Even More on Defective Work as an "Occurrence"
October 2002
Wielinski explains how a recent Texas Supreme
Court case may finally put to rest the question of whether the CGL policy provides
coverage for the defective work of others despite the definition of occurrence.
by Patrick
J. Wielinski
Cokinos, Bosien &
Young
Previous columns in this series have discussed the ongoing debate in the
case law over whether defective workmanship constitutes an "occurrence" as defined
in the standard form CGL policy. See the discussion in "Defective Work as an Occurrence" (July
2000) and "More on Defective Work as an Occurrence" (November 2000). Both columns discussed the tendency by some courts to forsake
the terms of the policy and rules of policy interpretation in order to import
notions of "business risk" into the definition to reach the conclusion that
property damage resulting from defective workmanship can never constitute an
occurrence. Reduced to its most basic elements, that argument is simply a product
of the approach which many insurers take to defective work claims: they hate
to pay them, choosing rather to view the property damage as the result of sloppy
building practices.
For this reason, 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. "Occurrence" is defined
in the standard policy as "an accident, including continuous or repeated exposure
to substantially the same general harmful conditions." 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.
Anomalous Results: The Recent Texas Experience
The myriad of coverage issues—trigger, existence of property damage, allocation,
legal obligation, occurrence, property damage, insured’s work exclusion, impaired
property exclusion, etc.—all swirl around defective work claims. The result
is that relatively simple claims continue to cause confusion, resulting in inconsistent
opinions and confusion between courts, even within the same jurisdiction. One
jurisdiction that is wrestling with the issue of defective work as occurrence
is Texas.
A recent case resulting in confusion and which was previously described in
the November 2000 column in this series is Hartrick
v Great American Lloyds Ins. Co., 62 SW3d 270 (Tex App—Houston [1st Dist]
2001). Hartrick actually involved a series of
three opinions, with the last one, issued in late 2001, superceding the others.
The state of the law in Texas on this issue serves as a microcosm of the occurrence
debate on a national basis. That case involved structural problems and defects
in the poured slab foundation of a house. The jury found no negligence and deceptive
trade practices violations, but answered "yes" on a breach of warranty claim.
Despite the fact that the defective site work was performed by a subcontractor,
the court never ruled on the exception to Exclusion (l); rather, it decided
the case on the basis of the definition of "occurrence" in the policy. Somewhat
curiously, in reaching the conclusion that there had been no occurrence, the
court borrowed from Mid-Century Ins. Co. v Lindsey,
997 SW2d 953 (Tex 1999), a case involving injuries to the occupant of a car
after a child discharged a shotgun stored in a gun rack in an adjacent pickup
truck. The issue there was whether the discharge constituted an "accident" for
purposes of underinsured motorist benefits under an automobile policy.
The court held that an injury is accidental if from the viewpoint of the
insured; it is not the natural and probable consequence of the action or occurrence
which produced the injury—in other words, if the injury could not reasonably
be anticipated by the insured, or would not ordinarily flow from the action
or occurrence which caused the injury.
Based on this definition, the Hartrick court
concluded, "Lack of compliance with implied warranties, i.e., promises implied
as a matter of law … are not accidental, but result from not doing what one
must do. By not doing what it had to do, Claremont (its builder) could reasonably
anticipate injury to Hartrick (the homeowner)…." The court continued that because
Claremont was responsible for the damages and could reasonably foresee them,
it did not become legally obligated to pay damages because of an accident under
the terms of the policy. Claremont was, therefore, not entitled to indemnity
for the judgment entered against it.
Split in Authority
There are two problems with this analysis. First, cases interpreting whether
intentional acts constitute occurrences should not have applied to this claim
in light of the jury’s failure to find intentional or knowing conduct on the
part of the insured contractor. More importantly, under these circumstances,
the Hartrick opinion is out of step with the
current statement of Texas law on this issue in Federated
Mut. Ins. Co. v Grapevine Excavation, Inc., 197 F3d 720 (5th Cir 1999).
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.
Unfortunately, the Hartrick v Great American Lloyds reasoning has been adopted in a number of Texas cases, including Malone v Scottsdale Ins. Co., 147 F Supp 2d 623
(SD Tex 2001); Devoe v Great American Ins. Co.,
50 SW3d 567 (Tex App—Houston 2001, no pet); Acceptance
Ins. Co. v Newport Classic Homes, Inc., 2001 WL 1478791 (ND Tex Nov.
