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.

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

Jeremy S. Macklin | Traub Lieberman

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.

Heads I win, Tails You Lose: Southern Owners Insurance Company v. MAC Contractors

Julius Parker | Butler Weihmuller Katz Craig

On July 29, 2020, the Eleventh Circuit Court of Appeals issued its opinion in Southern Owners Ins. Co. v. MAC Contractors, of Fla., LLC, — Fed. Appx. —, 2020 WL 4345199 (11th Cir. July 29, 2020).  While claiming to follow its own precedent, which narrowly interpreted the Florida Supreme Court’s decisions in United States Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007) and Auto-Owners Ins. Co. v. Pozzi Window Co., 984 So. 2d 1241 (Fla. 2008), the Court reached the conclusion that a complaint which alleged that a newly-constructed home was “replete with construction defects” sufficiently pled “property damage” within the meaning of a general liability policy.  As such, it concluded that the insurer owed a duty to defend its insured home builder against a construction defect claim. This constitutes a departure from the court’s previous position on this issue.

In Amerisure Mut. Ins. Co. v. Auchter Co., 673 F.3d 1294 (11th Cir. 2012), the Eleventh Circuit interpreted the J.S.U.B. and Pozzi Window cases to reach the conclusion that a general liability policy did not cover a claim made against the insured general contractor for a roof which was defectively installed by a subcontractor.  The roof was composed of ceramic S-shaped tiles which required fastening at a precise torque in order to function as designed.  The roofing contractor failed to apply the correct torque, leading to the tiles becoming dislodged and falling off the building during heavy winds.  

The Court explained its reasoning:

The only damages Amelia alleges are those to correct the faulty roof supplied by Auchter’s subcontractor.  In so claiming, Amelia is effectively seeking to secure the roof that Auchter should have installed in the first instance: one that conformed with the contract specifications.  Amelia’s claim is thus simply a “claim for the cost of repairing the subcontractor’s defective work.”  U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871, 890 (Fla. 2007).  As such, Amelia’s claim alleges no “property damage.”  See id.

Auchter, 673 F.3d at 1307.

Following Auchter, the Eleventh Circuit held that where the work of one subcontractor damages the work of another subcontractor, the complaint alleges “property damage” requiring the insurer to defend.  See Carithers v. Mid-Continent Cas. Co., 782 F.3d 1240 (11th Cir. 2015).  There, a brick mason installed brick veneer on a house and a different subcontractor defectively applied a coating over the bricks.  The Court thus held that the complaint alleged property damage to property other than the coating subcontractor’s work (i.e., the bricks).

Relying on Carithers, the Eleventh Circuit in MAC Contractors held that the District Court erred in granting summary judgment in favor of the insurer:

Here, the language of the underlying complaint, “at least marginally and by reasonable implication, could be construed” to create potential coverage under the policy. …  The operative amended complaint alleged that KJIMS 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 KJIMS to prove that one subcontractor negligently damaged nondefective work performed by another subcontractor.

MAC Contractors, 2020 WL 4345199 at *4, citing Trizec Props., Inc. v. Biltmore Constr. Co., Inc., 767 F.2d 810, 813 (11th Cir. 1985).

The problem with MAC Contractors is that it departs from the firmly-established rule that the plaintiff must plead concrete facts which show that coverage is implicated.  Nat’l Union Fire Ins. Co. v. Lenox Liquors, Inc., 358 So. 2d 533 (Fla. 1977).  The complaint in MAC Contractors did not allege that any one subcontractor damaged the work of any other subcontractor, only that the house was “replete with construction defects.”  Rather, the Eleventh Circuit found the duty to defend based upon the possibility that the complaint could be interpreted to allege that one subcontractor damaged the work of another subcontractor.  Basing the duty to defend on the ambiguity of a complaint turns the duty to defend on its head.

Following MAC Contractors, plaintiffs’ counsel in construction defects will be encouraged to plead vague allegations of property damage, because the more vague the complaint, the more it could be read to allege that which it does not.  Fortunately for insurers, the Court elected not to publish its decision in the Federal Reporter.  Therefore, under Rule 36-2 of the Eleventh Circuit’s Rules, the case may not be cited as binding precedent.  That of course begs the question, “Why issue an opinion which runs roughshod over prior established law and then banish it to the ethereal realm of unpublished decisions?”  The decision is pending a Motion for Reconsideration by the three-judge panel only, so perhaps there is hope for a sounder outcome upon reconsideration. 

Are Repair Costs Covered Damages Under a Liability Policy?

Larry P. Schiffer | Squire Patton Boggs | September 27, 2019

Liability policies cover sums an insured becomes legally obligated to pay to a third-party as damages for a loss. Typically, there is no coverage in a liability policy for expenses incurred by the insured to repair damage to the insured’s own property. Additionally, nearly every liability policy has an owned-property exclusion. In a recent case, the 5th Circuit addressed this subject and whether an exception to the owned-property exclusion applied.

