Insurer Must Defend Faulty Workmanship Claims

Tred R. Eyerly | Insurance Law Hawaii

   The court determined that the insurer improperly denied a defense for construction defect claims made against the insured. Amerisure Mut. Ins. Co. v. McMillin Tex. Homes, 2022 U.S. Dist. LEIS 40363 (W.D. Texas March 8, 2022). 

    McMillin was a developer, general contractor and home seller. It constructed multiple homes in various communities in the San Antonio area. After the homes were completed, homeowners observed defects in the artificial stucco exterior finish. After claims were lodged against McMillin, the various claims were tendered to Amerisure. Amerisure filed for declaratory judgment that it had to duty to defend or indemnify and moved for summary judgment.

    Amerisure first argued the homeowners’ faulty workmanship claims did not allege “property damage” under the policies. It argued there were no allegations that any property damage existed, but merely that the stucco suffered from construction defects. The court disagreed. Among the allegations was the statement that due to the construction defects, the homes suffered damage “not only to the exterior stucco, but also to the underlying wire lath, paper backing, house wrap, flashing, water resistive barriers, sheathing, interior walls, interior floors and/ or other property.” Consequently, the underlying claims amounted to property damage.

    The court then considered exclusions relied upon by Amerisure. Exclusions J (5) and (6) precluded coverage for faulty workmanship. Both were limited by the phrase “that particular party” of property damaged due to the insured’s work. This limitation precluded application of the exclusions to damage on other parts of the home or non-defective portions of the insured’s work. Here, several of the homeowners alleged damage to parts of the house beyond the stucco system, including interior walls, interior floors and other property. Therefore, Amerisure failed to establish as a matter of law that Exclusions J (5) and (6) prohibited coverage for the homeowners’ claims. 

    Next the court determined that Exclusion k did not apply to the construction of a building because buildings were constructed or erected, not manufactured. 

    Exclusion L, Damage to Your Work, only applied to exclude damages to the insured’s “competed” work. The underlying complaints did not specifically allege when property damage from McMillin’s work occurred. The property damage could have occurred before, during, and after completion of McMillin’s work. 

    Finally, there was a duty to defend rip and tear allegations. Amerisure asserted that the policy did not cover tear-out work performed to remove and replace the stucco system because defective work itself did not constitute covered “property damage” and any ensuing tear-out work would not qualify for independent coverage under the policies. The extent of any property damage and whether repair or removal of the stucco exterior was necessary to fix any covered damages would depend upon the facts in each instance. For the duty to defend analysis, the insured needed only to demonstrate the potential that tear-out work would be necessary. 

    The duty to indemnify could only be determined when the underlying suit was concluded.

    Consequently, Amerisure’s motion for summary judgment was denied. 

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Pennsylvania Federal Court Confirms: Construction Defect Claims Not Covered by CGL Policies

Nathan Cazier and Scott Thomas | Payne & Fears

The construction industry operates under the constant spectre of claims seeking damages for defective or faulty workmanship. Fortunately, the law in most states treats these claims as covered under commercial general liability (“CGL”) policies. A small minority of states take a much stingier view. In a newly decided case, a Pennsylvania federal court confirmed that Pennsylvania belongs to this small group of states that regard construction claims as not worthy of liability insurance coverage. Main St. Am. Assurance Co. v. Howard Lynch Plastering, Inc., No. CV 21-3977, 2022 WL 445768, (E.D. Pa. Feb. 14, 2022).

Main St. involves a typical construction defect case: W.B. Homes (“W.B.”) developed a residential community, contracting with various trades to build the homes. W.B. required these subcontractors to obtain liability insurance covering their work and, when homeowners sued W.B. for damages due to allegedly faulty work, W.B. tendered the claim to these insurers. One of them, Main Street Assurance Co. (“Main Street”) then sued W.B. for declaratory relief, arguing that under Pennsylvania law, it had no duty to defend W.B.

