By Kevin T. Merriman and Mark D. LoGalbo
A recent trend has emerged in the way in which courts deal with claims for coverage arising from a contractor’s faulty workmanship. For years, the majority view has been that faulty workmanship claims are not covered under Commercial General Liability (“CGL”) policies because they do not arise from “occurrences.” In recent years, however, a number of courts have revisited this issue, holding that such claims do constitute “occurrences,” thus casting doubt on whether the “majority” view may still be regarded as such. The controversy even has prompted several states to pass legislation deeming construction defect claims to be “occurrences” under CGL policies.
The issue is significant because, while construction defect claims might otherwise be excluded under the business risks exclusions of a CGL policy, many claims are brought by general contractors based on faulty workmanship performed by their subcontractors.
Policyholders have argued that the “majority” view creates a conflict with the so-called “Your Work” exclusion, in that the exclusion excepts damages arising out of work performed by a subcontractor. To the extent such claims do not constitute “occurrences” in the first instance, as under the “majority” view, the exception might not restore coverage for damages caused by a subcontractor’s faulty work. This article discusses the “majority” and “minority” views, and the recent trend toward finding that construction defect claims may constitute “occurrences,” as well as the apparent conflict between the “majority” view and the subcontractor exception to the “Your Work” exclusion.
The “Majority” View: Faulty Workmanship Standing Alone Is Not An “Occurrence”
The CGL policy’s insuring agreement provides that it will pay as damages those sums that a policyholder becomes legally obligated to pay as damages because of bodily injury or property damage caused by an “occurrence.” The standard policy definition provides that an “occurrence” is “an accident,” which usually is interpreted to mean an “undesigned, sudden and unexpected event.” In the context of coverage for construction defects, a threshold issue, then, is whether such claims are fortuitous, or merely the foreseeable and expected consequences of an insured’s failure to fulfill its contractual obligations.
Insurers argue that claims for faulty workmanship, because they arise from an insured’s calculated decisions about the materials, manner, and method of work to be performed, and because the claims result from a failure to perform under contract, lack the requisite fortuity to qualify as accidents. Insurers argue that damages resulting from a failure to perform under contract are not unexpected or fortuitous, and that a contrary result would convert CGL policies into performance bonds or warranties for a contractor’s goods or services. Policyholders counter that unexpected and unforeseen consequences of faulty work, whether damage to the insured’s own work or product, or the work or product of others, is accidental and therefore within a CGL policy’s coverage grant.
The majority view has long been that where property damage is confined to the work of an insured contractor, it is not caused by an “occurrence.” See e.g., U.S. Fid. & Guar. Corp., 163 Ariz. 476, 788 P.2d 1227 (Ct. App. 1989); Essex Ins. Co. v. Holder, 370 Ark. 465,261 S.W.3d 456 (2007); Peterbit of Connecticut, Inc. v. First Financial Ins. Co., 2011 U.S. Dist. LEXIS 106740 (D. Conn. September 20, 2011); Pursell Constr., Inc. v. Hawkeye-Security Ins. Co., 596 N.W.2d 67 (Iowa 1999); Cincinnati Ins. Co. v. Motorists Mut. Ins. Co., 306 S.W.3d 69 (Ky. 2010); Lerner Corp. v. Assurance Co. of America, 120 Md.App. 525,707 A.2d 906, 912 (1998); Liparoto Const., Inc. v. General Shale Brick, Inc., 284 Mich.App. 25,772 N.W.2d 801 (2009); Hawkeye-Security Ins. Co. v. Vector