The Supreme Court of Mississippi has held, in a decision issued last month, that damage resulting from a subcontractor’s defective work could be a covered “occurrence” under a general contractor’s Commercial General Liability (CGL) insurance policy. The case drew intense national interest from the insurance and construction industries (including a friend-of-the-court brief filed by the Associated General Contractors of America), because it represents a growing trend toward finding insurance coverage for construction defects. While the insurance industry has long taken the position that improperly performed construction work by definition cannot be “accidental” and thus is not covered by standard-form CGL policies, in just the past three years courts in South Carolina, Florida, and Tennessee have come to the same conclusion reached by the Mississippi court.
The Mississippi case involved allegedly defective work performed by a building foundation subcontractor, including serious rebar deficiencies that caused structural damage, and insufficient water barriers that led to mold and mildew. The subcontractor did not respond to demands to remediate the defects, and the general contractor performed the repair work at its own expense and brought a coverage suit against its CGL carrier. The insurance policy contained the standard definition of “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” It also contained a “your work” exclusion and an exception to that exclusion for work performed by subcontractors.
The trial court focused on the fact that the general contractor had voluntarily hired subcontractors to perform much of the work. It treated the hiring of the foundation subcontractor as the operative “occurrence,” and reasoned that the hiring of a subcontractor is an intentional act, not an “accident,” and therefore could not be a covered occurrence. On appeal, the state Supreme Court held that this focus on the hiring of subcontractors was misguided; what mattered was “the underlying acts or conduct of the insured or the subcontractors.” The issue was whether those acts or conduct were intentional or accidental.
The insurer contended that there could not have been a covered occurrence, because “failing to install rebar is not an accident. Defective construction work that causes mold, rust, or water leaks likewise is not an accident.” The insurer pointed to a federal circuit court case interpreting Mississippi insurance law to preclude coverage for defective construction work for that reason. The state Supreme Court rejected that approach and instead looked to the recent trend, holding that “faulty workmanship, defective work, et al., may be accidental, intentional, or neither.” In support of its interpretation, the court looked to the “your work” exclusion and the subcontractor exception to that exclusion, noting that if defective work categorically cannot be an accident or occurrence in the first place, then there would be no need for that exclusion and exception. The court also pointed to the fact that the insurer had charged the general contractor an extra premium for subcontractor coverage.
The court did not definitively hold that the damages at issue were covered by the CGL policy; it noted that there was insufficient evidence in the record to determine whether there had been “property damage” as defined by the policy, or whether various exclusions might bar coverage. Nevertheless, the court’s core holding that defective subcontractor work can be an “occurrence” under standard CGL policy language is an important decision and a trend to watch.