A contractor sought recovery from its commercial general liability (CGL) policy for damages that the project owner claimed for water leakage and damage caused by the Exterior Insulation System furnished and installed by the contractor.  The insurance company filed a declaratory judgment action asking the court to declare that the insurance policy provided no coverage and that the company had no duty to defend the contractor in the litigation that was filed by the owner.

In the owner’s legal action against the contractor the owner alleged that the system installed by the contractor allowed water to leak into the building from the time tenants first leased the building all the way up to the present time.  Contractor did repair work under its warranty but this apparently failed to correct the problem.  The owner complains that the contractor also failed to repair interior drywall and ceiling tile and has made no further efforts to remedy the problem.  Owner alleges that “as a direct and proximate result of these breaches of contract by Defendant, [Owner] has incurred extensive structural and aesthetic damage to the exterior and interior” of the Building.

As basis for denying coverage for the above “damages” the insurance company argued in its court pleadings that the owner’s complaint does not alleged an “occurrence” as defined by the policy; there are no allegations of “property damage” as defined by the policy, and coverage is precluded by three separate exclusions in the policy.   In reviewing the policy, the court explained that as a general matter, CGL policies “are intended to provide coverage for injury or damage to the person or property of others; they are not intended to pay costs associated with repairing or replacing an insured’s defective work and products which are purely economic losses.”    CGL policies respond when an “occurrence” causes “damages.”  The policy defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  No definition of “accident” is provided.   But “when construing CGL policies, courts define an accident as ‘an unforeseen occurrence, usually of an untoward or disastrous character or an undesigned sudden or unexpected event of an inflictive or unfortunate character.'”

The court says that the “mere failure of a product to perform as warranted is not beyond the realm of expectation and is foreseeable by the parties.”  Moreover, the court says that the law is well settled “that the natural results of negligent and unworkmanlike construction of a building do not constitute an “occurrence.”  In this case, the owner’s complaint alleges damages caused solely by the contractor’s breach of contract in failing to properly install the System and in failing to remedy the problem, and the court concludes that the damages alleged were the natural and ordinary consequences of the alleged breach of contract.  As a result, the court concludes that the damages alleged in the underlying owner’s complaint were not the result of an “occurrence” and are not covered, or potentially covered, under the CGL policy.  Consequently, the insurance carrier was not required to defend the contractor.  American Fire & Casualty Company v. Broeren Russo Construction, 54 F.Supp.2d 842 (C.D. Ill. 1999).

An interesting twist to this case is that the contractor argued that its situation was different from others cited by the court because  the owner’s complaint alleged damage to property other than that which was supplied by the contractor, such as interior drywall and ceiling tile.  Regardless of the fact that this other property was damaged, the court concluded that “the resulting damages were clearly were ‘encompassed by the normal expectancies which are inherent in the risk of product or performance failure.'” The underlying complaint did not include a claim for damage to property other than the building itself and, therefore, the court finds no “occurrence” and no coverage.

One final argument that was rejected by the court was that if the damages resulted from negligence of subcontractors rather than the insured prime contractor, there would be coverage.  The court stated that even if the damages were caused by subcontractors, the alleged damages from water leaking were still the foreseeable result of negligent and unworkmanlike conduct in installing the system.  “Accordingly, the damages alleged in the underlying complaint were not the result of an “occurrence.”

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 2, No. 8 (Aug 2000).

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