The 7th Circuit Court of Appeals reversed summary judgment for an insurer on the issue of whether the commercial general liability policy covered faulty subcontractor work, citing a similar case recently ruled on by the Indiana Supreme Court. The Circuit Court also dealt with an issue surrounding umbrella policies for the first time.

In Trinity Homes LLC and Beazer Homes Investments LLC v. Ohio Casualty Insurance Co. and Cincinnati Insurance Co., No. 09-3613, the homebuilders appealed summary judgment in favor of Ohio Casualty and Cincinnati Insurance on its suit that the insurers breached their contracts by not providing coverage after builders incurred significant liability related to defective work done by subcontractors. Ohio Casualty, a primary insurer, claimed its policy didn’t cover subcontractor work. Cincinnati, which provided an umbrella policy, argued its coverage wasn’t triggered because all of the builders’ underlying policies were not unavailable as required by the policy.

The builders settled with all its other commercial general liability insurers, which resulted in those insurers paying at least 75 percent of the relevant policy limit. This would functionally exhaust the CGL policy. The builders would make up the difference.  

The 7th Circuit reversed summary judgment in favor of Ohio Casualty, citing Sheehan Construction Co. v. Continental Cas. Co., 935 N.E.2d 160 (Ind. 2010). In Sheehan, the Supreme Court clarified a standard CGL policy does cover damage to a home’s structure resulting from defective subcontractor work unless the subcontractor work was intentionally faulty. They left the application of any exclusions or limitations in the policy, as well as any other state law doctrines, for the District Court on remand.

The judges then moved on to the claim against Cincinnati. They looked at whether the settlement between the other insurers was sufficient to exhaust the CGL’s policy coverage under the umbrella policy. They disagreed that the umbrella policy clearly required exhaustion, finding the terms of the policy to be ambiguous.

Cincinnati argued that other courts dealing with similar umbrella policies have held that the policies require a full payout before it’s exhausted. But Cincinnati’s policy didn’t include clear language that stated the coverage wasn’t triggered absent a payment of the full CGL policy limit by the insurer, as the insurers involved in the cases Cincinnati cited had included.

Other Circuit Courts have held that exhaustion of a primary policy could be accomplished by a settlement agreement where the primary insurer paid some of the limit and the insurer paid the remainder.

“Although Indiana law controls, there is no reason to suspect that it would differ from these analogous holdings,” wrote Judge Michael Kanne. “Our construction of the ambiguity in Cincinnati’s policy is also reinforced by Indiana public policy favoring out-of-court settlement. Cincinnati’s reading of the policy would deter parties who have both CGL and excess insurance from settling with their CGL insurers.”

The judges also declined to reach the question of whether any exclusions or limitations in Cincinnati’s policy apply to the builders’ claim, leaving that for the District Court on remand.