Hillary Coombs Jarvis and Jill C. Maguire – May 28, 2013
In Shane Traylor Cabinetmaker, L.L.C. et al. v. American Resources Insurance Co., No. 1110418, 2013 Ala. LEXIS 42 (Ala. May 3, 2013), the Alabama Supreme Court affirmed summary judgment in favor of insurer American Resources because its policyholders did not establish that faulty workmanship claims (asserted by counterclaim in underlying litigation) constituted “occurrences” triggering coverage under a business liability policy. The policyholders also failed to establish coverage under the “products–completed operations hazard” provisions. American Resources thus had no duty to defend or indemnify the insureds in the underlying litigation.
The underlying lawsuit arose out of a dispute between Robert L. Barbee and his company (“Barbee”), on one hand, and Shane Traylor Cabinetmaker, L.L.C. (“STC”) and Michael Shane Traylor (“Traylor”), on the other. Barbee had engaged STC and Traylor to undertake cabinetry and woodworking on homes that Barbee was building. STC and Traylor sued Barbee for breach of contract, among other claims, relating to the cabinet and wood work that STC had performed in the Barbee homes. Barbee filed a counterclaim against STC and Traylor, alleging breach of contract, negligence, and misrepresentation, among other claims. Barbee later filed an amended counterclaim, seeking mental anguish damages. Barbee also sought a declaratory judgment concerning the issue of whether Barbee had an ownership interest in STC.
STC and Traylor notified their insurer, American Resources, of Barbee’s counterclaim in the underlying litigation and twice requested that American Resources defend and indemnify them. American Resources refused, asserting that Barbee’s claims were not covered under the policy. STC and Traylor sued American Resources, alleging breach of contract and bad faith.
American Resources’s policy provided coverage for legal damages due to “bodily injury” or “property damage” only where either was caused by an “occurrence.” The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The trial court concluded that the policy required that an “accident” take place in order to trigger coverage and that Barbee’s claims amounted to a business dispute—not an “accident.” 2013 Ala. LEXIS 42, *9 (citations omitted).
STC and Traylor argued that Barbee’s allegations that their cabinet and wood work was “defective and deficient in several particulars and had to be repaired or replaced” constituted an “accident” under Alabama case law. Id. at *10. The Alabama Supreme Court rejected this contention, finding that it had previously determined that “‘faulty workmanship itself’ simply does not constitute an accident or ‘occurrence’ within the meaning of a comprehensive general-liability insurance policy . . . , such as the policy here.” Id. at *10-11 (quoting Town & Country Property, LLC v. Amerisure Insurance Co., 2011 Ala. LEXIS 183, at *16-17 (Ala. Oct. 21, 2011)). Because Barbee did not allege “damage to [Barbee’s homes] as a result of the alleged faulty workmanship, additional repairs or remodeling to [Barbee’s homes] necessitated by STC and Traylor’s allegedly faulty work, . . . any loss of use of [Barbee’s homes] . . . [or] damage resulting from . . . a condition other than STC and Traylor’s allegedly defective work,” id. at *12-13, no “occurrence” had taken place.
The Court also rejected STC’s and Traylor’s arguments that one could reasonably infer from Barbee’s counterclaim a claim for damage for loss of use. Barbee’s counterclaim did not allege damage to other property resulting from STC’s and Traylor’s allegedly defective work and the Court “decline[d] to infer loss of use or other injuries based on speculation as to damage that was not alleged.” Id. at *17.
The Court also rejected with dispatch several other arguments STC and Traylor raised. In particular, although the Court assumed for the sake of argument that mental anguish could satisfy the “bodily injury” provision of American Resource’s policy, Barbee’s claim for mental anguish did not arise from STC and Traylor’s allegedly defective work – but rather a dispute surrounding the ownership of STC. Id. at *18-19. STC and Traylor also sought coverage under the “products–completed operations hazard” provisions, which, in other cases, the Alabama Supreme Court had interpreted to provide coverage for losses resulting from breaches of warranty and misrepresentations tied to the insured’s work. Id. at *19-20. In Shane Traylor, the Court concluded that, to the extent that Barbee alleged misrepresentations, those misrepresentations related to the ownership dispute only – and not to the quality of the work performed. Thus, the “products–completed operations hazard” provisions likewise provided no coverage.
The Alabama Supreme Court’s ruling in Shane Traylor reinforces prior decisions holding that faulty workmanship, by itself, is not an “accident” triggering coverage under Alabama law. Considering the ongoing debate concerning the “occurrence” issue in the construction defect dispute context, the Shane Traylor decision likely will be looked to by both insurers and policyholders in future litigation – both within and outside of Alabama.