In my experience, an insurer oftentimes acts differently than its lawyers. What I mean is that the way in which an insurance claim is handled changes dramatically once it is handed off to a defense lawyer. Insurance defense lawyers oftentimes argue different reasons for the denial of a claim than its client wrote in its denial letters to my client. This sometimes leads to insurance defense lawyers arguing that a policy provides much less coverage than the insured believed it provided. But in zealously advocating for their client, sometimes insurance defense lawyers go too far, as was the case in RLI Insurance Company v. Willbros Construction (U.S.) L.L.C., et al.
In RLI Insurance Co. v. Willbros Construction (U.S.) L.L.C., et al., the issue before the Court was whether a particular exclusion in an insurance policy precludes coverage of the value of line pipe that the defendants attempted to install under a river. The defendant in this case was hired to construct a natural gas pipeline. Willbros Construction hired a subcontractor to drill the pipeline hole. While the subcontractor was installing the line pipe, the line pipe became lost and damaged. They submitted a claim to RLI Insurance Company for $1,567,530.09 to recover the cost of the replacement line, which RLI Insuranece Company denied.
RLI Insurance Company argued that the defendant’s loss was caused by faulty construction or workmanship excluded from coverage by the “Defects, Errors, and Omissions” exclusion of the policy, because the hole through which the line pipe was to be installed was defectively drilled. It further argued that the “ensuing loss” provision did not extend coverage to defendant’s claim because there was no separate and independent “covered peril” beyond the faulty construction that caused the loss.
Willbros Construction maintained that the policy covered the line pipe’s value, and that even if the hole was defectively drilled, the resulting damage to the line pipe is a covered loss that is not otherwise excluded.
The parties filed their respective motions for summary judgment, presenting this issue before The United States District Court for the Southern District of Texas (Houston Division), Judge Kenneth M. Hoyt presiding. The Court narrowed the issue in the following manner:
The issue is whether the line pipe constitutes ‘construction,’ as used in the polemical policy provision. Because “construction” is an ambiguous term that could have multiple meanings in the policy, the Court holds in [Willbros Construction’s] favor.
The Court reasoned that the policy’s exclusion effectively eliminated coverage for the repair or replacement of defective workmanship while maintaining coverage for damage that results from that defective workmanship.
The Court summarized it thusly,
The exclusion protects [RLI Insurance Company] from becoming the guarantor of [Willbros Construction’s] work, but it does not eliminate coverage for ensuing losses caused by defective workmanship – here, the damaged line pipe.” And after finding that in cases involving ambiguous contract terms, “the Court must ‘adopt the [interpretation] of an exclusionary clause urged by the insured as long as that [interpretation] is not unreasonable,” the Court ultimately ruled in Willbros Construction’s favor.
The real gem, however, came on the last page of the Court’s opinion. “Consequently, even if the hole was defectively drilled, the resulting damage to the line pipe is a covered loss of property separate and distinct from the allegedly defective hole. To hold otherwise, as [RLI Insurance Company] wishes, would effectively undermine [Willbros Construction’s] reason for buying insurance in the first place.” (internal citations omitted) (emphasis added).