Following Pennsylvania precedent, Main St. held that faulty workmanship is not an “occurrence” and, thus, claims grounded in faulty workmanship are not covered under CGL policies. See Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Com. Union Ins. Co., 908 A.2d 888 (Pa. 2006). Kvaerner – and now Main St. – reason that CGL policies, which cover only liability caused by an “occurrence,” define “occurrence” as an “accident,” and “faulty workmanship does not constitute an ‘accident.’” Id. at 899–900.

W.B. anticipated this reasoning, and tried to get around it in two ways: First W.B. argued that the construction defect claim was grounded in product liability (which might be covered by CGL policies in Pennsylvania). The court rejected this argument, since the homeowners never actually alleged that any product caused damage. Next, W.B. argued that the policy’s “Products Completed Operations Hazard” exclusion, (eliminating coverage for certain damages caused by faulty workmanship) implies that the policy was intended to treat faulty workmanship as an “occurrence” – otherwise the exclusion would be unnecessary. Main St. rejected this argument because, in the court’s view, it doesn’t overcome W.B.’s threshold problem: faulty workmanship is not an “occurrence” in Pennsylvania. Thus, the court reasoned, because the “occurrence” requirement in the insuring agreement was never satisfied, the court need not consider whether exclusions and their exceptions apply.

Takeaways

Main St. makes it clear that risk transfer strategies for Pennsylvania projects based on traditional general liability insurance coverage will continue to be problematic. Negotiating during the procurement process (when possible) for amended language that broadens coverage, or for favorable choice-of-law provisions, may help. Manuscripted OCIP’s specifically designed to provide coverage for construction defect claims may also be an alternative.Finally, negotiating favorable indemnity agreements with trades and suppliers – which has its own set of challenges and limitations – becomes even more important. But there are no convenient solutions to Pennsylvania’s outlier perspective on insurance coverage for construction defect claims.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Michigan Court of Appeals Remands Construction Defect Case

Tred R. Eyerly | Insurance law Hawaii

    After its prior decision holding there was no coverage for faulty workmanship was remanded by the Michigan Supreme Court, the Court of Appeals remanded to the trial court. Skanska United States Bldg. v. M.A.P. Mech. Contrs., 2021 Mich. App. LEXIS 7336 (Mich. Ct. App. Dec. 28, 2021). The post summarizing the Supreme Court decision is here.

    Skanska USA Building was the construction manager on a renovation project at a medical center. Skanska subcontracted the heating and cooling portion of the project to defendant M.A.P. MAP held a CGL policy from Amerisure. Skanska and the medical center were named as additional insureds. 

    MAP installed a steam boiler and related piping for the heating system. When completed, the heating system did not function properly. MAP installed some of the expansion joints backwards, causing damage to concrete, steel, and the heating system. 

    MAP notified Amerisure. After making repairs, Skanska also submitted a claim to Amerisure. The claims were denied. Skanska filed suit against MAP and Amerisure. The trial court denied Amerisure’s motion for summary judgment. All parties agreed that the damage was caused by an unforeseen accident. There were material issues of fact as to whether there was an occurrence. 

    The Court of Appeals reversed, holding that an occurrence could not include damages for the insured’s own faulty workmanship. There was no genuine issue of material fact that plaintiff sought coverage for replacement of its own work product. The Supreme Court then reversed the Court of Appeals decision, holding that “an ‘accident’ may include unintentionally faulty subcontractor work that damages an insured’s work product.”

    Now, on remand, the Court of Appeals remanded to the trial court in light of the Supreme Court’s decision. Amerisure urged the court to follow the majority approach and hold that, while faulty subcontractor work that damages an insured contractor’s work product may be an accident, an insured’s own faulty workmanship that damages only its own work product, requiring the product to be repaired or replaced, is not. The issue, however, was not presented previously to the trial court.