Constr. Co., 185 Mich.App. 369,460 N.W.2d 329, 334 (1990); McAllister v. Peerless Ins. Co., 124 N.H. 676,474 A.2d 1033, 1036 (1984); Auto-Owners Ins. Co., 268 Neb. 528,684 N.W.2d 571, 577 (2004); Bonded Concrete, Inc. v. Transcontinental Ins. Co., 12 A.D.3d 761,784 N.Y.S.2d 212, 213 (1st. Dep. 2004); George A. Fuller Co. v. U.S. Fid. & Guar. Co., 200 A.D.2d 255, 613 N.Y.S.2d 152, 155 (1st Dep. 1994), lv. denied, 645 N.E.2d 1215 (N.Y. 1994); Jakobson Shipyard, Inc. v. Aetna Cas. & Sur. Co., 961 F.2d 387, 389 (2d Cir. N.Y. 1992); J.Z.G. Res., Inc. v. King, 987 F.2d 98, 103 (2d Cir. N.Y. 1993); Oak Crest Constr. Co. v. Austin Mut. Ins. Co., 329 Or. 620,998 P.2d 1254, 1258 (2000); Kvaerner Metals Div. Of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 589 Pa. 317,908 A.2d 888, 899 (2006); L-J, Inc. v. Bituminous Fire & Marine Ins. Co., 366 S.C. 117,621 S.E.2d 33, 36 (2005); Great Divide Ins. Co. v. Bitterroot Timberframes of Wyoming, LLC, 2006 WL 3933078 at *9 (D. Wyo. Oct. 20, 2006); Group Builders, Inc. v. Admiral Ins. Co., 123 Haw.142,231 P.3d 67 (Ct. App. 2010).
In general, courts adopting this view have determined that faulty workmanship, standing alone, is not covered under a CGL policy because, “as a matter of policy interpretation, the fortuity implied by reference to accident or exposure is not what is commonly meant by a failure of workmanship.”Auto-Owners Ins. v Home Pride Cos., 268 Neb. 528, 532-533,684 N.W.2d 571, 576-77 (2004), citingLenning v. Commercial Union Ins. Co.,260 F.3d 574, 583 (6th Cir. Ky. 2001) (“there is no ‘occurrence’ to the extent [a] complaint alleges property damage arising out of defective or faulty craftsmanship); see also e.g., Pursell Const. v. Hawkeye-Security Ins.,596 N.W.2d 67, 71 (Iowa 1999) (“defective workmanship standing alone, that is, resulting in damages only to the work product itself, is not an “occurrence” under a CGL policy);State Farm Fire and Cas.Co. v. Tillerson,334 Ill.App.3d 404,409,777 N.E.2d 986, 991 (2002) ([w]here the defect is no more than the natural and ordinary consequences of faulty workmanship, it is not caused by an accident"). Put differently, damage that is the natural and ordinary consequence of work done by or under the supervision of an insured does not qualify as an accident:
According to the dictionary, an accident is ‘an event or condition occurring by chance or arising from unknown or remote causes. None of the damage the residents allege can be characterized as having been caused by an accident under this definition because none of it occurred by chance or arose from unknown or remote causes. The park’s alleged failure to carry out contractual and statutory obligations to assure that the foundations were properly installed could not possibly be considered accidental. Indeed, some of the damage alleged could arguably be characterized as having been an expected or intended consequence of the parks’ actions, which damage the policy explicitly excludes from coverage.
American Modern Home Insurance Co. v. Reeds at Bayview Mobile Home Park, 176 Fed.Appx. 363, 366 (4th Cir. Md. 2006).
This view was affirmed by the Ohio Supreme Court in Westfield Ins. Co. v. Custom Agri System, Inc., 133 Ohio St.3d 476,979 N.E.2d 269 (2012). In Custom Agri System, which involved damages caused by a defective grain bin, the court noted that, in general, CGL policies are not intended to insure against “business risks” that are the normal, frequent or predictable consequences of doing business that a business can and should control or manage, and therefore such risks lack the requisite element of fortuity required for an “occurrence.” Reasoning that claims of defective construction or workmanship constitute business risks, the court held that such claims do not arise from an “occurrence” as that term is used in a CGL policy and therefore are not covered.
