When a construction contractor engages in a construction project, it generally purchases a commercial general liability policy (“CGL”) to broadly cover it and, frequently, the property owner for claims that might arise during the course of construction. These insurance contracts are standard forms issued by the Insurance Services Office (“ISO”) that cover accidental property damage and personal injury claims asserted by third parties. There are also circumstances under which CGL policies may provide coverage for a subcontractor’s defective workmanship and this article identifies optional endorsements and policy language that may enhance the likelihood that such insurance coverage exists. Contractors should be aware of these options that they can explore with their insurance agents or brokers.
CGL insurance covers property damage caused by an “occurrence,” which the standard policy defines as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” However, the CGL policy does not define “accident” and the courts have rendered differing interpretations of that term as it relates to coverage issues. State supreme courts are split as to whether property damage to a contractor’s work product that results from poor workmanship constitutes an accidental occurrence for the purposes of a CGL policy.
II. A majority of state supreme courts to have considered the issue have not found insurance coverage for damage to contractors’ work product caused by poor workmanship, therefore, it may be advisable to obtain certain endorsements when insuring projects in those states.
The majority of state appellate courts to have considered the issue agree that “claims of faulty workmanship, standing alone, are not ‘occurrences’ under CGL policies.” Cincinnati Ins. Co. v. Motorists Mut. Ins. Co., 306 S.W.3d 69, 73 (Ky. 2010). A typical CGL policy conditions its coverage of property damage on being “caused by an ‘occurrence.’” Id. at 72. The policy further defines an occurrence “‘as an accident, including continuous or repeated exposure to substantially the same general harmful conditions.’” Id.
To determine the meaning of an accident, these courts apply the doctrine of fortuity, which consists of two elements: intent and control. Id. at 74. Intent is not at issue as these courts accept that contractors do not desire their work product to be substandard. Id. Because contractors do have the direct ability to influence the quality of their work, however, a substandard result is within their control and not an accident. Id. at 76. These courts also assert an underlying policy argument that, by requiring contractors to be liable for the quality of their work, the law encourages them to do better work and to select better subcontractors. Id. at 75.
Applying that rationale, the majority of state courts have held that CGL’s do not cover a contractor’s faulty work as “[s]imply put, ‘[f]aulty workmanship is not an accident . . . .’” Id. at 76. State supreme courts adhering to the majority rule include Alabama, Arkansas (since superseded by statute), Kentucky, New Hampshire, Ohio, Oregon, Pennsylvania, and South Carolina (since superseded by statute). Nat’l Sur. Corp., LLC v Westlake Invs., LLC., 880 N.W.2d 724, 747 (Waterman, J., dissenting) (collecting cases).
For construction projects in states that follow the majority rule, contractors should question their insurance brokers about policy endorsements that can be obtained for an additional charge that modify or eliminate certain exclusions. One such endorsement supplements the definition of “occurrence” to include damage to the contractor’s work caused by a subcontractor’s act or omission that was “neither expected or intended” by the insured. See Traveler’s Form CG D6 12 11 10.
III. A minority of state supreme courts have found CGL policies cover property claims relating to a contractor’s work product that are caused by subcontractor’s negligence or poor workmanship.
On June 29, 2020, the Michigan Supreme Court joined the minority jurisdictions when it issued an opinion that reached a result similar to the effect of the above described policy endorsement. The Court found “unintentionally faulty subcontractor work that damages an insured’s work product is an 'accident' under a commercial general liability policy”. Skanska v M.A.P. Mechanical Contractors, Inc. and Amerisure Mutual Insurance Company, Case No. 159510-159511, 2020 WL 3527909, at*3 (Mich. June 29, 2020). Skanska was the construction manager for a medical center renovation and its mechanical subcontractor, MAP, installed some expansion joints in the heating system backward, causing damage to concrete, steel and the heating system. Skanska spent $1.4 million to repair the damaged work and submitted a claim to MAP’s insurer to cover that loss. Although Skanska was listed as an additional named insured under MAP’s policy, the insurer denied coverage asserting that the defective work was not an “occurrence” because it was not an accident. The Michigan Supreme Court disagreed and found that faulty work by a subcontractor that damaged the contractor’s work was not anticipated or expected by the contractor and can be considered an accident. The Michigan Court also relied upon a reading of the insurance contract as a whole.
