A federal appeals court ruled against a QBE Insurance Group Ltd. unit in a coverage dispute over arson at a hotel construction project, reversing a lower court ruling in the insurer’s favor.

The construction project’s general contractor was Fargo, North Dakota-based Axia Contracting LLC and its owner was Fargo-based 255   Blackhawk Hospitality LLP, according to Tuesday’s ruling by the 10th U.S. Circuit Court of Appeals in Denver in Praetorian Insurance Co. v. Axia Contracting LLC.; 255 Blackhawk Hospitality LLP.

At the time of the June 2017 fire, a builder’s risk policy issued by Sun Prairie, Wisconsin-based Praetorian, a QBE unit, was in effect, according to the ruling. A policy provision required that the jobsite be protected with chain link fencing and all entrance and access gates remain securely locked during nonworking hours, according to the ruling.

Praetorian denied coverage because the job site was not enclosed by chain link fencing, nor were the gates securely locked. The insurer filed suit in U.S. District Court in Denver seeking a declaration it was not obligated to provide coverage, and Axia counterclaimed for breach of contract and bad faith. 

The District Court granted Praetorian summary judgment on the basis that the defendants’ failure to maintain fencing was a material policy breach.

The ruling was unanimously overturned by a three-judge appeals court panel. The panel said it “must reject the district court’s conclusion that defendants’ failures to maintain fencing and secured access was a material breach…As defendant’s argue, treating the failure to fence as a material breach could excuse Praetorian’s obligation to cover damages from a tornado. Such a result is clearly in inconsistent with the parties’ expectations as indicated by the policy’s plain terms,” said the ruling, in remanding the case for further proceedings.

Praetorian’s attorney had no comment, while Axia’s attorneys could not be reached.

In 2018, a federal appeals court overturned a lower court ruling and held Praetorian had a duty to defend a tire retailer in connection with a fatal accident because the incident may not have fallen under the coverage’s policy exclusion.