Alleging Property Damage in Construction Defect Lawsuit

David Adelstein | Florida Construction Legal Updates

When there is a construction defect lawsuit, there is an insurance coverage issue or consideration.  As I have said repeatedly in other articles, it is all about maximizing insurance coverage regardless of whether you are the plaintiff prosecuting the construction defect claim or the contractor(s) alleged to have committed the construction defect and property damage.  It is about triggering first, the insurer’s duty to defend, and second, the insurer’s duty to indemnify its insured for the property damage.   

The construction defect claim and lawsuit begins with how the claim and, then, lawsuit is couched knowing that the duty to defend is triggered by allegations in the lawsuit (complaint).  Thus, preparing the lawsuit (complaint) is vital to maximize the insurer’s duty to defend its insured.

In a recent opinion out of the Eleventh Circuit, Southern-Owners Ins. Co. v. MAC Contractors of Florida, LLC, 2020 WL 4345199 (11th Cir. 2020), a general contractor was sued for construction defects in the construction of a custom home.  A dispute arose pre-completion and the owner hired another contractor to complete the house and remediate construction defects.   The contractor’s CGL insurer originally provided a defense to the general contractor but then withdrew the defense and filed an action for declaratory relief asking for the declaration that it had no duty to defend the contractor because the underlying lawsuit did NOT allege property damage.  The trial court agreed with the contractor and granted summary judgment in its favor finding that the underlying complaint did not allege property damage beyond defective work.  But, on appeal, the Eleventh Circuit reversed.

Among other allegations, the owner’s underlying complaint against the contractor asserted that the contractor committed defects through chipped pavers in the driveways and walkways, inconsistent paint finish, marks on ceilings, damage to exterior doors, damage to the top stair tread, damage to hardwood floors, metal roof dents, scratches in granite, holes in ceilings, etc.  The owner sought its costs to repair and remediate the defects and damage from the contractor.  In looking at whether the  contractor’s CGL insurer had a duty to defend the contractor–the insured–the Eleventh Circuit (focusing on precedent out of the Eleventh Circuit) stated:

The operative amended complaint alleged that [the contractor] used subcontractors for work on the residence and that the residence was “replete with construction defects” and various damage. It did not further allege which subcontractors performed which work or how the damage occurred. Given these ambiguities, the complaint’s allegations are broad enough to allow [the contractor] to prove that one subcontractor negligently damaged nondefective work performed by another subcontractor.  If [the contractxor] could establish that at least some of the damage arose in this way, there would be “damage apart from the defective work itself” and therefore “property damage.”

***

For these reasons, we conclude that the underlying operative complaint can fairly be construed to allege “property damage” within the meaning of the CGL policy and Florida law. Accordingly, the district court erred in granting summary judgment to [the CLG insurer] on this basis.

MAC Contractors of Florida, 2020 WL at *4 (internal citations omitted).

Fifth Circuit Holds Insurer Owes Duty to Defend Latent Condition Claim That Caused Fire Damage to Property Years After Construction Work

Jeremy Macklin | Traub Lieberman Straus & Shrewsberry

Most general liability policies only provide coverage for “property damage” that occurs during the policy period. Thus, when analyzing coverage for a construction defect claim, it is important to ascertain the date on which damage occurred. Of course, the plaintiffs’ bar crafts pleadings to be purposefully vague as to the date (or period) of damage to property. A recent Fifth Circuit decision applying Texas law addresses this coverage issue in the context of allegations of a condition created by an insured during the policy period that caused damage after the policy expired.

In Gonzalez v. Mid-Continent Cas. Co., 969 F.3d 554 (5th Cir. 2020), Gilbert Gonzales (the insured) was a siding contractor. In 2013, the underlying plaintiff hired Gonzales to install new siding on his house. In 2016, the underlying plaintiff’s house was damaged in a fire. The underlying plaintiff sued Gilbert in Texas state court alleging that when Gonzalez installed the siding in 2013, he hammered nails through electrical wiring and created a dangerous condition that caused a fire three years later in 2016.

