Coverage for defective construction claims under commercial general liability (CGL) policies remains an important and frequently contested issue, and the last year has seen significant developments on the issue.
Courts have taken varying approaches to the question and applied different parts of the CGL policy as they define the legal framework for analyzing the issue. As the landscape changes, insurers, contractors and damaged parties must be aware of the legal analyses and differing approaches.
Last year, the Ohio Supreme Court determined that defective construction itself does not trigger coverage.
Westfield v. Custom Agri Systems
In Westfield Ins. Co. v. Custom Agri Systems, Inc., 2012 Ohio 4712, the court took a hard-line approach and found that faulty workmanship lacks the requisite fortuity to constitute an “occurrence” under the policy. The court reasoned that a CGL policy is not intended to protect contractors against every risk of operating a business and does not insure against the insured’s faulty work itself. Rather, a CGL policy insures only the consequential damages to other property that may stem from that work. The decision forecloses any arguments that defective work itself may be covered, but acknowledges that collateral damage to non-defective property may constitute an occurrence and trigger coverage.
Recent decisions from other states, however, have determined that defective construction does constitute an “occurrence,” although coverage may still be precluded by other parts of the policy.
Taylor Morrison Services v. HDI-Gerling America
In Taylor Morrison Services, Inc. v. HDI-Gerling America Ins. Co., 2013 Ga. LEXIS 618, the Georgia Supreme Court observed that “the limits of coverage do not all have to be found in the word ‘occurrence,’ inasmuch as the other words of the insuring agreement — as well as the policy exclusions — have their own roles to play in marking the limits of coverage. The sounder analytical approach is to avoid conflating the several requirements of the insuring agreement and the exclusions, and instead, to let each serve its proper purpose.”
The court held that faulty workmanship could be an “occurrence,” even absent third-party property damage, but that other steps in the analysis could still limit coverage. The court noted that the insuring agreement requires the occurrence to result in “property damage,” which typically does not include the faulty work itself but rather applies only to damage to non-defective property.
“CGL coverage generally is intended to insure against liabilities to third parties for injury to property or person, but not mere liabilities for the repair or correction of the faulty workmanship of the insured.”
While the decision may be helpful to policyholders, the definition of “property damage” and policy exclusions likely still restrict coverage for the faulty work.
Capstone Building v. Am. Motorists
In Capstone Building Corp. v. Am. Motorists Ins. Co., 2013 Conn. LEXIS 187, the Connecticut Supreme Court also concluded that unintended defective construction could constitute an “occurrence.”
The court found that negligent work performed by the insured is unintentional and therefore accidental. But, continuing the analysis, the court held that the faulty work itself did not fit within the definition of “property damage” required to trigger coverage, stating that “the policy covers claims for property damage caused by defective work, but not claims for repair of the defective work itself.”
Accordingly, while defective work may constitute an occurrence, only damage to non-defective property may be entitled to coverage, subject to the policy’s exclusions. Addressing those exclusions, the court found that the “your work” exclusion precluded coverage for faulty work performed by the insured but that work performed by subcontractors did not fall within that exclusion and could still be covered.
Like the decision in Georgia, the ruling expands the potential scope of coverage for faulty workmanship, but other language within the insuring agreement and policy exclusions may limit coverage obligations.
K&L Homes v. Am. Family Mutual
The North Dakota Supreme Court has taken an even broader approach to the issue. In K & L Homes, Inc. v. Am. Family Mut. Ins. Co., 2013 ND 57, the court overturned previous case law and found that “occurrence” includes construction defects if the faulty work was unexpected and unintended by the insured.
In its analysis of “occurrence,” the court refused to distinguish between damage to the contractor’s work and damage to other property (like the Ohio court had done). The court did not detail its analysis addressing the “property damage” requirement but, in overturning its previous decision, found that property damage included damage to the work product.
The decision appears to be even broader than those issued by Connecticut and Georgia, and could allow for coverage for the defective work itself.
Cherrington v. Erie
Similarly, in Cherrington v. Erie Ins. Prop. & Cas. Co., 2013 W.Va. LEXIS 724, the Supreme Court of Appeals of West Virginia reversed long-standing precedent in the state and determined that defective construction can be an “occurrence” and that faulty work itself may constitute “property damage.”
Significantly, the court also interpreted the policy’s exclusions in favor of the policyholder. The policy at issue included a “your work” exclusion that excluded coverage for work performed by the insured, but subcontractors were excepted from the exclusion.
Another exclusion precluded coverage for “your work” and for work performed by “others on your behalf.”
Finding that the two exclusions conflicted — with one providing coverage for the work of subcontractors and the other excluding it — the court refused to allow the policy to give coverage in one exclusion and then take away that coverage in the very next exclusion. Accordingly, the court found that the subcontractor exception to the “your work” exclusion allowed for coverage for the subcontractor’s defective work.
The ruling is decidedly favorable for policyholders and subjects insurers to significant coverage and defense obligations.
These recent decisions have marked some significant changes in the legal approach to defective construction claims.
Many courts are now conceding that defective construction is an “occurrence,” but other language in the insuring agreement and exceptions to coverage may still limit coverage obligations. While Ohio has restricted insurers’ obligations, other states have loosened the analysis to varying degrees.
It is important for all parties to understand the varying approaches and the analyses undertaken when determining potential rights and obligations for defective construction claims under CGL policies.
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