Appeals Court: Glass Damage Not Covered by Insurance

The U.S. Court of Appeals for the Fifth Circuit has affirmed a Texas district court’s judgment that Liberty Mutual Fire Insurance Company is not required to cover a general contractor’s claim for damage to the Energy Center 5 glass façade, a skyscraper in Houston.

Balfour Beatty Construction and Milestone Metals Inc. are the plaintiffs and appellants in the case, which was appealed in April 2019.

Background

According to the opinion, Balfour was hired by TCH Energy Corridor Venture (Trammell Crow) as the project’s general contractor. Balfour subcontracted with Milestone for the erection of structural steel, stairs and ornamental steel. Trammell Crow obtained an insurance policy from Liberty effective from July 10, 2014 to August 10, 2016.

On July 12, 2016, Milestone learned that slag from welding that occurred in October 2015 had fallen down the side of the building, damaging glass windows on lower floors. The opinion states that Trammell Crow, Balfour and Milestone then tendered a claim to Liberty under the policy. However, Liberty denied coverage and explained that the loss was excluded. Milestone and Balfour ultimately replaced the windows at a cost of nearly $687,000.

The insurance policy states that Liberty covers risks of direct physical loss or damage unless the loss is limited or caused by a peril that is excluded. Excluded perils include loss or damage caused by or resulting from an act, defect, error or omission (negligent or not). However, if an act, defect, error or omission results in a covered peril then Liberty does cover the loss or damage caused by that covered peril.

“Liberty concedes that the window damage was a ‘direct physical loss or damage’ that falls under the general insuring clause. Moreover, the parties agree that, absent the exception, the exclusion would bar appellants’ recovery because the window damage resulted from Milestone’s construction or installation activity. Therefore, the interpretative dilemma is whether the exception applies to reinstate coverage for appellants’ claim. Put differently, the question is whether the ‘an act, defect, error or omission’ ‘result[ed] in a covered peril,’” reads the opinion.

The district court ruled that the exception’s language suggests that there must be two loss events that are different in kind in order to reinstate coverage—one initial loss event (an excluded peril) followed by a separate covered peril, with only the latter peril subject to coverage.

In its opinion, the appeals court held up the district court’s judgment, stating, “… An ensuing loss provision like the one presented here is only triggered when one (excluded) peril results in a distinct (covered) peril, meaning there must be two separate events for the exception to trigger. Put simply, appellants’ welding operation involved falling slag, which damaged the exterior glass of Energy Center 5. The welding operation is inseparable from the falling slag; they are not two separate events. The falling slag is not an independent event that ‘resulted in a covered peril.’ Instead, the falling slag during the welding operation constituted damage, caused by an act of construction or installation, to the exterior glass. Further, even if the falling slag is separable from the welding operation, it is not a ‘covered peril.’”