Archive for the ‘Construction Defect Coverage’ Category

No CGL Coverage for Faulty Workmanship Under Pennsylvania Law

Friday, October 24th, 2014

By Gilbert Lee, Sedgwick New York

In State Farm Fire & Casualty Co. v. McDermott, 2014 WL 5285335 (E.D. Pa. Oct. 15, 2014), a federal court recently held that an insurer has no duty to defend or indemnify its insured against an underlying construction defect lawsuit containing causes of action sounding in negligence under a commercial general liability (“CGL”) policy affording coverage for property damage caused by an “occurrence.”  Upon considering the substance of the underlying lawsuit, the court concluded that under Pennsylvania law faulty workmanship is not an “occurrence” (defined to mean an accidental or unforeseeable event) that is covered under a CGL policy and, therefore, granted the insurer’s summary judgment motion.

In McDermott, the insured contracted with a homebuilder to provide plaster, stucco and window and door installation services for nearly three hundred homes built in Pennsylvania.  The insured was later named in a negligence and breach of contract lawsuit by the builder, alleging a variety of defective construction practices that purportedly resulted in water intrusion and corresponding home damages.  The insurer agreed to defend the insured subject to a reservation of its rights to disclaim coverage under the terms of the CGL policy prior to commencing a declaratory action challenging coverage.  

Relying on Pennsylvania case law, the court determined at the outset that faulty workmanship, and any resulting damages, is not an “accident” (as it is neither unexpected nor unintentional) and therefore not an occurrence under a CGL policy.  Thus, the issue of whether coverage was triggered under the policy hinged on the possibility that liability might rest on the insured’s alleged negligent work performance.  In reaching its decision, the court looked beyond the negligence allegations to conclude that, regardless of how it was framed, the substance of the insured’s potential liability stemmed from its alleged failure to meet contractual expectations.  Because the insured had a contractual duty to perform its tasks in a satisfactory manner, its alleged failure to do so was neither an accident nor an unforeseeable event covered under a CGL policy because the insured was bound to avoid that particular outcome.

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

Wednesday, September 24th, 2014

By Michael J. McNaughton, Sedgwick Chicago

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.

In California, Looks Really Do Matter: Visual Appearance and Internal Consistency of Policy Language Supports Application of Exclusion

Friday, September 5th, 2014

By Kimberly K. Jackanich, Sedgwick San Francisco

In Yu v. Landmark American Ins. Co., 2014 WL 4162365 (Cal. Ct. App. Aug. 22, 2014)*, the California Court of Appeals relied on the visual appearance and internal consistency of an endorsement entitled “EXCLUSION – YOUR PRIOR WORK” to find that the endorsement precluded coverage for construction defect claims asserted against a subcontractor for work performed over a year before the policy’s inception.

Yu, a developer, entered into a contract with a general contractor for the construction of a hotel.  The general contractor then entered into a subcontract with C&A Framing Company (“C&A”), but fired C&A before it had completed all of the work required by the subcontract. After May 2003, C&A never returned to the construction site.

Landmark American Insurance Company (“Landmark”) issued C&A a commercial general liability policy for the period of September 18, 2004 to September 18, 2005.  The policy contained an endorsement entitled “EXCLUSION – YOUR PRIOR WORK,” which provided that the insurance did not apply to bodily injury, property damage, or personal and advertising injury arising out of C&A’s work prior to 9/18/04.

In 2004, the developer sued C&A for alleged construction defects, and C&A tendered its defense to Landmark.  The insurer declined the tender on the basis of the Your Prior Work Exclusion and the Policy requirement that the outset of damage occur during the policy period.  Although C&A did not dispute the declination, the developer brought suit against Landmark and other insurers, alleging that C&A had assigned to her all rights against any insurer.  The developer argued that Landmark could not rely on the prior work exclusion because it was ambiguous and should be construed in favor of coverage.  The developer also argued that Landmark had failed to consider certain facts when denying coverage.  Specifically, the developer argued that the language of the prior work exclusion could be construed to modify the term “property damage,” such that property damage rather than prior work was excluded.

Rejecting the developer’s arguments, the court found that the heading of the endorsement, set out in all caps and boldface type, was prominent, clear, explicit and did not require any technical interpretations.  Finding that the developer’s interpretation was not objectively reasonable, the court also relied on the exclusion for pre-existing damage or injury to conclude that the plaintiff’s interpretation would be “wholly redundant and constitute surplusage” if the prior work exclusion was interpreted to preclude prior property damage.  Based on the clear application of the prior work exclusion, the court also rejected all of the developer’s arguments regarding Landmark’s failure to properly investigate or defend the matter.

