For this week’s Guest Post Friday here at Construction Law Musings, we welcome a friend and sometime co-presenter Craig Martin. Craig (@craigmartin_jd) is a partner in the law firm of Lamson Dugan and Murray, LLP in Omaha, Nebraska. He has a background and experience in all aspects of construction law. As part of his practice he counsels contractors, subcontractors, developers, owners, materials suppliers and design professionals in various construction disputes. He also successfully represents them in both State and Federal courts. Craig’s business goal is to provide cost-effective and distinguished counsel to the construction industry. Craig also authors the Construction Contractor Advisor blog.
This last year was the year for the courts to decide whether a defective construction claim was covered by your Commercial General Liability (CGL) Policy. While you might typically think that the answer to the question lies in the policy itself, a number of recent court cases reveal that it may also depend on the state in which a claim is litigated. As explained below, a number of state courts have entered opinions that interpret CGL policies and have come to very different conclusions.
When is Defective Construction covered?
In order to have coverage, a defective construction claim must satisfy five requirements:
- The insured must be legally obligated to pay
- Damages because of property damage
- Caused by an occurrence
- Where the damage is to property other than the work of the insured
- Unless the work was performed by subcontractors.
The issue that courts have been addressing is whether the damage caused by faulty or defective work is an occurrence.
What is an Occurrence?
Typically, a CGL policy defines an occurrence as an accident, including continuous or repeated exposure to substantially the same, general harmful conditions.
Is Faulty Workmanship an Occurrence?
In the last year, a number of state and federal courts have analyzed substantially similar CGL policies and their application to faulty workmanship. The majority of recent state court decisions have found that faulty workmanship may constitute an occurrence if the faulty work was unexpected and not intended by the insured, and the property damage was not anticipated or intentional, so that neither the cause nor the harm was anticipated, intended, or expected.
This was the very situation in North Dakota. In K&L Homes, Inc. v American Family Mutual Ins. Co., 829 N.W.2d 724 (N.D. 2013), the court went against its earlier decisions in finding that faulty workmanship was an occurrence, and noted that it was following the majority of the state supreme courts which have decided the issue.
The Connecticut Supreme Court similarly ruled that a contractor’s defective workmanship can give rise to an occurrence because negligent work is unintentional from the point of view of the insured. Capstone Building Corp. v. American Motorists Ins. Co., 67 A.3d 961 (Conn.2013).
The West Virginia Supreme Court also reversed its earlier holdings in finding that defective workmanship causing bodily injury or property damage is an occurrence under a CGL policy. But, the court noted that the underlying damages which created the accident or occurrence must not have been deliberate, intentional, expected, desired or foreseen by the insured. Cherrington v Erie Ins. Prop and Cas. Co., 745 S.E.2d 508 (W.Va. 2013)
But, the courts in Hawaii and New York reached the opposite conclusion. In Hawaii, the court held that the CGL policy did not cover defective workmanship because substandard construction work was a foreseeable breach of contract and therefore did not constitute an occurrence. Nautilus Ins Co v 3 Builders Inc. (June 24, 2013). In New York, the highest court, applying New Jersey law, found there is no “occurrence” where faulty construction only damages the insured’s own work. National Union Fire Ins. Co. of Pittsburg, PA v. Turner Constr. (May 15, 2014).
Will your Local Court Allow a Faulty Workmanship Claim?
Given that the courts mentioned above all reviewed similar CGL policies and yet reached differing conclusions, it will really depend on where a claim is heard. A majority of states have now ruled that faulty workmanship is an occurrence under a CGL policy. But, if you are in Hawaii or New York, you may have great difficulty in obtaining coverage.