While, under the “majority” view, courts hold that construction defect claims do not constitute “occurrences” if the damage is to the insured’s own work or product, most courts recognize that faulty work resulting in damage to the work or product of others may be accidental. This result would appear to be consistent with the standard business risk exclusions of the CGL policy—so why the controversy? The analysis becomes important in relation to the general contractor, for which an entire project may be regarded as its work or product, notwithstanding the use of subcontractors. An exception to the “Your Work” exclusion for work performed by subcontractors potentially extends coverage for such claims. To the extent such claims do not constitute “occurrences” in the first instance, however, courts may not look beyond the insuring agreement to find coverage within the “Your Work” exclusion, in accordance with the general rule that coverage cannot be created by exclusions. Thus, if it is determined that construction defect claims do not constitute “occurrences” in the first instance, no effect may be given to the subcontractor exception.
The “Minority” View: Faulty Workmanship May Constitute An “Occurrence”
In response to insurers’ arguments that faulty construction claims are not “occurrences” because they lack the requisite fortuity, policyholders argue that to give effect to the subcontractor exception to the “Your Work” exclusions, the proper inquiry is not whether the policyholder’s actions (i.e., performing the construction work) are intended or expected, but whether the resulting damage is expected or intended. That is, where the damage resulting from faulty construction is unexpected and unintended, the claim arises from an “occurrence.” See e.g., Westfield, 133 Ohio St.3d at 487, 979 N.E.2d at 277 (“A deliberate act—such as performing construction work—can have accidental consequences”) (dissent).
Based on these arguments, the minority view holds that claims for faulty workmanship may constitute an “occurrence” under a standard CGL policy, regardless of whether the resulting damages is to the policyholder’s own work, or otherwise. In United States Fire Insurance Co. v. J.S.U.B., Inc., 979 So.2d 871 (Fla. 2007), for example, the court, interpreting the term "accident" in terms of the result rather than the acts that led to damage, declined to distinguish between damage to an insured’s work and damage to the work of others:
Further, we fail to see how defective work that results in a claim against the contractor because of injury to a third party or damage to a third party’s property is “unforeseeable,” while the same defective work that results in a claim against the contractor because of damage to the completed project is “foreseeable.” This distinction would make the definition of “occurrence” dependent on which property was damaged.
* * *
In sum, we reject a definition of “occurrence” that renders damage to the insured’s own work as a result of a subcontractor’s faulty workmanship expected, but renders damage to property of a third party caused by the same faulty workmanship unexpected. There is simply nothing in the definition of the term “occurrence” that limits coverage in the manner advanced by U.S. Fire, and we decline to read the broad “business risk” exclusions … into the definition of “occurrence” used in the coverage provisions of the post-1986 standard CGL policies at issue in this case.
979 So.2d at 885.
This view has been adopted by a number of courts in recent years. See Greystone Consrt., Inc. v. Nat’l Fire & Marine Ins. Co., 661 F.3d 1272 (10th Cir. Colo. 2011) (noting a “strong recent trend” in cases adopting a more expansive construction of what constitutes an “occurrence”). See also Capstone Bldg. Corp. v. Am. Motorist Ins. Co., 308 Conn. 760, 771, 67 A.3d 961, 973 (2013) ("We conclude that defective construction or faulty workmanship that causes damage to nondefective property may constitute property damage resulting from an occurrence, thus triggering coverage under the commercial general liability policy."); Architex Ass'n, Inc. v. Scottsdale Ins., 27 So.3d 1148 (Miss. 2010) (holding the term “occurrence” cannot be construed in such a manner as to preclude coverage for unexpected or unintended “property damage” resulting from negligent acts or conduct of a subcontractor unless otherwise excluded); Sheehan Constr. v. Continental Cas. Co., 935 N.E.2d 160, modified on other grounds 938 N.E.2d 685 (Ind. 2010) (holding that faulty workmanship may