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.1 This article reviews the two most prevalent types of analysis used by the courts, and why they lead to very different coverage interpretations.
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
1 The discussion in this article supplements and updates the in-depth discussion of this issue contained in Chapter 3 of Insurance for Defective Construction, by Patrick J. Wielinski, published March 2000 by IRMI.
"Occurrence" is defined in the standard Insurance Services Office, Inc. (ISO), policy as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."
3See Bundy Tubing Co. v Royal Indemnity Co., 298 F2d 151 (6th Cir 1962); City of Carter Lake v Aetna Casualty & Surety Co., 604 F2d 1052 (8th Cir 1979); Travelers Ins. Co. v Volentine, 578 SW2d 501 (Tex Civ App-Texarkana 1979).
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