Last Monday, the U.S. District Court in Galveston, Texas analyzed an insurer’s duty to defend and indemnify an insured under a Commercial General Liability Policy in a lawsuit against the insured for faulty work on a boat that resulted in the need to replace the entire hull. The court found a duty to defend in favor of the insured and denied the insurer’s motion on the duty to indemnify, without prejudice pending the development of further evidence in the case. In Robert Garner; dba Kustom Kolors Boatworks v. Nautilus Insurance Company, 2017 WL 1134142 (S.D. Tex. March 27, 2017), the insured worked on a boat to repair cracks “in the fiberglass gel coat” and “other interior structural problems.” After the boat was put to routine use, it reportedly developed significant cracks and “the entire hull” was not repairable and allegedly had to be replaced because of the work performed by the insured. A lawsuit was filed and Nautilus refused to defend. A judgment was taken in the underlying case against the insured for $48,375 and then this separate lawsuit in the insured’s name was filed against Nautilus.

In the subsequent coverage suit, both parties moved for summary judgment on Nautilus’s duty to defend and indemnify under the CGL policy.  The court noted the distinction between the duty to defend, as based on a strict eight-corners analysis, and the duty to indemnify as based on the actual facts establishing the insured’s liability in the underlying litigation.  Addressing the duty to defend, the court declined to review extrinsic evidence and found that the allegation of the limited work performed, resulting in the entire hull needing to be replaced and related loss of use, was sufficiently alleged to trigger coverage under the policy.  In doing so, the court rejected Nautilus’s more restrictive reading of the factual allegations and found the “property damage” allegation was sufficiently alleged so as to trigger a duty to defend.  The court then turned to the exclusions relied upon by Nautilus to deny coverage.

The court examined exclusion j(4) for damage to “personal property in the care, custody or control of the insured” and discussed Texas law finding that the exclusion only applies to the “particular object of the insured’s work” which the insured “totally and physically manipulates.” And here, the court noted it was a “close call” but it did not apply the exclusion under the facts alleged. The court next examined j(6) precluding coverage for “property damage to…[t]hat particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.”  The court noted the insured “was hired to repair certain parts of the boat’s hull, but his work on those parts had a negative impact on the entire hull and required replacement of the hull as a whole.” The court then quoted Texas law addressing the exclusion stating in part that if the insurer wanted the exclusion to apply more broadly, it should say “because ‘your work’ was incorrectly performed on any part of it” and, because it is more limited as worded, the exclusion should not apply under the facts alleged.  Similarly, the court examined exclusion l for damage to “your work” and found that because the damage alleged went beyond the scope of the work performed by the insured, it did not preclude coverage.

Lastly, the court examined exclusion d, the “aircraft, auto or watercraft exclusion” which Nautilus also argued precluded coverage for property damage.  Nautilus asserted that the loss was one “arising out of the ownership, maintenance, use or entrustment to others of…watercraft” and the insured’s work on the boat and repairs were “maintenance.”  But, turning to an exception to the exclusion, the court disagreed noting that it does not apply to “(1) A watercraft while ashore on premises you own or rent….” The court found significant the lack of allegations implying the work or repair took place anywhere other than the insured’s premises.  Accordingly, the court found none of the exclusions applied and Nautilus had a duty to defend the underlying lawsuit.  The court also denied the insurer’s motion on the duty to indemnify, without prejudice, pending the development of further evidence in the case.  In doing so, the court noted in part that Nautilus “correctly points out that the analysis of a duty to indemnify is less favorable to the insured.”

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