DOES “FAULTY WORKMANSHIP” CONSTITUTE AN OCCURRENCE UNDER YOUR CGL POLICY?

Posted on December 17, 2023December 17, 2023 by David Adelstein

There is nothing more scintillating than an insurance coverage dispute, right? Well, some folks would agree with this sentiment. Others would spit out their morning coffee in disagreement. Regardless of where you fall in the spectrum, they are always important because maintaining insurance is a NECESSARY part of business, particularly in the construction industry. The ideal is to have insurance that covers risks you are assuming in the performance of your work.

Sometimes, insurance coverage disputes provide valuable insight, even in disputes outside of Florida. Recently, the Western District of Kentucky in Westfield Insurance Co. v. Kentuckiana Commercial Concrete, LLC, 2023 WL 8650791 (W.D.KY 2023), involved such a dispute. While different than how Florida would treat the same issue, it’s still noteworthy because it sheds light into how other jurisdictions determine whether “faulty workmanship” constitutes an “occurrence” under a commercial general liability (CGL) policy.

In this case, the commercial general liability insurer of a subcontractor sued the subcontractor (insured) and the general contractor (additional insured) seeking a declaration that it had NO duty to defend either in a construction defect arbitration initiated by the owner of an apartment project. More specifically:

The allegations at issue here concern water damage [the owner] ascribes to faulty workmanship by [the general contractor] and [the subcontractor]. Asserting claims for negligence and breach of contract, [the owner] accused [the general contractor] of failing to complete theproject with “skill, care and diligence,” breaking its “promise to perform the work according to the Contract Documents,” breaching “its warrantyof defect-free Work,” breaking “its promise to supervise and to coordinate the Work using its ‘best skill and attention,’ ” and breaking “its promise to beresponsible for the acts, omissions and qualifications of its supervisors and Subcontractors in performing the Work. The engineer’s report enclosed with[the owner’s] initial arbitration demand concluded that damage occurred where [the general contractor’s] work “did not conform to the ConstructionDocuments, local ordinances and industry standard, was not workmanlike, and was negligent.” [The general contractor’s] arbitration demand against [the subcontractor], moreover, incorporates all the allegations from [the owner’s] original arbitration demand and ascribes them to [the subcontractor].

Westfield Ins. Co., supra, at *2 (internal citations omitted).

The fundamental issue is that under Kentucky law “faulty construction-related workmanship, standing alone, is not a fortuitous ‘occurrence’ under CGL policies including language similar to that at issue here.” Westfield Ins. Co., supra, at *2 (noting the CGL policy “defined occurrence as ‘an accident, including continued or repeated exposure to the same general harmful conditions.’”).

In this case, the trial court found that the CGL insurer had NO duty to defend the general contractor and subcontractor because “the alleged errors concern aspects of the project over which the general contractor and subcontractor exercised control over the work.” Westfield Ins. Co., supra, at *3.

In short, Kentucky law is clear that “faulty workmanship” does not ordinarily “constitut[e] an occurrence under a CGL policy” because the“ultimate liability falls to the on one who performed the negligent work … instead of the insurance carrier.” The allegations brought by [the owner] do not implicate events that were beyond the control of either [the general contractor] or [the subcontractor]. So neither the breach nor the faulty-workmanship allegations leveled against [the general contractor] and [subcontractor] constitute a fortuitous event amounting to an “occurrence” covered by the [CGL] insurance policy. To hold otherwise would essentially convert [the subcontractor’s] CGL coverage into a construction bond.

Westfield Ins. Co., supra, at 84 (internal citations omitted).

Now, while I don’t agree with this holding, this is the law in Kentucky, meaning a CGL policy does not provide the preferred (and, really, necessary) coverage for faulty workmanship. Does your CGL policy provide coverage for faulty workmanship? Or, does faulty workmanship constitute an occurrence under your CGL policy? If you do not know the answer to these questions, make sure to find out!

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

AN OCCURRENCE UNDER BUILDER’S RISK INSURANCE POLICY IS BASED ON THE LANGUAGE IN THE POLICY

Posted on March 18, 2023March 18, 2023 by David Adelstein

Builder’s risk insurance coverage is a vital property insurance coverage during the course of construction. Builder’s risk insurance is not a one-size-fits-all product so please make sure you are working with your insurance broker to procure this product that factors in and covers risk associated with the project.

