Author: Bill Wilson
There has been an increasingly disturbing trend of courts upholding claim denials based on property damage not arising from an "occurrence" in the CGL policy. Typically, these claims involve contractors and damage to "your work." While I'm not saying the claims are covered, I do question whether the "no occurrence" basis for the denial is proper and in keeping with the policy language.
Note: Before proceeding, you might want to download the following state by state case law:
There has been an increasingly disturbing trend of courts upholding claim denials based on property damage not arising from an "occurrence" in the CGL policy. Typically, these claims involve contractors and damage to "your work." While I'm not saying the claims are covered, I do question whether the "no occurrence" basis for the denial is proper and in keeping with the policy language in many cases.
Here is how the CGL policy defines "occurrence":
13. "Occurrence" means an accident, including
continuous or repeated exposure to
substantially the same general harmful
conditions.
In other words, for the most part, "occurrence" is synonymous with "accident." So, what constitutes an "accident" and why can't faulty workmanship occur accidentally? Here are several definitions:
Accident:
"[A]n unforeseen and unplanned event or circumstance."
"[L]ack of intention or necessity."
"[A]n unfortunate event resulting especially from carelessness or ignorance."
"[A]n unexpected happening causing loss or injury which is not due to any fault or misconduct on the part of the person injured but for which legal relief may be sought."
Source: Merriam-Webster Online Dictionary (www.m-w.com)
Accident:
"[A]n unexpected usually sudden event that occurs without intent or volition although sometimes through carelessness, unawareness, ignorance, or a combination of causes and that produces an unfortunate result (as an injury) for which the affected party may be entitled to relief under the law or to compensation under an insurance policy."
Source: Merriam-Webster's Dictionary of Law, 1996
Accident:
"[A]n unusual, fortuitous, unexpected, unforeseen or unlooked for event, happening or occurrence; an unusual or unexpected result attending the operation or performance of a usual or necessary act or event...Insurance contract...[a]n accident within accident insurance policies is an event happening without any human agency, or, if happening through such agency, an event which, under circumstances, is unusual and not expected by the person to whom it happens. A more comprehensive term than 'negligence,' and in its common signification the word means an unexpected happening without intention or design."
Source: Black's Law Dictionary, Abridged Sixth Edition
When the "No Occurrence" Claim Denial IS Valid
Some courts have found that faulty workmanship is the "ordinary and natural consequence" of the failure to comply with contractual or governmental regulations and that contractors who do so incur a(n uninsurable) business risk, gambling that a loss won't occur or the shoddy construction won't be noticed. It makes sense that the "no occurrence" claim denial IS valid when the insured deliberately performed the work, or used substandard materials, in violation of contract, construction code, design specifications, or accepted construction practices such that the faulty workmanship was, or should have been, foreseeable and expected.
There are many stories from hurricane-ravaged areas where fly-by-night contractors have entered and exited quickly to make a fast buck. They engage in shoddy workmanship, knowing that the work product would be defective. In instances such as these, clearly there has been no "accident" since the insured has deliberately engaged in faulty workmanship and his liability lies almost entirely within his breach of contract.
Likewise, an insured who subs work to someone known to be incompetent or have a poor track record would have knowingly engaged in reasonably foreseeable faulty workmanship. In such instances, the damage can be reasonably inferred to have occurred as an "ordinary or natural consequence." However, in the absence of a preponderance of evidence to the contrary, the presumption should be that the damage was accidentally and negligently caused.
In his paper, "Hot Topics Involving Liability Insurance Coverage," Clifford J. Shapiro explains:
"[A]cts that cause construction defects normally are undertaken with the intent to perform the work properly, but unknowingly are performed improperly by mistake. The property damage that results from these mistakes is therefore neither intended nor expected by the contractor performing the work. Accordingly, property damage that arises out of construction defects should be considered 'accidental' and held to qualify as an 'occurrence' under the CGL insurance policy. Importantly, this conclusion does not mean that the CGL insurance policy provides coverage for all property damage arising out of construction defects. It means only that the ultimate coverage determination should based on careful application of the policy exclusions. Nonetheless, the courts that have addressed the 'occurrence' issue in the construction defect context remain split.
"[T]he CGL and umbrella policies contained detailed business risk and policy exclusions. The business risk exclusions contemplate that some construction defects are covered and some are not. The policy exclusions become meaningless if all construction defects are excluded from coverage because they do not constitute an 'occurrence.' Because the parties included the business risk exclusions, they could not have intended to exclude all construction defects, whether negligently or intentionally caused."
