No Coverage for Faulty Workmanship Where Underlying Claim is Strictly Breach of Contract

Tred R. Eyerly | Insurance Law Hawaii | June 22, 2016

Considering certified questions from the federal district court, the Arkansas Supreme Court followed a prior decision in deciding there was no coverage for property loss caused by faulty workmanship based solely on breach of contract. Columbia Ins. Group, Inc. v. Cenark Project Mgt. Services, Inc., 2016 Ark. LEXIS 185 (Ark. April 28, 2016).

The homeowners entered a contract in 2005 with Arkansas Infrastructure, Inc. (AII) to construct pads for the construction of six homes. The contract provided that AII would perform the work in accordance with the plans, specifications, and drawings developed by CENARK Project Management Services, Inc.

In 2012, the homeowners sued AII for breach of contract, alleging that AII had failed to construct the pads in accordance with the plans and specifications designed by CENARK.

AII tendered to its insurer, Columbia, who defended under a reservation of rights. Columbia filed suit for a declaratory judgment as to its coverage obligations. Cross-motions for summary judgment were filed. The federal district court certified a question to the Arkansas Supreme Court:

Does faulty workmanship resulting in property damage to the work or work product of a third party (as opposed to the work or work product of the insured) constitute an “occurrence?”

The Arkansas Court noted that the underlying claim was for breach of contract. No claim of negligent or faulty workmanship was alleged because the statute of limitations had expired for any such claims. Therefore, the case was controlled by the court’s prior decision in Unigard Sec. Ins. Co. v. Murphy Oil USA, Inc., 962 S.W. 2d 735 (Ark. 1998). There, the court held that there was no coverage for breach of contract.

Here, the homeowners were seeking the economic losses flowing from AII’s alleged breach. The court acknowledged that courts across the country have held there is no distinction between contract and tort claims when evaluating coverage under a CGL policy. Nevertheless, under Unigard, there was no coverage for the claim.

The court noted that under the 2011 statute,  Arkansas Code Annotated section 23-79-155, a CGL policy “offered for sale . . . shall contain a definition of ‘occurrence’ that includes  . . . property damage . . . resulting from faulty workmanship.” The statute did not apply here, however, because the homeowners’ claims arose prior to the enactment of the statute.

In light of the court’s conclusion that there was no coverage under the policy, the certified question was moot.