Trying to Reconcile the Irreconcilable: Making Sense of Recent Caselaw on
Occurrence
December 2005
It is a daunting task to try to reconcile
disparate results in two construction defect cases decided within days of each
other and interpreting identical policy provisions to identical factual scenarios.
by Patrick
J. Wielinski
Cokinos, Bosien
& Young
It has been slightly over 1 year since the last column in this series commented
on the opinion of the South Carolina Supreme Court in L-J, Inc. v. Bituminous Fire & Marine Ins. Co.,
2004 WL 1775571 (S.C. April 21, 2004), referred to in this column as "L-J
One."1 At that time, a petition for rehearing
was pending before the court, largely due to the court's radical reversal of
the opinion of the South Carolina Court of Appeals that held that damage to
a completed road arising out of the work of subcontractors of the insured road
contractor constituted an "occurrence" under the standard CGL definition.2 In reversing, the South Carolina Supreme Court held that, even though there
were numerous acts of negligence on the part of the insured, L-J, no occurrence
had taken place since they were mere examples of faulty workmanship causing
damage to the roadway system only, which
did not fall within the definition of "occurrence" under the CGL policy.
Setting the Pace for "No Occurrence": L-J
Two
The first opinion of the South Carolina Supreme Court, reversing the court
of appeals, was issued on August 9, 2004, but on February 3, 2005, the court,
in a 5–0 unanimous vote, granted the petition for rehearing after a firestorm
of comment from the construction industry and legal groups. The unanimous decision
to grant the petition for rehearing caused some optimism that the court would
reconsider and even reverse its opinion denying coverage. Thus, the stage was
set for the rehearing of L-J One and the case
on rehearing garnered increasing national attention. The second opinion is reported
at L-J, Inc. v. Bituminous Fire & Marine Ins. Co.,
___ S.E.2d ___, 2004 WL 3540903 (S.C. Sept. 26, 2005).
Even though it withdrew its prior opinion, the Supreme Court of South Carolina
maintained its denial of coverage in L-J Two.
Despite the fact that the court observed that there were numerous acts of negligence
on the part of L-J, no occurrence had taken place. The court stated as follows:
- Although the alligator cracking may have constituted property damage,
we find that an "occurrence," as defined under the CGL policy, did not take
place. According to the deposition testimony outlined above, the only "occurrences"
were various negligent acts by Contractor during road design, preparation,
and construction, which led to the premature deterioration of the roads.
Those negligent acts included: (1) failure to prepare the subgrade by deciding
not to remove the tree stumps and by failing to remove or compact the wet
clay in the subgrade; (2) improperly designed drainage system; (3) ill-prepared,
thin road course that could not handle heavy wheel-loads; and (4) improperly
designed curve edge detail.
- We find that these negligent acts constitute faulty workmanship, which
damaged the roadway system only. And because faulty workmanship is not something
that is typically caused by an accident or by exposure to the same general
harmful conditions, we hold that the damage in this case did not constitute
an occurrence.
The Bituminous policy contained the standard definition of "occurrence,"
meaning "an accident, including continuous or repeated exposure to substantially
the same general harmful conditions." While the court recognized that the conduct
of L-J was negligent, nevertheless, in a footnote, it stated that a CGL policy
may "provide coverage in cases where faulty workmanship causes a third party
bodily injury or damage to other property, not
in cases where faulty workmanship damages the work product alone. [Emphasis
in original.]"
The South Carolina Supreme Court supported its holding by citing to High Country Assoc. v. New Hampshire Ins. Co.,
648 A.2d 474 (N.H. 1994), as an example of a case upholding coverage where defective
workmanship resulted in property damage. There, the defective installation of
siding by the insured on a condominium project resulted in extensive damage
to the structure of the buildings because of water infiltration. The court regarded
the facts of High Country Assoc. as setting out
covered property damage caused by continuous exposure to moisture, rather than
simply a claim for the contractor's defective work outside the scope of CGL
coverage. It is difficult to see how the defective compaction of the subgrade,
resulting in the cracking of the pavement in L-J,
differed from the negligent installation of the siding resulting in water infiltration
and damage to the building in High Country. In
both cases, the damage was to the insured's work. Both cases represent property
damage caused by an occurrence.