Which brings us to....
When the "No Occurrence" Claim Denial is NOT Valid
In Mid-Century Ins. Co. of Texas v. Lindsey (1999), the Texas Supreme Court differentiated between conduct and its expected consequences by opining on a rational definition of the meaning of an "occurrence":
"An injury caused by voluntary intentional conduct is not an accident just because 'the result or injury may have been unexpected, unforeseen and unintended.' On the other hand, the mere fact that 'an actor intended to engage in the conduct that gave rise to the injury' does not mean that the injury was not accidental. Rather, both the actor's intent and the reasonably foreseeable effect of his conduct bear on the determination of whether an occurrence is accidental...'an effect that 'cannot be reasonably anticipated from the use of [the means that produced it], an effect which the actor did not intend to produce and which he cannot be charged with the design of producing, is produced by accidental means.'"
Likewise, in Harken Exploration Co. v. Sphere Drake Ins. (2001), the 5th Circuit agreed that:
"...if the act is deliberately taken, performed negligently, and the effect is not the intended or expected result had the deliberate act been performed non-negligently, there is an accident."
Finally, in Federated Mutual Insurance Company v. Grapevine Excavation, Inc. (1999), the 5th Circuit stated:
"Under Illinois law addressing the definition of 'occurrence,' the issue that must be determined is whether the injury was expected or intended from the standpoint of the insured, not whether the acts were performed intentionally...[I]f the actor expects or intends the injury to follow from the act, there is no coverage under the policy. However, even an intentional act will be covered under the policy language at issue of it causes an unexpected or unintended result."
In other words, deliberate, knowingly shoddy workmanship is not an accident, but ordinary negligence certainly can be. How many contractors who wish to perpetuate and grow a viable business deliberately perform faulty work? Certainly, there are "fly by night" contractors (as witnessed recently in the aftermath of Gulf Coast hurricanes) and their knowingly shoddy work does not constitute an accident; however, they are inarguably in the minority. Many, if not most, incidences of faulty workmanship arise out of common negligence. To claim otherwise is to assert that perfection and malfeasance are the only two forms of conduct in the construction industry.
Let's face it, even the most skilled craftsman is fallible. Don Malecki is recognized as one of the country's foremost authorities on the CGL policy, having authored at least ten books on insurance, including "The CGL Book," and having served as an expert witness in a number of high-profile cases. In discussing this issue via email, Don gave an excellent practical example of the faulty reasoning inherent in many of these decisions:
"I agree with you that if defective work was performed unintentionally or unexpectedly, the result should be an accident/occurrence. I am reminded of the time I took a course in cabinet-making and the only tools I was permitted to use were a mallet and a wood chisel. There were times when I was just about done with my accomplishment when a crack would appear in the wood. I did not intentionally cause that crack or even expect it. I was being very careful. The frustration of seeing my work of art destroyed by accident drove me to another career: Insurance. [No derogatory comments please.]"
This illustrates that even the most skilled of craftsmen are not infallible. Accidents happen. Keep in mind that, at this point, we're not looking for coverage for claims involving damage to "your work" by you, but rather trying to establish that it is not appropriate to end the quest for coverage (or lack thereof) with the insuring agreement.
If, for example, the insured or a sub accidentally mixes a batch of concrete using an incorrect ratio of water, cement, and sand, so that the resulting foundation is defective, thus threatening the entire structure, the CGL insuring agreement should be triggered since there was no deliberate attempt to produce faulty work. Again, this doesn't mean that the claim is necessarily covered just because the insuring agreement is triggered...the role of policy exclusions are to whittle down the often huge risk undertaken by the insuring agreement into something insurable.
In the 2006 decision, Lee Builders, Inc. v. Farm Bureau Mutual Ins. Co., the Kansas Supreme Court upheld an appeals court ruling that damage arising from a subcontractor's work constituted an "occurrence" under the CGL policy. The court concluded that faulty work can arise from an occurrence, as evidenced by exclusion l. and its exception: "If there can be no occurrence, the exclusion—and its exception—appear to be superfluous. The court also disagreed with other jurisdictions that claims arising from breaches of contracts, as opposed to torts, cannot be occurrences...if that were the case, again, the business risk exclusions would be unnecessary.
Even more recently, in Travelers Indemnity Co. of America v. Moore & Associates, the Tennessee Supreme Court ruled that: (1) defective workmanship may constitute an "occurrence" under the CGL insuring agreement, (2) damages caused by faulty workmanship are "property damage" as defined by the CGL, and (3) damages to the insured contractor's work resulting from the faulty workmanship of a subcontractor are not excluded from coverage.
