Expert Commentary

Trying to Reconcile the Irreconcilable: Making Sense of Recent Case Law on Occurrence

It is a daunting task to try to reconcile disparate results in two construction defect cases decided within days of each other and interpreting identical policy provisions to identical factual scenarios.

Construction Defect Coverage
December 2005

It has been slightly over 1 year since the last column in this series commented on the opinion of the South Carolina Supreme Court in L-J, Inc. v. Bituminous Fire & Marine Ins. Co., 2004 WL 1775571 (S.C. April 21, 2004), referred to in this column as "L-J One."1 At that time, a petition for rehearing was pending before the court, largely due to the court's radical reversal of the opinion of the South Carolina Court of Appeals that held that damage to a completed road arising out of the work of subcontractors of the insured road contractor constituted an "occurrence" under the standard CGL definition.2 In reversing, the South Carolina Supreme Court held that, even though there were numerous acts of negligence on the part of the insured, L-J, no occurrence had taken place since they were mere examples of faulty workmanship causing damage to the roadway system only, which did not fall within the definition of "occurrence" under the CGL policy.

Setting the Pace for "No Occurrence": L-J Two

The first opinion of the South Carolina Supreme Court, reversing the court of appeals, was issued on August 9, 2004, but on February 3, 2005, the court, in a 5-0 unanimous vote, granted the petition for rehearing after a firestorm of comment from the construction industry and legal groups. The unanimous decision to grant the petition for rehearing caused some optimism that the court would reconsider and even reverse its opinion denying coverage. Thus, the stage was set for the rehearing of L-J One and the case on rehearing garnered increasing national attention. The second opinion is reported at L-J, Inc. v. Bituminous Fire & Marine Ins. Co., ___ S.E.2d ___, 2004 WL 3540903 (S.C. Sept. 26, 2005).

Even though it withdrew its prior opinion, the Supreme Court of South Carolina maintained its denial of coverage in L-J Two. Despite the fact that the court observed that there were numerous acts of negligence on the part of L-J, no occurrence had taken place. The court stated as follows:

Although the alligator cracking may have constituted property damage, we find that an "occurrence," as defined under the CGL policy, did not take place. According to the deposition testimony outlined above, the only "occurrences" were various negligent acts by Contractor during road design, preparation, and construction, which led to the premature deterioration of the roads. Those negligent acts included: (1) failure to prepare the subgrade by deciding not to remove the tree stumps and by failing to remove or compact the wet clay in the subgrade; (2) improperly designed drainage system; (3) ill-prepared, thin road course that could not handle heavy wheel-loads; and (4) improperly designed curve edge detail.
We find that these negligent acts constitute faulty workmanship, which damaged the roadway system only. And because faulty workmanship is not something that is typically caused by an accident or by exposure to the same general harmful conditions, we hold that the damage in this case did not constitute an occurrence.

The Bituminous policy contained the standard definition of "occurrence," meaning "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." While the court recognized that the conduct of L-J was negligent, nevertheless, in a footnote, it stated that a CGL policy may "provide coverage in cases where faulty workmanship causes a third party bodily injury or damage to other property, not in cases where faulty workmanship damages the work product alone. [Emphasis in original.]"

The South Carolina Supreme Court supported its holding by citing to High Country Assoc. v. New Hampshire Ins. Co., 648 A.2d 474 (N.H. 1994), as an example of a case upholding coverage where defective workmanship resulted in property damage. There, the defective installation of siding by the insured on a condominium project resulted in extensive damage to the structure of the buildings because of water infiltration. The court regarded the facts of High Country Assoc. as setting out covered property damage caused by continuous exposure to moisture, rather than simply a claim for the contractor's defective work outside the scope of CGL coverage. It is difficult to see how the defective compaction of the subgrade, resulting in the cracking of the pavement in L-J, differed from the negligent installation of the siding resulting in water infiltration and damage to the building in High Country. In both cases, the damage was to the insured's work. Both cases represent property damage caused by an occurrence.

