In an important ruling for contractors and their insurers, the United States District Court for the District of Massachusetts recently ruled that damage resulting from faulty workmanship was an insured “occurrence” under a Commercial General Liability (CGL) insurance policy.
General Casualty Company of Wisconsin v. Five Star Building Corporation, et al., 2013 U.S. Dist. LEXIS 134177 (D. Mass. September 19, 2013), was a declaratory judgment case between an insurer and its insured, an HVAC contractor, which was hired by The University of Massachusetts to upgrade the HVAC system on a portion of the University’s Science Center. As part of its work, the HVAC contractor made penetrations in the existing roof system to install supports for ductwork and other rooftop structures related to the HVAC work. After making the penetrations, the HVAC contractor installed temporary patches that would remain until subcontractors installed the supports and permanent patches. While this work was being performed, a severe rainstorm caused some temporary patches to fail. The rainwater intrusion caused extensive damage to the roofing insulation system and to the interior of the building. The HVAC contractor reported the damage to its CGL insurer, who agreed to provide coverage for most of the damage to the interior and contents of the building, but denied coverage for damage to the roofing insulation system.
An “Occurrence”? The CGL policy contained the typical definition of “occurrence,” i.e., “an accident, including continuous or repeated exposure to substantially the same harmful conditions.” The insurer argued that this definition did not include faulty workmanship. The HVAC contractor countered that although faulty workmanship may not itself constitute an occurrence, the occurrence was a torrential rainstorm that led to the leaking, even if that leaking was caused in part by the allegedly faulty workmanship. The court adopted the HVAC contractor’s argument and ruled that the rain damage to the roofing system was an “occurrence” under the CGL policy.
The “Your Work” Exclusion. The standard CGL insurance policy (which uses the Insurance Services Office (“ISO”) Form) contains a host of definitions and exclusions that limit significant avenues of recovery for construction defect claims by attempting to exclude coverage for faulty workmanship and design errors and omissions, save for injury to persons or damage to the property of third parties. In the context of construction defects, the most significant exclusions preclude coverage for:
- That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of your operations; or
- That particular part of any property that must be restored, repaired or replaced because your work was incorrectly performed on it.
These exclusions are known as the “your work” exclusions and are relied on by insurers to exclude coverage for damage that arises out of defective workmanship, including damage to the defective work and damages incurred to replace it. The court in the General Casualty case considered both of those exclusions and found that neither applied.
The court rejected the insurer’s argument based on the “Your Work” exclusion. In doing so, the court emphasized that the HVAC contractor’s work concerned replacing the HVAC system, and that the penetrations to the roof and installation of the temporary patches were only incidental to that HVAC work. According to the court, the damaged areas of the roof were not areas on which the HVAC contractor was “working directly or indirectly” such that coverage would be excluded under the first prong of the “Your Work” exclusion.
The court also rebuffed the insurer’s argument under the second prong, i.e., that the damage was excluded because it was damage to that particular part of the property that must be restored, repaired, or replaced because the HVAC contractor’s work was incorrectly performed. The court found that the insurer had failed to present conclusive evidence showing the HVAC contractor’s work was faulty or incorrectly performed, concluding that the presence of leaking rainwater alone did not establish the HVAC contractor’s negligence in installing the temporary patches.
Although the standard CGL policy contains several definitions and exclusions that limit recovery for construction defect claims, the lesson from General Casualty is that an insured who carefully parses out the claim and the policy to show why the claim is covered may overcome significant exclusions and successfully secure coverage. This outcome also follows a growing national and regional trend toward treating damages caused by potentially defective workmanship as “occurrences” entitled to coverage [1].
[1] Our September 2013 Newsletter featured a summary of a recent case in which the Connecticut Supreme Court expanded CGL coverage to encompass certain types of defective work claims in Capstone Building Corporation v. American Motorists Insurance Company. See Luke R. Conrad, “Connecticut Supreme Court Expands Commercial General Liability Insurance Coverage to Include Construction Defects.”