CGL Provides No Coverage for Damage to the Insured’s Work

Barry Zalma | Zalma on Insurance | March 22, 2019

Construction contracts are risk transfer devices. The owner shifts the risk of loss to the general contractor who shifts the risk of loss to subcontractors and all shift the risks of loss to their insurers. Commercial General Liability (CGL) policies agree to accept the risk of loss faced by those insured by the CGL for an “occurrence” happening during the policy period. It does not, however, provide coverage for the general costs of doing business.

In Skanska USA Building Inc. v. M.A.P. Mechanical Contractors, Inc., and Amerisure Insurance Company and Amerisure Mutual Insurance Company, Skanska USA Building Inc. v. M.A.P. Mechanical Contractors, Inc., Amerisure Insurance Company, And Amerisure Mutual Insurance Company, No. 340871, No. 341589, State of Michigan Court of Appeals (March 19, 2019) the Michigan Court of Appeals was asked to resolve a dispute over whether there was an “occurrence” as defined by the policy that required defense and indemnity.

The dispute arose from the faulty installation of parts in the steam heat system of a hospital construction project resulted in an insurance coverage dispute. The resulting damage required extensive repairs, in excess of $1 million. The insurance carrier, Amerisure Insurance Company (“Amerisure”), appealed an order denying its motion for summary disposition.

BASIC FACTS

Starting in 2008, plaintiff was the construction manager on a renovation project for Mid-Michigan Medical Center in Midland (“Medical Center” or “MMMC”). Plaintiff subcontracted the heating and cooling portion of the project to defendant M.A.P. Mechanical Contractors (“MAP”). MAP obtained a commercial general liability insurance policy (“CGL policy”) from Amerisure. Plaintiff and the Medical Center are named as additional insureds on the CGL policy.

In 2009, MAP installed a steam boiler and related piping for the Medical Center’s heating system. MAP’s installation included several expansion joints, which are designed to accommodate the expansion of the piping caused by the flowing steam. Plaintiff determined that MAP had installed some of the expansion joints backward. Significant damage to concrete, steel, and the heating system had occurred.

According to plaintiff, the cost of the repair and replacement work was approximately $1.4 million. Plaintiff submitted a claim to Amerisure seeking coverage as an insured. Plaintiff’s claim was denied.

Amerisure asserted several grounds for summary disposition, including: (1) MAP’s defective construction was not a covered occurrence within the CGL policy; (2) plaintiff failed to provide proper notice of a claim; (3) plaintiff entered into a settlement without Amerisure’s consent; and (4) several exclusions barred coverage.

The trial court denied Amerisure’s motion.

The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” However, the policy did not define the word “accident.”

Defective workmanship, standing alone, is not an occurrence within the meaning of a general liability insurance contract, an occurrence exists where the insured’s faulty work product damages the property of another.

There is no indication MAP purposefully installed the expansion joints backwards. The parties affected by MAP’s negligence did not anticipate, foresee, or expect backward expansion joints or property damage to the entire length of the underground steam and condensate lines.

ANALYSIS

The dispositive issue in this case is whether there was an “occurrence” triggering coverage. There was no genuine issue of material fact that plaintiff sought coverage for replacement of its own work product.

At issue was whether there was an “occurrence” triggering coverage. Because the policy did not define “accident,” the Court looked to a common definition of “accident,”  that anything that begins to be, that happens, or that is a result which is not anticipated and is unforeseen and unexpected by the person injured or affected thereby—that is, takes place without the insured’s foresight or expectation and without design or intentional causation on his part. In other words, an accident is an undesigned contingency, a casualty, a happening by chance, something out of the usual course of things, unusual, fortuitous, not anticipated, and not naturally to be expected.

The fortuity required is not what is commonly meant by a failure of workmanship. The court was unable to find in the policy language a reasonable basis to expect coverage for defective workmanship.

In sum, the court concluded that defective workmanship of the insured, standing alone, was not the result of an occurrence within the meaning of the insurance contract. Summary disposition was properly granted on this issue.