Another Approach: BRAC v. National Union
Inexplicably, despite the results of cases such as L-J Two, other courts, considering virtually
identical facts, have found that defective construction constitutes an occurrence
under a CGL policy issued to a contractor. Just 2 days after L-J Two, Broadmoor Anderson v. National Union Fire Ins.
Co. of Louisiana, 912 So.2d 400 (La. App. 2 Cir. Sept. 28, 2005), was
decided. In that case, National Union wrote an OCIP policy in connection with
the construction of the Hollywood Casino Shreveport project. BRAC, the general
contractor, was insured under the OCIP, as was Tiede-Zoeller, its subcontractor.
After completion, problems developed with the shower stalls in the guestrooms
in the hotel portion of the project. Leaking water damaged interior finishes,
drywall, carpets, and floors. Expert reports concluded that the problem was
due to defective workmanship in installing the shower pans. In that connection,
expert analysis concluded the problem was not a design defect, but was specifically
due to the subcontractor's defective workmanship installing the guest space
room shower pans. In particular, the assessment portion of the report concluded
after destructive testing that the waterproof membrane portion of the shower
pans lacked the proper slope for drainage, resulting in both the shower pans
themselves leaking and the gypsum wallboard surrounding the shower assemblies
retaining moisture. The report recommended removing and replacing all of the
shower pan assemblies down to the structural slab and up to four feet above
the existing finished curb.
The owner demanded that BRAC repair the leaking shower assemblies and associated
damages pursuant to the warranty requirements in the general contract. When
Tiede-Zoeller contested its liability for the leaks, BRAC hired Tiede-Zoeller
to perform the repair, with each party reserving their rights. At the same time,
BRAC made a claim as an insured on the OCIP policy issued by National Union.
National Union disputed whether the CGL policy was intended to cover liability
for the breach of BRAC's construction contract with Hollywood, contending that
there was not an accident, that is, an occurrence under the standard definition
of that term contained in the policy. The court rejected this argument, finding
that the CGL granted coverage for sums that BRAC became "legally obligated to
pay" for "property damage" caused by an "occurrence" did not contain any express
distinction between tort and contractual liability. The court stated that while
the term "accident" may imply a tortious event, Tiede-Zoeller's deficient conduct,
unexpected and with lack of foresight, could also be considered accidental.
In support of that determination, the court looked to the products-completed
operations coverage provided in the policy. The court's analysis of the products-completed
operations coverage available to an insured contractor is worth quoting at length:
- The products-completed operations hazard is defined to include property
damage occurring off the insured's premises "arising out of ‘your product'
or "your work'" except for "work that has not yet been completed or abandoned."
The definition of "your work," which in this case is BRAC's work as an insured,
describes "work or operations performed by you or on your behalf." T-Z [Tiede-Zoeller]
clearly performed and completed work on BRAC's behalf as a subcontractor.
The completed work of both BRAC and T-Z is therefore a focus of the products/work
completed operations coverage which was extended for a period of seven years
after acceptance of the hotel project by Hollywood. Although a collapse
of a building structure long after completion of the project might cause
bodily injury to a third party and be a covered accident arising in tort,
the contemplated hazard as defined in the policy also indicates coverage
for property damage relating to the deficient performance of the contractor
that harms the structure and its owner and therefore entails a contractual
breach. Also, there is no limitation in all the provisions discussed so
far regarding who may suffer damage and be a beneficiary of the policy coverage,
whether a third party or the insured's contracting partner.
Concluding that analysis, the court hit the nail on the head with the following
observation:
- While the overhauled coverage for contractual liability for property
damage is apparently reined in drastically by the policy exclusions which
we will next review, the general grant of coverage is not limited to only
claims in tort.
