Fortney & Weygandt, Inc. v. American Manufacturers Mutual Insurance Co.
2010 U.S. App. Lexis 2836 (6th Cir. Feb. 12, 2010)

The United States Court of Appeals for the Sixth Circuit recently held that where a contractor’s defective foundation work required complete demolition and rebuilding of project that the defective work exclusion of commercial general liability policy did not preclude coverage for destruction of portions of the building not defectively constructed.

Frisch’s Restaurants, Inc. (“Frisch”) contracted with general contractor Fortney & Weygant, Inc. (“Fortney”) to build a restaurant. When the building was almost complete, soil shifted around the foundations, which broke an underground utility line. Upon examination, Frisch’s determined that the foundation Fortney had built was defective. To correct the defect, the entire structure had to be demolish and rebuilt.

Frisch filed suit against Fortney to recovery costs of replacement. The architect filed suit as well in a separate litigation. Fortney tendered its defense to its insurer, AMICO, who refused to defend or indemnify Fortney due to a policy exclusion for defective workmanship that stated insurance does not apply to property damage to “that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”

The district court granted AMICO’s motion on the pleadings finding that the exclusion applied and denied Fortney’s motion for summary judgment seeking a declaration of coverage, but the Court of Appeals reversed. Since the issue has not been addressed in the Sixth Circuit, the Court adopted the Fifth Circuit’s reasoning. In holding that AMICO had a duty to defend Fortney, the Court held that the exclusion applied only to the cost of repairing or replacing distinct component parts on which the insured performed defective work. The plain meaning of the CGL exclusion excluded only the property that the insurer performed defective work on. In this instance, the exclusion only applied to the building’s foundation.

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