Best Laid Plans: How the Definition of "Occurrence" in CGL Cases
Continues To Change
January 2012
Whether faulty workmanship falls
within a standard commercial general liability (CGL) policy's definition
of "occurrence" has been the subject of much litigation in recent
years.
by
R. Steven Rawls and Ryan
K. Hilton1
Butler Pappas
Weihmuller Katz Craig, LLP
Some courts have held that faulty workmanship or improper construction
is not an "occurrence" because it is not an "accident."2
Other courts have held that defective construction may constitute
an "occurrence" when "property damage" results from the "unexpected,
unforeseen, or undesigned happening or consequence" of the insured's
negligent behavior.3 Yet other courts
have held that defective construction itself is not an "occurrence,"
but any damage resulting from defective construction may be an "occurrence"
even if it is damage to the insured's project.4
Recent litigation considering whether a construction defect is
an "occurrence" has not necessarily produced clear opinions on complex
issues. Rather, the courts' opinions sometimes seem to raise
questions more
than they provide answers.
Sheehan Constr. Co., Inc. v. Continental Cas.
Co.
In Sheehan Constr. Co., Inc. v. Continental
Cas. Co., 935 N.E.2d 160 (Ind. 2010), the Supreme Court of
Indiana addressed whether faulty workmanship is an accident within
the meaning of a standard CGL policy. The court said that "the answer
depends on the facts of the case."
Sheehan involved a general contractor
that hired subcontractors to build houses. After the houses were
completed, two particular home owners complained of various problems
caused by the subcontractors' faulty workmanship. Those problems
included leaking windows, fungus growth on the siding, decayed oriented
strand board sheathing, deteriorating and decaying floor joints,
and water damage to the interior of the home, including water-stained
carpeting. Those problems were the result of lack of adequate flashing
and quality caulking around the windows, lack of a weather-resistant
barrier behind the brick veneer to protect the wood components of
the wall, improperly installed roofing shingles, improperly flashed
or sealed openings for the chimney and vents, and inadequate ventilation
in the crawl space.
The Sheehan court addressed the
policies' definition of "occurrence," which was "an accident, including
continuous exposure to substantially the same general harmful conditions."
The court noted that the policies did not define the term "accident."
However, the court relied on a prior case wherein it defined "accident"
to mean "an unexpected happening without intention or design" (citing
Tri-Etch, Inc. v. Cincinnati Ins. Co.,
909 N.E.2d 997 (Ind. 2009)). The court further stated: "Implicit
in the meaning of 'accident' is the lack of intentionality."
The court described that faulty workmanship that is intentional
from the viewpoint of the insured cannot be an "accident" or an
"occurrence." On the other hand, if the faulty workmanship is "unexpected"
and "without intention or design" and thus not foreseeable from
the viewpoint of the insured, then it is an accident within the
meaning of a CGL policy.
The court explained that if the subcontractor's faulty work was
the product of unintentional conduct, then the court starts with
the assumption, from the general contractor's viewpoint, that the
work on the home owners' homes would be completed properly. Any
resulting damage would therefore be unforeseeable and constitute
an "accident" and therefore an "occurrence" within the meaning of
the CGL policies.
The trial court had entered summary judgment in favor of the
insurers on the grounds that there was no damage to property "other
than to the structural components of the homes themselves," and
thus there was no "occurrence" or "property damage." On this point,
the Sheehan court found that the
trial court erred.
The policies at issue in Sheehan
contained the standard "your work" exclusion with the subcontractor
exception. The court reiterated that faulty workmanship may constitute
an "accident" and thus an "occurrence" depending on the facts. The
court explained that if the subcontractors performed the defective
work intentionally instead of "without intention or design," then
it is not an "accident." Otherwise, the opposite is true. The court
pointed out that none of the parties' trial materials addressed
whether the subcontractors' faulty workmanship was the product of
intentional versus unintentional conduct, and so the trial court
reached no conclusion on that point. The court accordingly reversed
the judgment of the trial court and remanded the case for further
proceedings.
Prior to Sheehan, faulty workmanship
was not an "accident" and therefore was not an "occurrence" under
Indiana law. See R.N. Thompson & Assocs.,
Inc. v. Monroe Guar. Ins. Co., 686 N.E.2d 160 (Ind. Ct. App.