constitute an “occurrence” if the resulting damage is an event that occurs without expectation or foresight); Lee Builders, Inc. v. Farm Bureau Mut. Ins., 281 Kan. 844,137 P.3d 486 (2006) (holding unforeseen and unintended damage from leaking windows installed by an insured's subcontractor was caused by an “occurrence”); Wanzek Constr., Inc. v. Employers Ins., 679 N.W.2d 322 (Minn. 2004) (holding damage to a swimming pool caused by a subcontractor was covered under a CGL policy); Revelation Indus. v. St. Paul Fire & Marine Ins., 350 Mont. 184, 206 P.3d 919 (Mont. 2009) (holding property damage to an insured's products or completed work done for the insured by a subcontractor is an “accident” and the CGL policy provides coverage to the insured); Auto Owners Ins. v. Newman, 385 S.C. 187,684 S.E.2d 541 (2009) (holding that a subcontractor's negligent application of stucco to a home resulted in an “occurrence” under the CGL policy's grant of coverage for the resulting progressive property damage to the home), overruled by Crossmann Communities of N.C., Inc. v. Harleysville Mut. Ins., 2011 WL 93716, at *1, (S.C. Jan. 7, 2011), withdrawn and substituted by 395 S.C. 40,717 S.E.2d 589 (2011) (adhering to the result in Newman); Corner Constr. v. United States Fid. and Guar., 638 N.W.2d 887 (S.D. 2002) (holding that the CGL policy provided coverage for a general contractor's liability for property damage to the building as a result of the subcontractor's faulty workmanship, which was an “accident” resulting in property damage); Travelers Indem. Co. of America v. Moore & Assocs., Inc., 216 S.W.3d 302 (Tenn. 2007) (holding that defective workmanship may constitute an “occurrence” under a CGL policy; damages caused by faulty workmanship are “property damage” and “damages resulting from the faulty workmanship of a subcontractor are not excluded from coverage”); Lamar Homes, Inc. v. Mid–Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007) (holding that a general contractor's defective construction or faulty workmanship in building a house foundation is an “occurrence” within the meaning of the CGL policy); American Family Mut. Ins. v. American Girl, Inc., 268 Wis.2d 16, 673 N.W.2d 65 (2004) (holding that damage to a warehouse caused by soil settlement, which occurred because of a subcontractor's faulty site-preparation advice was accidental, not intentional or anticipated, and was an “occurrence” within the meaning of the CGL policies).
Indeed, several courts previously holding that faulty workmanship claims may not constitute an “occurrence” have reversed course and now hold that such claims may constitute an “occurrence.” For example, the Alabama Supreme Court has withdrawn its opinion that previously affirmed the view that faulty workmanship is not an “occurrence.” Owners Ins. Co. v. Jim Carr Homebuilder, LLC, 2013 WL 5298575 (Ala. Sept. 20, 2013). In that case, the court held that faulty workmanship itself is not an “occurrence,” and damage caused by such faulty workmanship may result from an “occurrence” only where the damage is to property “outside the scope of the contractor’s work.” Id. at *5, 6. As a result, this court found that a contractor’s faulty workmanship in, among other things, constructing a roof and laying bricks for a house, which resulted in water damage throughout the house, was not covered under the contractors CGL policy, because the contractor was hired to build the entire house, and, therefore, the damage was within the scope of the contractor’s work. Id. at *6. The Court withdrew and substituted this opinion. Owners Ins. Co. v. Jim Carr Homebuilder, LLC,2014 WL 1270629 (Ala. March 28, 2014). The present court rejected the insurer's contention that "faulty workmanship performed as part of a construction or repair project might result in an 'occurrence' only to the extent that that workmanship results in property damage to real or personal property that is not part of that construction or repair project." Owners Ins. Co., 2014 WL 1270629, *5 (emphasis by the Court). In doing so, the court said:
However, in making that argument Owners asks the term “occurrence” to do too much. The term “occurrence” is defined in the Owners policy simply as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” If some portion of the Owners policy seeks to affect coverage by references to the nature or location of the property damaged, it is not the provision in the policy for coverage of occurrences. The policy simply does not define “occurrence” by reference to such criteria.