The Role of Policy Exclusions
The exclusion most often cited in faulty workmanship claims (if the court ever makes it that far) is Exclusion l:
Note: For more information on all of the property damage exclusions, check out our three-part article, "CGL Workmanship Exclusions"):
2. Exclusions
This insurance does not apply to:
l. Damage To Your Work
"Property damage" to "your work" arising
out of it or any part of it and included
in the "products-completed operations
hazard".
This exclusion does not apply if the damaged
work or the work out of which the damage
arises was performed on your behalf by a
subcontractor.
Note that an exception is made for damage arising out of work performed by a subcontractor and for damage TO work performed by a subcontractor. The exception to the exclusion results exempting a broad class of damage from the exclusion such that the CGL policy COVERS claims or suits against the insured for:
PD to the insured's work arising out a sub's work.
PD to a sub's work arising out of the insured's work.
PD to a sub's work arising out of that sub's work.
PD to a sub's work arising out of another sub's work.
In other words, the exception to Exclusion l. means that the CGL only excludes PD for damage TO the insured's work arising out of that work. That is the extent of the faulty workmanship exclusion in the current CGL policy. This assumes that the CG 22 94 or CG 22 95 endorsements are not attached...if they are, then the coverage afforded above vanishes.
When you think about the subcontractor exception to the exclusion (i.e., the coverage grant), it makes sense. While the sub's work is part of "your work" and would otherwise be excluded, the exception recognizes and supports the premise that an "innocent insured" (i.e., owner or general contractor hiring the sub) shouldn't suffer because of, or be held vicariously liable for, acts of an independent contractor, along with the concept of "separation of insureds."
Tort vs. Contractual Liability: The CGL Policy as Performance Bond
Many, if not most, defective construction claims allege negligence, breach of warranty, breach of contract, and/or outright fraud. A number of courts, dating back to at least Weedo v. Stone-E-Brick, Inc. (1979), have opined that liability policies cover tort liability, not contractual liability which would result in the CGL becoming a performance bond. For example, in United States Fidelity & Guaranty Corp. v. Advance Roofing & Supply Co., Inc. (1989), the Arizona Court of Appeals stated:
"[W]e recognize that there are some authorities that appear to conclude that the mere showing of faulty work is sufficient to bring a claim for resulting damages (of whatever nature) within policy coverage. In our opinion these authorities disregard the fundamental nature of a comprehensive general liability policy of the type involved in this litigation, and ignore the policy requirement that an occurrence be an accident. If the policy is construed as protecting a contractor against mere faulty or defective workmanship, the insurer becomes a guarantor of the insured’s performance of the contract, and the policy takes on the attributes of a performance bond."
Similarly, in the case of Continental Western Insurance Company v. Jerry's Homes, Inc., the Iowa appeals court ruled that damage to concrete work performed on Jerry's behalf by its subcontractors was not caused by an "occurrence." According to the court:
"[T]o rule otherwise would make the general liability policy more like a performance bond and make the insurer more like the guarantor of the insured's work."
These are patently illogical conclusions because they fail to look at the insurance contract in its totality, specifically the exclusions. This limited scope of review and analysis is particularly bothersome when you look at the multitude of court cases where a court has preached about how important it is to view the policy/contract in its totality. As correctly expressed in Broadmoor Anderson v. National Union Fire Ins. Co. of Louisiana (2005) by the Louisiana Court of Appeals:
"[W]e are required here to deal with the precise language at hand in the context of the entire policy." [emphasis added]
From the standpoint of the insureds in most of these cases, the damage was fortuitous and unexpected and, thus, constituted an "accident" unless the insured was aware of a known and demonstrated pattern of faulty work on the part of its subcontractors. In general, while faulty workmanship typically is NOT covered, it's not necessarily because the work, by definition, is nonaccidental, but rather because there are exclusions for faulty workmanship. If the defective work is unexpected or unintended from the standpoint of the insured, it's accidental, giving rise to the exception to Exclusion l. in the CGL policy.
Liability policies, in general, have very broad insuring agreements. It's the nature of most liability policies to have an extremely broad coverage grant that is whittled away, bit by bit, by exclusions, much like a statue is the result of a sculptor taking a large block of stone and revealing the image locked within it. For example, the liability insuring agreement of the ISO Personal Auto Policy provides coverage for resident family members for the use of ANY "auto." Is a motorcycle an "auto"?
