The Supreme Court of Alabama recently held in Owners Ins. Co. v. Jim Carr Homebuilder, LLC that a contractor’s commercial general liability (“CGL”) policy provided coverage for property damage caused by the defective work of subcontractors. The Jim Carr Court decided that although faulty workmanship by itself may not constitute an “occurrence” (which is required to trigger coverage) under a CGL policy; faulty workmanship that results in property damage will be considered an “occurrence”. Through this decision, the Alabama Supreme Court joined the recent (but not uniform) trend in other jurisdictions that recognize that defective work may be covered under a CGL.
Approximately one year after the purchase of a $1.2 million home, Pat and Thomas Johnson began to experience water leaks through the roof, walls, and floors. The Johnsons sued the general contractor, Jim Carr Homebuilder (“Jim Carr”), who had employed subcontractors to perform all of the actual construction work on the project. The case was sent to arbitration, and a $600,000 arbitration award entered against Jim Carr. In support of the damages award, the arbitrator found, among other things: (1) flashing was either not installed or improperly installed by subcontractors; (2) brick was improperly prepared for installation by subcontractors resulting in excessive absorption of water from the mortar; (3) sufficient weep holes were not installed in the brick or were covered by mortar by subcontractors; (4) windows and doors were not properly installed by subcontractors; and (5) part of the roofing was not properly installed by a subcontractor.
Jim Carr filed a claim with its CGL insurance carrier, Owner’s Insurance Company (“OIC”) and sought coverage from OIC to pay the arbitration award. OIC filed a declaratory judgment action – a lawsuit where a court is asked to determine the rights and obligations between the parties without ordering that anything be done or damages be paid - asking the Court to determine whether OIC had an obligation to pay the arbitration award. OIC argued that it had no obligation to pay because property damage covered under the CGL can only be damage to something other than the work being performed by the contractor. Since Jim Carr constructed the entire home, OIC argued that the CGL did not provide coverage for any damage to the home.
The Court rejected OIC’s argument, pointing out that under OIC’s interpretation of the CGL there would “be no portion of the project that, if damaged as a result of exposure to such a condition arising out of faulty workmanship of the insured, would be covered under the policy.” The court instead held that faulty workmanship that leads to any property damage – including property damage to the project itself – will qualify as an “occurrence” under the standard CGL policy.
The Court also considered whether the “your work” exclusion precluded coverage even if the defective work qualified as an “occurrence.” The standard form CGL policy excludes “‘property damage’ to ‘your work’ . . . and included in the ‘products-completed operations hazard.’” The Jim Carr Court held that the “your work” exclusion does not apply at all if the policyholder purchases “completed operations” coverage. Because Jim Carr had purchased a completed operations coverage endorsement, the “your work” exclusion was not applicable. The Court held that the entire arbitration award should be covered by the insurance policy.
This is a significant holding for construction industry policyholders. In light of the Jim Carr decision, Alabama policyholders should consult their insurance agents to insure that the language of their CGL policy reflects the court’s treatment of the “your work” exclusion and includes coverage for completed operations. Each reader should be aware that the state courts are varied in the application of this doctrine, and it is not safe to assume that every state will hold the way the Alabama court did in this case.