At the time Gilbert performed construction work, he was insured by Mid-Continent Casualty Company. Mid-Continent disclaimed coverage to Gonzales on the basis that the complaint unequivocally alleged that property was damaged in 2016 and there were no allegations that property damage occurred prior to 2016 or was continuing in nature.

The Fifth Circuit started its analysis by acknowledging Texas’ strict eight-corners rule for determining an insurer’s duty to defend. Relying on prior Texas and Fifth Circuit decisions (Don’s Building Supply, Inc. v. OneBeacon Insurance Co.Wilshire Insurance Co. v. RJT Construction, LLC, and VRV Development L.P. v. Mid-Continent Casualty Co.), the court narrowed its focus to “actual, physical damage alleged in the underlying litigation.” The court reasoned, “[i]f the only alleged damage occurred outside of the policy period, then there is no duty to defend. But if any of the alleged damage occurred during the policy period, then the duty to defend attaches.”

The court held that the underlying lawsuit “plainly alleges physical injury to property that occurred within the policy period.” The court identified three reasons for its holding: (1) the underlying complaint stated that the 2016 fire “relates back to [the] construction and/or installation of siding” in 2013, (2) the policy defined “property damage” to include “all resulting loss of use of that property,” so damage to the wire includes damage to the entire house, and (3) the underlying plaintiff’s claim of damages alleged that “the electrical wires were damaged in 2013.”

Judge Catharina Haynes dissented, explaining that she would hold that property damaged occurred after the policy period ended, when the fire broke out in 2016. Judge Haynes agreed that the court is bound by Don’s BuildingWilshire, and VRV Development, but she emphasized that those cases also hold that when an underlying plaintiff alleges actual, physical damage due to the insured’s negligent conduct, the alleged property damage does not relate back to the time of the negligent act when determining when the property damage occurred. Judge Haynes criticized the majority for focusing on the time of the negligent conduct.

The Gonzales decision highlights the importance of analyzing each allegation in an underlying pleading to determine when any physical injury may have occurred. The dissent also leaves the door open for a different panel of Fifth Circuit judges to distinguish or reverse Gonzales.

South Carolina Supreme Court Holds Insurers Not Entitled to Intervene in Construction Defect Action to Contest Coverage

Jared Burtner | Phelps Dunbar

The Supreme Court of South Carolina held that the insurers of contractors and subcontractors sued in a construction defect action could not intervene in order to obtain a verdict that would apportion liability and damages among the insurers without the need of a subsequent declaratory judgment action. Builders Mut. Ins. Co. v. Island Pointe, LLC, 2020 S.C. LEXIS 68 (May 13, 2020).

Following construction of a condominium complex, the property owners’ association discovered damage to the condominiums and sued a number of contractors and subcontractors involved in the construction and development. The defendants’ various insurers were not named as parties, but they moved to intervene at the end of the discovery period. They requested at trial a special verdict form or a general verdict form accompanied by interrogatories with the goal of having the jury allocate liability among the defendants and the insurers by proxy. The trial court denied the motion, and the insurers’ appeal was taken up directly by the Supreme Court.

The Supreme Court first concluded that the insurers did not have the right to intervene under South Carolina Rule of Civil Procedure 24 because they could not demonstrate that they were real parties in interest with interests that were “direct,” “immediate” and “significantly protectable,” instead of “remote or contingent.” The Court then determined that the insurers had also failed to demonstrate that they would not delay or prejudice the adjudication of the original parties’ rights, as required to permit permissive intervention, because special verdict forms or interrogatories would heighten the plaintiff’s burden of proof by requiring itemized damages while relieving the defendants and their insurers of their “collective burden” of proving covered and non-covered damages in a declaratory judgment action. The defendants’ rights would further be affected, the Court noted, because special verdict forms could motivate the insurer-appointed defense counsel to concede liability where certain damages would have a higher likelihood of coverage. The Court was not persuaded that a subsequent declaratory judgment action could not be based upon the evidence adduced at trial.

