Are Untimely Repairs an “Occurrence” Triggering CGL Coverage?

Christopher G. Hill | Construction Law Musings

All Class A commercial contractors in Virginia are required to have a minimum level of Commercial General Liability (CGL) coverage.  As a general rule, this insurance is there for damage to property or persons arising from an “occurrence” that is covered by the policy.  Many cases that are litigated relating to coverage for certain events under a CGL policy turn on the definition of “occurrence” and whether the event leading to a request for coverage constitutes an “occurrence.”

A recent case in Fairfax County, Virginia, Erie Insurance Exchange v. Spalding Enterprises, et al., is just such a case.  In the Spalding Enterprises case, the Court considered the following scenario.  A homeowner, Mr. Yen contracted with Spalding Enterprises to fix some fire damage at his home.  Spalding promised the repairs would be complete in October of 2019.  However, after Mr. Yen paid a $300,000.00 deposit, Spalding Enterprises stated that the work would not be completed until November of 2019.  Yen then fired Spalding Enterprises and sued for breach of contract, constructive fraud, and violation of the Virginia Consumer Protection Act.  Spalding Enterprises sought coverage from Erie Insurance for the claim and Erie denied coverage and sought a declaratory judgment that the events alleged in the Complaint by Mr. Yen did not fall under the definition of “occurrence” in the CGL policy held by Spalding Enterprises.

After discussing the definition of occurrence in the policy and the law in Virginia that generally precludes intentional acts from that definition where the result of the intentional act is a natural or probable consequence of that intentional act, the Court stated:

Here, Mr. Yen’s detrimental reliance is unquestionably a natural or probable consequence of the misrepresentations made upon which Mr. Yen was intended to rely. It follows that any alleged constructive fraud in the complaint is not an occurrence under Spaulding Enterprise’s CGL policy with Erie.

Because the fraud allegations (set out in more detail in the opinion) stated that the damages directly arose from the actions of Spalding Enterprises, the Court agreed with Erie and stated that the allegations in the factual allegations found in the Complaint did not constitute an “occurrence” under the policy.

The takeaways (aside from having an experienced Virginia construction attorney assist with any of these tricky issues) are 1. CGL policies do not cover everything and 2. be sure to carefully read any policy documents because the Virginia courts will look at the specific language very carefully in determining if coverage applies.

South Carolina Federal Court Finds No Coverage for Faulty Workmanship Damages Discovered Years After Occurrence-Based Policy Expiration

Roben West | PropertyCasualtyFocus

Potential Six-Year Delay in Notice of Flood and Mold Damage “Substantially Prejudiced” Insurer

In Atain Specialty Insurance Company v. Carolina Professional Builders, LLC et al., 2:18-cv-2352-BHH (D.S.C. Oct. 2, 2020), a federal judge in South Carolina granted summary judgment to an insurer after finding that the record clearly supported that although flood and mold damages may have occurred during the policy period, that damage was distinct from the damage being complained about now, which occurred and was discovered years after the policy period. And, if the previous water and mold damage was the subject of the underlying lawsuit, the insured’s failure to provide notice for six years “substantially prejudiced” insurer.

Atain Specialty, an insurer-initiated coverage action, stemmed from an underlying suit by a homeowner against a builder on various grounds for faulty workmanship following water and mold damage to a home from extensive and mysterious leaking. The subject policy—a standard commercial general liability policy—insured property damage caused by an occurrence during the policy period, which was from 2009 to 2010. However, the policy also excluded coverage for property damage that was first discovered after the expiration of the policy.

Issues arose when the insurer, homeowner, and builder disagreed on when the property damage occurred. The insurer contended that the damage occurred several years after the policy expired, while both the builder and homeowner argued that the damage first occurred in 2009, during the policy period. The court turned to the record to resolve the dispute based not on when the damage occurred, but rather on when the damage was discovered.

Specifically, the court looked to the homeowner’s pleadings, discovery responses, and deposition testimony in the underlying lawsuit against the builder, all of which established that the damage was not discovered until shortly before the underlying lawsuit was filed in 2015. Because the court found the record was flooded with evidence that the damage was not discovered until 2014 or 2015—several years after the expiration of the policy—the court applied the exclusion barring coverage for damage discovered outside of the policy period. This exclusion was found to be “unambiguous and subject to only one interpretation.”

The court pointed out another concern with the homeowner and builder’s argument that the property damage occurred in 2009, during the policy period: timeliness. Even if there was a genuine dispute as to whether the damage occurred and was discovered in 2009 as opposed to 2014 or 2015, the builder’s notice to the insurer would have been untimely and substantially prejudicial and thus, the court would have found that the underlying lawsuit would not be covered under the policy in any event.