The court’s holding in Yu is an important reminder for insurers regarding the visual appearance and internal consistency of their policies.  The court’s reliance on the caps and boldface type as well as the title of the “YOUR PRIOR WORK” exclusion illustrates the significance of carefully crafted and visually clear policy headings.  Further, the court’s secondary support in the policy’s pre-existing damage exclusion reinforces that courts will interpret the policy as a whole.  Thus, when limiting and exclusionary language is internally consistent, insureds will face an uphill battle in their efforts to broadly construe policy language for purposes unintended by the insurers.

 

*The opinion is unpublished

Is Defective Construction an “Occurrence”? More States Are Answering Yes

Tuesday, May 27th, 2014

By Aaron F. Mandel and Stevi A. Siber-Sanderowitz, Sedgwick New York

Last year, we examined the different approaches states have adopted to resolve whether defective construction by itself is an “occurrence” within the meaning of liability insurance policies.  See Is Defective Construction Work an “Occurrence”?  The Answer Isn’t So Concrete, Insurance Coverage Law Report (May 2013).  Since then, a number of states either have seen their highest courts depart from precedent by concluding that such claims satisfy the “occurrence” requirement, or have sought to pass legislation requiring liability policies to define “occurrence” to include faulty construction work.  Below is a summary of these developments, as well as a recommendation on how to address this trend.

The trendsetter appears to have been the West Virginia Supreme Court’s decision in Cherrington v. Erie Insurance Property & Casualty Co., 745 S.E.2d 508 (W. Va. 2013).  As previously reported on the Insurance Law Blog, that case involved a lawsuit arising out of defects at a newly constructed residential project.  Only the project itself suffered damage, and the builder’s liability insurer denied coverage on the ground that, among other reasons, allegations of defective construction do not constitute an “occurrence.”  This position aligned with several prior West Virginia Supreme Court decisions.  Ignoring precedent and stare decisis, the Cherrington court overhauled West Virginia law and held that the term “occurrence” in general liability policies includes defective construction.  The court reasoned that, by defining “occurrence” to mean “an accident,” all damages or injuries unintentionally caused by an insured fall within a liability policy’s insuring agreement.  The court supported its conclusion by noting that the “your work” exclusion implied damage to the insured’s work must be within the insuring agreement.  Otherwise, the exclusion would be meaningless.

Taking Cherrington’s lead, the North Dakota Supreme Court in K&L Homes, Inc. v. American Family Mutual Insurance Co., 829 N.W.2d 724 (N.D. 2013), also reversed course and held that defective construction may constitute an “occurrence” provided that the insured did not expect or intend the faulty work and resulting damage.  There, homeowners claimed their homes were damaged because of substantial shifting caused by improper footings and inadequately compacted soil under the homes’ footings and foundations.  After examining the standard general liability form’s drafting history and surveying cases nationwide, the court concluded that defective construction could qualify as an “occurrence” under the builder’s liability policy if the builder did not intend or expect the faulty work and the “property damage” was not anticipated or intentional.  Although the North Dakota Supreme Court previously had held that faulty or defective workmanship standing alone is not an “occurrence,”¹ the K&L Homes court explained its decision by noting that previous case law incorrectly distinguished between defective construction that damages only the insured’s work, and defective construction that damages a third-party’s work or property.  The court found there is nothing in the definition of “occurrence” which supports differentiating between the two types of damage.

Not to be outdone by its sister courts in West Virginia and North Dakota, the Alabama Supreme Court earlier this year reversed a decision less than six months old, and held that defective construction can qualify as an “occurrence” under a liability policy.  Specifically, in Owners Insurance Co. v. Jim Carr Homebuilder, LLC, the Supreme Court of Alabama held that an insured hired to build a house was not entitled to coverage for “property damage” or “bodily injury” (i.e., mental anguish) resulting from the insured’s defective construction.  No. 1120764, 2013 WL 5298575 (Ala. Sept. 20, 2013) (“Jim Carr I”).  On rehearing, the court withdrew its opinion in Jim Carr I and replaced it with a new decision that held defective construction could constitute a covered “occurrence” under a general liability policy if the damage was unintended.  Owners Ins. Co. v. Jim Carr Homebuilder, LLC, No. 1120764 (Ala. March 28, 2014) (“Jim Carr II”).  As the court explained, “the fact that the cost of repairing or replacing faulty workmanship itself is not the intended object of the insurance policy does not necessarily mean that, in an appropriate case, additional damage to a contractor’s work resulting from faulty workmanship might not properly be considered ‘property damage’ ‘caused by’ or ‘arising out of’ an ‘occurrence.’”  Because the policy did not define an “occurrence” in terms of the ownership or character of the property damage, the court concluded there was no basis for distinguishing between damages to the insured’s work and damage to third-party work.