The Court then clarified two of its earlier decisions that the insurers raised as mandating intervention. The Court stated that its decision in Auto Owners Insurance Co. v. Newman, 385 S.C. 187, 684 S.E.2d 541 (2009) should not be read to foreclose an insurer from seeking a declaratory judgment action to resolve a coverage dispute. The Court further clarified its decision in Harleysville Group Insurance v. Heritage Communities, Inc., 420 S.C. 321, 803 S.E.2d 288 (2017) affirming an order that rejected an insurer’s attempt to allocate covered and noncovered damages and instead directed the insurer to pay an entire general verdict. The Court explained that the Harleysville decision was based solely on the insurer’s inadequate reservation of rights that constituted an implied waiver of the right to contest coverage.  

Coverage for Defective Work? Michigan Joins Majority

Alexander G. Thrasher and Heather Howell Wright | Buildsmart

Michigan has joined the majority of jurisdictions in holding that a general liability policy may provide coverage for claims for property damage allegedly caused by the defective work of a subcontractor. In a unanimous decision reversing the Michigan Court of Appeals, the Michigan Supreme Court held that a subcontractor’s unintentional defective work was an “accident” and, thus, an “occurrence” covered under the subcontractor’s commercial general liability (CGL) policy.

In Skanska USA Building Inc. v. MAP Mechanical Contractors, Inc., Skanska USA Building Inc. served as the construction manager on a medical center renovation project. Skanska hired defendant MAP Mechanical Contractors, Inc. (MAP) to perform heating and cooling work that included the installation of expansion joints on part of a steam boiler and piping system.  Several years after the installation, extensive damage to concrete, steel, and the heating system occurred, and Skanska determined that the cause was MAP’s incorrect installation of some of the expansion joints. Skanska repaired and replaced the damaged property at a cost of about $1.4 million and submitted a claim to MAP’s insurer, co-defendant Amerisure Insurance Company. Amerisure denied coverage for the claim, and Skanska filed suit.

The trial court denied competing summary judgment motions, and Skanska and Amerisure both filed applications for leave to appeal to the Court of Appeals. The applications were granted, and the appeals were consolidated.

The policy provided coverage for “property damage” caused by an “occurrence.” The term “occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Interpreting this language, the Michigan Court of Appeals held that summary judgment should be granted to Amerisure as “there was no ‘occurrence’ under the CGL policy because the only damage was to the insured’s own work product.” The term “accident” is not defined in the policy and the Court of Appeals, applying a definition of “accident” from Michigan appellate court precedent, reasoned that there was no “accident” and thus no “occurrence” to trigger coverage under the policy.

Skanska appealed to the Michigan Supreme Court. The Skanska Court began its review by focusing on the policy’s definition of “occurrence” as an “accident.” In doing so, the court relied on a definition of “accident” as “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.” Amerisure contended that an “accident” must involve “fortuity,” or “something over which the insured has no control,” but the court disagreed. Instead, the court concluded that the term “accident” is both plain and broad in its meaning and a subcontractor’s faulty work may fall within the court’s definition of an “accident.” Although “fortuity” is one way to show an accident occurred, the court was steadfast that it is not the only way to do so.

The court also rejected the Court of Appeals’ conclusion that “accident” cannot include damage limited to the insured’s own work product because the policy at issue did not limit the definition of “occurrence” with any reference to the owner of the damaged property.

Finally, the court rejected Amerisure’s argument that providing coverage for the faulty subcontractor’s work would convert the insurance policy into a performance bond. The court observed: The fact that “coverage may overlap with a performance bond is not a reason to deviate from the most reasonable reading of the policy language.”

