Defective Work as an Occurrence1
July 2000
Despite standardized CGL policy language,
courts around the United States have, at best, produced a mixed bag of results
in applying the definition of “occurrence” to faulty workmanship. This article
reviews the two most prevalent types of analysis used by the courts, and why
they lead to very different coverage interpretations.
by Patrick
J. Wielinski
Cokinos, Bosien &
Young
Courts continue to grapple with the issue of whether defective construction
by an insured contractor constitutes an "occurrence" as defined in the standard
commercial general liability (CGL) policy.2 Despite standardized policy language, courts around the United States have,
at best, produced a mixed bag of results in applying that definition to faulty
workmanship. While mixed bags often defy categorization, a general trend is
discernable in this occurrence case law. Those courts that utilize a strict
"breach of contract" analysis tend to find no occurrence, and in turn, no coverage
for the insured contractor. In contrast, those courts that employ a more traditional
analysis-that is, whether the property damage was neither expected nor intended
from the standpoint of the insured-tend to find a covered occurrence. Part and
parcel of this analysis is a determination of whether the claim involves damage
to property other than the insured's own work. If it does, the court is more
likely to find an occurrence and uphold coverage for that damage. The distinction
between work and nonwork usually is lost upon most courts that employ the strict
breach of contract analysis.
"Breach of Contract" Cases
A recent example of the "breach of contract" analysis is found in Oak Crest Construction Co. v Austin Mutual Ins. Co.,
329 Or 620, 998 P2d 1254 (2000). There, a contractor made claim for the cost
to strip and refinish painting performed by a subcontractor. The court held
that there was no accident since the claim arose solely from a breach of contract
and allegations that the contractor spent money to repair a subcontractor's
"deficient" painting of wood work could not support the conclusion that it resulted
from the subcontractor's breach of the duty to act with due care. This case
raises several issues. First, it apparently involved only the repair of the
defective work itself, that is, the insured's subcontractor's painting. Nevertheless,
the insured contractor neither expected nor intended that the subcontractor
would perform its work defectively. In addition, the court never considered
whether the same conduct giving rise to the breach of contract could also be
negligent, that is, whether the subcontractor's painting was negligently performed.
A similar case implying a breach of contract approach to deny coverage is West American Ins. Co. v Keno & Sons Construction, Inc.,
2000 US Dist LEXIS 2181 (ND Ill Feb. 24, 2000). In that case, a water main ruptured
during the construction of a water reservoir by the insured contractor, Keno.
The owner filed a claim against Keno for breach of contract, alleging that Keno's
subcontractors failed to perform properly, causing the water main to rupture.
The underlying lawsuit was for breach of contract, including a standard allegation
that the resulting damages were foreseeable. The court rejected the contractor's
argument that the water main rupture was not intentional or expected, but instead
was the result of negligence. Instead, the court held that where a claim alleges
damages that are the natural result of negligent and unworkmanlike construction,
there is no occurrence under a CGL policy.
"Traditional Approach" Cases
On the other hand, other courts have found a covered occurrence under similar
circumstances. For example, in Twin City Fire Insurance
Co. v Triple S Dynamics, Inc., Mealey's Emerging Insurance Disputes,
April 5, 2000 (WD Wash March 1, 2000), the insured manufactured and sold two
grain cleaners, both of which suffered from numerous operational problems and
eventually failed. As a result, the owner lost the use of its facility and suffered
significant business interruption losses. The insurer denied coverage for the
business interruption on the basis that the failure should have been expected.
The court simply held that the uncontroverted evidence indicated the failure
of the cleaners was unrelated to any prior problems, and, at worst, was the
result of negligence. It was thus accidental under Oregon law. The court also
determined that the business interruption damages stemming from loss of use
of the entire plant constituted damage to other than the insured's own product.
Similarly, in Radenbaugh v Farm Bureau General Ins.
Co. of Michigan, 240 Mich App 134, 610 NW2d 272 (2000), the insured was
sued in an action alleging defective workmanship, breach of contract, and breach
of warranty after providing erroneous schematics and instructions to the excavation
contractor hired by the owner for the construction of the foundation for a double-wide
manufactured home. The insurer contended that since the complaint alleged breach
of contract, defective workmanship, and breach of warranty, there was no occurrence.
The court did not agree, finding that it was clear that the underlying complaint
alleged damages broader than mere diminution in value of the insured's product-the
double-wide-but rather numerous items of damage caused by the defective installation
of the basement.
Another recent case reaching a similar conclusion is E&R Rubalcava Construction, Inc., v The Burlington Ins.
Co., 2000 WL 680401 (ND Tex May 25, 2000), in which a subcontractor was
sued by the general contractor for faulty installation of the foundation of
a home. It was alleged that the faulty workmanship caused cracks in the walls
and ceilings, prevented doors from shutting and windows from operating properly,
and caused wood framing distress and cracking and similar damage because of
the weak slabs. Since the insured's foundation work caused damage to other parts
of the home, the court applied Federated Mutual Ins.
Co. v Grapevine Excavation, Inc., 197 F3d 720 (5th Cir 1999), to uphold
coverage. In that case, the Fifth Circuit set out something of a "bright line"
test for determining when property damage caused by defective workmanship constitutes
an occurrence under a CGL policy. There, the court stated that where the defective
work in turn causes damage to the work product of a third party, as opposed
to the defective work itself, that damage is presumed to have been unexpected
and therefore, an accident or occurrence. In contrast, where the property damage
is caused by the insured's intentional tort, such as trespass, that damage is
the natural result of voluntary and intentional acts and is deemed to not have
been caused by an occurrence, no matter how unexpected, unforeseen, and unintended
that damage may be.
In applying this "bright line" test to the allegations before it, the court
in Rubalcava held that even though the plaintiff
denominated its claims against the insured in terms of breach of contract, those
allegations sounded in negligence, causing damage to other parts of the home.
Therefore, the court found an occurrence requiring the insurer to defend its
insured.
The long and the short of these cases is that even though courts may speak
in terms of breach of contract or foreseeability, the classic test for existence
of an occurrence involving defective work under a CGL policy remains whether
the property damage is unexpected and unintended and whether it extends beyond
the work or product of the insured.3
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