Some courts would have us believe that the only source for answering this question lies in the broad insuring agreement term "auto," much like some courts would have us believe that coverage for faulty workmanship hinges entirely on the insuring agreement term "occurrence." What constitutes an "auto" is determined largely within the exclusions of the policy where we learn that an "auto" does NOT, for example, include a vehicle with less than four wheels, nor one designed for use off public roads. Likewise, we learn that faulty workmanship is or is not covered to the extent that such coverage is molded by the policy exclusions.
Even so, if the drafters of the CGL policy want to include some measure of coverage that approaches that of a performance bond, why can't they? Numerous courts have ruled that people are free to enter into most any contracts that don't violate the law or public policy. If an insurer wants to provide an exception for faulty workmanship performed by a sub, thus converting (to some extent) the insurance policy into a performance bond, then that should be permitted. With the introduction in 2004 of the CG 22 94 and CG 22 95, ISO provides insurers with a means to cover faulty workmanship of subs or not.
Most insurance practitioners would agree that the CGL is not designed to cover automobile exposures (that's why we have a Business Auto Policy), but it can. Sometimes these exposures are considered incidental, such as valet parking. Other times coverage is found, intended or not, through the language itself. But you can't say that the CGL doesn't cover autos.
In addition, in the past, there have been markets for "ripping and tearing" coverage, a form of legal liability insurance provided on a first-party basis that covers the cost of labor to remove defective workmanship. Such proprietary forms were similar to product recall coverage in that that they typically only covered the cost to remove the work/product, not the cost to replace the defective work/product.
Today, a version of this type of insurance is more commonly known as "Contractors Rework" coverage which often covers both the labor to remove and replace defective work. At the time of this writing, as one example, such liability coverage was provided in Amerisure's Contractor's Advantage Program®. St. Paul has offered a similar product for ongoing operations. The presumption is that faulty workmanship, for most legitimate contractors, is accidental and insurable based on an underwriting of the account approaching that of a performance bond.
The CGL covers any claim or suit for which an insured is "legally obligated" for BI or PD that occurs during the coverage period and within the coverage territory. Period. The policy makes no judgments about what constitutes the legal obligation...tort, contract, statute, whatever. In Broadmoor Anderson v. National Union Fire Ins. Co. of Louisiana (2005), the Louisiana Court of Appeals observed:
"While the overhauled coverage for contractual liability for property damage is apparently reined in drastically by the policy exclusions which we will next review, the general grant of coverage is not limited to only claims in tort."
Similarly, in Vandenberg v. Superior Court (1999), the California Supreme Court rejected numerous appellate court decisions that the insuring agreement term "legally obligated to pay as damages" only refers to tort liability, holding that nothing in the language "...suggests any special or legalistic meaning to the phrase...A reasonable layperson would certainly understand 'legally obligated to pay' to refer to any obligation which is binding and enforceable under the law, whether pursuant to contract or tort liability."
As stated in Broadmoor and Vandenberg, the type and extent of liability is governed by the exclusions in the policy. In Erie Insurance Exchange v. Colony Development Corp. (2003), the Ohio Court of Appeals rejected the argument that finding that faulty workmanship could arise from an "occurrence" turned the policy into a performance bond on the basis that this was prevented largely by the application of policy exclusions.
In American Family Mutual Ins. Co. v. American Girl, Inc. (2004), the Wisconsin Supreme Court noted the obvious:
"If, as American Family argues, losses actionable in contract are never CGL 'occurrences' for purposes of the initial coverage grant, then the business risk exclusions are entirely unnecessary. The business risk exclusions eliminate coverage for liability for property damage to the insured’s own work or product--liability that is typically actionable between the parties pursuant to the terms of their contract, not in tort. If the insuring agreement never confers coverage for this type of liability as an original definitional matter, then there is no need to specifically exclude it. Why would the insurance industry exclude damage to the insured’s own work or product if the damage could never be considered to have arisen from a covered 'occurrence' in the first place?
A careful perusal will reveal that the CGL does, indeed, provide some measure of contractual liability, just as it provides some degree of coverage for breach of warranty and even intentional torts.
Contractual Liability
The CGL has included some contractual liability coverage for several decades. The pre-1966 CGL covered:
"...loss by reason of the liability imposed by law or contract upon the Insured for damages because of injury to or destruction of property, including the loss of use thereof, caused by accident."
The 1966 and 1973 CGL policies simplified this language by covering (as does the current form):
"...all sums which the insured shall become legally obligated to pay as damages because of...property damage to which this insurance applies, caused by an occurrence...."