Builder’s risk insurance is typically an occurrence-based policy. No different than other occurrence-based policies (such as commercial general liability), a dispute may arise as to the occurrence. This could be due to the triggering of the actual policy during the coverage period or it could be due deductible obligations, as in the case discussed below. When dealing with a builder’s risk insurance policy–again, no different than any policy–the language in the policy matters. Definitions used in the policy to define specific terms matter and, in numerous cases, the ordinary dictionary meanings of terms matter. But it all starts with the policy language.

In KT State & Lemon, LLP v. Westchester Fire Insurance Co., 2023 WL 2456499 (M.D.Fla. 2023), a builder’s risk policy provided coverage from April 2018 through the end of November 2019. There was a $50,000 per occurrence deductible for loss caused by or from water damage. An extension to the builder’s risk policy was negotiated through the end of January 2020 that increased this water damage deductible to $250,000 per occurrence. During construction and the testing of the fire suppression (sprinkler) system, leaks started to occur resulting in water damage. Two leaks occurred in September 2019, one leak in October 2019, one leak in November 2019, and two leaks in December 2019 (during the extension and higher water damage deductible period).

The plaintiff-insured argued that all of the leaks in the fire sprinkler system should constitute one single occurrence. Naturally, it did so because one occurrence would be a $50,000 deductible since the initial leak occurred prior to the extension period. The insurer took a contrary position and argued that each leak was a separate occurrence meaning there were four leaks with a $50,000 per occurrence deductible and two leaks in December 2019 each with a $250,000 deductible. This is a big deal from a dollar’s perspective as it means each leak would have to have damages in excess of the per occurrence deductible and the insured would potentially be responsible for the first $700,000 in water damage based on the six leaks.

“In Florida, the [insurance] contract should be ‘construed according to the plain language of the policy,’ and any ambiguities must be ‘construed against the insurer and in favor of coverage.’ KT State, supra, at *2 (citations omitted).

The Court looked at the policy language, specifically how the builder’s risk policy defined the term “occurrence” as it would be this definition in the policy that shed light on whether there would be one occurrence or multiple occurrences:

All LOSS attributable directly or indirectly to [1] one originating cause, event, incident or repeated exposure to the same originating cause, event or incident, or [2] to one series of similar originating causes, events, incidents or repeated exposures to the same originating cause, event or incident first occurring in the Policy period. All such LOSS will be treated as one OCCURRENCE, unless a specified period of time is included in this Policy. The most the Company will pay for LOSS in any one OCCURRENCE is the applicable Limit of Insurance shown on the Declarations.

As to the underlined above, the policy did not define the terms “series” or “similar.” Yet, these terms are not technical terms so the Court looked at the ordinary dictionary definitions. “The dictionary meaning of ‘series” is ‘[a] number of things of one kind (freq. abstract, as events, actions, conditions, periods of time) following one another in time or in logical order.’ The dictionary meaning of ‘similar’ is ‘alike in substance’ or ‘having characteristics in common.’” KT State, supra, at *3 (citations omitted). Based on the definition of “occurrence” in the policy, and the ordinary dictionary definitions of “series” and “similar,” the Court found the six fire sprinkler leaks constituted only one occurrence:

Reading the policy language from the standpoint of an ordinary person, in light of the common meaning of the terms used, and in a common-sense and natural manner produces only one reasonable conclusion. Plaintiffs’ claimed loss was attributable, directly, or indirectly, to a “series of similar originating causes, events, [or] incidents,” and therefore resulted from one occurrence. The loss resulted from leaks in the same sprinkler system, due in whole or part to improper installation by the same [subcontractor] crew under the same contract, in the same general location in the same building, and occurred one after the other in a relatively short span of time from late September to December 2019.

KT State, supra, at *4.

Yet, despite there being one occurrence, the Court applied a caveat to the benefit of the insurer since there were two leak incidents during the extension of the policy with an increased $250,000 per occurrence deductible:

Accordingly, under the Policies’ definition of “occurrence,” the leaks at issue together constituted one occurrence. For damage from leaks that occurred prior November 30, 2019, therefore, a single deductible of $50,000 applies. The result is different, however, for leaks after that date, because the parties expressly modified the Policies at that point. The original policy term ended on November 30, 2019. Plaintiffs were only entitled to purchase an extension of coverage beyond that date on the same terms as before if no “risk aggravating situation” was present at the time of the extension. But such a situation was present, because Plaintiffs had reported multiple leaks, and that was obviously the reason the parties changed the water damage deductible to $250,000 when they extended coverage to January 30, 2020. It is clear that the increased deductible was intended to apply to similar water damage events occurring during the extended policy period. Therefore, the increased deductible applies to water damage from leaks occurring after November 30, 2019, notwithstanding the definition of “one occurrence.”

