Homebuilder's commercial liability insurance may not completely protect you
In a recent decision involving the defective construction of a home, The Kentucky Supreme Court held that a claim for defective construction against a homebuilder is not covered by the homebuilder’s commercial general liability (CGL) insurance policy. In the case of Cincinnati Insurance Co. v. Motorists Mutual Insurance Co., the Kentucky Supreme Court addressed the issue of whether a homeowner’s claim for defective construction against a homebuilder is, standing alone, a claim for property damage caused by an “occurrence” under the homebuilder’s CGL policy. The Supreme Court adopted the majority view and found that a contractor’s CGL insurance policy does not cover defective construction work.
The buyers of a newly constructed home sued the homebuilder, claiming that the homebuilder’s work was so defective that the home was beyond repair and would need to be razed. The homeowners sought to recover damages to remediate the defective work, and the homebuilder sought coverage for that claim under its CGL policy. The CGL insurance carrier argued that claims for defective construction work are not covered under the policy.
The Kentucky Supreme Court began its analysis of whether the CGL policy covered the defective work by analyzing the terms of the CGL policy. The policy provided that the CGL carrier would pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage.” The policy further required that the “bodily injury” or “property damage” be caused by an “occurrence.” The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The policy did not define the term “accident.”
The Court relied on the doctrine of fortuity to find that CGL policy did not provide coverage. The Court found that under the doctrine of fortuity, for there to be an “accident” for which there is coverage, it must be shown that the loss was “not intended” and that the loss was a “chance event” beyond the control of the insured. The Court found that the defective work was not an “accident” even though the builder did not intend to build a defective house. The Court found that the term “accident” is something that does not result from a plan or design and does not result when a third party controls the event. Therefore, the Court concluded that the defective work was not “fortuitous” or an “accident,” because the homebuilder had control over the construction of the house, either directly or through the subcontractors it chose. The Court found that construction defect claims do not present the degree of fortuity contemplated under the ordinary definition of “accident.” The Court noted that to hold otherwise would be to convert the CGL policy into a performance bond.
This decision highlights the importance of contractors and owners making sure that there is insurance coverage for all risks on a construction project. Coverage under a CGL policy is very fact sensitive and varies from state to state. Therefore, contractors and owners should consult with counsel and their insurance agents to insure that they have adequate coverage to protect all of the risks on their construction projects.