1997); Indiana Ins. Co. v. De Zutti,
408 N.E.2d 1275 (Ind. 1980). These cases explained that there was
no "occurrence" or "accident" because any damage was the natural
and ordinary consequence of the faulty workmanship. Furthermore,
Indiana courts did not differentiate between the defective work
and the resulting property damage caused by the defective work.
See R.N. Thompson & Assocs., 686
N.E.2d at 160.
Of course, the work any subcontractor performs is intentional.
The distinction Sheehan seems to
draw is in determining whether the subcontractor intentionally performed
faulty workmanship. Certain problems seem to accompany this approach,
however. Such a determination would likely require a fact finder,
and whoever performed the allegedly faulty work would presumably
never admit that they intentionally did so. The
Sheehan court did not provide any
guidance as to whether courts should apply a subjective or objective
standard in making this determination.
In addition, the court said that faulty workmanship that is intentional
from the viewpoint of the insured cannot be an "occurrence." But
how does this play out where the general contractor is an additional
insured under the subcontractor's policy and the general contractor
seeks coverage? Or, what happens when, like in
Sheehan, the general contractor seeks
coverage under its own policy, which has the "your work" exclusion
with the subcontractor exception? Because the subcontractor did
the faulty work, it is unclear how the general contractor could
have intended to do faulty work if the general contractor did not
actually do the work. Also, Sheehan's
inquiry seems to focus on the accidental nature of the conduct and
not on the accidental nature of the results of the conduct, which
is inconsistent with the approach other courts have taken.5
Crossmann Cmtys. of N.C. v. Harleysville
Mut. Ins. Co.
The Supreme Court of South Carolina recently did an about-face
with respect to whether a construction defect is an "occurrence"
under a CGL policy in Crossmann Cmtys. of
N.C. v. Harleysville Mut. Ins. Co., 395 S.C. 40, 717 S.E.2d
589 (2011). Specifically, the court originally opined on January
7, 2011, that faulty workmanship that directly causes further damage
to non-defective components of an insured's project does not constitute
an "occurrence." Crossmann Cmtys. of N.C.,
Inc. v. Harleysville Mut. Ins. Co., 2011 S.C. LEXIS 2 (2011)
(withdrawn). It reasoned that, where the damage to the property
is no more than the natural and probable consequence of faulty workmanship,
such that the two cannot be distinguished, it does not constitute
an "occurrence." Shortly thereafter, the court granted a petition
for rehearing after it received numerous amici briefs.
Prior to the Crossmann court rehearing
argument on May 23, 2011, South Carolina promptly passed legislation
to circumvent the result of Crossmann.
South Carolina's governor signed the law, which is section 38–61–70
of the Code of Laws of South Carolina, on May 17, 2011. The new
law requires CGL policies to contain a definition of "occurrence"
that includes "(1) an accident, including continuous or repeated
exposure to substantially the same general harmful conditions; and
(2) property damage or bodily injury resulting from faulty workmanship,
exclusive of the faulty workmanship itself." S.C. Code Ann. § 38–61–70
(2010). This statute applies to "any pending or future dispute over
coverage that would otherwise be affected by [it] as to all commercial
general liability policies issued in the past, currently in existence,
or issued in the future."
Crossmann involved a general contractor
that used subcontractors to construct multiple condominium projects
from 1992 through 1999. In 2001, various unit owners sued Crossmann,
the general contractor, after they discovered construction defects
and resulting problems with the units. Negligent construction led
to water damage throughout the condominiums. Crossmann settled with
the plaintiffs for $16.8 million and sought indemnification from
its insurer.
The trial court found that the home owners' claims fell within
the definition of "occurrence" and found coverage for the claims.
The case made its way up to the Supreme Court of South Carolina.
On rehearing, the Supreme Court of South Carolina commented that
it and other courts have struggled to discern the meaning of the
expanded "occurrence" definition in the context of progressive damage
cases. The court referred to the "continuous or repeated exposure
to substantially the same general harmful conditions" language as
comprising the expanded "occurrence" definition. Because of this
expanded language, the court found that the definition of "occurrence"
was ambiguous. Accordingly, the court said that it had to construe
the ambiguity in favor of the insured, Crossmann, and find that
the damages caused by repeated water intrusion triggered the insuring
language of the policies.