Michigan Supreme Court Finds Faulty Subcontractor Work That Damages Insured’s Work Product May Constitute an “Occurrence” Under CGL Policy

Jason Taylor | Traub Lieberman Straus & Shrewsberry

In Skanska USA Bldg. Inc. v. M.A.P. Mech. Contractors, Inc., 2020 WL 3527909 (Mich. June 29, 2020), the Michigan Supreme Court addressed whether unintentionally faulty subcontractor work that damages an insured’s work product constitutes an “accident” under a commercial general liability insurance policy. In aligning itself with a growing number of jurisdictions, the Michigan Supreme Court answered, “yes.” In Skanska, a construction manager brought an action against a commercial general liability (CGL) insurer seeking coverage as additional insured for the cost of repairs to correct faulty work performed by its subcontractor in renovation of medical center. In 2009, the construction manager hired MAP to install a steam boiler and related piping for the medical center’s heating system. MAP’s installation included several expansion joints, which it was later discovered, were installed backward. Significant damage to concrete, steel, and the heating system occurred as a result. The construction manager performed the work of repairing and replacing the damaged property to the tune of $1.4 million, and submitted a claim to MAP’s CGL insurer, Amerisure, seeking coverage as an additional insured.

Amerisure denied the claim contending that MAP’s defective construction was not a covered “occurrence” within the CGL policy. The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions,” but did not define the term “accident.” The trial court looked to the Court of Appeal’s decision in Hawkeye-Sec. Ins. Co. v. Vector Const. Co., 185 Mich. App. 369 (1990), which defined “accident” as “…a result which is not anticipated and…takes place without the insured’s foresight or expectation and without design or intentional causation on his part.” But, again citing Hawkeye, the trial court concluded that “[d]efective 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.”

The trial court held that an “occurrence” may have happened because the damage caused by MAP’s defective installation of the expansion joints may have gone beyond the scope of the work required by the contract between the plaintiff and the medical center. On appeal, however, the Court of Appeals reversed the trial court and ordered that summary disposition be granted to Amerisure reasoning that there was no “occurrence” under the CGL policy because the only damage was to the insured’s own work product.

The Michigan Supreme Court reversed again holding that faulty work by a subcontractor may fall within the plain meaning of an “occurrence,” or “accident.” The Michigan Supreme Court rejected the carrier’s argument that faulty workmanship to the insured’s product was not an “occurrence” because it lacked “fortuity.” According to the court, fortuity is one way to show that an incident is an accident, but it is not the only way. Rather, appropriate focus of the term “accident” must be on both the injury-causing act or event and its relation to the resulting property damage or injury, which must be analyzed from the subjective standpoint of the insured. Thus, even if an insured acts intentionally, the act may still be an “accident” under policy so long as the injury or damage was not specifically intended by the insured. The Michigan Supreme Court also noted that the policy did not limit the definition of “occurrence” by reference to the owner of the damaged property, which might otherwise preclude a finding of an “occurrence” for damage to the insured’s own work product.

The court, referencing other similar rulings in other jurisdictions, resorted to its reading the contract as a whole to confirm its conclusion. For example, the court reasoned that the policy contained an exclusion precluding coverage for damage to an insured’s own work product (the “Your Work” exclusion), but that the exclusion contains an exception for work performed by a subcontractor on the insured’s behalf. Thus, “[i]f faulty workmanship by a subcontractor could never constitute an ‘accident’ and therefore never be an ‘occurrence’ triggering coverage in the first place, the subcontractor exception would be nugatory.” Skanska, 2020 WL 3527909 at *6 (citing cases). Put another way, if the insuring agreement does not confer an initial grant of coverage for injury or damage to the insured’s own faulty work, then there would be no reason for the “your work” exclusion (and the subcontractor exception).

The Skanska Court also reviewed the context and history of CGL policies, including policy language changes from the 1973 policy forms to those adopted in 1986 in support of its conclusion that an “accident” may include damage to an insured’s own work product, and referred to cases holding otherwise as an “outdated view” of the insurance industry. While this history is interesting, it is beyond the scope of this post. Suffice it to say, the Michigan Supreme Court found that “the 1986 reformation of the scope of coverage under the CGL policies underscored a plain reading of “accident”—that faulty subcontractor work may fall within the policy’s coverage. Id. at *10.

