As noted in our previous installment of CDCQ, the “occurrence” issue is one of the most hotly litigated topics in construction defect coverage cases. This last quarter was no exception. Two recent cases addressing this issue – and reaching opposite results when it comes to whether faulty workmanship qualifies as an “occurrence” under liability policies – are Zurich American Insurance Co. v. R.M. Shoemaker Co., No. 12-2268, 2013 WL 1224104 (3d Cir. Mar. 27, 2013), and K&L Homes, Inc. v. American Family Mutual Insurance Co., --- N.W.2d ---, 2013 WL 1364704 (N.D. Apr. 5, 2013).
In Zurich, Shoemaker was hired to oversee construction of an addition to a Monmouth County, New Jersey prison. Shoemaker’s oversight allegedly was deficient and enabled subcontractors to perform faulty construction work on the project. That faulty construction work led, in turn, to water intrusion that reduced the prison’s structural integrity and damaged its electrical system and acoustic ceiling tiles, among other things. Shoemaker was insured under occurrence-based CGL policies that defined “occurrence” to mean an “accident,” and its insurers sued in federal court, seeking a declaration that the damage to the prison was not the result of an “occurrence” within the meaning of their policies.
Resolving the matter under Pennsylvania law, the district court determined that Shoemaker’s failure to perform its oversight duties was not an “occurrence.” Shoemaker appealed, and the Third Circuit Court of Appeals affirmed. The court noted that, when it comes to “occurrence” policies, “the critical inquiry dictating whether a general liability insurer must defend its insured ... is whether an event was sufficiently fortuitous from the perspective of the insured to qualify as an ‘occurrence.’” Citing to Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Co., 589 Pa. 317 (2006), and Millers Capital Insurance Co. v. Gambone Brothers Development Co., 941 A.2d 706 (Pa. Super. 2007), the court held that “[f]aulty workmanship – whether caused by the contractor’s negligence alone or by the contractor’s negligent supervision, which then permitted the willful misconduct of its subcontractors – does not amount to an ‘accident’ or ‘occurrence.’”
In contrast to Zurich, the North Dakota Supreme Court in K&L altered the landscape of construction defect-related “occurrence” litigation in that state by concluding that faulty workmanship by itself can qualify as an “occurrence” within the meaning of a CGL policy.
There, K&L was hired to construct a home. The homeowners sued K&L after they noticed cracks, unevenness, and shifting in the home caused by allegedly defective work on its footings and foundation, and ultimately recovered damages from K&L for breach of contract and breach of warranty. American Family had issued a CGL policy to K&L providing coverage for “property damage” arising out of an “occurrence,” which the policy defined to mean an “accident,” and K&L sued American Family for coverage. The parties cross-moved for summary judgment, and the court granted American Family’s motion on the ground that the defective work on the house was not an accident (and, therefore, not an “occurrence” within the meaning of the policy). It appears that the lower court’s decision was guided by the North Dakota Supreme Court’s decision in ACUITY v. Burd & Smith Construction, 721 N.W.2d 33 (N.D. 2006), in which the North Dakota Supreme Court held that faulty construction work did not implicate an “occurrence” unless it was accompanied by bodily injury or property damage to something other than the work itself.
On appeal, the North Dakota Supreme Court reversed. The court expressly rejected American Family’s argument that ACUITY applied because the entire house was K&L’s work within the meaning of policy. The court instead ruled that ACUITY was incorrectly decided, and held that “there is nothing in the definition of ‘occurrence’ that supports that faulty workmanship that damages the property of a third party is a covered ‘occurrence,’ but faulty workmanship that damages the work or property of the insured contractor is not an ‘occurrence.’” Based on this reasoning, the court concluded that faulty workmanship itself “may constitute an ‘occurrence’ if the faulty work was ‘unexpected’ and not intended by the insured, and the property damage was not anticipated or intentional, so that neither the cause nor the harm was anticipated, intended, or expected.”