New Jersey decided to take a different tack in addressing the “occurrence” issue.  On November 25, 2013, New Jersey State Assemblyman Gary Schaer introduced Bill No. A4510, which would have required liability policies issued, renewed, or delivered in New Jersey to define “occurrence” to include damages resulting from faulty workmanship.²  According to the bill’s interpretive statement, it required that “occurrence” be defined to address “both accidents and faulty workmanship” in order to remedy New Jersey case law that “varied in their holdings as to whether damage from faulty workmanship is accidental in nature and therefore within the definition of an occurrence.”³  Although the bill recently died in committee, its introduction demonstrates a continuing trend in states seeking to legislate the “occurrence” issue.  Laws addressing the “occurrence” issue are already on the books in Colorado, Arkansas, South Carolina, and Hawaii. See, e.g., Col. Code § 13-20-808; Ark. Code § 23-79-155; S.C. Code § 38-61-70; Haw. Stat. § 431:1-217.

The foregoing cases and proposed legislation demonstrate states’ willingness to compel liability insurers to cover risks they have not traditionally insured.  The foundation for this traditional rule is sound:  an insured can prevent damage to its own work simply by performing its work correctly.  In contrast, the reasoning behind compelling liability insurers to cover damage to an insured’s own work is shaky.  For example, courts concluding that defective construction work is covered under liability policies because there would otherwise be no reason for those policies to include the “business risk” exclusions ignore that construction defect claims often involve damage to an insured’s work and other third-party property.  The exclusions protect the insurer from having to insure uncovered damage (to the insured’s work) while preserving coverage for the covered damage (to the third-party property).  In other words, the “business risk” exclusions actually confirm that liability policies are not intended to cover damage to an insured’s work as opposed to suggesting that damage is covered in the first instance.

Despite the weak reasons courts and legislatures have cited to in compelling liability insurers to cover faulty workmanship,it is doubtful those courts and legislatures will revert back to leaving defective workmanship claims outside the realm of liability policies.  In that case, how should liability insurers respond?

Although case law and statutes declaring that defective construction qualifies as an “occurrence” within the meaning of liability policies generally leaves the policies’ “business risk” exclusions intact, we previously offered three potential responses in our earlier “Occurrence”? article:  (1) including more specific policy exclusions that eliminate coverage for “property damage” to an insured’s own work; (2) charging higher premiums for policies issued to entities engaged in the construction industry and/or issuing policies only in excess of significant self-insured retentions; or (3) refusing to issue policies to parties that perform construction work.  These options have drawbacks:  higher premiums would be passed along to project owners and developers (which would unnecessarily increase construction costs), significant self-insured retentions could limit the pool of insureds capable of performing construction work to only those that could absorb them (thus decreasing competition), and no longer affording liability coverage for construction projects may cause the construction industry to come to a screeching halt.

Absent a statute or declared public policy prohibiting insurers and their insureds from doing so, a fourth option could be that insurers specify in policies that defective construction is not an “occurrence.”  This would be the insurance equivalent of Newton’s third law (for every action, there is an opposite and equal reaction).

Limiting whether and to what extent faulty workmanship qualifies as an “occurrence” under liability policies would provide the greatest benefit to all involved:  not only would that preserve the intent of liability policies to respond only to third-party injuries caused by defective construction (such as a steel beam falling on a car or a crane collapsing onto an adjacent building), it would keep liability policy premiums down by ensuring damages to construction projects caused by faulty workmanship are addressed through traditional channels – namely, sureties.


¹  ACUITY v. Burd & Smith Constr., 721 N.W.2d 33 (N.D. 2006).

²  The proposed bill, however, noted that it was not intended to restrict or limit the “business risk” exclusions commonly found in liability policies.  In the ISO Form, the “business risk” exclusions include Exclusion j. (Damage to Property), Exclusion k. (Damage to Your Product), Exclusion l. (Damage to Your Work), and Exclusion m. (Damage to Impaired Property or Property Not Physically Injured).

³  Specifically, the bill cited to Pennsylvania National Mutual Casualty Insurance Co. v. Parkshore Development Corp., 403 Fed. App’x 770 (3d Cir. 2010) (applying New Jersey law and holding that a subcontractor’s faulty work that resulted in damage to the insured general contractor’s work was not an “occurrence”), and Firemans Insurance Co. of Newark v. National Union Fire Insurance Co., 387 N.J. Super. 434 (N.J. App. Div. 2006) (holding that faulty workmanship was not “property damage” caused by an “occurrence” under a typical general liability policy).