There is nothing in the language since 1966 that indicates that the CGL insuring agreement does not include ANY legal liability not otherwise excluded or limited conditionally by the policy. In fact, the 1966 and 1973 CGL policies made an express, notable exception to the Contractual Liability exclusion:
"[T]his exclusion does not apply to a warranty of fitness or quality of the named insured’s products or a warranty that work performed by or on behalf of the named insured will be done in a workmanlike manner...."
If the current exclusions are reviewed, there is, indeed, an exclusion for Contractual Liability that addresses PURE contractual liability exposures other than those imposed in an "insured contract." If the CGL insuring agreement only covers tort liability, as many courts have claimed, then how can there be coverage for "insured contracts" if coverage is never triggered? In addition, there is no historical indication that the CGL policy has forsaken the warranty noted above other than simplifying the language and moving it to the definitions section of the policy....
Breach of Warranty
In Weedo v. Stone-E-Brick, Inc. (1979), the New Jersey Supreme Court opined that the CGL policy does not serve as a warranty of goods and services. Other courts have opined that the CGL does not apply to implied (much less express) warranties of "good and workmanlike construction and fitness for habitation or other particular purpose." On the contrary, the CGL clearly applies to certain warranties as outlined in the following definition (similar to the definition of "your product"):
22. "Your work":
a. Means:
(1) Work or operations performed by you
or on your behalf; and
(2) Materials, parts or equipment
furnished in connection with such
work or operations.
b. Includes
(1) Warranties or representations made
at any time with respect to the
fitness, quality, durability,
performance or use of "your work",
and
(2) The providing of or failure to provide
warnings or instructions.
Intentional Losses
To reinforce the requirement that losses be accidental, the CGL has an "intentional loss" exclusion:
2. Exclusions
This insurance does not apply to:
a. Expected Or Intended Injury
"Bodily injury" or "property damage"
expected or intended from the
standpoint of the insured.
This exclusion does not apply to "bodily
injury" resulting from the use of
reasonable force to protect persons or
property.
Even so, this exclusion includes a "self-defense" exception which illustrates how important it is to read the ENTIRE policy. If someone read the insuring agreement without perusing the exclusions, they would undoubtedly insist that intentional losses are NEVER covered when, in fact, the exclusions make it clear that, under certain circumstances, intentional losses are covered by the policy.
Also, note that this doesn't exclude intentional ACTS, but rather the BI or PD that arises from them. In his paper, "Hot Topics Involving Liability Insurance Coverage," Clifford J. Shapiro explains:
"[A]ction that is intentionally taken, but that is performed negligently, should be considered to be an "accident" where it causes an effect that is not what would have been intended or expected had the action been performed non-negligently."
Most industry experts agree that faulty workmanship, by definition, cannot constitute an "occurrence." In discussing this issue with Jack Gibson, President of the International Risk Management Institute, Jack responded via email:
"My opinion parallels yours. This is a tactic to exclude coverage that is usually intended under the policy. Where the property damage is truly unintentional, it is, in my view, an occurrence. The coverage analysis should then center on the exclusions. We have just updated "Insurance for Defective Construction," and the author, Pat Wielinski, criticizes this insurer tactic and the rationale in this case in particular."
Finally, if faulty workmanship is not, by definition, "accidental" and, thus, not an "occurrence" that triggers coverage under the CGL, then why not simply establish that beyond any reasonable doubt via the Coverage A - Liability exclusions. This seems to work in the case of Coverage B - Personal Injury and Advertising Injury coverages which include the following exclusions:
2. Exclusions
This insurance does not apply to:
a. Knowing Violation Of Rights Of Another....
f. Breach Of Contract....
g. Quality Or Performance Of Goods –
Failure To Conform To Statements....
Conclusion
It is shortsighted to restrict the consideration of faulty workmanship claims to the CGL insuring agreement alone. The entire policy must be taken in context. It is feasible, and even likely, that an insured may damage his own work accidentally and, from his standpoint, such fortuitous loss can arise from a subcontractor's negligence.
Most liability policies, including the CGL, provide very broad coverage via the insuring agreement. It is the role of the exclusions and conditions in the policy to establish what specific types of liability and occurrences will be insured.
Below is a state by state and federal jurisdiction listing, to the best of my knowledge, of applicable court cases involving this issue. Following that is a listing of references and resources for further study.
September 2010 Update
In response to these adverse judicial decisions, some insurers have introduced endorsements that define unintentional faulty workmanship to be an "occurrence." In addition, at least one state has enacted legislation to accomplish the same thing. For more details on this, check out the following companion article:
References & Resources