Is a Construction Defect an “Occurrence” for Insurance Coverage?
The intricacies of CGL policy coverage for construction defects have led to a variety of interpretations by courts and legislation some states
Construction is always a complex process. Whether it occurs in the context of a single, residential home or a large mixed-use commercial project, there is always a risk of a construction defect occurring and developing into litigation for the contractors, developers and owners of the project.
The defect or defects may be from bad workmanship, inadequate management, poor site preparation or materials, bad design, interference by owners or frequent and confusing change orders during the process or any combination of all of the above. Bonds are sometimes required to cover for these issues and provide adequate funding to repair the defects and complete the project.
In other cases, however, a construction contractor may seek insurance coverage under their Commercial General Liability (CGL) insurance policy. This trend has been seen in various states, with a few cases being decided by those states’ highest courts. The increase in litigation over this issue has also caused the legislature in several states to enact laws governing some aspects of a CGL and the issue of coverage of insurance defects.
Is it An Occurrence?
For an insurance policy to trigger coverage, there typically needs to be an event that causes property damage. In most CGL policies, this is described as an “occurrence.” Much of the litigation on coverage disputes for construction defects has involved the definition of “occurrence” and whether shoddy workmanship would constitute an occurrence and trigger coverage.
Some have argued that faulty or negligent workmanship is not sufficiently “accidental” in the sense that it is foreseeable and not as random as a severe storm or other accident that causes property damage. Of course, all insurance is purchased on the assumption that even the most random of “accidents” is potentially possible.
The entire insurance industry is built on this assumption, with the degree of risk going to the cost of the policy and not to whether coverage is possible. A tall building has a much higher risk of suffering lightening strikes than it does of being struck by a meteorite, but that would simply mean coverage for meteorite strikes would be much less expensive.
Exclusions and Exceptions
Contractual interpretation is based on the language of the contract, and courts have noted that the “your work” exclusion would only be included in a contract if property damage resulting from your work was an occurrence and nominally covered under the policy.
Otherwise, there would be no need for a “your work” exclusion. In addition, they also find that the subcontractor exception to the “your work” exclusion also functions to reinforce that faulty workmanship is an occurrence under the policy, and triggers coverage.
A small number of states have passed laws that define a construction defect as an occurrence under a CGL. Of course, how they do it in each state differs and if you are involved in construction litigation over defects, you and your attorney should carefully read the statute before making any assumptions regarding coverage of your specific defect.
Tennessee’s Supreme Court has found in at least one case where negligent workmanship qualified as an “accident” and therefore an “occurrence” under a CGL policy. However, the type of damage and the terms of the policy will be relevant in any determination of coverage.
A review of this material once again reinforces that when it comes to construction litigation involving faulty workmanship or other construction defects, the devil is in the details.