KT State, supra, at *5.

DETERMINING OCCURRENCE FOR INJURY UNDER COMMERCIAL GENERAL LIABILITY POLICY WITHOUT APPLYING “TRIGGER THEORY”

Posted on June 26, 2021June 26, 2021 by Edward Garber

Oftentimes an occurrence in a commercial general liability policy is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” It is this occurrence that causes the bodily injury or property damage that may be covered by the policy.

An interesting non-construction case determined an occurrence under a commercial general liability policy occurred when the negligent act occurred irrespective of the date of discovery or the date the claim was discovered or asserted. See Certain Underwriters at Lloyd’s, London Subscribing to Policy No. J046137 v. Pierson, 46 Fla.L.Weekly D1288c (Fla. 4^thDCA 2021). This is interesting because the appellate court did NOT apply a “trigger theory” to first determine the occurrence’s policy period. The appellate court found it did not need to determine which “trigger theory” applied to determine the occurrence for the injury and relied on a cited case: “trigger theories are generally used in the context of deciding when damage occurred ‘in cases involving progressive damages, such as latent defects, toxic spills, and asbestosis’ because the time between the ‘injury-causing event (such as defective construction, a fuel leak, or exposure to asbestos), the injury itself, and the injury’s discovery or manifestation can be so far apart.” Pierson, supra, citing and quoting Spartan Petroleum Co. v. Federated Mut. Ins. Co., 162 F.3d 805, 808 (4^th Cir. 1998).

In Pierson, police officers were found civilly liable for civil rights violations that occurred twenty-years earlier when the officers physically and verbally forced a 15-year old boy to confess to a crime. Many years later, DNA evidence proved the boy did not commit the crime he was forced to confess and was incarcerated for. The officers sued the police department’s commercial general liability policy for failing to indemnify them in the civil lawsuit. The policy, however, was NOT in effect twenty years earlier when the officers verbally and physically forced the confession. “Since it is undisputed that the Officers’ misconduct occurred twenty years prior to the execution of the policies, there can be no duty to indemnify in this case…. [T]he fact that [the boy] suffered the consequences of the Officers’ wrongful conduct throughout his incarceration, including while the subject policies were in effect, is irrelevant for purposes of determining whether the Insurer has a duty to indemnify. Likewise, the fact that [the boy] was exonerated while the 2009 policy was in effect is of no consequence.” Pierson, supra.

What does this holding mean? It could likely mean outside of a latent defect scenario or a pollution liability issue–or property damage scenario–a “trigger theory” to determine when an occurrence occurred or is triggered is not applicable. An occurrence will be deemed to occur when the accident causing the injury occurred, as defined by the policy.

CGL INSURANCE AND CONSTRUCTION DEFECTS (DUTY TO DEFEND; TRIGGERING OF CGL POLICY; COVERED RESULTING DAMAGE)

Posted on April 11, 2015November 8, 2024 by Edward Garber

I previously wrote about insurance coverage issues in a construction defect dispute, specifically in the context of the insurer denying coverage outright and refusing to defend its insured.

As a sequel to this posting, a noteworthy opinion was issued by the Eleventh Circuit Court of Appeals in Carithers v. Mid-Continent Cas. Co., 2015 WL 1529038 (11^th Cir. 2015) in a commercial general liability (CGL) insurance coverage dispute dealing with construction defects to a house. This opinion discusses central issues to an insurance coverage dispute in a construction defect context: the triggering of a CGL policy, the duty to defend, the duty to indemnify, covered resulting damage stemming from construction defects, and a claimant resolving a dispute with an insured in order to pursue rights against the insured’s CGL carrier (also known as a Coblentz agreement).

In this case, the owners hired a general contractor to build their house. The general contractor had CGL insurance with products completed operations coverage. Upon discovering construction defects, the owners sued the general contractor. The general contractor’s insurer refused to defend the general contractor, meaning the insurer denied coverage (which is the last thing the general contractor ever wants to hear). The insurer denied coverage because the complaint alleged that the damages were not discovered until 2010; however, the general contractor did not have any CGL coverage after 2008. Thus, if the manifestation theory applied to trigger coverage (discussed below), there would be no coverage under the CGL policy.

The general contractor and insurer then entered into a consent judgment in the action for $90,000 in favor of the owners that assigned to the owners the general contractor’s rights under its CGL policy. (This forms the framework for what is known as a Coblentz agreement.) The owners then sued the general contractor’s CGL insurer.