Another Approach: BRAC v. National Union

Inexplicably, despite the results of cases such as L-J Two, other courts, considering virtually identical facts, have found that defective construction constitutes an occurrence under a CGL policy issued to a contractor. Just 2 days after L-J Two, Broadmoor Anderson v. National Union Fire Ins. Co. of Louisiana, 912 So.2d 400 (La. App. 2 Cir. Sept. 28, 2005), was decided. In that case, National Union wrote an OCIP policy in connection with the construction of the Hollywood Casino Shreveport project. BRAC, the general contractor, was insured under the OCIP, as was Tiede-Zoeller, its subcontractor. After completion, problems developed with the shower stalls in the guestrooms in the hotel portion of the project. Leaking water damaged interior finishes, drywall, carpets, and floors. Expert reports concluded that the problem was due to defective workmanship in installing the shower pans. In that connection, expert analysis concluded the problem was not a design defect, but was specifically due to the subcontractor's defective workmanship installing the guest space room shower pans. In particular, the assessment portion of the report concluded after destructive testing that the waterproof membrane portion of the shower pans lacked the proper slope for drainage, resulting in both the shower pans themselves leaking and the gypsum wallboard surrounding the shower assemblies retaining moisture. The report recommended removing and replacing all of the shower pan assemblies down to the structural slab and up to four feet above the existing finished curb.

The owner demanded that BRAC repair the leaking shower assemblies and associated damages pursuant to the warranty requirements in the general contract. When Tiede-Zoeller contested its liability for the leaks, BRAC hired Tiede-Zoeller to perform the repair, with each party reserving their rights. At the same time, BRAC made a claim as an insured on the OCIP policy issued by National Union. National Union disputed whether the CGL policy was intended to cover liability for the breach of BRAC's construction contract with Hollywood, contending that there was not an accident, that is, an occurrence under the standard definition of that term contained in the policy. The court rejected this argument, finding that the CGL granted coverage for sums that BRAC became "legally obligated to pay" for "property damage" caused by an "occurrence" did not contain any express distinction between tort and contractual liability. The court stated that while the term "accident" may imply a tortious event, Tiede-Zoeller's deficient conduct, unexpected and with lack of foresight, could also be considered accidental.

In support of that determination, the court looked to the products-completed operations coverage provided in the policy. The court's analysis of the products-completed operations coverage available to an insured contractor is worth quoting at length:

The products-completed operations hazard is defined to include property damage occurring off the insured's premises "arising out of ‘your product' or "your work'" except for "work that has not yet been completed or abandoned." The definition of "your work," which in this case is BRAC's work as an insured, describes "work or operations performed by you or on your behalf." T-Z [Tiede-Zoeller] clearly performed and completed work on BRAC's behalf as a subcontractor. The completed work of both BRAC and T-Z is therefore a focus of the products/work completed operations coverage which was extended for a period of seven years after acceptance of the hotel project by Hollywood. Although a collapse of a building structure long after completion of the project might cause bodily injury to a third party and be a covered accident arising in tort, the contemplated hazard as defined in the policy also indicates coverage for property damage relating to the deficient performance of the contractor that harms the structure and its owner and therefore entails a contractual breach. Also, there is no limitation in all the provisions discussed so far regarding who may suffer damage and be a beneficiary of the policy coverage, whether a third party or the insured's contracting partner.

Concluding that analysis, the court hit the nail on the head with the following observation:

While the overhauled coverage for contractual liability for property damage is apparently reined in drastically by the policy exclusions which we will next review, the general grant of coverage is not limited to only claims in tort.