Washington Insurance Law: 2013 Year in Review

Tuesday, January 21st, 2014

2013 was a particularly eventful year in Washington insurance law. This paper, authored by Sedgwick Seattle’s Robert Meyers, summarizes the holdings of several notable Washington insurance decisions that were filed in 2013.  Download a copy of the paper here. 

In June 2013, Bob gave a webinar on The State of Bad Faith in Washington.   The WA program, and the others in our bad faith series, are are available for on demand viewing.  Please click here to request a link.

What’s in Store for New Jersey in 2014? Super Bowl XLVIII and Legislation Addressing the “Occurrence” Issue in the Construction Defect Context

Friday, January 3rd, 2014

By Stevi A. Siber-Sanderowitz, Sedgwick New York

The New Year might bring more to New Jersey than just the Super Bowl.  Indeed, on November 25, 2013, the legislature introduced a bill before the New Jersey State Assembly, which, if enacted, would require general liability policies (in policies issued, renewed, or delivered in New Jersey) to contain a definition of “occurrence” which includes damages resulting from faulty workmanship.  The introduction of A4510 is part of a growing trend in state legislatures that seek to resolve the “occurrence” issue by passing laws in a purported effort to clarify the term “occurrence” when determining coverage for construction defect claims.

A4510 provides that a commercial liability insurance policy delivered, issued, executed, or renewed in New Jersey must contain a definition of “occurrence” that includes: (1) an accident, including continuous or repeated exposure to substantially the same general harmful conditions; and (2) property damage or bodily injury resulting from faulty workmanship.

As we’ve previously explained (Is Defective Construction an “Occurrence”?  The Answer Isn’t So Concrete), the definition of “occurrence” in the construction defect context is a thorny issue.  Courts have varied in their holdings as to whether damage from faulty workmanship is accidental in nature and therefore an “occurrence.”  See, e.g., Penn. Nat’l Mut. Cas. Ins. Co. v. Parkshore Dev. Corp., 403 Fed. App’x. 770 (3d Cir. 2010) (holding that a subcontractor’s faulty work that resulted in damage to the insured general contractor’s work was not an “occurrence”); Westfield Ins. Co. v. Custom Agri Sys., Inc., 979 N.E.2d 269 (Ohio 2012) (holding that defective construction work itself is not covered because it is not the result of an “occurrence,” but that the resulting damage may be covered because it was fortuitous and unintended); Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007) (finding coverage for damage to a building’s foundation, sheetrock, and stone veneer allegedly caused by the builder’s defective construction of a house’s foundation).  By requiring a definition of “occurrence” that addresses both accidents and faulty workmanship, A4510 intends to reduce confusion by resolving coverage issues arising from courts’ varying interpretations of those issues.

Keep in mind, however, that if enacted, A4510 would not necessarily obligate insurers to provide coverage for construction defects.  As the bill notes, it is not intended to restrict or limit the business risk exclusions commonly found in general liability policies (e.g., “your work” and “your product” exclusions), which might preclude coverage for faulty workmanship on other grounds.

West Virginia Reverses Course, Concludes that Faulty Workmanship is Covered Under a CGL Policy

Thursday, June 27th, 2013

By Aaron F. Mandel, Sedgwick New York

Last week, the Supreme Court of Appeals of West Virginia issued an opinion holding that faulty construction work qualifies as an “occurrence” under a CGL policy if it causes “bodily injury” or “property damage.” Cherrington v. Erie Insurance Property & Casualty Co., — S.E.2d —, 2013 WL 3156003 (W. Va. June 18, 2013). Cherrington reverses approximately 14-years’ worth of precedent concluding that CGL policies did not cover faulty workmanship.

For a full analysis of Cherrington and other recent case law addressing the “occurrence” issue in the context of faulty construction work, be sure to check out Sedgwick’s Construction Defect Coverage Quarterly when it drops next month.

Prior issues of the Construction Defect Coverage Quarterly can be found here.

  

Construction Defect Coverage Quarterly

Monday, April 29th, 2013

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.

Introducing Construction Defect Coverage Quarterly, and an Analysis of “Occurrence” in Defect Coverage Actions

Thursday, February 7th, 2013

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

Pennsylvania Court Finds No Coverage for Construction Defect Claims Under General Liability Policies

Tuesday, December 11th, 2012

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.

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