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
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.
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 firstname.lastname@example.org and
Click Here to
for Your FREE DCD Magazine Subscription