Alexander G. Thrasher and Heather Howell Wright | International Law Office
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.