Expert Commentary

Best Laid Plans: How the Definition of "Occurrence" in CGL Cases Continues To Change

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.


Liability Insurance
January 2012

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.


1Contributing author Ryan K. Hilton is a senior associate practicing in the area of third-party coverage at the firm of Butler Pappas Weihmuller Katz Craig LLP.

2See, e.g., Group Builders, Inc. v. Admiral Ins. Co., 123 Haw. 142, 231 P.3d 67 (2010).

3See, e.g., Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 51 Tex. Sup. J. 231 (2007).

4See, e.g., Lennar Corp. v. Auto-Owners Ins. Co., 214 Ariz. 255, 151 P.3d 538 (Ariz. Ct. App. 2007).

5See, e.g., U.S Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007) (CGL policy that provides coverage for "accident" includes "injuries or damage neither expected nor intended from the standpoint of the insured").


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.

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