Arkansas Rules No "Occurrence" for Construction Defect in CGL Insurance
April 2008
In Essex Ins. Co.
v. Holder (Ark. March 6, 2008), the Arkansas Supreme Court held that
defective workmanship which results in damages only to the insured's work product
is not an accidental occurrence under a commercial general liability (CGL) policy.
by Kevin
Merriman
Ward Norris Heller
& Reidy LLP
The claim arose from a suit for damages alleging breach of contract, breach
of express and implied warranties, and negligence in connection with the insured's
construction of a home. The underlying complaint alleged that the homeowners
suffered damage resulting from the insured's delay, employment of incompetent
subcontractors, and defective and incomplete construction. The insurer issued
three policies implicated in the loss. The first policy defined "occurrence"
as an accident. The other two policies, which were not before the court, modified
the definition by excluding from the definition actual or alleged defective
or negligent workmanship and construction.
The coverage action was filed in federal district court, which asked the
Arkansas Supreme Court to answer the question whether defective construction
is an accident and therefore an "occurrence" within the meaning of a CGL policy.
The court held that it was not. The court rejected the insured's argument that
the undefined term "accident" was ambiguous, finding prior decisions of the
court have defined the term as "an event that takes place without one's foresight
or expectation—an event that proceeds from an unknown cause, and therefore not
expected."
Persuaded by the reasoning of the district court in
Nabholz Construction Corp. v. St. Paul Fire & Marine
Ins. Co., 354 F. Supp. 2d 917 (E.D. Ark. 2005), the Arkansas court concluded
that faulty workmanship is not an accident but a foreseeable occurrence, and
that performance bonds, not CGL policies, insure contractors against claims
for cost of repair or replacement of faulty work.
In reaching its decision, the court cited:
- Pursell Constr., Inc. v. Hawkeye-Security Ins.
Co., 596 N.W.2d 67 (Iowa 1999)
- Kvaerner Metals Div. of Kvaerner US, Inc. v.
Commercial Union Ins. Co., 589 Pa. 317 (Pa. 2006)
- McAllister v. Peerless Ins. Co., 124
N.H. 676 (1984)
The court expressly rejected the contrary view recently adopted by the Texas
Supreme Court in Lamar Homes, Inc. v. Mid-Continent
Cas. Co., 239 S.W.3d 236 (Tex. 2007).
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