See also K & L Homes, Inc. v. American Family Mut. Ins. Co., 829 N.W.2d 724 (N.D. 2013) (overruling prior decision that there is only an “occurrence” where faulty workmanship damages a third party’s work or property and holding that faulty workmanship constitutes an "occurrence" whenever resulting property damage is unexpected and unintended); Cherrington v. Erie Ins. Prop. & Cas. Co., 231 W.Va. 470, 745 S.E.2d 508 (2013) (recognizing trend in favor of coverage for construction defects and finding that the court’s “prior proscriptions limiting the scope of the coverage afforded by CGL policies to exclude defective workmanship to be so broad in their blanket pronouncement that a policy of CGL insurance may never provide coverage for defective workmanship as to be unworkable in their practical application.”).
With respect to this reversal of course, the Cherrington court went so far as to suggest that its prior precedent holding faulty work not be an “occurrence” was "not legally sound." The court remarked:
While we appreciate this Court's duty to follow our prior precedents, we also are cognizant that stare decisis does not require this Court's continued allegiance to cases whose decisions were based upon reasoning which has become outdated or fallen into disfavor. Although we fully understand that the doctrine of stare decisis is a guide for maintaining stability in the law, we will part ways with precedent that is not legally sound. Thus, when it clearly is apparent that an error has been made or that the application of an outmoded rule, due to changing conditions, results in injustice, deviation from that policy is warranted."
Cherrington, 231 W.Va. 470, 745 S.E.2d at 517 (citations and internal quotations omitted)
The trend toward finding that construction defects may constitute “occurrences” has been so strong that some courts have proclaimed it to be the new “majority rule.” See e.g., Cherrington, 231 W.Va. 470, 745 S.E.2d at 517(“[A] majority of other states have reached the opposite conclusion, announcing their contrary view [that construction defects may constitute ‘occurrences’] either in judicial decisions or through legislative amendments to their states’ insurance statutes.”); see also K & L Homes, 829 N.W.2d at 729 (“Currently, the majority of state supreme courts who have decided the issue of whether inadvertent faulty workmanship is an accidental “occurrence” potentially covered under the CGL policy have decided that it can be an “occurrence.”).
In addition, several state legislatures, reacting to the uncertainty about coverage for construction defect claims, have gone so far as to pass legislation mandating that construction defects be construed as “occurrences.” See Ark. Code Ann. § 23-79-155 (Arkansas); Colo. Rev. Stat. § 13-20-808 (Colorado); Haw. Rev. Stat. § 431:1 (Hawaii); S.C. Code Ann. § 38-61-70 (South Carolina). The common denominator among these statutes is that they attempt to provide a construction of the term "occurrence" that is more favorable toward contractors and sub-contractors who are sued for construction defects arising from faulty workmanship.
Colorado was the first state to codify the definition of "occurrence" in CGL policies. Effective May 21, 2010, Colorado Code section 13-20-808 provides that a court interpreting a liability insurance policy “shall presume that the work of a construction professional that results in property damage,including damage to the work itself or other work,is an accident unless the property damage is intended and expected by the insured.” Colo. Rev. Stat. § 13-20-808(3). Likewise, the South Carolina legislation enacted on May 17, 2011, provides that CGL policies shall include in the definition of "occurrence" "property damage or bodily injury resulting from faulty workmanship, exclusive of the faulty workmanship itself." S.C. Code Ann. § 38-61-70. The South Carolina statute, unlike the statute passed in Hawaii, made the new provision applicable to all CGL policies issued in the past, currently in existence or issued in the future.
On November 25, 2013, a bill was introduced before the New Jersey State Assembly which, if enacted into law, would redefine the term “occurrence” in an insurance policy to includedamages resulting from a contractor’s faulty workmanship, thereby providing the possibility that such damages would be covered by the contractor’s insurer. Similar to the jurisdictions noted above, the proposed New Jersey legislation would not impact the exclusions that insurers have in their policies.
