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D4COST Software

Faulty Workmanship:
Covered by Insurance? Depends

By Matthew J.
DeVries and Stephen Ream

WIn the July-August 2012 Legally Speaking column, we addressed the legal significance of “additional insured” certificates in the construction process. In this issue, we address another equally important insurance topic—faulty workmanship. There is a recent national trend to broadly expand the definition of an “occurrence,” under a commercial general liability (“CGL”) policy when the claim arises from defective construction. However, despite the fact that more defective work claims may now be categorized as “occurrences,” a recent case recognized that coverage may not be broadened due to other policy provisions. This contrast reinforces the need for careful professional analysis on questions involving coverage arising from defective work on construction projects.

The Dispute. In Taylor Morrison Services, Inc. v. HDI-Gerling America Ins. Co., the Georgia Supreme Court addressed whether defective work that did not damage other property could qualify as an “occurrence” under the contractor’s CGL policy and, if so, whether that answer changes based on the theory of recovery. The answers are yes and yes.

The Georgia Supreme Court held that an “occurrence” as the term is used in the standard CGL policy does not require that the damage be to the property or work of someone other than the insured. Moreover, the court held that in many cases an “occurrence” might be found in the context of a claim for breach of warranty. The court did find that a claim for fraud is probably inconsistent with an “occurrence” in most cases. In reaching its conclusions, the court looked to the common understanding and usage of the words in the insurance policy itself.

Contract Provisions. The court ruled that an insurance policy is simply a contract. As with any contract, the provisions would be given their clear and unambiguous meanings. The policy in question defined an “occurrence” as an “accident.” Hence, the court needed only to define the word “accident” in order to identify the meaning of “occurrence.” The court accepted the standard dictionary definition that an “accident” is an unexpected or unintentional event that leads to an unfortunate result. The court concluded that this definition should not be artificially expanded to include a requirement that the damage be to the property or work of someone other than the insured absent a limiting definition in the policy. Accordingly, the court held that faulty workmanship is an “occurrence” under a standard CGL policy regardless of whether there is damage to the property or work of someone other than the insured.

Occurrence. Although this ruling broadens the historical definition of an “occurrence,” it does not automatically translate into expanded coverage for defective work. As the court noted, an “occurrence” alone, is not enough to give rise to coverage under a standard CGL policy. The occurrence must also cause bodily injury or property damage to a third party for which the insured is liable to pay damages and not be prohibited under other common exclusions. The court recognized that “business risk” exclusions typically limit coverage of the insured’s work. For these reasons, the court noted that a CGL policy will not generally cover the cost to repair solely the insured’s defective work or product.

The court also addressed whether the existence of an “occurrence” depends upon the plaintiff’s theory of recovery. The court noted that a claim for fraud would likely never be premised upon bodily injury or property damage that was caused by an accident. Under Georgia law, fraud requires intent. Hence, it is necessarily inconsistent with the common understanding of an “accident” and likely would never be an “occurrence.”

Breach of Warranty. Conversely, the court viewed a breach of warranty claim differently. The court determined that while making a warranty is an intentional act, breaking a warranty may not be. Because in certain cases, breach of warranty may be a strict liability claim, unlike fraud, it does not require an intentional act. Moreover, faulty workmanship, which can constitute an “occurrence”, may be the very cause of a breach of warranty. The court reasoned that since faulty workmanship may qualify as an “occurrence,” breaching the warranty to repair the faulty workmanship could also constitute an “occurrence.”

Nonetheless, the court went on to say that this may not always, or even usually, result in coverage. A standard CGL policy only insures against the liability to pay damages due to bodily injury or property damage. When faulty workmanship is the “occurrence,” finding covered “property damage” may depend on whether the faulty workmanship causes physical injury to, or the loss of use of, non-defective property or work. Accordingly, the court expects that coverage would likely only arise from the breach of a warranty of non-defective property. Other exclusions, such as the business risk exclusion, may also apply.

Lessons Learned. Despite the limitations on the holding as it relates to coverage, the case is noteworthy for its extensive analysis of an “occurrence” and its acknowledgment of a national trend in other jurisdictions to interpret the term “occurrence” to encompass unanticipated damage to non-defective property resulting from poor workmanship. Accordingly, it is likely that this case represents an important evolutionary step rather than the final word on coverage. It remains for future disputes to determine whether and how this expanded definition of an “occurrence” ultimately affects coverage.

About the Authors: Matt and Stephen are members of the Construction Service Group of Stites & Harbison, PLLC. Matt lives in Nashville, is a LEED Accredited Professional and he is the founder of www.bestpracticesconstructionlaw.com. Stephen lives in Atlanta and is a frequent speaker and writer on risk management for construction projects. You can reach the authors at mdevries@stites.com and sreams@stites.com.


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