Where a subcontractor failed to conduct soil-compaction testing before construction, the house that was built on non-compacted soil sustained settlement damage. The homeowners sued both the general contractor (GC) and subcontractor for damages. The GC tendered the claim to its commercial general liability (CGL) carrier to defend and indemnify. The insurer filed a declaratory judgment action asking the court to deny coverage because the failure to perform contractually required work did not constitute an “occurrence” as defined by the policy. The court held that this was a covered occurrence. It also held that exclusions j(7) and I (eye) didn’t apply because they only apply to bar coverage to repair the defective work, which in this case was the soil compaction testing, and not the actual damages to portions of the constructed house. Owners Insurance Company v. Tibke Construction, Inc., 901 N.W. 2d 80 (South Dakota 2017).

Whether the damages alleged by the Browns were caused by an occurrence as defined by the CGL policy.

The insuring clause is set forth in § I of the policy and provides:

“1. Insuring Agreement

  1. [Owners] will pay those sums that the insured becomes legally obligated to pay as damages because of … “property damage” to which this insurance applies.
  2. This insurance applies to … “property damage” only if:

(1) The … “property damage” is caused by an “occurrence[.]”

Section V defines occurrence and property damage:

  1. “Occurrence” means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.


  1. “Property damage” means:

  2. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

  3. Loss of use of tangible property that is not physically injured. All such loss shall be deemed to occur at the time of the “occurrence” that caused it.”

The court concluded,

“Whether the CGL policy provides [GC] coverage for the alleged damages to the house initially depends on whether there was property damage caused by an occurrence. It is undisputed that the Browns suffered property damage as a result of construction on unstable soil. Accordingly, the only issue relevant to the initial question of coverage is whether the alleged failure to test the soil was an occurrence.”

The Insurer argued that “a claim for damages arising from incorrectly performed work,” like failing to test the soil beneath a construction site, does not constitute an accident because the CGL policy is not meant to cover faulty workmanship. Further, Owners argues that the alleged faulty workmanship in this case is not a covered occurrence because it arose “from the defendants’ intentional choice not to conduct soil testing and their deliberate decision to construct the house on that soil despite their choice not to test it.”

The court cited previous case precedent for the proposition that:

“[i]f inadvertent faulty workmanship causes unexpected injuries to people or property, it may constitute an accident and thus an occurrence. “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.’ ”

The court held,

The failure to test the soil was an occurrence because it was an accident—an unexpected event. This occurrence allegedly caused property damage to the house in the form of excessive settlement, cracking, and structural unsoundness. [GC] has established that coverage exists under § I of the CGL policy.


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. 20, No. 3 (Mar 2018).

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