Nebraska Appellate Court Gets Down to Earth to Hold That Faulty Workmanship Standing Alone Is Not An “Occurrence”

The insurance and construction industries have disagreed about coverage claims involving faulty workmanship for many years.  Contractors believe their CGL insurance policies should always cover property damage caused by defects and poor workmanship, and insurance carriers resist insuring business risks that are solely within a contractors’ control.  As previously reported on Sedgwick’s Insurance Blog, jurisdictions are split on whether faulty construction work, by itself, qualifies as an “occurrence” within the meaning of CGL policies.

The Nebraska Court of Appeals recently addressed that issue in Cizek Homes, Inc. v. Columbia National Insurance Co. (Case No. A-13-585) (Sept. 9, 2014).  In that case, the insured agreed to build a home for a homeowner.  The insured sold the homeowner a parcel lot, prepared the soil on the lot, and built the home.  After the homeowner moved in, the soil beneath the house settled and caused physical damage to the residence. The homeowner and the insured reached a settlement, and the insured sought coverage from its CGL insurer.  The insurer denied coverage on the grounds that:  (1) the damages did not arise from an “occurrence” as defined in the CGL policy; and (2) even if they did, the policy’s “Impaired Property” and “Recall” exclusions precluded coverage.

The insured filed a declaratory judgment action against the insurer and prevailed on summary judgment. Specifically, although the evidence revealed that the only “property damage” was to the home itself (which was the insured’s work), the trial court nevertheless concluded the damage was the result of an “occurrence” — i.e., the insured’s negligent preparation of the soil for construction.  The Court of Appeals reversed, concluding that the damage to the house did not qualify as an “occurrence” within the policy because the damage to the home was caused by the insured’s faulty workmanship.  To support its decision, the Court of Appeals cited to Auto-Owners Ins. Co. v. Home Pride Cos., 684 N.W.2d 571 (Neb. 2004), in which the Nebraska Supreme Court held that CGL policies do not provide coverage for faulty workmanship “that damages only the resulting work product.”  Because it held there was no initial grant of coverage, the court did not address whether the “Impaired Property” or “Recall” exclusions applied to the insured’s claim.

Insurance carriers did not design CGL policies to provide coverage for claims of inferior or defective work.  Accordingly, the Cizek court correctly recognized that damages which are the natural or probable result of work conducted by the insured are not fortuitous, and therefore outside the scope of the insuring agreement. In situations where courts determine there is an occurrence, however, carriers can still look to “business risk” exclusions such as the “Impaired Property” or “Recall” exclusions as potential defenses to coverage.  Carriers also need to be mindful that the occurrence question in construction defect coverage actions can be jurisdiction-specific.

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