The import of these statutes is that contractors now may establish coverage if the damage caused by faulty workmanship is not expected or intended and is not otherwise excluded by the business risks exclusions. As discussed below, policyholders argue that this result is consistent with the rationale of courts that have found that damage resulting from faulty workmanship must constitute an “occurrence,” because otherwise the “Your Work” exclusion of the standard CGL policy, and its subcontractor exception, would be surplusage.
The "Your Work" Exclusion
As mentioned above, many construction defect claims involve a general contractor seeking coverage for alleged damaged caused by the work of a subcontractor. The involvement of a subcontractor implicates the “Your Work” exclusion of the standard CGL policy, which excludes property damage to the policyholder’s own work, but contains an exception “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”
The 1973 version of the standard-form CGL policy contained business-risk exclusions that, unlike those in the present policy edition, did not include an exception for damage resulting from a subcontractor's work. See French v. Assurance Co. of America, 448 F.3d 693, 700 (4th Cir. Va. 2006) (“In the 1973 version of the [ISO’s CGL policy form], the work performed exclusion precluded coverage for ‘property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith.’”). The “on behalf of” language was interpreted to mean no coverage “whatsoever for damage to a subcontractor's work, or for damage to [the insured's] own work for damage resulting from a subcontractor's work.” Maryland Casualty Co. v. Reeder, 221 Cal.App.3d 961, 972, 270 Cal.Rptr. 719 (Cal. App.1990). In response to this interpretation by courts, many contractors expressed unhappiness with the standard policy provisions, and insurers responded in the mid-1970s by offering, for a higher premium, a Broad Form Property Damage Endorsement that effectively extended coverage to damage arising out of a subcontractor’s work. See Greystone Const., Inc. v. National Fire & Marine Ins. Co.,661 F.3d 1272, 1287-1288 (10th Cir. Colo. 2011).
When the 1986 commercial general liability coverage form replaced the 1973 CGL, the subcontractor exception was made part of the Your Work exclusion, rather than being offered separately as an endorsement. This resulted both because of the demands of the policyholder community (which wanted this coverage) and the view of insurers that the CGL was a more attractive product that could be better sold if it contained this coverage. 2 Jeffrey W. Stempel, Stempel on Insurance Contracts § 14.13[D] (2007).
Advocates for the “minority” view—that faulty construction claims can constitute an “occurrence”—point to the subcontractor exception to the “Your Work” exclusion as evidence that faulty construction claims properly may be considered “occurrences,” arguing that the “Your Work” exclusion necessarily assumes that faulty workmanship can constitute an “occurrence,” because damage to a policyholder’s work is excepted from the exclusion if the faulty workmanship that led to the damage was performed by the policyholder’s subcontractor. In other words, the argument is that if faulty workmanship were not an “occurrence,” the “Your Work” exclusion and its subcontractor exception would serve no purpose, because faulty workmanship claims would not be covered in the first instance.