    The trial court was directed to determine whether an occurrence took place and, if so, the scope of coverage in light of the Supreme Court’s decision. 

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Court Of Appeals Clarifies That Expert Testimony Required in Nearly All Faulty Construction Cases

Joseph Davies | Smith Debnam Narron Drake Saintsing & Myers

In a recent decision touching on many interesting issues, North Carolina’s Court of Appeals effectively determined that, in all but the most obvious cases, expert testimony is required to establish a failure to perform construction in a workmanlike fashion.

Small Claims Court to Court of Appeals

In Dan King Plumbing Heating & Air Conditioning, LLC v. Harrison, 20221-NCCOA-27, a plumbing and HVAC contractor entered into two contracts with the defendant – one for plumbing work and one for HVAC work. The contractor filed suit to recover money owing under the contracts, and the defendant filed a number of counterclaims based on breach of contract and alleged misrepresentations. One of the breach of contract claims alleged that the contractor failed to perform the plumbing work in a “workmanlike fashion” – essentially that the contractor’s work was defective and, therefore, had not fulfilled its obligations under the contract. The case initially started in small claims court – the contractor sued for less than $4,000. After losing in small claims court, the contractor appealed to district court, where the homeowner filed his counterclaims and obtained a jury verdict in his favor in excess of $30,000. Apart from any legal analysis, this case stands as a good reminder that even “small” cases can quickly take on a life of their own, well beyond what the plaintiff may have anticipated at the outset.

Verdict for the Owner

At trial, the homeowner relied upon his own testimony and several pictures of the plumbing to establish his claim for defective work. The contractor requested that the court direct a verdict in its favor on this particular claim, arguing that the homeowner was required to provide expert testimony to establish his claim and, having failed to do so, was not entitled to have the jury decide the issue. In general, to establish a claim for faulty workmanship, the pleading must allege how it was faulty and requires the party alleging the breach to show that the contractor or builder did not use the “customary standard of skill and care” in the particular industry, location, and time-frame in which the construction occurs. In this case, the contractor argued that establishing a failure to abide by the customary standard of skill and care necessarily requires expert testimony regarding exactly what that standard of care is. The homeowner argued in response that whether the work was deficient did not require an expert and is something that a jury could determine on its own. The trial court denied the contractor’s motion, and the jury returned a verdict in favor of the homeowner. Each party appealed various aspects of the case.

Expert Testimony and the “Common Knowledge” Exception

On appeal, the contractor essentially argued that these construction cases are like a medical or legal malpractice case, where there ordinarily must be some expert that testifies regarding the standard that a doctor or lawyer should meet in a given situation. The Court of Appeals noted that general rule requires expert testimony in cases like this and discussed the “common knowledge” exception o the general rule. That exception applies in situations where “the workmanship is so grossly subpar that it is obvious to any layperson that the work does not live up to a professional standard of care.”  In those cases, expert testimony would not be required. The court then provided two analogies – the work must be the construction equivalent of a surgeon leaving a sponge inside a patient on the operating table or a lawyer being ignorant of the applicable statute of limitations.

Verdict for the Contractor

The court then reviewed the twelve photographs the owner had introduced into evidence and concluded that they were insufficient to indicate to a layperson that the plumbing work was obviously or grossly defective. As a result, the common knowledge exception did not apply, expert testimony was required, and the contractor was entitled to judgment in its favor on this claim because the homeowner had failed to offer any expert evidence.

