Everest Indemnity Insurance Co. is on the hook to defend an insured alleged to have improperly installed a fire suppression system under its errors and omissions policy because its various exclusions were, at best, ambiguous.

The ruling in Bayside Fire Protection LLC v Everest Indemnity Insurance Co. is critical of the insurer’s language in its commercial general liability (CGL) and E&O policy exclusions and how they interact.

According to the March 21 opinion handed down by the U.S. District for Maryland, the E&O endorsement “both seems to provide coverage for negligence and remove coverage for negligence.”

“It is when all exclusions come together that it becomes unclear what the E&O endorsement covers. Given that the extrinsic evidence provided does not resolve the issue of what the E&O endorsement covers, the contract must be construed against Everest as the drafter of the instrument,” Judge George J. Hazel wrote.

Bayside Fire Protection sought a declaration that Everest was required to defend it against claims brought by a District of Columbia property owner over the installation of a fire suppression system. The property owners alleged that improper installation not only presented a personal injury and safety risk for tenants but also a revenue loss and property devaluation for the owners. The owners claimed they suffered financial damage and pain and suffering. They sought more than $1 million in damages from Bayside.

Bayside had obtained a CGL policy from Everest that covered “bodily injury” or “property damage” caused by an accident. The CGL policy contained exclusions for damage to property that was not physically injured due to a defect in the insured’s work, as well as any loss Bayside incurred to repair its own work due to a defect, deficiency or dangerous condition.

Bayside also had enhanced coverage through an Everest errors and omissions endorsement that covered “injury or damage” from negligence that is not “bodily injury” or “property damage.” This coverage obligated Everest for any loss resulting from a negligent act, error or omission to which this insurance applies. Loss is defined as “injury or damage other than ‘bodily injury,’ ‘property damage,’ or ‘personal and advertising injury.'”

Bayside maintained that it “reasonably expected” that any alleged damage from negligent acts would fall under this E&O coverage.

The claims and crossclaims against Bayside in the underlying D.C. lawsuit were dismissed while this insurance dispute was being heard. However, the controversy that remained was whether Everest was required to provide cover for Bayside in that underlying lawsuit.

Everest first argued that the E&O endorsement was not implicated because “there is no indication whether or how Bayside’s professional specialization came into play.” Everest argues that this is a “run-of-the-mill construction defect case.”

But the court said Everest was incorrect. Bayside was hired to install fire safety and sprinkler systems, as well as fire blocking materials, a fire annunciator panel and fire alarms. The D.C. plaintiffs objected to Bayside’s installation of the systems. The E&O endorsement specifically covers Bayside’s “fire suppression and extinguishing” operations. Thus, the court found that Bayside’s work did fall under the “covered operations” of the E&O endorsement.

Everest next argued that the D.C. lawsuit did not allege a “loss” because the property owners’ claims were for risk of bodily harm from fire. However, the judge noted that the D.C. plaintiffs also claimed financial damages related to the loss of the property’s use as a home and as rental income, as well as damages in diminishment of the value of the property. In addition, the D.C. plaintiffs claimed that they would need to gut and rebuild the unit and the entire property to correct negligent work performed by Bayside.

The court found that the D.C. plaintiffs alleged a “loss,” noting that the policies did not define the term “damage” and thus that could be construed broadly. That meant the allegations in the D.C. lawsuit “potentially” brought the claims within the policy coverage.

Then the court considered the exclusions.

Everest asserted that several exclusions in the CGL were applicable, including the exclusions of “expected or intended injury,” damage to “your product” or “your work,” and damage to “impaired property” or property “not physically injured” arising out of a “defect” in “your product” or “your work” or “a delay or failure” to “perform a contract or agreement.”

Bayside argued that the exclusions of the CGL policy “engulf the whole of the coverage” of the E&O endorsement, and thus, the coverage provided under the E&O endorsement is illusory.

The judge leaned toward Bayside’s position.

“It is difficult to understand how a ‘negligent act, error, or omission’ related to Bayside’s provision of ‘fire suppression and extinguishing’ installation and materials would ever be covered, particularly because damages because of deficiencies in an insured’s work are excluded. Thus, the E&O endorsement both seems to provide coverage for negligence and remove coverage for negligence,” the judge wrote. “At best, the coverage of the E&O endorsement is ambiguous, and at worst, it is illusory.”

The judge further noted that Everest “did not offer a single hypothetical scenario” to explain how, when reading the exclusions into the endorsement, any loss from a negligent act could feasibly be covered.

Additionally, the court noted that it is commonly understood that an E&O endorsement covers for the insured’s own negligent acts. Yet Everest did not explain why that common interpretation did not apply here.

The court said that Everest’s exclusion seems to remove all coverage for negligent acts performed by an insured—rather than just limit coverage. “When two provisions in an insurance policy are repugnant to one another, the provision most favorable to the insured will be applied,” the judge wrote.