Blurred Coverage Boundaries

On the other hand, the distinction can be blurred, depending on the jurisdiction, the nature of the damage claimed, and the language of the coverage form. For example, in the landmark case of Vandenberg v. Superior Court of Sacramento County, 982 P.2d 229 (Cal. 1999), the California Supreme Court noted that while the general rule is that damages from an insured's breach of a contract are not covered under the CGL form, this rule is not a universal one just because a contract is involved.

In this particular case, the Court said that, when there is property damage, the focus of a judicial inquiry should be the nature of the risk that caused the damage and the specific policy language. The policy language stated that the insurer agreed to pay sums that the insured was “legally obligated to pay as damages,” and the Court found that any reasonable layperson would understand this to refer to any obligation that is binding and enforceable under the law, regardless of whether this is pursuant to a contract or tort. Admittedly, this decision is not universally accepted by jurisdictions throughout the country. It does, however, represent sound reasoning for extending CGL coverage for breaches of contract under certain circumstances.

The standard CGL form itself can also contribute to questioning about whether the form applies to breaches of contract. The CGL form applies to claims for damages that the insured is legally obligated to pay because of property damage caused by the insured. Such property damage can be caused by the insured's work, and the insured's work is defined in the CGL form as including “warranties or representations made at any time with respect to the fitness, quality, durability, performance, or use of” the named insured's work. So, if the insured builds a retaining wall for a customer and offers a warranty that the wall will stand for years, only to see the wall fall after a month, does the insured have coverage under his CGL form if the claimant files a lawsuit based on breach of contract? The answer is “yes” and “no.”

Explaining Exclusions

There is an exclusion in the CGL form that applies to property damage to the named insured's work arising out of that work. Thus, the form will not cover a claim for the damage to the wall itself, regardless of how a court views the breach-of-contract claim language.

However, if that falling wall has crushed the claimant's patio furniture, that claim is going to be covered, even if presented as a breach of the warranty (or contract). This is consistent with the Vandenberg decision in that the breach of contract resulted in property damage. The falling wall, therefore, was not just a failure of the insured's warranty of quality and durability, but also a claim based on the insured's work damaging another's property—something the general liability form is meant to do. The property damage claim has, in effect, transcended the breach-of-contract language.

Thus, if a property damage claim is brought against the insured and the complaint lists breach of contract as the source of the claim, then the insurer should examine the facts of the incident before automatically assuming that a breach-of-contract claim is never covered by the general liability policy.

If the failure of the insured's work has damaged another's property in addition to damage to the insured's work, that claim may very well be covered even if it is presented to the court as a breach of contract. The insurer can certainly raise the issue of coverage for a breach of contract under a general liability policy, but unless the insurer can point to policy language or case law to support its position, the issue is still going to come down to the fact that the insured's work damaged another's property.

Because insurance coverage for such a claim is the reason the insured purchased the liability policy, where is the basis for denial of coverage? Breach of contract is not the automatic answer.