As one court holding that such claims are “occurrences” observed, “[t]he very existence of the ‘Your Work’ exclusion and the history of the subcontractor exception to that exclusion provide us solid confirmation that our holding … is correct.” French v. Assurance Co. of America, 448 F.3d 693, 705 (4th Cir. Va. 2006); see also K&L Homes, Inc. v. Am. Family Mut. Ins. Co., 829 N.W.2d 724 (N.D. 2013); Stanley Martin Cos. v. Ohio Cas. Group, 313 Fed.Appx. 609 (4th Cir. Va. 2009) (“If the definition of ‘occurrence’ cannot be understood to include an insured’s faulty workmanship, an exclusion that exempts from coverage any damage the insured’s faulty workmanship causes to its own work is nugatory. If, on the other hand, the definition of ‘occurrence’ does include an insured’s faulty workmanship, such an exclusion functions as a meaningful ‘limitation or restriction on the insuring clause.’”); Cherrington, 745 S.E.2d at 521(“[A] finding based upon our prior case law to the effect that the defective workmanship at issue is not covered by the CGL policy’s insuring clause is incongruous with the policy’s express language providing coverage for the acts of subcontractors.”). As the French v. Assurance Co. of America court, citing Lee Builders, Inc. v. Farm Bureau Mutual Insurance Co., 281 Kan. 844,137 P.3d 486 (Kan. 2006), explained:
If the policy’s exclusion for damage to the insured’s work contains a proviso stating that the exclusion is inapplicable if the work was performed on the insured’s behalf by a subcontractor, it would not be justifiable to deny coverage to the insured, based upon the absence of an occurrence, for damages owed because of property damage to the insured’s work caused by the subcontractor’s work. Reading the policy as a whole, it is clear that the intent of the policy was to cover the risk to the insured created by the insured’s use of a subcontractor. Moreover, if coverage were never available for damage to the insured’s work because of a subcontractor’s mistake, on the theory that there was no occurrence even under those circumstances, the foregoing subcontractor proviso to the exclusion for damage to the insured’s work would be meaningless, and if possible, policies should not be interpreted to render policy provisions meaningless.
French, 448 F.3d at 706.
Under this view, the “majority” rule—that construction defects are business risks and therefore do not constitute “occurrences”—would run afoul of the axiom that policy exclusions do not create coverage, because in order to give effect to the subcontractor exception of the “Your Work” exclusion, a court adopting the “majority” view would necessarily have to find coverage in the subcontractor exception itself.
As one commentator has noted, regarding the application of the “Your Work” exclusion to construction defect claims:
[I]f the named insured becomes liable for damage to work performed by a subcontractor—or for damage to the named insured's own work arising out of a subcontractor's work—the exclusion should not apply to the resulting damage. Neither, apparently, should any exclusion apply to the named insured's liability for damage to a subcontractor's work out of which the damage to other property arises. If, for example, a subcontractor's faulty wiring causes an entire building to burn and the general contractor is sued for the entire loss by the building owner, the general contractor's CGL coverage form should cover his liability for the entire amount of the loss, including the cost of the failed wiring. If, instead, the loss had originated in work performed by the general contractor, the general contractor would be covered only for damage to work performed by subcontractors; there would be no recovery for any work performed by the named insured (general contractor).
D. Malecki & A. Flitner, Commercial General Liability 37-38 (4th ed. 1992).
In other words, by application of the subcontractor exception of the “Your Work” exclusion, a general contractor who subcontracts out all of its work to subcontractors can ensure complete coverage for faulty workmanship. Under the “minority” view, however, that the subcontractor exception did not create the coverage; rather, it merely preserved coverage that would otherwise have existed, but for the “Your Work” exclusion. As the Texas Supreme Court concluded, "when a general contractor becomes liable for damage to work performed by a subcontractor—or for damage to the general contractor's own work arising out of a subcontractor's work—the subcontractor exception preserves coverage that the 'your-work' exclusion would otherwise negate." Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 12 (Tex. 2007).
Recent years have seen a shift by a number of courts in how CGL policies are interpreted for the purpose of determining coverage arising out of a contractor’s faulty workmanship. While the majority rule long has been that such claims do not arise out of “occurrences,” recent holdings and legislative action has created a new trend in favor of holding that such claims may arise from an “occurrence,” calling into question whether the “majority” view, in fact, still is the majority view. As support for the recent trend, policyholders have found success in arguing that the subcontractor exception to the “Your Work” exclusion conflicts with the “majority” view. While it remains to be seen whether the recent trend will continue, for now, at least, it appears that policyholders are gaining ground on this issue.
The article above is an adaptation of A New Trend Under Construction: Faulty Workmanship as an Occurrence, For the Defense, Vol. 56, #5, May 2014.