A question often arises whether there is insurance coverage under a commercial general liability (CGL) policy for damage the insured contractor’s own work. Many states require that there is no insurable “occurrence” under a CGL policy unless there has been damage to property or work of someone other than the “insured.” In Taylor Morrison Services, Inc. v. HDI-Gerling America Insurance, 746 S.E.2d 587 (2013), the Georgia Supreme Court held (1) damage to work of the insured can constitute an “occurrence;” (2) Liabilities based on Fraud are not covered as an occurrence; and (3) Breach of warranty could potentially create a covered occurrence.
The typical standard CGL policy language was at play in this case. The policy covered damages arising out of bodily injuries or property damage caused by an “occurrence,” which is defined as “an accident….”
Taylor-Morrison is a homebuilder. It was sued by homeowners alleging that concrete foundations of their homes were improperly constructed by virtue of the fact that the builder failed to lay four inches of gravel beneath the foundations; failed to use adequate moisture barriers under the concrete slab; and used too high a water-to-cement ratio. Due to these defects, the homeowners alleged that the foundations were failing and this caused physical damage to the homes including “water intrusion, cracks in the floors and driveways, and warped and buckling flooring.” They also asserted that the builder misrepresented or concealed from them material information about the construction of the foundations.
The carrier filed suit against the insured contractor for declaratory judgment, asserting that the claims did not involve potential liabilities for which there could be coverage under the CGL policy. The trial court awarded summary judgment to the carrier, finding no coverage because there was no “occurrence”, because it found there can be no occurrence when the only “property damage” alleged is damage to the work of the insured. Georgia law was applied by the court although the work was performed in California. The court does not say so, but this must have been based on a contract clause specifying the applicability of Georgia law.
Summary judgment was reversed on appeal. With the state supreme court holding that “An ‘occurrence,’ as the term is used in a standard CGL policy, does not require damages to the property or work on someone other than the insured.” In so holding, the court insisted that “Nothing about our holding is inconsistent with the settled notion that CGL coverage is intended to insure against liabilities to third parties for injury to property or person, but not mere liabilities for the repair or correction of the faulty workmanship of the insured.” Expanding on this, the court explains that an “occurrence” alone is not enough to give rise to coverage, but there also must be “bodily injury” or “property damage” as a result of the “occurrence” that the insured must pay to a third party. Instead of arguing that there was no occurrence here, the court suggests the better argument by the carrier would be to focus on other policy provisions such as exclusions. The carrier did not argue exclusions, including business risk exclusions were applicable, however. Focusing only on the insuring agreement of the policy turned out to be the wrong argument for this carrier.
In rejecting the carrier’s argument that an occurrence requires damages to something other than the work of the insured, the court cited a “strong recent trend in the case law [that] interprets the term ‘occurrence’ to encompass unanticipated damage to nondefective property resulting from poor workmanship.” The court stated:
“’[M]ost federal circuit and state supreme court cases [now] line up in favor of finding an occurrence in [the context of a claim by homeowners against an insured-homebuilder for damage to nondefective portions of a home resulting from the defective construction of another portion of the home].’ Indeed, we find a number of recent decisions in our sister states that construe “occurrence” without reference to the identity of the person whose property or work is damaged thereby.”
Based on case law from around the country, the court went on to hold that damage to work other than the insured’s own work is not necessary in Georgia to find an insurable “occurrence” under the standard CGL policy.
The second part of the decision of this court addressed the question of whether Georgia law requires that the claims being defended not be for breach of contract, fraud, or breach of warranty from the failure to disclose material information. “Occurrence” is defined in the policy as an “accident,” but the court notes that the word “accident” is not itself defined. So the court looked to what it considered the “usual and common meaning of ‘accident.’” It concluded that the term conveys nothing about the nature or extent of the injuries caused by the unexpected happening, and conveys nothing about the nature of the legal theory of liability other than if the theory is absolutely and necessarily inconsistent with the notion of an ‘accident’ … a claim premised upon such a theory of liability could not possibly involve an ‘occurrence.’
Having said that, the court explained, “Fraud claims generally are such claims.” In other words, fraud claims are not covered as an “accident.” In most cases, the court says that for an occurrence to exist, “the claims must be for something other than fraud….”
Turning finally to the question of whether breach of warranty is covered, the court said, “this is a different story.” As seen by the court the making of an express warranty is an intentional act, but “the breach of a warranty may not be.” Even though the breach of warranty could be intentional, it is not necessarily so. Warranty law imposes strict liability regardless of intent or culpability if the warranty is breached. Faulty workmanship may cause the work to amount to a breach of warranty for that work. The court says that since faulty workmanship can constitute an “occurrence” the “occurrence” might be found in the context of a claim for breach of warranty. But having said that, the court went on to explain:
“[E]ven a breach of warranty that involves an ‘occurrence’’ will not necessarily –or even usually—give rise to coverage under a standard CGL policy.” This is because “property damage” may be found only when the faulty workmanship causes physical injury to, or loss of use of, nondefective property or work. “As such, it generally will only be a breach of warranty of nondefective property from which coverage might arise, as liability for breach of the warranty of the defective property would not involve ‘damages because of’ ‘property damage’ to the nondefective property.” Despite having said that, however, the court wrapped up its decision by holding that “For an ‘occurrence’ to exist for purposes of a standard CGL policy, it is not always necessary that the claim be for something other than breach of warranty.”
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. 16, No. 1 (Jan 2014).
Copyright 2014, ConstructionRisk, LLC