A fundamental tenet of Michigan jurisprudence, like that of every state, is that unambiguous contracts are not open to judicial construction and must be enforced as written. Courts enforce contracts according to their unambiguous terms because doing so respects the freedom of individuals freely to arrange their affairs via contract. The general rule of contracts is that competent persons shall have the utmost liberty of contracting and that their agreements voluntarily and fairly made shall be held valid and enforced in the courts.

The Michigan Court of Appeal noted that it is an established principle of law that an “occurrence” cannot include damages for the insured’s own faulty workmanship. Amerisure was, therefore, entitled to judgment as a matter of law because coverage was not triggered due to lack of an “occurrence” and there is no genuine issue of material fact that the only damage was to plaintiff’s own work product (rather, that of its subcontractor).

Because there is no coverage, there was no need to address whether any of the exclusions apply or whether conditions precedent were met.

ZALMA OPINION

CGL policies provide extensive coverage to its policyholders. It does not, however, cover every potentiality. It will never provide coverage for a loss that is not fortuitous, contingent or an unknown event. It will not protect the policyholder from damage caused by the policyholder’s own negligence to its own product. For that reason judgment was entered in favor of the insurer.

Wisconsin Follows “Cause Theory” in Determining Number of Occurrences

Andrew W. Miller | Brouse McDowell | March 1, 2019

In Secura Insurance v. Lyme St. Croix Forest Company, LLC, No. 2016AP299 (Oct. 30, 2018), the Wisconsin Supreme Court determined the number of occurrences arising from a large forest fire that took place in May of 2013. The fire in question allegedly began in a piece of logging equipment and quickly spread to an adjacent grass pile and eventually the surrounding forest. In total, the fire consumed 7,442 acres over three days, damaging the real and personal property of many individuals and businesses.

Ray Duerr Logging, Inc., the owner of the piece of equipment that ignited and caused the fire, sought coverage for damage to third-party property under a commercial liability policy issued by Secura. That policy contained a general aggregate limit of $2,000,000, but a sub-limit of $500,000 per occurrence “due to fire, arising from logging operations…” The policyholder took the position that the fire constituted several occurrences; specifically each time the fire spread to a new property represented a new occurrence. Secura, in turn, argued that the entire fire constituted a single occurrence.

In finding that the fire was a single occurrence, the court noted that Wisconsin followed the “cause theory” as opposed to the “effect theory” when determining whether an event is a single occurrence or multiple occurrences. Under the cause theory, “‘where a single, uninterrupted cause results in all of the injuries and damage, there is but on accident or occurrence.’”1 Alternatively, “the effect theory suggests that the wording ‘each accident’ ‘must be construed from the point of view of the person whose property was injured.’”2

The policyholder’s position – that each time the fire spread to a new property represented a new occurrence – fit with the effect theory of causation, as from the standpoint of each property owner, the damage to their own property was a new, separate accident. However, the court could not square this view with the cause theory. Here, the cause of the fire in question all traced back to the fire in the logging equipment. Further, the court noted that while the fire spread over a large area, it was all within the same geographic area. And the fire was continuous – there was no temporal break over the three days that the fire spread. In sum, there was no way that the fire could be considered anything other than a single cause, meaning that coverage under Secura’s policy was limited to a single, $500,000 occurrence limit.

This case highlights the importance of purchasing adequate occurrence limits. Here, while the policyholder purchased $2,000,000 in coverage, $1,500,000 of the limits was unavailable due to the triggering of the applicable per-occurrence limit in the policy.

Multiple Instances of Defectively Designed, Manufactured, or Installed Windows Does Multiple Occurrences Make

Nora Valenza-Frost | PropertyCasualtyFocus | May 12, 2017

Damaged Windows

After previously holding that various claims against the insured, Pella, alleged property damage caused by an “occurrence,” thus triggering Liberty Mutual Insurance Company’s (“Liberty”) coverage obligations under various CGL policies, in Pella Corp. v. Liberty Mut. Ins. Co., No. 4:11-cv-00273 (S.D. Mar. 31, 2017), the Southern District of Iowa was then tasked with determining the number of “occurrences.”