In Eagle Water, L.L.C. v. Ash, No. 19-30056 (5th Cir. Sep. 26, 2019) (unpublished), the owner of a sewer system repaired that system following a localized collapse and sought to recover the cost of repair from its liability insurer. The insurer paid for property damage suffered by a homeowner when the sewer system backed up because of the collapse, but rejected the policyholder’s request to cover the cost for repairing the sewer system. As the court noted, without those repairs, there could have been additional backups or sewage spills.

The policy had the usual liability coverage grant providing coverage for “those sums that the Insured becomes legally obligated to pay as damages because of . . . property damage.” The policy also had the usual owned-property exclusion that precluded coverage for damage to property “owned by the Insured.”

After the insurer rejected the claim, the policyholder sued and the insurer moved for summary judgment. The district court granted summary judgment to the insurer reasoning that the repair costs were not covered by the liability insurance policy because those costs were not damages that the policyholder became legally obligated to pay.

In affirming, the circuit court held that the district court correctly determined that the policyholder’s sewer repair costs were not covered by its liability insurance policy. The court stated that when the policyholder paid to repair its sewer system, it was not compensating anyone for loss or injury, so the repair costs were not damages and not covered. Damages, held the court are money claimed by, or ordered to be paid to, a person as compensation for a loss or injury (citations omitted).

The appellate court rejected the policyholder’s argument that an exception to the owned-property exclusion should apply. That judicial exception, said the court, arises in situations where the costs expended are done so to prevent future harm to third parties. The court distinguished the operative case and noted that in that case the repairs were necessary to prevent imminent or immediate harm to third parties because actual damages had occurred. Notably, the court stated that concluding that an owned-property exclusion does not prevent coverage is not the same as concluding that coverage exists. The court concluded that no matter whether the owned-property exclusion applied, the policyholder’s repair costs were not covered by the policy, because those costs were not damages as defined by the liability policy.

The Importance of Careful Coverage Analysis

Heather Howell Wright | Bradley | July 2017

Ohio has joined the majority of jurisdictions in holding that a general liability policy may provide coverage for claims made by a project owner for property damage allegedly caused by the defective work of a subcontractor. In Ohio Northern Univ. v. Charles Constr. Serv., Inc., an Ohio appeals court found coverage. It distinguished a 2012 decision of the Ohio Supreme Court, Westfield Ins. Co. v. Custom Agri Systems, Inc. that seemed to hold, broadly, that “claims of defective construction or workmanship brought by a property owner are not claims for ‘property damage’ caused by an ‘occurrence’ under a commercial general liability policy.” A close comparison of the two cases reveals their consistency and demonstrates that the “devil is in the details” of any coverage analysis.

Coverage for Defective Work

Most commercial general liability policies are written on standardized forms developed by the Insurance Services Offices. The standard general liability policy provides that it applies to “property damage” caused by an “occurrence.” Whether faulty or defective workmanship constitutes an “occurrence” under the general liability policy 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 construction defects or faulty workmanship satisfy the “occurrence” and “property damage” requirements under a general liability policy, and that losses sustained as a result of such defects may be covered.

The Ohio Cases

Ohio Northern University (the “Owner”) contracted with Charles Construction Services, Inc. (the “Contractor”) to build a luxury hotel and conference center on the Ohio Northern campus (the “Project”). The Contractor subcontracted most of the work to various trade and supplier subcontractors. After construction was complete, the Owner discovered evidence of water intrusion and moisture damage to wall coverings, dry wall, and insulation. Remediation of the damage led to the discovery of additional structural defects.

The Owner sued the Contractor, who, in turn, filed claims against its subcontractors. The Contractor’s insurer, The Cincinnati Insurance Company (the “Insurer”), intervened in the lawsuit and sought a declaration that it had no obligation to defend or indemnify the Contractor. In a motion for summary judgment, the insurer relied on the Ohio Supreme Court’s decision in Custom Agri to support its claim that it had no duty to defend or indemnify the Contractor. The trial court held in favor of the insurer holding that, under Custom Agri, defective construction was not an occurrence and, therefore, that there was no coverage.

On appeal, the Court of Appeals explicitly rejected the Insurer’s argument that Custom Agri stood for the “expansive proposition that all claims for defective workmanship, regardless of who performed it, are barred from coverage under a [general liability] policy because such claims” can never constitute a claim for “property damage” caused by an “occurrence” under a general liability policy. The Court of Appeals noted that, unlike Custom Agri, the property damage sustained by Ohio Northern was caused by the defective work of subcontractors, not by the work of the insured Contractor. Moreover, the property damage occurred after the project was completed. Thus, the property damage was within the “Products-Completed Operations Hazard,” and the insured Contractor had paid supplemental premiums to obtain “Products-Completed Operations Hazard” coverage. In considering each of these facts, the Court of Appeals reversed the trial court’s entry of summary judgment for the Insurer.

Conclusion

Comparison of these two Ohio cases demonstrates the necessity of conducting a close review of the facts and procedural posture of any coverage case to identify possible bases for establishing coverage.