Whether construction defects are occurrences under Commercial General Liability (“CGL”) insurance policies is an issue that has been highly litigated in recent years. A review of cases from various states discloses that courts have been divided both in the way they decide and analyze this issue.
Historically, it was well settled throughout the country that defective workmanship was not a covered occurrence under a CGL policy of insurance. However, many courts throughout the U.S. have re-examined this precedent and have begun a new trend by finding that defective workmanship can, in fact, be an occurrence. The problem is that not all states have reached the same conclusion and have therefore created a patchwork of inconsistent results and analyses which differ from state to state. For those of us in the insurance industry, this results in a tedious task of determining which states follow which trend.
And as described by Christopher C. French’s article, Construction Defects: Are they “Occurrences"?, the decisions fall under one or a combination of these schools of thought:
- Construction defects are “occurrences” so long as the damage was not expected or intended by the policyholder; (majority)
- Construction defects are “occurrences’” to the extent property other than the work performed by the policyholder is damaged; (majority)
- Construction defects are not “occurrences” because they are not “accidents”; (minority)
- Construction defects are not “occurrences” because to hold otherwise would transform insurance into surety or performance bonds; (minority) and
- Construction defects are not “occurrences” because they are due to intentional acts from which the resulting damage is a foreseeable consequence. (minority)
I recently wrote a blog about New Jersey’s decision to join the majority states which interpret defective workmanship as an occurrence. Currently, there are twenty-five states that follow the majority trend that interpret a defect as an occurrence. Others have attempted to deviate from the majority trend by adding additional requirements, such as requiring “collateral” or “consequential” damages. However, some states still hold on to the minority trend, which finds that defective workmanship does not give rise to an occurrence under CGL insurance policies.
During a CLE seminar I attended this Summer, it was reiterated that policy language should be interpreted to fulfill the reasonable expectations of the policyholder when the policy is construed, as a whole with all ambiguities in the policy language, against the author of the policy and resolved in favor of the policyholder. In addition, the rules of insurance policy interpretation dictate that construction defects are “occurrences,” which are defined in CGL policies as an “accident,” including continuous or repeated exposure to harmful conditions. The term “accident” itself, however, is undefined. Common law provides that an accident is an event or happening that unexpectedly and unintentionally results in injury or property damage. It should follow that the analysis on this issue should focus on whether the faulty workmanship and resulting damage was expected or intended. Therefore, assuming the faulty workmanship and resulting damage was unexpected and unintended by the contractor then the resulting construction defects, and any related property damage, should be an occurrence.
As obvious as the foregoing rationale may sound, at least to some of us, some courts do not agree. In an upcoming blog series, I will analyze and discuss the variations among states regarding defective workmanship as occurrence.