The issues in this case were (a) the insurer’s duty to defend its general contractor-insured, (b) the triggering of an occurrence under a CGL policy, and (c) resulting damage covered under the CGL policy.

(A) Duty to Defend

The insurer’s duty to defend is triggered by the allegations in the complaint. Here, the Eleventh Circuit held that the insurer had a duty to defend because the duty to defend is broader than the insurer’s duty to indemnify and “all doubts as to whether a duty to defend exists in a particular case must be resolved against the insurer and in favor of the insured.” Carithers, supra, at *4 (quotation and citation omitted). “An insurance company must defend an action where the facts alleged against the insured would give rise to coverage, even if those facts are not ultimately proven at trial.” Id.

(B) Triggering of an Occurrence Under CGL Policy

The insurer wanted the manifestation theory to trigger CGL coverage. Under this theory, the CGL policy is triggered if the damage is discovered (manifests itself) during the policy period.

The reason the insurer wanted this theory to apply is because the owners admitted that they discovered the damage / defects in 2010 when the general contractor’s CGL policy was no longer in effect.

Conversely, the owners wanted the injury-in-fact theory to apply to trigger coverage. Under this theory, the policy is triggered when the damage occurs even if the damage is not discovered until sometime later. Here, the trial court found that the damage occurred in 2005 when the general contractor’s CGL carrier was in effect (although the damage was not discovered until 2010). Because there was evidence and a finding as to when the damage occurred, the Eleventh Circuit held that the injury-in-fact theory was the correct theory to trigger CGL coverage.

(C) Resulting Damage Covered Under a CGL Policy

The cost of repairing damage to other work resulting from faulty workmanship would be covered under the CGL policy. In other words, repairing damage to another trade’s work would be covered but repairing / replacing damage to the trade’s own work would not be covered. The Eleventh Circuit analyzed this application to determine whether the trial court appropriately determined that certain items were resulting damage.

(1) Brick

The trial could found that the defective application of exterior brick coating caused resulting damage to the brick itself. If the exterior brick coating was applied by the subcontractor that installed the brick, then the brick should not be covered since the brick was the subcontractor’s own work as opposed to other work. However, there was no evidence at the trial level whether the brick coating and installation of the brick was done by the same subcontractor or different subcontractors. Because the plaintiff owners (who were assigned rights under the policy by the general contractor insured) had the burden of proof on this issue, which they failed to meet, the Eleventh Circuit reversed any damage awarded associated with the brick.

(2) The Tile and Mud Base

The trial court found that defective adhesive and an inadequate base caused damage to the tile. The trial court awarded damage to replace the tile and mud base. Similar to the brick, the issue turned on whether the installation of the tile and mud base was done by the same subcontractor or different subcontractors. And, similar to the brick, no evidence was offered on this point so the Eleventh Circuit reversed any damage awarded associated with the tile and mud base.

(3) Balcony

The trial court found that defects in the construction of the balcony resulted in damage to the garage. However, because the balcony had to be rebuilt in order to repair the garage, the trial court held that this work was resulting damage covered by the CGL policy. The Eleventh Circuit agreed with the trial court holding that the cost of repairing damage resulting from defective work is covered and since repairing the balcony was part of repairing the garage, these costs would be covered.

Important take-aways:

This case provides strong arguments to an insured when its CGL carrier denies coverage, specifically based on the argument that its policy was never triggered. Remember, the duty to defend is broader than the duty to indemnify so any doubts must be resolved in favor of the insured.

Don’t forget about the injury-in-fact theory to trigger CGL coverage. If you have evidence, such as an expert opinion, as to when the damage started to occur, this theory can be valuable if the owner discovered the latent defects after the expiration of your CGL policy. This helps an owner maximize CGL coverage and a general contractor maximize coverage under its CGL policy.

Make sure to meet your burden of proof to establish resulting damage or other damage caused by faulty workmanship. Make sure to prove that the resulting damage was work performed by a different subcontractor and not the subcontractor that performed the faulty workmanship. And, to this point, make sure to include appropriate language in the consent judgment.

Make sure you know how to couch your coverage arguments to an insurer in order to maximize insurance coverage.

If your insurer denies coverage, consider entering into what is known as a Coblentz agreement with the claimant where a consent judgment is entered against you and rights under your policy are assigned to the claimant. The benefit is that in consideration of the consent judgment and assignment of rights, the claimant gives up any rights to collect that judgment against you.