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Where a general contractor – builder was sued by a homeowner to recover damages from leaking windows, fungus growth, decayed OSB sheathing, deteriorating and decaying floor joists and water damage to the home interior, the contractor tendered the claim to its commercial general liability (CGL) insurance carrier on the basis that the claim arose out of alleged defects in work performed by subcontractors.  Pursuant to the subcontractor exception to the “your work” exclusion of the CGL policy, the Supreme Court of Indiana held the damages were covered by CGL policy.  As an additional insured under the subcontractor’s separate CGL policy, the contractor may also be covered for the damages.  The trial court had granted summary judgment to the insurance carriers on the grounds that there was no damage to the property “other than to the structural components of the homes themselves” and thus there was no “occurrence” or “property damage.”  In reversing the summary judgment the court held that faulty workmanship may constitute an accident and a covered “occurrence” if done “without intention or design.”   Sheehan Construction Company v. Continental Casualty, 935 N.E. 2d 160 (Dec. 2010).

In this case, the underlying litigation against the builder was initiated by a single homeowner, but was eventually turned into a class action suit when other owners started experiencing similar problems.  Continental Insurance agreed to represent the builder with a reservation of rights.  Mediation of the suit resulted in a $2.8 million settlement.  Continental filed a declaratory judgment action asking the court to declare that it was not obligated to indemnify the builder.

After the trial court found there to be no “property damage” resulting from an “occurrence,” the homeowners appealed to the intermediate court of appeals of Indiana, and that court upheld the trial court decision because it concluded the damage to the homes “cannot be treated as distinct from the underlying faulty workmanship….”   What the court appears to be saying is that what the homeowners were claiming as their damages was the work itself, which the owners demanded be replaced.  Without damage to something other than to the installed work, the court didn’t believe there was the type of “property damage” intended to be covered by a CGL policy which was the current version of the standard ISO policy form for CGL.

In reviewing the matter, the Supreme Court did an extensive review of almost 30 court decisions from around the country that have considered whether faulty workmanship is covered by a CGL policy.  This will be a good resource to keep handy for attorneys that may be making the argument for coverage under a CGL policy.  The court concluded:  “[W]e align ourselves with those jurisdictions adopting the view that improper or faulty workmanship does constitute an accident so long as the resulting damage is an event that occurs without expectation or foresight.”   The court then goes on to explain that “As applied to the case before us, if the faulty workmanship was the product of unintentional conduct then we start with the assumption, from Sheehan’s viewpoint, that the work on the Class member’s homes would be completed properly.  The resulting damage would therefore be unforeseeable and constitute an “accident” and therefore an “occurrence” within the meaning of the Insurers’ CGL policies.

In reaching this decision, the court noted the subcontractor exception to the “your work” exclusion, and further explained that “If the insuring provisions do not confer an initial grant of coverage, then there would be no reasons for a “your work” exclusion.”  The court quoted favorably from an ABA  law journal article authored by Clifford J. Shapiro at 25 Construction Law, Summer 2005, as follows:  “By incorporating the subcontractor exception into the ‘your work’ exclusion, the insurance industry specifically contemplated coverage for property damage caused by a subcontractor’s defective performance.”  For the reasons, the trial court judgment was reversed and remanded.

Comment:  One of the first things an attorney representing parties in construction defect cases should do is evaluate what potential insurance coverage may be available – both under the contractor’s policies as well as the subcontractor’s policies.  This includes reviewing the certificates of insurance and tendering timely notice of the claims to the insurance carriers.   For additional commentary on the applicability of CGL policies to faulty workmanship, see Clifford J. Shapiro & Linda B. Foster, Point/Counterpoint: Inadvertent Construction Defects Are an “Occurrence” under CGL Policies, 22 Construction Law, Spring 2002.  See also, John B Lennes and J. Kent Holland, The Jonah Perspective on Construction Defects: A View From Inside the Fish, Federation of Defense & Corporate Counsel Quarterly, Vol. 53, No. 4, Summer 2003.

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. 14, No.1 (Jan 2012).

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