The West Virginia Supreme Court of Appeals has abandoned nearly five decades of holding that faulty workmanship is not an “occurrence” under commercial general liability (“CGL”) policies. On June 18, 2013, the West Virginia Supreme Court of Appeals decided Cherrington et al. v. Erie Ins. Prop. & Cas. Co. and joined the majority of states holding that faulty or defective workmanship is an “occurrence,” and therefore, property damage caused by faulty workmanship warrants CGL coverage.
Cherrington involved a dispute over the construction of a home in West Virginia. In the underlying lawsuit, Ms. Cherrington sued contractor Pinnacle for allegedly faulty work, including uneven concrete flooring, water infiltration through the roof and chimney joint, and cracked drywall. Pinnacle sued its CGL insurer for a coverage declaration. The central holding of the Cherrington trial court was that, in line with longstanding West Virginia law, there was no “accident” or “occurrence” based on the allegedly faulty subcontractor work. On appeal, the West Virginia Supreme Court of Appeals reversed the trial court and overruled a line of cases dating back to 1965, when the Supreme Court of Appeals decided McGann v. Hobbs Lumber Co.
In McGann v. Hobbs Lumber Co., the Supreme Court of Appeals had denied CGL coverage for property damage (a roof collapse) caused by allegedly negligent construction collapse, holding that a liability policy is not intended to cover damages to an insured’s property or work completed by the insured. The Supreme Court adhered to this position for the next five decades: in Erie Ins. Prop. & Cas. Co. v. Pioneer Home Improvement, Inc. (1999), the court held that a CGL policy did not cover property damaged caused by faulty workmanship, because the faulty workmanship was not an occurrence. In Webster County Solid Waste Authority v. Brackenrich & Associates, Inc. (2005), the court denied similar coverage, reasoning that faulty workmanship claims are outside the risks traditionally assumed by CGL policies, because they “are essentially contractual in nature.” And in 2011, in Corder v. William W. Smith Excavating Co., the court reiterated that faulty workmanship is not an occurrence. In overruling this line of cases, the Cherrington court noted that the prior, “perfunctory” holdings were “so broad in their blanket pronouncement[s]” that they were “unworkable in their practical application.”
In holding that faulty workmanship was an “occurrence,” the Cherrington court reasoned that it was “common sense” that faulty subcontractor work is an “accident,” in this case, defined in the policy as an incident that was not “deliberate, intentional, expected, desired, or foreseen.” Pinnacle could not have expected or foreseen that its subcontractors would do bad work, or it wouldn’t have hired them in the first place. Turning to the policy language, the court explained that the subcontractor exception to exclusion “L” (excluding coverage for “your work”) expressly covered “subcontractor acts,” so denying coverage for property damaged caused by such acts would be inconsistent with the policy. And, it would be unfair to preclude Pinnacle from coverage for damage caused by its subcontractor’s faulty work, when the policy expressly anticipated coverage for subcontractor acts. The court then rejected a case-by-case approach to faulty workmanship, and adopted the more “solid pronouncement” that “defective workmanship causing bodily injury or property damage is an ‘occurrence’ under a policy of commercial general liability insurance.”
The Cherrington opinion is in line with the oft-cited Texas Supreme Court’s decision in Lamar Homes, Inc. v. Mid-Continent Casualty Co. There, a builder’s insurer denied coverage for a lawsuit arising out of allegedly defective subcontractor work, claiming that coverage would transform the CGL policy into a performance bond. The Fifth Circuit to the Supreme Court of Texas rejected the argument, and like the Cherrington court, reasoned that the subcontractor exception to the “your work” exclusion warranted treating faulty subcontractor work as an occurrence. The court gave effect to the plain language of that subcontractor exception, holding that the “the CGL policy covers what it covers.”
Time will tell whether West Virginia’s new faulty workmanship position is a sign that a uniform shift to the majority position is coming. However, more states are adopting West Virginia’s practical approach to faulty workmanship. Some have legislation requiring that CGL policies expressly cover property damage caused by subcontractor faulty workmanship, superseding legal opinions to the contrary.