Tuesday, 27 August 2013 15:38
By Patricia Porter Kryder
A city desired to enlarge its sewage treatment facility and hired an engineering firm to plan the project. The plan called for the demolishing of the old facility and creating a new lagoon. Shortly after submitting the winning bid, the contractor, who won the bid, procured a builders’ risk policy, pursuant to the city’s terms, and began construction on the project.
The city began operating the new lagoon in late 2008. In February of 2009, a hole developed in the liner of the old lagoon, causing the wastewater to drain. Several days later, a hole developed in the liner in the new lagoon, again, causing the wastewater to drain completely. It was discovered that the liners were ripping due to sinkholes developing underneath the lagoons.
The city made a claim against the contractor’s builders’ risk policy. The insurer denied the claim, contending that the policy did not cover the damages that occurred in February 2009, due to the completion of construction in 2008. The city then filed suit. The issue for the court to consider was whether or not the sinkhole occurred during “the course of construction.” The trial court ruled in favor of the insurer’s motion for summary judgment, holding the holes in the liners did not occur during the “course of construction” and the insurer was not liable for the damages. The city appealed.
Contract provided for additional steps before project completion
The Tennessee Court of Appeals analyzed the builders’ risk policy and the contract between the city and the contractor. The court found the provisions of the builders’ risk policy provided coverage for direct physical loss caused by covered peril, including sinkholes, to buildings and structures during the “course of construction, erection, or fabrication.” The court further found a specific section in the policy stated that coverage does not extend to any property that is “put to its intended use.” The insurer argued that because the city began using the lagoons in late 2008, they were effectively put to their intended use, and coverage ceased at that time. The court was not persuaded.
The court found that multiple provisions in the contract between the contractor and the city required the opposite conclusion—the lagoons were not put to their intended use by February of 2009. The court found the contract specifically called for a testing period, the issuance of appropriate permits, the city’s acceptance of the project, and final payment before the project was “put to its intended use.” The court found that it was undisputed that the city had not actually accepted the project under the contract or issued the final payment by February of 2009; thus, the court concluded that “while construction on the new lagoon had reached a point in the fall of 2008 at which time the plant could be put into operation for purposes of testing and startup, it was not in such an operational condition that construction was complete… [or had] been ‘put to its intended use.’”
The city prevailed in this case and was able to prove coverage under the contractor’s builders’ risk policy. The phrase of “put to its intended use” is common in builders’ risk policies and often operates to terminate the policy’s coverage over a particular project. To the extent parties to a construction project are able to define when a project has been “put to its intended use” (as the city did in this case with its contract with the contractor), parties can potentially avoid the termination of insurance coverage.