2001). Most of these cases involve residential construction, and generally follow
Hartrick's determination that property damage is the natural and probable consequence
of defective workmanship and does not constitute an occurrence under a CGL policy.
On the other hand, recent cases such as E&R Rubalcava
Construction, Inc. v The Burlington Ins. Co., 2000 WL 680401 (ND Tex
May 25, 2000); CU Lloyd's of Texas v Main Street Homes,
Inc., 79 SW3d 687 (Tex App—Austin 2002, no pet h); First Texas Homes, Inc. v Mid-Continent Cas. Co.,
2001 U.S. Dist LEXIS 2397 (ND Tex March 7, 2001), aff'd, 32 Fed Appx 127, 2002
WL 334705 (5th Cir Feb. 19, 2002); Mt. Hawley Ins. Co.
v Steve Roberts Custom Builders, Inc., 2002 WL 17600 (E D Tex July 25,
2002), and Great American Ins. Co. v Calli Homes, Inc.,
slip op, No. H-01-3457 (SD Tex Sept. 20, 2002), all in the residential context,
have upheld the existence of an occurrence arising out of defective workmanship
of the insured's subcontractors, largely adopting its Federated v Grapevine Excavation approach.
Latest Resolution
Notwithstanding the split in authority, the issue may have finally been laid
to rest in Texas by its Supreme Court in King v Dallas
Fire Ins. Co., 2001 WL 1946129 (Tex Aug. 29, 2002). Curiously, at least
for purposes of this discussion, the King case (like the Mid-Century v Lindsey case relied upon in the Hartrick line of cases) does not involve the
interpretation of occurrence in the context of defective workmanship, or even
property damage. King was a derivative liability case in which one of the insured's
employees "negligently" assaulted another party at a job site and that party
sued King, the employer, claiming that the employer was liable for the negligence
of its employee under theories of negligent hiring, training, and supervision
and for failing to run a criminal background check on its employee. The insured
filed a declaratory judgment action on the duty to defend under the policy and
the insurer claimed that there was no occurrence within the meaning of the policy.
In the course of determining that the insured was entitled to coverage based
upon the "separation of insureds" clause, the court reviewed Texas law and held
that the existence of an occurrence is to be determined from the standpoint
of the insured and distinguished other cases which involved intentional acts
on the part of the insured since here, the insured employer had not acted intentionally.
Based on the separation of insureds clause, occurrence must be determined by
looking at the intent of the insured seeking coverage.
Most significant as to defective work claims, the court determined that its
holding was in accord with the evolution of the definition of occurrence in
CGL policies. The inclusion of the requirement that the occurrence must be viewed
from the "standpoint of the insured" was to eliminate any confusion over whether
an accident was to be determined from the standpoint of the insured or the victim.
Even though the 1986 revisions of the CGL policy moved the "expected or intended
from the standpoint of the insured" language from the occurrence definition
to a separate exclusion, it did not affect coverage. The reasoning behind that
shift was so that courts would not have to construe the occurrence definition
as an exclusion.
Based upon the rationale of King v Dallas Fire,
the Hartrick v Great American line of cases misstated
Texas law. King returned the focus in the determination
of an occurrence under Texas law to where it has always been, whether the property
damage or bodily injury is expected or intended from the standpoint of the insured.
In that sense, most defective work claims constitute occurrences, since insureds,
particularly insured general contractors, neither expect nor intend that the
work will be performed defectively.
The CGL policy recognizes that defective workmanship, under the proper circumstances,
constitutes an occurrence. It is then up to the insurer, or the court, to apply
the property damage exclusions. If the analysis stops at the definition of occurrence,
assuming that property damage arising out of defective construction work in
breach of a contract or warranty is not naturally foreseeable, and not intended
or expected, many claims will be wrongly denied. Certainly, some of those claims,
such as those that involve damage only to the insured’s own work may nevertheless
be denied based on the exclusions. On the other hand, claims involving damage
to property other than the insured’s own work or defective work by subcontractors
may not be excluded. In any case, insured contractors deserve an analysis of
claims which goes beyond an overly broad application of the definition of occurrence
and which considers the exclusions in the policy.
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