The Alabama Supreme Court Changes Its Mind on Coverage Under CGL Policy

by Butler Snow LLP

Last September the Alabama Supreme Court issued an opinion addressing the applicability of the “own work” exclusion to claims against a contractor for defective construction.  However, on March 28, 2014, the Alabama Supreme Court, on rehearing, completely reversed itself.  Owners Ins. Co. v. Jim Carr Homebuilder, LLC, 2014 WL 1270629 (Ala. March 28, 2014).

In this case, the Johnsons hired Jim Carr Homebuilder (“JCH”) to build them a new lake house.  Shortly after its completion, the Johnsons began noticing problems with the house leaking which resulted in damage to the places where the house was leaking and to other areas of the house.  The Johnsons sued JCH.  JCH’s CGL carrier, Owners Ins. Co. (“Owners”), filed a declaratory judgment action asking the court to determine whether it had a duty to defend or indemnify JCH.  The underlying case was sent to arbitration and resulted in an arbitration award for the Johnsons.  After the arbitration award was entered, the Johnsons were granted summary judgment in Owners’ declaratory judgment action with the trial court ruling that Owners had a duty to indemnify JCH for the arbitration award.  In the original opinion, the Alabama Supreme Court reversed the trial court and found no duty to indemnify JCH existed.  On rehearing, the Supreme Court did an “about-face” and ruled that Owners did have to indemnify JCH.

On appeal (in its substituted opinion), the Alabama Supreme Court took a second look at the term “occurrence.”  In its original opinion, the Court found that because JCH was hired to build the Johnsons a house (rather than just a part of a house, such as a roof), “any damage that resulted from poor workmanship was damage to JCH’s own product.”  However, in its substituted opinion, the Court took a closer look at the actual definition of “occurrence,” as defined by Owners’ policy.  “Occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful condition.”  In reviewing that definition, the Court held that “[i]f some portion of the Owners policy seeks to affect coverage by references to the nature or location of the property damages, it is not the provision in the policy for coverage of occurrences.”  (Substituted Op. at *15).

In other words, the court still affirms that faulty workmanship is not an “occurrence.” However, it points out that the definition of “occurrence” does not specify the type of resulting damage.  Therefore, as in this case, although the faulty workmanship itself is not “property damage arising out of an occurrence,” property that was damaged as the result of the insured’s faulty workmanship, may still be considered an “occurrence,” even if it is the insured’s other property or work.

The court also undertook a new review of the “your work” exclusion.  The Owners’ policy states that it does not apply to “‘property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’”  Therefore, in order for the “your work” exclusion to apply, the insured (JCH) cannot have additional coverage for bodily injury or property damage in completed operations.  “Simply put, the ‘your work’ exclusion applies if and only if the Policy’s declarations fail to show any coverage for ‘products-completed operations…’”  (Substituted Op. at *21).  In the instant case, JCH had coverage for property damage from completed operations and therefore the “your work” exclusion did not apply.

The court’s interpretation of “occurrence” under the policy in question does not specify a certain type, ownership or location of property that must be damaged as a result of the faulty workmanship.  This interpretation opens the potential range of damages claimed by an injured party that would be covered under a CGL policy.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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