In Balfour Beatty v. Liberty Mutual Ins. Co., the 5th Circuit Court of Appeals provided valuable insight on coverage available through ensuing loss exceptions to faulty work and design exclusions in builder’s risk insurance policies. In Balfour Beatty, the Court held that, in order to establish coverage through an ensuing loss exception, the ensuing loss must be causally distinct from the original excluded loss.1
Balfour Beatty, serving as general contractor for construction of a commercial office building in Houston, Texas, subcontracted with Milestone for steelwork on the project. As part of this work, Milestone welded a 2-inch metal plate to external tubing on the eighteenth floor of the building. While welding the plate in place, welding slag fell down the side of the building, damaging exterior glass windows on the floors below.
Balfour Beatty and Milestone, along with the developer, sought coverage for the damage to the windows under their builder’s risk policy, issued by Liberty Mutual. Liberty Mutual denied coverage, claiming that the damage was excluded by the policy’s “Defects, Errors, and Omissions” exclusion. The insureds sued, arguing that the ensuing loss exception to this exclusion would carve back coverage because the damage to the windows constituted an “ensuing loss.”
The Court interpreted the policy to exclude damage “caused by” or “resulting from ... act[s] ... relating to ... construction.” However, coverage would apply for any loss caused by “an act, defect, error, or omission” that “results in a covered peril.” The parties agreed that the exclusion barred coverage, except to the extent the exception applied. Accordingly, the Court’s analysis focused on whether Milestone’s welding operations was a separable resulting “covered peril,” distinct from the welding operations.
The Court characterized the falling slag as the damage resulting from the welding operations and, on that basis, held that the falling slag did not constitute a separate event resulting in a covered peril. In effect, the Court interpreted the language of the exception to require that there be a second, entirely distinct, loss event – one of which is an excluded peril and a second, which is the resulting covered peril. In this case, the Court determined that the damage to the windows directly resulted from the falling slag, which itself directly resulted from the subcontractor’s faulty work, rather than from a separate event resulting in a covered peril. Based on this analysis, the Court held that the damage to the windows was not an ensuing loss.
It is important to consider this case in context. Case law addressing faulty work exclusions, including the LEG forms2 and others, is relatively uncommon. Where guidance does exist, it tends to be piecemeal and underdeveloped in any one particular jurisdiction. This can give outsized consideration to cases from outside of the jurisdiction where your particular dispute occurs. For that reason, all cases addressing these issues should be carefully considered and should be on contractors’ radar. Understanding this function of your builder’s risk policy can be one of the most important aspects of the program, as terms can differ significantly. Where deficiencies potentially exist, contractors should consider whether they have options to enhance that aspect of their program or supplement the program with other lines of coverage that can potentially respond in situations like the one in Balfour Beatty.
1Balfour Beatty Constr., LLC v. Liberty Mutual Fire Ins. Co., 968 F.3d 504, 514 (5th Cir. 2020).
2LEG refers to the London Engineering Group who introduced standardized versions of the various faulty work exclusions to the market.