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.

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. 

Alleging Property Damage in Construction Defect Lawsuit

David Adelstein | Florida Construction Legal Updates

When there is a construction defect lawsuit, there is an insurance coverage issue or consideration.  As I have said repeatedly in other articles, it is all about maximizing insurance coverage regardless of whether you are the plaintiff prosecuting the construction defect claim or the contractor(s) alleged to have committed the construction defect and property damage.  It is about triggering first, the insurer’s duty to defend, and second, the insurer’s duty to indemnify its insured for the property damage.   

The construction defect claim and lawsuit begins with how the claim and, then, lawsuit is couched knowing that the duty to defend is triggered by allegations in the lawsuit (complaint).  Thus, preparing the lawsuit (complaint) is vital to maximize the insurer’s duty to defend its insured.

In a recent opinion out of the Eleventh Circuit, Southern-Owners Ins. Co. v. MAC Contractors of Florida, LLC, 2020 WL 4345199 (11th Cir. 2020), a general contractor was sued for construction defects in the construction of a custom home.  A dispute arose pre-completion and the owner hired another contractor to complete the house and remediate construction defects.   The contractor’s CGL insurer originally provided a defense to the general contractor but then withdrew the defense and filed an action for declaratory relief asking for the declaration that it had no duty to defend the contractor because the underlying lawsuit did NOT allege property damage.  The trial court agreed with the contractor and granted summary judgment in its favor finding that the underlying complaint did not allege property damage beyond defective work.  But, on appeal, the Eleventh Circuit reversed.

Among other allegations, the owner’s underlying complaint against the contractor asserted that the contractor committed defects through chipped pavers in the driveways and walkways, inconsistent paint finish, marks on ceilings, damage to exterior doors, damage to the top stair tread, damage to hardwood floors, metal roof dents, scratches in granite, holes in ceilings, etc.  The owner sought its costs to repair and remediate the defects and damage from the contractor.  In looking at whether the  contractor’s CGL insurer had a duty to defend the contractor–the insured–the Eleventh Circuit (focusing on precedent out of the Eleventh Circuit) stated:

The operative amended complaint alleged that [the contractor] 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 [the contractor] to prove that one subcontractor negligently damaged nondefective work performed by another subcontractor.  If [the contractxor] could establish that at least some of the damage arose in this way, there would be “damage apart from the defective work itself” and therefore “property damage.”

***

For these reasons, we conclude that the underlying operative complaint can fairly be construed to allege “property damage” within the meaning of the CGL policy and Florida law. Accordingly, the district court erred in granting summary judgment to [the CLG insurer] on this basis.

MAC Contractors of Florida, 2020 WL at *4 (internal citations omitted).

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

“Your Work” Exclusion Bars Coverage

Tred R. Eyerly | Insurance Law Hawaii

    Although the appellate court agreed there was property damage caused by an occurrence, the “your work” exclusion barred the insured contractor’s claim. King’s Cove Marina, LLC v. Lambert Commercial Construction. LLC, 2019 Minn. App. LEXIS 389 (Minn. Ct. App. Dec. 16, 2019).

    King’s Cover Marina sought to expand and remodel its main building. The marina hired Lambert to perform the remodeling project. Lambert hired Roehl Construction, Inc. as a subcontractor to install new concrete footings on the main level of the building and to provide concrete for the second-level mezzanine floor.

    After completion, the marina sued Lambert for breach of contract and negligence. The marina alleged that the concrete floors on the first and second levels were not constructed in accordance with industry standards or with project plans and specifications, resulting in excessive movement and cracking of the new concrete floors. Lambert tendered its defense to its insurer, United Fire & Casualty Company. United Fire defended under a reservation of rights and later sued Lambert for declaratory judgment. 

    While the declaratory judgment action was pending, Lambert and the marina settled the underlying lawsuit. Lambert confessed judgment in the marina’s favor in the amount of $2 million. Judgment was entered against Lambert. The marina filed a supplemental complaint for garnishment against Untied Fire. United Fire answered, asserting that the settlement was unreasonable because it failed to allocate between covered and non-covered damages. The trial court determined on summary judgment there was coverage for the claims and damages asserted by the marina against Lambert. United Fire appealed.

    The appellate court agreed with the trial court’s determination that there was property damage caused by an occurrence. However, Exclusion (l) applied to bar coverage. The provision excluded coverage for:

“Property damage” to “your work” arising out off it or any part of it and included in the “products-completed operations hazard.”

This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.

The products-completed operations hazard included “all ‘bodily injury’ and ‘property damage’ occurring away from premises you own or rent and arising out of ‘your product’ or ‘your work.””

    Here, any costs associated with repairing or replacing Lambert’s faulty work were barred by Exclusion l. The marina’s claimed damages arose at least in part out of Lambert’s work and any damages associated with repairing such work were excluded from coverage by Exclusion l. 

    The exception for subcontractors under Exclusion l was not applicable because the settlement agreement between the marina and Lambert was limited to roofing and siding performed by Lambert and excluded the concrete work performed by Roehl. Thus, the subcontractor exception to Exclusion l did not apply to the claims at issue in the settlement agreement. 

    The settlement agreement was also unreasonable as a matter of law because it did not allocate between covered and non-covered damages. The trial court failed to distinguish between repair-and-replacement damages caused by work Lambert was hired to perform – to which Exclusion l applied – and damages to adjacent structures that were not caused by, though arising from, Lambert’s construction work.