A federal appeals court affirmed a ruling in favor of an American International Group Inc. unit in a construction delay case, holding that a policy exclusion for property not physically injured applied.

New York-based Turner Construction Co., the general contractor for a building 17-story, mixed-use building project in Bethesda, Maryland, hired Sterling, Virginia-based Schnabel Foundation Co. to provide a “support of excavation” system, according to Wednesday’s ruling by the 4th U.S. Circuit Court of Appeals in Richmond, Virginia, in Schnabel Foundation Co. v. National Union Fire Insurance Co. of Pittsburgh, Pennsylvania.

These systems retain the earth immediately surrounding a building site and provides lateral support to neighboring properties during construction, according to the ruling.

In attempting to construct the system as close to the property line as possible, Schnabel drilled larger holes for the solider piles, which are retaining walls, used than it had planned. This resulted in damage to the floor of an adjoining restaurant and led to a year-long delay in the project’s completion, according to the ruling.

Litigation among the parties ensued. Turner, which had obtained an umbrella commercial general liability policy from AIG unit National Union, reached a $5 million settlement with Schnabel and assigned its remaining rights to Schnabel.

AIG refused to provide coverage to Schnabel, which filed suit against the insurer. The U.S. District Court in Greenbelt, Maryland, ruled in AIG’s favor, which was affirmed by a unanimous three-judge appeals court panel.

The CGL policy’s Exclusion D excludes coverage for “Damage to Impaired Property or Property Not Physically Injured,” said the appeals court ruling,

The situation “satisfies the first condition of Exclusion D because it is ‘property that has not been physically injured,’” said the ruling. “We conclude that the Site suffered no physical injury due to the defective (support of evacuation); only the site’s neighboring properties suffered physical injury through floor buckling and other cognizable property damage.

“The Site was temporarily unable to provide lateral support to its neighbors, but that caused no injury to the Site itself,” said the ruling in affirming the lower court’s decision.

Attorneys in the case could not immediately be reached for comment.