A federal appeals court has decided that Phoenix Insurance Company must provide a defense for Wehr Constructors, Inc. This ruling comes from a case involving mold and construction defects at St. Claire Medical Center in Morehead, Kentucky.
On April 18, the Sixth Circuit Court of Appeals reversed a previous ruling that stated Wehr’s commercial general liability policy did not cover the situation. This decision is significant as it revives Wehr’s claim for defense costs and highlights ongoing uncertainties in Kentucky regarding insurance coverage for construction-related damage.
The dispute began when Wehr was hired in 2016 to construct a new Medical Services Pavilion at St. Claire. However, by early 2019, the hospital terminated the contract due to delays, poor management of subcontractors, and serious defects that led to mold growth in the building.
Instead of suing Wehr directly, St. Claire filed a lawsuit against Travelers Casualty and Surety Company of America, which had issued a performance bond for Wehr’s work. Travelers then sought to add Wehr to the lawsuit, not to accuse them of wrongdoing, but to clarify Wehr’s role in relation to the bond.
Wehr requested Phoenix and two other insurers to defend them in the case. Phoenix refused, claiming they only had to defend direct lawsuits against the contractor and argued that construction defects were not considered "accidents" under their policy.
The Sixth Circuit disagreed with Phoenix’s arguments. Judge Ronald Lee Gilman, writing for the court, stated that even though Wehr was not directly sued, the allegations in the St. Claire case were closely related to Wehr’s actions. This connection was enough to trigger Phoenix’s duty to defend. The court emphasized that Kentucky law requires insurers to step in when there’s a chance that damages might fall under the policy.
The court also considered whether the mold damage, which affected parts of the hospital not involved in the construction, could be covered. While Kentucky’s Supreme Court has not fully embraced the idea that damage to unrelated property might be covered, the court found that the allegations did suggest a possibility of coverage, which activated Phoenix’s defense obligations.
However, the ruling was not entirely favorable for Wehr regarding its professional liability policy with St. Paul Surplus Lines Insurance Company. This policy only applied if Wehr had agreed to act as a construction manager, which they had not, so the court upheld the insurer’s refusal to provide a defense.
The third insurer, Travelers Property Casualty Company of America, had an umbrella policy similar to Phoenix’s. While a lower court suggested that Travelers also had no duty to defend, the appeals court sent this issue back for further consideration due to Travelers’ different role as an excess carrier.
This case has broader implications for both insurers and policyholders in the construction industry. It shows that even an indirect involvement in litigation can compel an insurer to defend a contractor, especially when significant performance bond liabilities are at stake.
The case is officially known as Phoenix Insurance Company, et al. v. Wehr Constructors, Inc., No. 24-5325, in the U.S. Court of Appeals for the Sixth Circuit.