An insurer is obligated to defend a contractor in arbitration over a construction project under a provision in its commercial general liability policy, says a federal appeals court, in affirming a lower court ruling.

Construction of a luxury apartment complex was plagued with problems from the start, which eventually led the property owners to terminate contractor St. Cloud, Minnesota-based Miller Architects & Builders a little over a year after construction began, according to Wednesday’s ruling by the 8th U.S. Circuit Court of Appeals in St. Louis in Westfield Insurance Co. v. Miller Architects & Builders.

Over the next few months, workers allegedly discovered significant architectural and structural problems caused by Miller and its subcontractors, according to the decision.

This led to threats of legal action, and Miller sought coverage under its CGL policy with Westfield Center, Ohio-based Westfield Insurance Co., the ruling said.

After the property owner sought damages against Miller in arbitration, the insurer filed suit in U.S. District Court in St. Paul, seeking a declaration it was not obligated to defend or indemnify Miller, and Miller filed a counterclaim against the insurer.

The District Court ruled Westfield must defend Miller because some claims are arguably covered by the policy, but stayed resolution of whether it was also obligated to indemnify the contractor, according to the ruling.

A three-judge appeals court panel unanimously affirmed Westfield’s obligation to defend Miller.

“Under Minnesota law, an insurer’s duty to defend is broader than its duty to indemnify,” said the ruling. “Specifically, all Miller must show at the duty-to-defend stage is that one of the property owners claims is ‘arguably within the (policy’s) scope,’” said the ruling, in citing an earlier case.

“We begin and end with a claim that is arguably covered under the policy: the damage caused by a leaky roof,” it said. “The property owner has alleged in the arbitration that water has come through a defective installed roof and has damaged the ‘finishes and electrical work in the building’s interior.’

“This claim arguably falls under the initial grant of coverage in the policy, which includes ‘property damage’ caused by an ‘occurrence.’ The harm to finishes and electrical work qualifies as ‘property damage’ under Minnesota law,” the ruling said. 

The ruling held that three policy exclusions do not apply. “In sum, the claims against Miller do not ‘clearly’ fall outside the scope of the coverage,” it said, in affirming the lower court ruling that Westfield must defend Miller.

Attorneys in the case did not respond to a request for comment.

In 2017, a federal appeals court ruled Westfield was obligated to provide a defense in a case where it held that failing to put an adequate coat of sealant to a building’s exterior, which led to water damage, can be considered an “occurrence” under a CGL policy.