Coverage for Defective Work? Michigan Joins Majority

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.

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.

Michigan Supreme Court Holds a Contractor’s Defective Work Is an ‘Occurrence’

Scott R. Murphy and Anthony C. Sallah | Barnes & Thornburg

In Skanska USA Building v M.A.P Mechanical Contractors, Inc., Docket No. 159510, ____ Mich ____, 2020 WL 3527909, the Michigan Supreme Court found that a subcontractor’s inadvertent faulty work may constitute an “accident” under Michigan law, and therefore constitute an accidental “occurrence” under current standard form commercial general liability (CGL) policy. This landmark decision on July 29, 2020 changes the law in Michigan, and reverses many years of lower court rulings that denied coverage for Michigan contractors on the ground that inadvertent construction defects do not constitute an accidental occurrence under the CGL policy.

Skanska served as a construction manager on a hospital renovation project involving the replacement of certain HVAC equipment. Skanska subcontracted the HVAC work to MAP Mechanical Contractors who procured a commercial general liability policy for the project. Sometime after the project was completed, the owner discovered that some of the expansion joints were installed backwards by the subcontractor, thereby causing significant damage to concrete, steel and the heating system. The cost to repair the subcontractor’s defective work exceeded $1.4 million. Skanska sued both the subcontractor and its insurer seeking payment for the cost of the repair and replacement work.  

After the trial court found a genuine issue of material fact concerning whether coverage was triggered under the CGL policy, the court of appeals reasoned that there was no “occurrence” under the policy because the only damage was to the insured’s own work product. The court of appeals relied upon prior appellate court precedent from Michigan in reaching its decision and, according to the Michigan Supreme Court, ignored the express language of the CGL policy. In reversing the decision from the court of appeals, the court reasoned: 

Nor is there any support for the Court of Appeals’ conclusion that “accident” cannot include damage limited to the insured’s own work product. Amerisure does little to defend that holding, and focuses mainly on its fortuity argument. Most significantly, the Court of Appeals accepted that an insured can seek coverage for its damage to a third party’s property. Id. at 9-10. But the policy does not limit the definition of “occurrence” by reference to the owner of the damaged for distinguishing between damage to the insured’s work . . . the Court of Appeals failed to recognize that an insured’s own defective workmanship is excluded from coverage via the explicit exclusions, not in the initial grant of coverage.

The court went on to reject the carrier’s historical argument that including faulty subcontractor work essentially converts the policy into a performance bond. According to the court, “coverage may overlap with a performance bond is not a reason to deviate from the most reasonable reading of the policy language.” Id. at 4. The court summarized its holding as follows: 

For these reasons, given the plain meaning of the word “accident,” we conclude that faulty subcontractor work that was unintended by the insured may constitute an “accident” (and thus an “occurrence”) under a CGL policy.

Notably, the Michigan Supreme Court’s decision is limited to cases involving policy language revised by the 1986 ISO revisions to commercial general policies. Those revisions incorporated the “broad form” property endorsement as well as damage caused by faulty workmanship to other parts of work in progress including damage to, or caused by a subcontractor’s work after the insured’s operations are completed. 

This landmark decision tracks with the majority of states that recognize the changes to the standard language found in a CGL policy over the years and is a big win for policyholders in Michigan and elsewhere. For further information about this decision or coverage issues in other states, please refer to Barnes & Thornburg’s 50 state analysis of coverage decisions throughout the United States.

ASBCA Confirms that the Government’s Failure to Identify a Defect During Construction is a Constructive Waiver of the Specifications

Maria Panichelli and Michael Richard | Obermayer Rebmann Maxwell & Hippel

Many federal construction contractors have been there: it’s near the end of the project and the government raises an issue with work that was done much earlier, but is not in strict compliance with the specifications. The contracting officer demands strict compliance with the specifications, even if it means tearing out completed work to fix the defect. And of course, the contracting officer insists that the government does not have to pay for the additional work. The contractor has to proceed as directed, but is the contractor actually entitled to additional compensation or not? On December 17, 2019, the Armed Services Board of Contract Appeals handed down its decision in the Appeal of Buck Town Contractors & Co., confirming that if the government knew about the defective work during performance but said nothing, then it has constructively waived strict compliance with the contract specifications and the contractor is entitled to additional compensation.

Buck Town involved a U.S. Army Corps of Engineers project to rebuild a levee with strips of reinforcing geotextile. The specifications required that all seams between the strips be perpendicular to the centerline of the levee. The contractor installed the strips in the right direction, but when it reached the end of a roll of geotextile, it would simply continue that installation with a piece from a new roll. This created a seam on certain strips that was parallel to the centerline of the levee, in clear violation of the specifications.

During performance, this non-compliant work was observed by the Corps’ Quality Assurance representatives, who approved of the work without objection. Buck Town’s installation of connected strips with parallel seams was noted in both the government’s QA logs and the contractor’s Quality Control logs, without identifying it as non-compliant with the specifications. In reliance on the government’s approval, Buck Town rebuilt the levee above the non-compliant geotextile installations. Later on, Corps’ personnel from another project discovered the defect, and the contracting officer directed Buck Town to remove the levee and reinstall the geotextile in compliance with the contract specifications. Buck Town did the additional work and then submitted a claim for the time and costs incurred.

The Corps denied the claim arguing that it was entitled to strict compliance with the contract specifications. Buck Town appealed to the ASBCA, arguing that the Corps had waived strict compliance by approving the non-compliant installation and allowing it to proceed with the work. The contracting officer testified that he was unaware of the non-compliant installations, and the Corps’ QA representatives testified that they were unaware that the geotextile installations failed to meet the contract requirements. The Corps argued that it could not have waived compliance with the contract specifications when the contracting officer did not have actual knowledge that the reinforcing geotextile was not being installed in conformance with the contract requirements.

The Board rejected these arguments, holding that the knowledge of the QA representatives was imputed to the contracting officer and therefore he knew, or should have known, that the work was not being performed in strict compliance with the contract. By failing to identify the non-compliant work during performance, the government waived strict compliance with the contract specifications. The Board sustained Buck Town’s entitlement to time and money incurred in correcting the defective work.

The takeaway for contractors is that you may be entitled to additional time and money for corrections to defective work, provided you can show that the government knew about the defective work and allowed you to proceed anyway.