The court supported this statement by citing to American
Family Mutual Ins. Co. v. American Girl, Inc., 268 Wis. 2d 16, 673 N.W.2d
65 (2004), for the proposition that if losses actionable in contract are never
CGL occurrences for purposes of the initial coverage grant in the policy, then
the business risk exclusions are entirely unnecessary. Finally, noting the conflict
in the caselaw within the State of Louisiana itself as to coverage for defective
workmanship, the court, in referring to those cases, stated that, "[t]he entire
contractual language of those disputed policies is not always clear from the
opinions, "and we are required here to deal
with the precise language at hand in the context of the entire policy." Having engaged in that exercise, the court concluded that the defective work
performed by the subcontractors of the insured contractor constituted an insured
accident and occurrence.3
Reconciling the Irreconcilable
It is a daunting task to try to reconcile such disparate results in two cases
decided within days of each other and interpreting identical policy provisions
to identical factual scenarios. For example, the basis of the South Carolina
Supreme Court's holding in L-J Two appears to
be its conclusion that there must be damage to a third-party's property beyond
the work itself in order for there to be an occurrence. That conclusion is not
supported by the language of the definition of "occurrence" which contains no
such requirement. Nor does the definition of property damage.4 The court in L-J Two seemed to confuse the faulty
workmanship itself, i.e., the actions of the insured contractor that gave rise
to the damage, with the property damage that resulted from it. If that property
damage is unexpected and unintended, it is an accident under the traditional
formulations of occurrence described above. These formulations are truer to
the policy language and intent.
Moreover, the holding in L-J Two fails to
take into account the fact that it is the property damage exclusions, including
the "your work" exclusion, that differentiate between covered and noncovered
property damage once there has been an occurrence. The holding in Broadmoor v. National Union stands in stark contrast
to that of L-J Two by upholding the existence
of an occurrence under virtually identical circumstances. The only means whereby
the results can be explained, and perhaps even reconciled, is the focus of the
Second Court of Appeals of Louisiana on the language of the entire CGL policy
before it. A close reading of the opinion indicates that the court carefully
considered the structure of the entire policy, particularly in its detailed
analysis of the relationship between occurrence, completed operations coverage,
and the work of subcontractors in the defective construction context. Based
on such a detailed analysis, the court could not help but conclude that there
was coverage for property damage caused by the defective work of the insured
general contractor's subcontractors.
On the other side of the coin, by limiting its focus only to the coverage
grant and accompanying definitions of occurrence and property damage, the opposite
conclusion by the South Carolina Court is somewhat understandable, but still
disquieting. The insurance coverage for complex construction defect claims cannot
be fully and fairly evaluated unless the entire policy is considered, otherwise,
the results are disappointing, especially for insureds as to expected coverage
for certain types of construction defects. This is especially true where notions
of third-party property damage are engrafted onto the policy language.
Cases such as L-J v. Bituminous illustrate
the apparent disconnect between the underwriting and claims departments of insurance
companies once a claim is made on a CGL policy. The industry is now in its second
generation of policy forms that provide an insured general contractor with coverage
for property damage arising out of the defective work of subcontractors by virtue
of the subcontractor exception, part of the products-completed operations coverage.
Since that exception has been available for over 30 years, underwriters, brokers,
agents and insureds expect such coverage
to be provided in the standard CGL policy. Unfortunately, once a claim is made
involving property damage caused by a subcontractor's defective work, claims
departments of insurers ignore that coverage by arguing that there has been
no occurrence to trigger coverage under the policy. These types of arguments
intentionally truncate the terms of the policy in order to divert attention
from the coverage that is preserved for subcontractor work. In other words,
insurance company claims departments refuse to consider the language of the
entire policy that the underwriters in the same insurance company issued, contrary
to the underwriting intent. The result is cases such as L-J v. Bituminous. Perhaps it is not only the
results of disparate caselaw that need to be reconciled, but also the underwriting
and the claims departments of the insurance companies writing CGL coverage for
the construction industry.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.