Companies such as homebuilders, construction companies and contractors face significant financial risk from bodily injury and property damage claims arising from allegedly faulty workmanship or construction defects. Although these companies purchase commercial general liability (“CGL”) policies to manage those risks, they often face obstacles to recovery under policy terms and exclusions that purportedly preclude coverage for faulty workmanship when the damage is to the construction project itself. The Alabama Supreme Court’s decision in Owners Ins. Co. v. Jim Carr Homebuilder, LLC, however, highlights a growing majority among courts nationwide which have held that damage to a construction or building project purportedly due to the policyholder’s faulty workmanship can constitute a covered “occurrence” under the CGL policy. The decision may also signal a willingness by courts to adopt a pro-policyholder interpretation of the “Your Work” exclusion, a common barrier to coverage for bodily injury or property damage arising from faulty workmanship after the construction project is complete, holding that the exclusion is inapplicable where the policyholder purchases completed operations coverage.
In Owners Ins. Co. v. Jim Carr Homebuilder, LLC, Thomas and Pat Johnson hired Jim Carr Homebuilders (“JCH”) to construct a new $1.2 million home on Lay Lake in Wilsonville, Alabama. When the Johnsons moved into their new home, they discovered water leaking through the roof, walls and floors, which caused water damage throughout the home. After JCH was unable to fix the problem, the Johnsons sued for breach of contract, fraud, and negligence and wantonness. The dispute was arbitrated, which resulted in a finding that JCH’s work was defective and a $600,000 award for the Johnsons.
JCH sought coverage under its CGL policy with the Owners Insurance Company (“Owners Insurance”). Owners Insurance, however, refused to provide coverage, arguing that faulty workmanship did not constitute an “occurrence,” a term defined under the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The carrier filed suit, seeking a judicial declaration that the claim was not covered under the CGL policy, but the trial court ruled in favor of coverage.
Owners Insurance appealed, and in September 2013, the Alabama Supreme Court reversed the trial court’s decision, holding that there was no coverage because JCH’s poor workmanship damaged the contractor’s own product. Faulty workmanship, according to the state’s high court, may constitute an occurrence only if it damages “personal property or other parts of the structure outside the scope of that construction or repair project.” Subsequently, however, the Alabama Supreme Court withdrew its September decision and issued a new one that handed victory to the policyholder.
Faulty Workmanship Coverage Can Apply to the Construction Project Itself
Before the Alabama Supreme Court, Owners Insurance argued that coverage for damage arising from faulty workmanship was triggered only if the damage was to real or personal property that was not part of what JCH built. The court rejected this argument, holding that faulty workmanship that results in damage to the construction project itself is also covered under a CGL policy. The court reasoned that if an “occurrence” can only take place when something other than the insured’s work is damaged, then coverage would be illusory in cases where the insured contractor is constructing an entirely new building. The court acknowledged that “the cost of repairing or replacing faulty workmanship is not the intended object of a CGL policy issued to a builder or contractor,” but nevertheless concluded that the “definition of the term ‘occurrence’ does not itself exclude from coverage the property damage alleged in [the] case.”
The “Your Work” Exclusion Does Not Apply If the Policyholder Purchases Products-Completed Operations Coverage
The “Your Work” exclusion found in most standard CGL policies ensures that the policy will not act as a “warranty” for the contractor’s poor work. The pertinent provision in the Owners Insurance policy excluded coverage for property damage “arising out of [“your work”] . . . or any part of it and included in the ‘products-completed operations hazard.’” The “products-completed operations hazard” is generally defined as risks, such as property damage, that arise out of work performed by the insured that has been completed and turned over to the owner. Most standard CGL policies do not insure against products-completed operations hazard. Thus, the “Your Work” exclusion precludes coverage for property damage (1) arising from the insured’s work, including faulty workmanship, after it has been completed, and (2) included in the products-completed operations hazard.
The Alabama Supreme Court concluded that JCH’s liability to the Johnsons arose after it had completed work on the Johnsons’ home, and thus fell within the definition of the “Your Work” exclusion, but the exclusion applied if and only if there was no coverage under the policy for “products-completed operations.” In other words, if the CGL policy provides coverage for bodily injury and property damage arising from completed operations, those risks are not included in the products completed-operations hazard, thus rendering the “Your Work” exclusion inapplicable to those risks. Because JCH had purchased coverage for bodily injury and property damage arising from completed operations, the Alabama Supreme Court concluded that the “Your Work” exclusion in the Owners Insurance policy did not preclude coverage. To conclude otherwise would render illusory the coverage JCH purchased for completed operations.
Growing Trend Toward Coverage for Faulty Workmanship
By reversing its prior decision and granting JCH coverage for property damage arising from its defective work, the Alabama Supreme Court joined a growing number of states that hold that the faulty workmanship of a contractor can constitute a covered “occurrence” under the contractor’s CGL policy. For example, in June 2013, the West Virginia Supreme Court, in Cherrington v. Erie Ins. Prop. & Cas. Co., 745 S.E.2d 508 (W. Va. 2013), reversed multiple prior decisions deny coverage and, noting the “definite trend in the law,” held that faulty workmanship qualifies as an “occurrence” under a CGL policy. A month later, in Taylor Morrison Services, Inc. v. HDI-Gerling America Ins. Co., the Georgia Supreme Court followed suit and overturned its prior decision finding no coverage.
As discussed in an earlier post here, the Pennsylvania Superior Court recently rendered a similar decision in the products liability context, finding coverage under a CGL policy for product defect claims against a door and window manufacturer. The decision, Indalex, Inc. v. National Union Fire Insurance Co. of Pittsburgh, Pa., suggests that Pennsylvania – which is one of only a handful of states whose highest court has declined broader coverage for faulty workmanship claims – may give way to a more policyholder-friendly analysis in such cases and join the growing trend toward providing coverage for risks arising from faulty workmanship or construction defects.