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Policy exclusions shield AIG unit in construction dispute


An American International Group Inc. unit is not obligated to provide coverage in a dispute with a construction firm over a San Diego water project, based on exclusions in its policy, says a federal appeals court.

Atlanta-based Archer Western Contractors Ltd. was the general contractor for the San Diego County Water Authority’s emergency water storage project, according to Thursday’s ruling by the 9th U.S. Circuit Court of Appeals in San Francisco in Archer Western Contractors Ltd. v. National Union Fire Insurance Co. of Pittsburgh, Pa., a Pennsylvania Corporation.

AWC had agreed to furnish all tools, equipment, labor, materials, and transportation in connection with the authority’s project, which comprised a system of reservoirs, pipelines and pumping stations that were intended to provide water to the San Diego region in the event of interruption to imported water deliveries, according to court papers.

Boston-based Liberty Mutual Insurance Co., which was not a party in the appeal, was the primary insurer, while National Union, a unit of New York-based AIG, provided excess coverage, according to court papers.

In 2011, the San Diego Water Authority filed suit against AWC for breach of contract, contractual indemnity, negligence, and declaratory relief charging, among other things, it had failed to perform work in the time required by its contract and in a “workmanlike” manner, according to court papers. 

The San Diego Water Authority alleged the project was supposed to take roughly two-and-a-half years, but, because of a multitude of factors, took about seven years to complete instead.

While Liberty Mutual paid $2 million in per occurrence policy limits to the Water Authority on AWC’s behalf under a reservation of rights, National Union refused to pay under its policy, and AWC filed suit. 

The U.S. District Court in Los Angeles ruled in National Union’s favor in the case, and a three-judge appeals court panel unanimously upheld the ruling, citing two policy exclusions.

One of the exclusions precludes coverage for property damage arising out of the contractor’s performance of operations. The other precludes coverage for property damage for property that must be repaired because the contractor’s work was incorrectly performed.

“Under California law, exclusionary clauses are interpreted narrowly against the insurer,” said the ruling. The ruling said, however, “Here, the alleged property damage was to the pump house and turbine generators, discrete portions of the property for which AWC was partially if not fully responsible, and the damage flowed from its allegedly defective work on the property,” said the ruling.

“We therefore agree with the District Court that the above exclusions precluded coverage,” and summary judgment was properly entered in National Union’s favor, said the ruling.