In sum, the Michigan Supreme Court’s holding in Skanska aligned Michigan with the growing body of jurisdiction to hold that an “accident” may include unintentionally faulty subcontractor work that damages an insured’s work product. Of course, the next logical inquiry is whether one or more of the CGL policy’s “business risk” exclusion might apply. (Notably, the Court did not address application of the “your work” policy exclusion. Specifically, Amerisure argued that because MAP was a named insured under the CGL policy, the subcontractor exception to the “your work” exclusion did not apply, and the exclusion barred coverage. The Court merely remanded this question, among others, to the Court of Appeals to address, depending on whether it determines they are properly presented and preserved for its review.)

Michigan Finds Coverage for Subcontractor’s Faulty Work

Tred R Eyerly | Insurance Law Hawaii

    The Michigan Supreme Court held that under a CGL policy, an “accident” may include unintentional subcontractor work that damages the insured’s work product. Skanska USA Building Inc. v. M.A.P. Mechanical Contractors, Inc., et al., 2020 Mich. LEXIS 1194 (Mich. June 29, 2020).

    Skanska USA Building Inc. was the construction manager on a renovation project for a medical centre. The heatng and cooling portion of the project was subcontracted to M.A.P. Mechanical Contractors, Inc. (MAP). MAP installed a steam builder and piping for the heating system. The installation included several expansion joints. After completion, Skanska learned that MAP had installed some of the expansion joints backward. This caused significant damage to concrete, steel and the heating system. The medical center sent a demand letter to Skanska, who send a demand letter to MAP. Skanska did the repairs and replacement of the damaged property. Skanska then submitted a claim of $1.4 million for its work to Amerisure Insurance Company. The claim was denied. 

    Skanska sued Amerisure. The trial court rejected Amerisure’s motion for summary judgment which argued MAP’s defective construction was not a covered “occurrence.” The Court of Appeals reversed and ordered that summary judgment be granted to Amerisure. The court reasoned that there was no “occurrence” because the only damage was to the insured’s own work product. 

    The Michigan Supreme Court reversed the Court of Appeals. Under Michigan law, an “accident” was “an undefined 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.” Generally, faulty work by a subcontractor could fall within the plain meaning of most of these terms. The accident happened by chance, was outside the usual course of things, and was neither anticipated nor naturally expected. 

    The policy as a whole confirmed this interpretation. The policy contained an exclusion precluding coverage for an insured’s own work product, but it contained an exception for work performed by a subcontractor on the insured’s behalf. If faulty workmanship by a subcontractor could never constitute an “accident” and therefore never be an “occurrence” triggering coverage in the first place, the subcontractor exception would be nugatory. Therefore, given the plain meaning of the word “accident,” faulty subcontractor work that was unintended by the insured could constitute an “accident” under a CGL policy. 

    The context and history of CGL policies supported the court’s conclusion that an “accident” could include damage to an insured’s own work product. In 1986, the ISO added the policy language on a subcontractor’s faulty work. It adopted changes to expand coverage to include some of the business risks that were previously excluded, specifically damage caused by a subcontractor’s faulty workmanship (with no carveout based on whose property was damaged). The 1986 reformation of the scope of coverage under the CGL policies underscored a plain reading of “accident” – that faulty subcontractor work may fall within the policy’s coverage. 

U.S. Eighth Circuit Court of Appeals Holds No CGL Insurance Coverage for Damages Arising from Contractor’s Shoddy Work

Gregory M. Boucher | Saul Ewing Arnstein & Lehr

On May 12, 2020, the United States Eight Circuit Court of Appeals, applying Missouri law, rejected a contractor’s contention that its commercial general liability (CGL) policy provided coverage for claims arising out of the contractor’s allegedly defective construction work. See Am. Family Mut. Ins. Co., S.I. v. Mid-Am. Grain Distributors, LLC, No. 19-2050, 2020 WL 2373986 (8th Cir. May 12, 2020). The court’s decision affirmed the lower court’s summary judgment decision in favor of the insurer.

Contractor Mid-American Grain Distributors, LLC (“Mid-American”) sought a defense and indemnification under its CGL policy issued by American Family Mutual Insurance Company (the “Insurer”) in response to claims in a lawsuit alleging damages arising from “design and construction issues.” However, the CGL policy only provided coverage for an occurrence, which was defined as an accident under the policy. Under Missouri law, an accident is determined by examining whether “the insured foresaw or expected the injury or damages” and does not include “acts that result in expected or foreseeable damages.”

Reasoning that damages resulting from shoddy workmanship are foreseeable, the appellate court ruled that there was no “accident” to trigger a defense or indemnification for Mid-American. This case serves as a reminder to owners and contractors alike that a contractor’s insurance policy often does not provide coverage for damages resulting from the contractor’s defective or shoddy work.