Whether faulty or defective workmanship constitutes an “occurrence” under the CGL is a state-specific question, and courts across the country are divided on this issue. While some states have held that faulty workmanship or improper construction is not an “occurrence” because it can never be an “accident,” others have held that faulty workmanship can be an “accident” if the resulting damage occurs without the insured’s expectation or foresight. The recent trend has been for courts to find that a construction defect or faulty workmanship satisfies the “occurrence” and “property damage” requirements under a general liability policy and losses sustained as a result of such defects may be covered. The Michigan Supreme Court’s decision is yet another example that the tide continues to change in favor of insureds as to whether property damage caused by defective work may be covered under a general liability policy.Print:EmailTweetLikeLinkedIn

Michigan Supreme Court Clarifies Decades-Old Dispute and Holds that Subcontractor’s Unintentional Defective Work Constitutes an “Accident” and “Occurrence” Granting Construction Manager CGL Coverage

Jay Berger | Clark Hill

In Skanska USA Building Inc v MAP Mechanical Contractors, Inc, (Michigan Supreme Court, Docket Nos. 159510-159511, June 29, 2020) the Michigan Supreme Court held, in a unanimous decision, that a subcontractor’s unintentional defective work is an “accident” and, therefore, an “occurrence” covered under a Commercial General Liability (CGL) policy, allowing insurance coverage for the costs incurred by the construction manager to repair the subcontractor’s defective work. The Supreme Court’s decision settles a decades-old dispute between general contractors and CGL carriers regarding the plain, standard language of current CGL policies, and limited the often-quoted Hawkeye-Security Ins Co v Vector Constr Co, 185 Mich App 369 (1990), which insurers relied upon to deny coverage for claims involving pre-1986 CGL policies.

Skanska USA Building Inc. (“Skanska”) filed suit in Midland Circuit Court against its subcontractor M.A.P. Mechanical Contractors, Inc. (“MAP”), and MAP’s CGL carrier, Amerisure Insurance Company (“Amerisure”), seeking coverage under an Amerisure policy for the cost of repairs Skanska performed to correct defective work MAP performed while renovating a Midland medical center. Skanska, acting as the construction manager, subcontracted the heating and cooling to MAP. Skanska and the medical center were named as additional insureds on the CGL policy.  In 2009, MAP performed work on the medical center’s heating system; two years later, Skanska determined that MAP had installed some of the expansion joints backward, resulting in damage to concrete, steel, and the heating system. Skanska repaired and replaced the damaged property. Skanska submitted a claim to Amerisure for the costs and Amerisure denied the claim. Skanska filed suit, and Amerisure moved for summary disposition, asserting, in part, that MAP’s defective work was not a covered “occurrence.” The trial court denied the parties’ respective motions for summary disposition and on appeal, the Court of Appeals reversed the trial court’s orders and remanded the case for entry of summary disposition in favor of Amerisure, concluding that there was no “occurrence” under the CGL policy because the only damage was to Skanska’s work product, which did not constitute an “accident.”

On subsequent appeal to the Michigan Supreme Court, the Court held that under the clear language of the current CGL policy, an “accident” could include unintentionally faulty subcontractor work that damages an insured’s work product. Accordingly, Skanska could recover its costs to repair MAP’s faulty work under the Amerisure policy.

The Court held that an “accident” (which was not defined in the policy) is “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.” Faulty work by a contractor falls within the definition of “accident” that is, it may happen by chance, is outside the usual course of things, and is neither anticipated nor naturally to be expected. To hold any other way, would render meaningless the language of the policy which precludes coverage for an insured on its work product, but contains an exception for work which is performed by a subcontractor on the insured’s behalf. Accordingly, the Court, under the plain reading of the policy (contrary to the long-standing 1990 decision in Hawkeye) held that a subcontractor’s defective work constituted an accident and that Skanska’s costs to remediate the work were covered under the CGL policy.

The Court’s opinion represents a major shift in the applicability of CGL policies to defective construction work, and contractors would be well advised to review their policies to determine if the policy language is like that in the Skanska case and to discuss this issue with their attorney. On behalf of the Associated General Contractors of Michigan, Jay Berger of Clark Hill PLC and Patrick Wielinski of Cokinos, submitted an Amicus Brief to the Supreme Court seeking the result which the Court granted.