In honor of Earth Day, which recently celebrated its 43rd birthday, the lead article in the current issue of our Construction Defect Coverage Quarterly addresses potential coverage issues implicated by green construction. We also continue the analysis of how various states define “occurrence” under liability policies, and highlight a recent opinion from a Washington federal court enforcing a broad EIFS exclusion.

Please click here to read the CDCQ and let us know if you are intrested in being placed on the mailing list for this quarterly newsletter.

We are pleased to introduce the inaugural issue of Sedgwick’s Construction Defect Coverage Quarterly.  In our first issue, we discuss the definition of an “occurrence” in the construction defect action context, and analyze a recent Colorado case which applied the “business risk exclusion” to preclude coverage.

As we note in the newsletter, one of the largest issues litigated in today’s construction defect coverage actions is whether defective construction constitutes an “occurrence” (and, therefore, may be covered) under liability insurance policies.  In addition to the analysis in the newsletter, we thought our readers would be interested in this case from the Ohio Supreme Court which held that faulty construction work does not qualify as an “occurrence” within the meaning of a general liability policy.

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Through its recent opinion in Westfield Ins. Co. v. Custom Agri Systems, Inc., 2012 WL 4944305 (Ohio Oct. 16, 2012) (“Westfield”), the Ohio Supreme Court joined the majority of states in holding that faulty construction work does not qualify as an “occurrence” within the meaning of a general liability policy.  

In Westfield, Younglove Construction (“Younglove”) contracted with PSD Development (“PSD”) to construct a feed manufacturing plant.  After PSD withheld payment, Younglove sued PSD for breach of contract in Ohio federal court.  In its answer, PSD alleged that one of Younglove’s subcontractors, Custom Agri Systems, Inc. (“Custom”), defectively constructed a steel grain bin, but did not allege that Custom’s defective construction work damaged PSD’s other property.  Younglove then sued Custom for contribution and indemnity, and Custom sought a defense and indemnity from its general liability insurer, Westfield Insurance Company (“Westfield”).  Westfield intervened in the action, seeking a declaration it was not obligated to provide coverage to Custom because Younglove’s claim against Custom did not seek damages arising out of “property damage” caused by an “occurrence.”  Westfield and Custom cross-moved for summary judgment on the issue.

In deciding the motions, the court acknowledged that Ohio law did not address whether defective construction work qualifies as an “occurrence” within the meaning of a liability policy.  Rather than decide the issue, however, the court found that a contractual liability exclusion in Westfield’s policy precluded coverage and granted summary judgment to Westfield.  Custom appealed to the Sixth Circuit, and Westfield filed an unopposed motion to certify two questions of state law to the Ohio Supreme Court:  whether a property owner’s claims of defective construction allege “property damage” caused by an “occurrence” under a commercial general liability policy, and, if so, whether contractual liability exclusions nevertheless preclude coverage for such claims.  The Sixth Circuit granted Westfield’s motion, and the Ohio Supreme Court accepted certification.

Addressing only the first question because the court believed it was dispositive, the Ohio Supreme Court held that defective construction does not constitute an occurrence.  The court reasoned that general liability policies are “not intended to protect business owners against every risk of operating a business,” nor are they “intended to insure the risks of an insured causing damage to the insured’s own work.”  The court also looked at court decisions in other jurisdiction, and found the majority view is that claims of defective construction are not claims for “property damage” caused by an “occurrence” within the meaning of general liability policies.  The court then analyzed whether Custom’s defective construction of the grain bin was an “occurrence,” noting the policy defined “occurrence” as an “accident including continuous or repeated exposure to substantially the same general harmful conditions.”  Although the policy did not define “accident,” the court noted that the term has an inherent “fortuity principle” under which losses must be “unexpected, as well as unintended,” and concluded that Custom’s defective work on the steel grain bin was not an “occurrence.”

by Aaron F. Mandel and Stevi A. Raab

By Stevi Raab

In the case of American Home Assurance Co. v. Trumbull Corp., No. GD-11-006886 (Ct. Com. Pl. Allegheny County, Oct. 10, 2012), the court granted summary judgment in favor of two excess general liability insurers on a matter of first impression relating to coverage for damages caused by alleged faulty workmanship.  The court held that, under Pennsylvania law, general liability policies do not cover such claims.

In 2007, Trumbull Corporation completed construction of a reinforced soil slope and foundation pad for a new J.C. Penney store in southwestern Pennsylvania.  Shortly after the store opened, cracks began appearing in the J.C. Penney store and two additional buildings due to soil settlement.  Three commercial tenants moved out of the shopping center because of the cracks and sued Trumbull for faulty workmanship.  Trumbull submitted the claim to its primary and excess general liability insurers.

Trumbull’s primary insurer agreed to defend it under a reservation of rights, but Trumbull’s excess insurers filed an action against Trumbull seeking a declaration that they were not obligated to provide coverage.  The excess insurers moved for summary judgment, arguing that, under Pennsylvania law, damage to buildings resulting from faulty workmanship does not constitute an “occurrence” under general liability policies.

In considering the excess insurers’ summary judgment motion, the court noted that Pennsylvania courts had previously considered coverage for construction defect claims under three fact scenarios:  (1) where the work itself was damaged; (2) where there was damage to portions of the project and the work was performed under a contract between the insured and property owner; and (3) where there was damage to other portions of the project and there was no contract between the insured and property owner.

Although Pennsylvania courts had consistently agreed that an insurer may properly deny coverage for damage to the faulty work itself, the court noted that the last two situations could be analyzed under two inconsistent lines of reasoning:  the first finding coverage for ancillary damage, and the second concluding that damage resulting from faulty workmanship is never covered because “faulty workmanship can never constitute an accident.”  According to the court, Trumbull presented a fourth situation – i.e., where the faulty workmanship damages the property of a third party who was not involved in the project and had no relationship with the insured.  However, because it concluded that Pennsylvania’s appellate courts have adopted the second of the lines of reasoning described above, the court held that the excess insurers were not obligated to provide coverage to Trumbull.

Trumbull indicates that Pennsylvania courts have adopted a blanket rule that general liability policies do not cover damages resulting from faulty workmanship.  If appealed, the Trumbull decision will provide Pennsylvania’s appellate court with the opportunity to clarify Pennsylvania law regarding coverage for construction defect claims under general liability policies.