Litigation over whether a Commercial General Liability insurance (CGL) policy provides coverage for faulty workmanship claims is rapidly evolving. Since 2012, six state supreme courts (CT, WV, ND, AL, GA, and OH) have ruled on whether faulty work can be an “occurrence;” whether the cost to repair the damage to the work constitutes “property damage”; how the “your work” exclusion and the subcontractor exception applies and whether providing such coverage converts a CGL policy into a bond. In addition, a few states have enacted legislation mandating CGL policies to define “occurrence” to include property damage resulting from faulty workmanship.
Of the six rulings, only the Supreme Court of Ohio ruled definitively against coverage, holding “claims of defective construction or workmanship brought by a property owner are not claims for ‘property damage’ caused by an ‘occurrence’ under a commercial general liability policy….” Westfield Ins. Co. v. Custom Agri Sys. Inc. 979 N.E.2d 269 (Ohio 2012)
Is Faulty Workmanship an Occurrence?
Although all of the rulings are nuanced, the other five states’ supreme courts have generally ruled that faulty workmanship can be an occurrence under the CGL policy. Rejecting the argument that faulty workmanship is foreseeable and therefore never fortuitous, the Supreme Court of Connecticut observed:
Addressing the oft-cited argument that property damage to the work itself can never be an occurrence as an occurrence necessarily involves damage to property or work of someone other than the insured, the Supreme Court of Georgia made this pithy observation:
Is it “Property Damage?”
For the CGL policy to be triggered, not only must there be an occurrence, but that occurrence must result in property damage. Mere claims for diminished value usually do not rise to the level of physical injury to tangible property, one of the key elements within the CGL’s definition of “property damage.” For example, the cost to remedy violations of buildings codes that result from shoddy construction do not involve injury to tangible property. Further, the cost of removing and reinstalling work involving a component part that was defective prior to delivery or that was simply improperly installed would likely not be considered physical injury to tangible property and therefore not “property damage.”
The “Your Work” Exclusion.
A substantial amount of the litigation regarding construction defects concerns the very existence of the “your work” exclusion and the subcontractor exception to that exclusion. On the one hand, the existence of exclusions and their exceptions do not create coverage. On the other hand, a determination that faulty workmanship can never be an occurrence and thus not covered by the CGL renders the “your work” exclusion meaningless – it would serve no purpose in the CGL policy.
The interpretation and construction of the “your work” exclusion and the subcontractor exception were concisely explained by the Supreme Court of Connecticut:
CGL as a Bond.
The five supreme court rulings generally have rejected that notion that allowing coverage under the CGL policy for faulty workmanship would result in the CGL being converted into a bond. First, the interpretation of one insurance policy (or bond) is independent of another. In other words, whether or not the CGL might be viewed as a bond is not relevant to interpreting the terms and conditions of that CGL policy – the coverage provided by a CGL policy is not affected by other insurance or bonds. Second, the differences between a bond and an insurance policy are numerous, not the least of which is the principal being bonded is expected to indemnify the surety for amounts paid under a bond – a concept foreign to liability insurance. Consider the following:
As construction defect litigation continues to progress, the trend appears to be in favor of coverage, albeit in various forms. Three of the supreme courts corrected prior precedent. Of particular note is the commentary of the Supreme of West Virginia regarding the need to revisit its prior rulings:
According to many commentators, the majority rule is now that faulty workmanship may be considered an “occurrence” that results in “property damage,” but is subject to the “your work” exclusion and, if applicable, coverage is reinstated by the subcontractor exception. However, great care should be exercised in drawing any sweeping conclusions from any perceived trends, in part because cases are always fact specific, and in part because the specific ruling of one court is often subtlety different from another court’s ruling.
For example, while the Supreme Court of Georgia does recognize that damage to the work itself may be an “occurrence” under the CGL policy, coverage is limited to property damage to other “non-defective property or work” of the insured.
This distinction may prove to be very important. As an illustration, should a subcontractor misread the plans and install two by four inch joists when the plan calls for two by six inch joists, the cost to remove and reinstall the proper joists is not covered by the CGL as there is no property damage. However, if the joists result in the collapse of the structure, the general contractor, whose work is the entire house being built, would have coverage for the damage to portions of the general contractor’s work (due to the subcontractor exception) that was not otherwise defective.
This article was originally published by AmWINS Group, Inc., a leading wholesale distributor of specialty insurance products and services. AmWINS publishes The Edge, a monthly email with informative and timely articles for P&C and benefits insurance agents and brokers. To sign up to receive The Edge or for more information about AmWINS, visit amwins.com.
Legal Disclaimer: Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Discussion of insurance policy language is descriptive only. Every policy has different policy language. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. Please refer to your policy for the actual language.