Unlike the majority courts which apply the doctrine of fortuity to define an accident for the purposes of a CGL, courts in the minority interpret the meaning of an accident from the context of the contractual language as a whole, giving meaning to all of its terms. Nat’l Sur. Corp. at 735. Because standard CGL contracts exclude coverage for property damage that is “‘expected or intended from the standpoint of the insured,’” courts infer that an accident “means ‘an unexpected and unintended event.’” Id. These courts still hold that CGL policies do not cover damage to the work product resulting from the contractor’s own defective workmanship. Id. at 737. But, they conclude that a subcontractor’s defective workmanship is unexpected and unintended by the contractor and, therefore, accidental. Id. at 739. Accordingly, these courts interpret the term “occurrence” broadly to include damage to contractors’ work product caused by negligent work performed by their subcontractors. Id.
Additionally, courts that find coverage for property damage caused by subcontractors rely upon language in a CGL policy’s “your work” exclusion. Id. at 740. This exclusion generally prevents the policy from being applicable to a contractor’s work product. Id. It also contains an exception to this exclusion that restores coverage to the contractor’s work product if it is caused by a subcontractor. Id. Because it would be illogical for a contract to explicitly restore coverage to damage caused by a subcontractor if the intended definition of an accident already precluded such coverage, these courts interpret the “your work” exclusion as additional evidence that damage to a contractor’s work product caused by poor workmanship by a subcontractor is a covered occurrence. Id.
In addition to Michigan, jurisdictions adhering to the minority approach include Utah, Florida, Kansas, Tennessee, Texas, Wisconsin, Indiana, and Iowa. See Id. at 742-43 (assessing the decisions of other state supreme courts). See also Gen. Sec. Indem. Co. v. Mt. States Mut. Cas. Co., 205 P.3d 529, 535 (Colo. App. 2009) (collecting cases).
IV. An Alabama supreme court decision highlights the importance of a contractor bargaining for coverage against claims for damage to a contractor’s work product that occurs after completion of the project.
Standard CGL policies cover a contractor for claims that arise from an accident that occurs while the contractor is working on the project; and exclude claims arising from the contactor’s completed work. However, a contractor can purchase additional coverage for claims that arise from the completed work to insure against the “completed operations hazard.”
This bargained for supplemental coverage in a CGL policy resulted in a finding of coverage for defective work by a homebuilder’s subcontractors in Owners Ins. Co. v. Jim Carr Homebuilder, LLC, 157 So. 3d 148, 157 (Ala. 2014). In that case the plaintiff homeowner had won a $600,000 judgment against its builder at arbitration for its subcontractors’ faulty workmanship in constructing a new home. Id. at 151. Before the Supreme Court of Alabama, the insurer, citing Alabama precedent, sought dismissal on the grounds that faulty workmanship resulting in damage to the builder’s work product does not constitute an “occurrence” for the purposes of a CGL. Id. at 154. While the Court largely agreed with the insurer’s assessment of its precedent on the definition of an occurrence, it nonetheless considered whether the CGL’s terms involving its “your work” exclusion could be read to require coverage. Id. at 156. Agreeing with the homeowners, the court determined that the “your work” exclusion was worded such that it “appli[ed] if and only if the Policy’s declarations fail to show any coverage for ‘products-completed operations.’” Id. at 157.
Because the declarations page listed “$4,000,000 in coverage for bodily injury and property damage arising out of the insured’s ‘products,” the Court determined that the builder and the insurer had bargained for an exception to the "your work" exclusion clause that allowed for $4,000,000 in coverage to the builder’s work product if the damage occurred after the completion of the project. Id. at 157. Thus, the contractor’s purchase of “completed operations hazard’ coverage resulted in a builder recovering from its insurance company for faulty work product performed by the builder’s subcontractors in a jurisdiction that had previously allowed no such recovery. Id. at 158.
Jurisdictions remain split over whether a subcontractor exception exists to the general prohibition of CGL insurance coverage for claims of damage to a contractor’s work product resulting from poor workmanship. In light of this disparity in the court decisions, contractors should explore with their insurance agent the advisability of purchasing endorsements that change the policy definition of “occurrence” and acquiring “products completed hazard” coverage. Finally, it is critical for contractors and project owners to be listed as additional insureds under subcontractor insurance policies.