Michigan Supreme Court Finds Faulty Subcontractor Work That Damages Insured’s Work Product May Constitute an “Occurrence” Under CGL Policy

Jason Taylor | Traub Lieberman Straus & Shrewsberry

In Skanska USA Bldg. Inc. v. M.A.P. Mech. Contractors, Inc., 2020 WL 3527909 (Mich. June 29, 2020), the Michigan Supreme Court addressed whether unintentionally faulty subcontractor work that damages an insured’s work product constitutes an “accident” under a commercial general liability insurance policy. In aligning itself with a growing number of jurisdictions, the Michigan Supreme Court answered, “yes.” In Skanska, a construction manager brought an action against a commercial general liability (CGL) insurer seeking coverage as additional insured for the cost of repairs to correct faulty work performed by its subcontractor in renovation of medical center. In 2009, the construction manager hired MAP to install a steam boiler and related piping for the medical center’s heating system. MAP’s installation included several expansion joints, which it was later discovered, were installed backward. Significant damage to concrete, steel, and the heating system occurred as a result. The construction manager performed the work of repairing and replacing the damaged property to the tune of $1.4 million, and submitted a claim to MAP’s CGL insurer, Amerisure, seeking coverage as an additional insured.

Amerisure denied the claim contending that MAP’s defective construction was not a covered “occurrence” within the CGL policy. The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions,” but did not define the term “accident.” The trial court looked to the Court of Appeal’s decision in Hawkeye-Sec. Ins. Co. v. Vector Const. Co., 185 Mich. App. 369 (1990), which defined “accident” as “…a result which is not anticipated and…takes place without the insured’s foresight or expectation and without design or intentional causation on his part.” But, again citing Hawkeye, the trial court concluded that “[d]efective workmanship, standing alone, is not an occurrence within the meaning of a[ ] general liability insurance contract[;] an occurrence exists where the insured’s faulty work product damages the property of another.”

The trial court held that an “occurrence” may have happened because the damage caused by MAP’s defective installation of the expansion joints may have gone beyond the scope of the work required by the contract between the plaintiff and the medical center. On appeal, however, the Court of Appeals reversed the trial court and ordered that summary disposition be granted to Amerisure reasoning that there was no “occurrence” under the CGL policy because the only damage was to the insured’s own work product.

The Michigan Supreme Court reversed again holding that faulty work by a subcontractor may fall within the plain meaning of an “occurrence,” or “accident.” The Michigan Supreme Court rejected the carrier’s argument that faulty workmanship to the insured’s product was not an “occurrence” because it lacked “fortuity.” According to the court, fortuity is one way to show that an incident is an accident, but it is not the only way. Rather, appropriate focus of the term “accident” must be on both the injury-causing act or event and its relation to the resulting property damage or injury, which must be analyzed from the subjective standpoint of the insured. Thus, even if an insured acts intentionally, the act may still be an “accident” under policy so long as the injury or damage was not specifically intended by the insured. The Michigan Supreme Court also noted that the policy did not limit the definition of “occurrence” by reference to the owner of the damaged property, which might otherwise preclude a finding of an “occurrence” for damage to the insured’s own work product.

The court, referencing other similar rulings in other jurisdictions, resorted to its reading the contract as a whole to confirm its conclusion. For example, the court reasoned that the policy contained an exclusion precluding coverage for damage to an insured’s own work product (the “Your Work” exclusion), but that the exclusion contains an exception for work performed by a subcontractor on the insured’s behalf. Thus, “[i]f faulty workmanship by a subcontractor could never constitute an ‘accident’ and therefore never be an ‘occurrence’ triggering coverage in the first place, the subcontractor exception would be nugatory.” Skanska, 2020 WL 3527909 at *6 (citing cases). Put another way, if the insuring agreement does not confer an initial grant of coverage for injury or damage to the insured’s own faulty work, then there would be no reason for the “your work” exclusion (and the subcontractor exception).

The Skanska Court also reviewed the context and history of CGL policies, including policy language changes from the 1973 policy forms to those adopted in 1986 in support of its conclusion that an “accident” may include damage to an insured’s own work product, and referred to cases holding otherwise as an “outdated view” of the insurance industry. While this history is interesting, it is beyond the scope of this post. Suffice it to say, the Michigan Supreme Court found that “the 1986 reformation of the scope of coverage under the CGL policies underscored a plain reading of “accident”—that faulty subcontractor work may fall within the policy’s coverage. Id. at *10.

In sum, the Michigan Supreme Court’s holding in Skanska aligned Michigan with the growing body of jurisdiction to hold that an “accident” may include unintentionally faulty subcontractor work that damages an insured’s work product. Of course, the next logical inquiry is whether one or more of the CGL policy’s “business risk” exclusion might apply. (Notably, the Court did not address application of the “your work” policy exclusion. Specifically, Amerisure argued that because MAP was a named insured under the CGL policy, the subcontractor exception to the “your work” exclusion did not apply, and the exclusion barred coverage. The Court merely remanded this question, among others, to the Court of Appeals to address, depending on whether it determines they are properly presented and preserved for its review.)

Michigan Finds Coverage for Subcontractor’s Faulty Work

Tred R Eyerly | Insurance Law Hawaii

    The Michigan Supreme Court held that under a CGL policy, an “accident” may include unintentional subcontractor work that damages the insured’s work product. Skanska USA Building Inc. v. M.A.P. Mechanical Contractors, Inc., et al., 2020 Mich. LEXIS 1194 (Mich. June 29, 2020).

    Skanska USA Building Inc. was the construction manager on a renovation project for a medical centre. The heatng and cooling portion of the project was subcontracted to M.A.P. Mechanical Contractors, Inc. (MAP). MAP installed a steam builder and piping for the heating system. The installation included several expansion joints. After completion, Skanska learned that MAP had installed some of the expansion joints backward. This caused significant damage to concrete, steel and the heating system. The medical center sent a demand letter to Skanska, who send a demand letter to MAP. Skanska did the repairs and replacement of the damaged property. Skanska then submitted a claim of $1.4 million for its work to Amerisure Insurance Company. The claim was denied. 

    Skanska sued Amerisure. The trial court rejected Amerisure’s motion for summary judgment which argued MAP’s defective construction was not a covered “occurrence.” The Court of Appeals reversed and ordered that summary judgment be granted to Amerisure. The court reasoned that there was no “occurrence” because the only damage was to the insured’s own work product. 

    The Michigan Supreme Court reversed the Court of Appeals. Under Michigan law, an “accident” was “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.” Generally, faulty work by a subcontractor could fall within the plain meaning of most of these terms. The accident happened by chance, was outside the usual course of things, and was neither anticipated nor naturally expected. 

    The policy as a whole confirmed this interpretation. The policy contained an exclusion precluding coverage for an insured’s own work product, but it contained an exception for work performed by a subcontractor on the insured’s behalf. If faulty workmanship by a subcontractor could never constitute an “accident” and therefore never be an “occurrence” triggering coverage in the first place, the subcontractor exception would be nugatory. Therefore, given the plain meaning of the word “accident,” faulty subcontractor work that was unintended by the insured could constitute an “accident” under a CGL policy. 

    The context and history of CGL policies supported the court’s conclusion that an “accident” could include damage to an insured’s own work product. In 1986, the ISO added the policy language on a subcontractor’s faulty work. It adopted changes to expand coverage to include some of the business risks that were previously excluded, specifically damage caused by a subcontractor’s faulty workmanship (with no carveout based on whose property was damaged). The 1986 reformation of the scope of coverage under the CGL policies underscored a plain reading of “accident” – that faulty subcontractor work may fall within the policy’s 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.

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.