This was an appeal of a trial court decision that a construction company was entitled to coverage under its comprehensive general liability insurance for alleged construction defects, despite a work product exclusion in the policy. The suit had been initiated by the developers of a condominium project and the condominium association, which claimed damages in excess of $1 million arising from construction defects in the condominium roof, the terrace and garage, and the brick facade.

On appeal, the insurance company challenged the conclusion of the trial court that the insured construction company, "acting as a construction manager rather than as a general contractor, performed only services and thus did not have a 'product' for which the policy provided an exclusion from coverage."

The appeal court took note of cases in point to the effect that the test for whether the insured party had a product was based on the degree of control over the project exercised by the insured. The president of the construction company involved here agreed that his company had effective control of the project. He testified that the company "coordinated all of the scheduling of the work, dealt with all of the contractors and subcontractors, obtained certificates of readiness for the utilities, prepared the contracts for the contractors, obtained building permits, ensured that the other contractors had insurance, arranged soil testing, inspected and approved the work, and approved payments for work as it was completed."

The court concluded that the insured construction company "clearly had ultimate responsibility and effective control of the project." Accordingly, it "cannot successfully argue that the project is not its work product."

The appeal court made an important distinction between a performance bond and general liability insurance. It said that a contractor is required to furnish a performance bond to protect a building owner from loss resulting from damage to the building due to defects. The contractor carries comprehensive general liability insurance for protection with respect to claims for personal injury or property damage to property other than the building under construction. Here, the court concluded, "to allow the association to recover damages from the (contractor's) policy would, in effect, convert the (contractor's) general liability policy into a performance bond and allow (the contractor) to shift its responsibility to provide a project free from defects to its insurer."

The court concluded that "exclusions in an insurance policy that preclude coverage for work product of a general contractor are similarly applicable to a construction manager with effective control of a project." The judgment of the trial court on this issue was reversed in favor of the insurance company and against the insured.

(THE RIVERS, Respondent v. RICHARD SCHWARTZ/NEIL WEBER, INC., Respondent. Minnesota Court of Appeals. Nos. C6-90-165, C4-90-195. August 21, 1990. CCH 1990 Fire and Casualty Cases, Paragraph 2728.)