Pella purchased annual liability policies – CGL policies (with an SIR) and Excess Indemnity policies (with an aggregate SIR) – from Liberty. Pella sought reimbursement of certain expenses incurred while defending against and resolving (either by settlement or damage awards) various claims against Pella. Due to the high number of underlying lawsuits against Pella, the coverage litigation focused on 15 of the highest value claims – the “Sample Claims” – which alleged Pella’s windows were defectively designed, manufactured, or installed, and allowed water intrusion to buildings that resulted in third-party property damage or personal injury.

Pella sought a declaration that each Sample Claim was one “occurrence,” or that Liberty should be estopped from arguing otherwise based on its alleged conduct while processing each Sample Claim. Liberty argued that the Sample Claims set forth either three or four occurrences at most, and that Pella should be estopped from arguing the Sample Claims present separate occurrences, as Pella had taken a contrary position in the parties’ prior coverage litigation.

Noting there was little, if any, Iowa case law regarding how to determine the number of occurrences, the court adopted the majority approach, which looks at the underlying cause of the property damage alleged. While the parties agreed with this approach, they disagreed with its application.

Pella argued that each Sample Claim should be considered to allege a separate occurrence as a matter of law because each Sample Claim presented a unique underlying circumstance. Liberty, on the other hand, argued that the concept of the underlying cause should be viewed by the court at a higher level of generality. Specifically, Liberty pointed out that the definition of “occurrence” included “continuous or repeated exposure to the same general harmful conditions,” which supported Liberty’s position that there were either three or four sets of general alleged causes of damage: (1) defective design and inadequate warnings; (2) improper installation; and (3) defective windows.

Looking at the definition of “occurrence,” the court concluded that the CGL policies were ambiguous with respect to the interpretation of the word “occurrence,” and accordingly analyzed cases outside of Iowa which interpreted the number of occurrences. The court held that some cases, including Liberty Mut. Ins. Co. v. Treesdale, Inc., 418 F.3d 330, 337–39 (3d Cir. 2005) and Chemstar, Inc. v. Liberty Mut. Ins. Co., 797 F.Supp. 1541, 1547-48 (C.D. Cal. 1992), provided support for Liberty’s position but involved different facts, and that others, such as American Red Cross v. Travelers Indemnity Co. of Rhode Island, 816 F.Supp. 755, 761 (D.D.C. 1993), supported Pella’s interpretation.

Applying those cases to the facts at hand, the court ultimately found that both parties’ positions were reasonable, yet flawed. In particular, the court noted:

While some Sample Claims themselves might involve multiple products, which could theoretically have caused water damage in different ways, there is little to no indication that subdividing any individual Sample Claim into multiple occurrences accords with the intent of the parties to the CGL policies. That neither party here argues that any individual Sample Claim presents more than one occurrence is persuasive evidence that the intent of the parties was not to define the unit of an ‘occurrence’ so narrowly.

Based on the principle that, where both parties present reasonable interpretations of ambiguous policy language, the insured’s interpretation prevails, the court adopted Pella’s position to hold that each Sample Claim presented a separate “occurrence.”

In closing, the court assessed Pella’s arguments in the prior coverage litigation, finding that because Pella’s arguments in the instant case were not actually inconsistent with its prior arguments, “judicial estoppel presents no bar to Pella’s current argument.” Whether Liberty was estopped from its argument was rendered moot by the court’s decision.

This case offers an example of the challenges an insurer may face where neither the applicable policy nor case law provides clear guidance in a unique situation. Liberty’s “30,000 foot” view of the number of occurrences had logical appeal, but, absent any clear policy language to support it, the policyholder was able to prevail by offering a similarly plausible (albeit similarly lacking in policy support) interpretation.

Alabama Supreme Court Affirms Summary Judgment In Favor Of Insurer Where Policyholders Cannot Demonstrate That Faulty Workmanship Claims Constitute Occurrences Under Policy

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.

via Alabama Supreme Court Affirms Summary Judgment In Favor Of Insurer Where Policyholders Cannot Demonstrate That Faulty Workmanship Claims Constitute Occurrences Under Policy – Insurance – United States.