The court supported this statement by citing to American Family Mutual Ins. Co. v. American Girl, Inc., 268 Wis. 2d 16, 673 N.W.2d 65 (2004), for the proposition that if losses actionable in contract are never CGL occurrences for purposes of the initial coverage grant in the policy, then the business risk exclusions are entirely unnecessary. Finally, noting the conflict in the case law within the State of Louisiana itself as to coverage for defective workmanship, the court, in referring to those cases, stated that, "[t]he entire contractual language of those disputed policies is not always clear from the opinions, "and we are required here to deal with the precise language at hand in the context of the entire policy." Having engaged in that exercise, the court concluded that the defective work performed by the subcontractors of the insured contractor constituted an insured accident and occurrence.3

Reconciling the Irreconcilable

It is a daunting task to try to reconcile such disparate results in two cases decided within days of each other and interpreting identical policy provisions to identical factual scenarios. For example, the basis of the South Carolina Supreme Court's holding in L-J Two appears to be its conclusion that there must be damage to a third-party's property beyond the work itself in order for there to be an occurrence. That conclusion is not supported by the language of the definition of "occurrence" which contains no such requirement. Nor does the definition of property damage.4 The court in L-J Two seemed to confuse the faulty workmanship itself, i.e., the actions of the insured contractor that gave rise to the damage, with the property damage that resulted from it. If that property damage is unexpected and unintended, it is an accident under the traditional formulations of occurrence described above. These formulations are truer to the policy language and intent.

Moreover, the holding in L-J Two fails to take into account the fact that it is the property damage exclusions, including the "your work" exclusion, that differentiate between covered and noncovered property damage once there has been an occurrence. The holding in Broadmoor v. National Union stands in stark contrast to that of L-J Two by upholding the existence of an occurrence under virtually identical circumstances. The only means whereby the results can be explained, and perhaps even reconciled, is the focus of the Second Court of Appeals of Louisiana on the language of the entire CGL policy before it. A close reading of the opinion indicates that the court carefully considered the structure of the entire policy, particularly in its detailed analysis of the relationship between occurrence, completed operations coverage, and the work of subcontractors in the defective construction context. Based on such a detailed analysis, the court could not help but conclude that there was coverage for property damage caused by the defective work of the insured general contractor's subcontractors.

On the other side of the coin, by limiting its focus only to the coverage grant and accompanying definitions of occurrence and property damage, the opposite conclusion by the South Carolina Court is somewhat understandable, but still disquieting. The insurance coverage for complex construction defect claims cannot be fully and fairly evaluated unless the entire policy is considered, otherwise, the results are disappointing, especially for insureds as to expected coverage for certain types of construction defects. This is especially true where notions of third-party property damage are engrafted onto the policy language.

Cases such as L-J v. Bituminous illustrate the apparent disconnect between the underwriting and claims departments of insurance companies once a claim is made on a CGL policy. The industry is now in its second generation of policy forms that provide an insured general contractor with coverage for property damage arising out of the defective work of subcontractors by virtue of the subcontractor exception, part of the products-completed operations coverage. Since that exception has been available for over 30 years, underwriters, brokers, agents and insureds expect such coverage to be provided in the standard CGL policy. Unfortunately, once a claim is made involving property damage caused by a subcontractor's defective work, claims departments of insurers ignore that coverage by arguing that there has been no occurrence to trigger coverage under the policy. These types of arguments intentionally truncate the terms of the policy in order to divert attention from the coverage that is preserved for subcontractor work. In other words, insurance company claims departments refuse to consider the language of the entire policy that the underwriters in the same insurance company issued, contrary to the underwriting intent. The result is cases such as L-J v. Bituminous. Perhaps it is not only the results of disparate case law that need to be reconciled, but also the underwriting and the claims departments of the insurance companies writing CGL coverage for the construction industry.

1. During that time, the author produced the second edition of Insurance Coverage for Defective Construction, including newly expanded discussions of the major issues surrounding commercial general liability (CGL) coverage for defective construction and now available on

2. See the discussion of the court of appeals and the first Supreme Court opinion in L-J One in Patrick Wielinski, "Sore Knees: Recent Case Law Ignoring the Subcontractor Exception," published on this in November 2004.

3. An application for writ of review was filed by National Union to the Louisiana Supreme Court in Broadmoor v. National Union on November 28, 2005.

4. For a more in-depth discussion of the third-party property damage issue, see Patrick Wielinski, "The New Business Risk Rationale (Part 1 and Part 2)," published on in December 2004, as well as Chapter 5: "Defective Work as Property Damage," Insurance for Defective Construction, Second Edition (IRMI 2005).

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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