The court also ruled on several other issues, including unfair trade practices and issues of civil procedure. The court examined the requirement of “aggravating factors” in order for a breach of contract to reach the level of an unfair trade practice. The court examined whether the homeowner had relied on any alleged misrepresentation and concluded he had not and could therefore not establish a claim for unfair trade practices on those grounds. The court also reviewed the trial court’s refusal to introduce certain evidence and the ordering of arguments at the trial. While these issues are undoubtedly important, the primary takeaway for those in the construction industry is that expert testimony will be required to prove workmanship claims in all but the most egregious cases. Of course, this also means that defending such claims will often require retaining an expert as well.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Proposed Bill Would Require All Commercial Liability Insurance Policies Issued In New Jersey To Specify Coverage For “Faulty Workmanship”

John S. Prisco | Stark & Stark

Assemblyman Gary S. Schaer of New Jersey’s 36th District introduced a proposed bill, A.B. 1075, that would require all commercial liability insurance policies issued in New Jersey to include “faulty workmanship” within the definition of “occurrence.”

The proposed bill “provides that a commercial liability insurance policy shall not be delivered, issued, executed, or renewed in this State, on or after the bill’s effective date, unless the policy contains a definition of occurrence that includes:

  • an accident, including continuous or repeated exposure to substantially the same general harmful conditions; and
  • property damage or bodily injury resulting from faulty workmanship.”

The proposed bill was introduced on January 11, 2022, and must move through the committee review process as an initial step. A substantially similar proposed bill, NJ A3401, was introduced by Assemblyman Schaer on February 25, 2020. The earlier bill was referred to the Assembly Financial Institutions and Insurance Committee but failed to make it through for passage.

The proposed bill is the next logical step following the New Jersey Supreme Court’s landmark decision in Cypress Point Condo. Assn. v. Adria Towers, LLC, 226 N.J. 403 (2016), which the Court issued on August 4, 2016. The issue in Cypress Point was whether rainwater damage caused by a subcontractor’s faulty workmanship constituted “property damage” caused by an “occurrence” to trigger coverage under the condominium developer’s commercial general liability (“CGL”) insurance policy. Cypress Point, a condominium association, filed suit against Adria Towers, the developer and general contractor for the project, its insurers, and various subcontractors hired by Adria Towers, alleging faulty workmanship during construction, which resulted in consequential damages to common elements and unit owner property.

After construction was complete, unit owners began experiencing roof leaks and water infiltration in their units and the common areas. The association alleged that consequential damages to the common elements and unit owner property were caused by rainwater leaking into the interior of the property due to faulty workmanship during construction. At issue was language contained in the 1986 ISP standard form CGL policy issued to the developer, which defined an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” In reviewing the association’s claims in conjunction with the 1986 ISP standard form CGL policy definition of “occurrence,” the Court held that the consequential damages caused by the subcontractors’ faulty workmanship constituted “property damage,” and the water leaking into the interior of the property due to the subcontractors’ faulty workmanship was an “occurrence” triggering coverage under the CGL policies at issue.

In arriving at its holding, the Court found that the term “accident” contained in the policy was not defined. Upon review of the policy and relevant case law, the Court concluded that “the term ‘accident’ in the policies at issue encompass[ed] unintended and unexpected harm caused by negligent conduct.” Having defined “accident,” the Court turned to the critical question of whether “the consequential water damage to the completed, nondefective portions of Cypress Point flowing from the subcontractors’ poor workmanship was foreseeable.” To this point, the Court noted that “no one claim[ed] that the subcontractors intentionally performed substandard work that led to the water damage.”

As a result, the Court held that

under our interpretation of the term ‘occurrence’ in the policies, consequential harm caused by negligent work is an ‘accident.’ Therefore, because the result of the subcontractors’ faulty workmanship here-consequential water damage to the completed and nondefective portions of Cypress Point-was an ‘accident,’ it is an ‘occurrence’ under the policies and is therefore covered so long as the other parameters set by the policies are met.

In so ruling, the Court’s decision in Cypress Point resolved decades of conflicting and contradictory rulings from New Jersey’s lower courts. The proposed bill introduced by Assemblyman Gary S. Schaer would codify the Court’s holding as part of the statutory requirements insurers must meet in order to issue policies in New Jersey. Whether or not the bill will gain traction in the legislature this time around and move through the committee process is unknown.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.