded.
The issue is whether the line pipe constitutes “construction,” as used in the polemical policy provision. Because “construction” is an ambiguous term that could have multiple meanings in the policy, The Court held in the insureds’ favor.
The policy extended coverage to “direct physical loss caused by a covered peril to materials, supplies, machinery, fixtures, and equipment that the insureds were installing, constructing, or rigging as part of their installation or construction project.” However, exclusions in the policy act to deny coverage of certain claims, including “Defects, Errors, and Omissions” exclusion, which provides:
“We” do not pay for loss caused by:
1) an act, defect, error, or omission (negligent or not) relating to:
a) design or specifications:
b) workmanship or construction; or c) repair, renovation, or remodeling; or 2) a defect, weakness, inadequacy, fault, or unsoundness in materials.
But if a defect, error, or omission described above results in a covered peril, “we” do cover the loss or damage caused by that covered peril.
In effect, the exclusion eliminates coverage for the repair or replacement of defective workmanship while preserving coverage for damage that results from that defective workmanship. The exclusion protects RLI from becoming the guarantor of the insureds’ work, but it does not eliminate coverage for ensuing losses caused by defective workmanship — here, the damages line pipe.
The parties dispute whether the lost or damaged line pipe is property covered by the policy, or “construction” excluded from coverage. In cases involving ambiguous contract terms, the Court must “adopt the [interpretation] of an exclusionary clause urged by the insured as long as that [interpretation] is not unreasonable, even if the [interpretation] urged by the insurer appears to be more reasonable or a more accurate reflection of the parties’ intent.”
Accordingly, the Court found that the line pipe was covered property. Consequently, even if the hole was defectively drilled, the resulting damage to the line pipe is a covered loss of property separate and distinct form the allegedly defective hole.