In an important ruling for contractors and their insurers, the Connecticut Supreme Court recently ruled that certain types of defective construction claims may qualify as insured “occurrences” under a standard commercial general liability (“CGL”) policy. In Capstone Building Corporation v. American Motorists Insurance Company, the Court ruled that construction defects or faulty workmanship by subcontractors that causes property damage to other, non-defective work may constitute “occurrences” covered by a standard CGL policy.

What does Capstone mean for the construction industry? As a threshold matter, the ruling has significant limitations that make it unwise to assume that general contractors who have CGL coverage in Connecticut can insulate themselves from the risk of deficient performance by their subcontractors. Capstone does not change the law regarding property damage from defective work performed by the insured contractor – known as the “your work” exclusion. Such damage remains excluded under the standard CGL policy and will not be covered.

A CGL policy provides coverage for specified types of “occurrences” that result in “personal injury” and “property damage.” Courts typically have rejected attempts by insured contractors to characterize defective construction work as “property damage” entitled to coverage. The primary obstacle to coverage has been the Connecticut courts’ refusal to recognize construction defects as covered “occurrences” because the courts hold that such defects are not “accidental” and lack the element of “fortuity.” As a result, defective work (even if performed by a subcontractor), the labor and materials to repair the work, and the costs to access the work have generally not been covered under a CGL policy.

Capstone is a departure from previous Connecticut law, in holding that damage (water and mold damage) to portions of a construction project caused by defective work in other areas could qualify as “physical injury to tangible property.” The Connecticut Supreme Court reinforced the national trend toward limited CGL coverage for defective work under the so-called “subcontractor exception” to the “your work” exclusion, a principle that permits coverage for damage to non-defective work caused by other, defective work. In one oft-cited case adopting this proposition, the Wisconsin Supreme Court  held that sinking, buckling, and cracking of a warehouse caused by soil settlement, where the soil settlement resulted from defective work by a soil engineering subcontractor, qualified as “physical injury to tangible property” entitled to coverage under a standard CGL.

Capstone is significant also in that it recognized defective work as an “occurrence” potentially covered by a CGL policy – although the law remains that the costs of repairing, replacing, and rectifying the defective work will not be covered. Rather, only damage to non-defective work that results from separate defective work performed by a subcontractor will qualify as “property damage” meriting coverage.

Nevertheless, that defective work may qualify as an “occurrence” eligible for coverage under a CGL policy is a welcome development. Contractors now have additional potential remedies for defective subcontractor work, where the work causes damage to other portions of the project. However, construction professionals should remember that potential coverage, like the court’s holding in Capstone, is limited. Contractors should view this remedy as one of the many risk allocation tools at their disposal, while understanding it is not a substitute for a performance bond or builder’s risk insurance, but a supplementary bonus to those essential products.