On August 22, 2011, the Crossmann
court withdrew its original opinion. In its opinion on rehearing,
the court clarified that negligent or defective construction resulting
in damage to otherwise non-defective components may constitute "property
damage," but the defective construction itself would not (citing
Auto Owners Ins. Co., Inc. v. Newman,
385 S.C. 187, 684 S.E.2d 541 (2009)). The court found that, because
the expanded definition of "occurrence" was ambiguous, it had to
construe it in favor of the insured so that the facts triggered
the insuring language of the applicable policies. The court noted,
however, that various exclusions may preclude coverage in some instances,
but the parties stipulated not to raise those issues at the rehearing
stage.
American Empire Surplus Lines Ins. Co.
v. Hathaway Dev. Co.
The Supreme Court of Georgia recently held that because the insured's
faulty workmanship caused damage to the surrounding properties,
the acts of the insured constituted "occurrences" under the CGL
policy in American Empire Surplus Lines
Ins. Co. v. Hathaway Dev. Co., 288 Ga. 749, 707 S.E.2d 369
(2011).
In Hathaway Dev., a general contractor
sued its plumbing subcontractor for negligent plumbing work at three
job sites. The general contractor sought to recover the cost of
repairs caused by the plumber's faulty workmanship. The costs went
beyond those required to fix the plumbing mistakes because they
were costs associated with water and weather damage to surrounding
properties.
The court described that the insured plumber on one project installed
a 4-inch pipe on an under slab, although the contract specified
6-inch pipe. On another project, the plumber improperly installed
a dishwasher supply line. On the third project, the plumber improperly
installed a pipe, which separated under hydrostatic pressure. Each
of these mistakes damaged surrounding property being built by the
general contractor.
The plumber's liability insurer denied coverage, contending that
its insured's work could not be deemed an accident. The trial court
agreed and granted summary judgment to the insurer. The court of
appeals reversed, holding that, because the plumber's faulty workmanship
caused damage to the surrounding properties, the acts of the plumber
constituted "occurrences" under the CGL policy. The Supreme Court
of Georgia affirmed the court of appeals' decision.
The court explained that the CGL policy at issue provided coverage
for damages resulting from an "occurrence." The policy defined an
"occurrence" as an "accident," but the policy did not define "accident."
The court therefore resorted to the commonly accepted meaning of
the term. The definitions of an "accident" included "an event happening
through such agency, an event which, under circumstances, is unusual
and not expected by the person to whom it happens." They further
provided: "[I]n its common signification the word means an unexpected
happening without intention or design."
Applying these definitions of "accident," the Supreme Court of
Georgia noted that the court of appeals had previously ruled that
faulty workmanship can constitute an "occurrence" under a CGL policy
(citing SawHorse, Inc. v. Southern Guar.
Ins. Co., 269 Ga. App. 493, 604 S.E.2d 541 (2004)).
The Supreme Court of Georgia stated that the court of appeals
in the case at hand "correctly determined that these acts constituted
an 'occurrence' under the CGL policy." Accordingly, the court held
that an "occurrence" can arise where faulty workmanship causes unforeseen
or unexpected damage to other property. The court rejected the notion
that the acts of the insured plumber could not be deemed an "occurrence"
or accident under the CGL policy because they were performed intentionally.
Prior to Hathaway Dev., federal
courts applying Georgia law had found that injuries accidentally
caused by intentional acts, such as defective construction, were
not the result of "occurrences." See,
e.g., Owners Ins. Co. v. James,
295 F. Supp. 2d 1354 (N.D. Ga. 2003); Hathaway
Dev. Co. v. Illinois Union Ins. Co., 274 F. Appx. 787 (11th
Cir. 2008).
Noticeably absent from the Hathaway Dev. decision
was any consideration of whether the CGL policy would cover the
costs to repair the faulty workmanship itself, such as the 4-inch
pipe, the dishwasher supply line, and the pipe that separated under
hydrostatic pressure. The decision implied that the policy would
not, though, because the court focused on the "surrounding properties"
throughout its opinion.
Conclusion
Courts continue to grapple with whether a construction defect
is an "occurrence" under a CGL policy. As can be seen from the
aftermath of the Crossmann ruling in South Carolina,
sometimes courts make unpopular decisions, and the legislature has
stepped in to mollify the perceived bad effects of such rulings.
Other court rulings have left many unanswered questions that will
be the subject of many debates until those courts address the particular
issues.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author's employer or IRMI. Expert Commentary articles
and other IRMI Online content do 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.