The “Occurrence” Debate Continues: Pennsylvania and North Dakota Edition

Aaron Mandel and Stevi Raab – April 30, 2013

As noted in our previous installment of CDCQ, the “occurrence” issue is one of the most hotly litigated topics in construction defect coverage cases. This last quarter was no exception. Two recent cases addressing this issue – and reaching opposite results when it comes to whether faulty workmanship qualifies as an “occurrence” under liability policies – are Zurich American Insurance Co. v. R.M. Shoemaker Co., No. 12-2268, 2013 WL 1224104 (3d Cir. Mar. 27, 2013), and K&L Homes, Inc. v. American Family Mutual Insurance Co., — N.W.2d —, 2013 WL 1364704 (N.D. Apr. 5, 2013).

In Zurich, Shoemaker was hired to oversee construction of an addition to a Monmouth County, New Jersey prison. Shoemaker’s oversight allegedly was deficient and enabled subcontractors to perform faulty construction work on the project. That faulty construction work led, in turn, to water intrusion that reduced the prison’s structural integrity and damaged its electrical system and acoustic ceiling tiles, among other things. Shoemaker was insured under occurrence-based CGL policies that defined “occurrence” to mean an “accident,” and its insurers sued in federal court, seeking a declaration that the damage to the prison was not the result of an “occurrence” within the meaning of their policies.

Resolving the matter under Pennsylvania law, the district court determined that Shoemaker’s failure to perform its oversight duties was not an “occurrence.” Shoemaker appealed, and the Third Circuit Court of Appeals affirmed. The court noted that, when it comes to “occurrence” policies, “the critical inquiry dictating whether a general liability insurer must defend its insured … is whether an event was sufficiently fortuitous from the perspective of the insured to qualify as an ‘occurrence.’” Citing to Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Co., 589 Pa. 317 (2006), and Millers Capital Insurance Co. v. Gambone Brothers Development Co., 941 A.2d 706 (Pa. Super. 2007), the court held that “[f]aulty workmanship – whether caused by the contractor’s negligence alone or by the contractor’s negligent supervision, which then permitted the willful misconduct of its subcontractors – does not amount to an ‘accident’ or ‘occurrence.’”

In contrast to Zurich, the North Dakota Supreme Court in K&L altered the landscape of construction defect-related “occurrence” litigation in that state by concluding that faulty workmanship by itself can qualify as an “occurrence” within the meaning of a CGL policy.

There, K&L was hired to construct a home. The homeowners sued K&L after they noticed cracks, unevenness, and shifting in the home caused by allegedly defective work on its footings and foundation, and ultimately recovered damages from K&L for breach of contract and breach of warranty. American Family had issued a CGL policy to K&L providing coverage for “property damage” arising out of an “occurrence,” which the policy defined to mean an “accident,” and K&L sued American Family for coverage. The parties cross-moved for summary judgment, and the court granted American Family’s motion on the ground that the defective work on the house was not an accident (and, therefore, not an “occurrence” within the meaning of the policy). It appears that the lower court’s decision was guided by the North Dakota Supreme Court’s decision in ACUITY v. Burd & Smith Construction, 721 N.W.2d 33 (N.D. 2006), in which the North Dakota Supreme Court held that faulty construction work did not implicate an “occurrence” unless it was accompanied by bodily injury or property damage to something other than the work itself.

On appeal, the North Dakota Supreme Court reversed. The court expressly rejected American Family’s argument that ACUITY applied because the entire house was K&L’s work within the meaning of policy. The court instead ruled that ACUITY was incorrectly decided, and held that “there is nothing in the definition of ‘occurrence’ that supports that faulty workmanship that damages the property of a third party is a covered ‘occurrence,’ but faulty workmanship that damages the work or property of the insured contractor is not an ‘occurrence.’” Based on this reasoning, the court concluded that faulty workmanship itself “may constitute an ‘occurrence’ if the faulty work was ‘unexpected’ and not intended by the insured, and the property damage was not anticipated or intentional, so that neither the cause nor the harm was anticipated, intended, or expected.”

via The “Occurrence” Debate Continues: Pennsylvania and North Dakota Edition | Sedgwick LLP – JDSupra.