Construction Defect as "Occurrence"

Defective Workmanship as an "Occurrence" Under Commercial General Liability Policies

Most state high courts to construe the post-1986 standard-form policy have held that unintended defective work can be an accident. Answering certified questions from the Fifth Circuit, Lamar Homes, Inc. v. Mid-Continent Casualty Co., 242 S.W.3d 1 (Tex. 2007) concluded "that allegations of unintended construction defects may constitute an ‘accident’ or ‘occurrence’ under the CGL policy and that allegations of damage to or loss of use of the home itself may also constitute ‘property damage’ sufficient to trigger the duty to defend under a CGL policy." The court reasoned that "a deliberate act, performed negligently, is an accident if the effect is not the intended or expected result; that is, the result would have been different had the deliberate act been performed correctly." U.S. Fire Insurance Co. v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007) reached the same result later that year, holding "that faulty workmanship that is neither intended nor expected from the standpoint of the contractor can constitute an ‘accident’ and, thus, an ‘occurrence’ under a post-1986 CGL policy." The Florida court confined the holding to damage beyond the defective component: "faulty workmanship or defective work that has damaged the otherwise nondefective completed project has caused ‘physical injury to tangible property’ within the plain meaning of the definition in the policy. If there is no damage beyond the faulty workmanship or defective work, then there may be no resulting ‘property damage.’"

The 1986 ISO revision to the "your work" exclusion supplies the textual argument for coverage where a subcontractor performed the defective work. Cypress Point Condominium Ass’n v. Adria Towers, LLC, 143 A.3d 273 (N.J. 2016) held that "the consequential damages caused by the subcontractors’ faulty workmanship constitute ‘property damage,’ and the event resulting in that damage—water from rain flowing into the interior of the property due to the subcontractors’ faulty workmanship—is an ‘occurrence’ under the plain language of the CGL policies at issue here." The exception, the court explained, "narrow[s] the exclusion by expressly declaring that it does not apply ‘if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor,’" so that "because the water damage to the completed portions of Cypress Point is alleged to have arisen out of faulty workmanship performed by subcontractors, it is a covered loss." Skanska USA Building Inc. v. M.A.P. Mechanical Contractors, Inc., 952 N.W.2d 402 (Mich. 2020) unanimously held that "an ‘accident’ may include unintentionally faulty subcontractor work that damages an insured’s work product," limited its earlier contrary precedent construing a 1973 policy form "to cases involving pre-1986 insurance policies," and observed that "the policy does not limit the definition of ‘occurrence’ by reference to the owner of the damaged property." The court rested on the structure of the exclusion itself: "If faulty workmanship by a subcontractor could never constitute an ‘accident’ and therefore never be an ‘occurrence’ triggering coverage in the first place, the subcontractor exception would be nugatory."

A minority of jurisdictions holds that defective work categorically lacks the fortuity an accident requires. Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Co., 908 A.2d 888 (Pa. 2006) held "that the definition of ‘accident’ required to establish an ‘occurrence’ under the policies cannot be satisfied by claims based upon faulty workmanship," because such claims "simply do not present the degree of fortuity contemplated by the ordinary definition of ‘accident’ or its common judicial construction in this context." The court explained that "[t]he key term in the ordinary definition of ‘accident’ is ‘unexpected,’" which "implies a degree of fortuity that is not present in a claim for faulty workmanship," and endorsed the concern that "[t]o permit coverage in such instances would convert CGL policies into performance bonds, which guarantee the work, rather than like an insurance policy, which is intended to insure against accidents." Because the underlying suit "avers only property damage from poor workmanship to the work product itself" — the construction of a coke oven battery alleged to have breached contract specifications, warranties, and industry standards — the insurer owed no duty to defend or indemnify; the decision did not resolve whether damage to property other than the insured’s own work product would qualify.

Where the no-occurrence rule governs, the subcontractor exception does not restore coverage. Ohio Northern University v. Charles Construction Services, Inc., 2018-Ohio-4057 (Ohio Oct. 9, 2018) held that "[p]roperty damage caused by a subcontractor’s faulty work is not an ‘occurrence’ under a CGL policy because it cannot be deemed fortuitous," notwithstanding that the contractor had purchased products-completed operations hazard coverage: "unless there was an ‘occurrence,’ the PCOH and subcontractor language has no effect, despite the fact that Charles Construction had paid additional money for it." The court acknowledged the converse proposition — "If the subcontractors’ faulty work were fortuitous, the PCOH and subcontractor-specific terms would require coverage" — but reasoned that a CGL policy "is not intended to insure business risks that are the normal, frequent, or predictable consequences of doing business and which businesses can control and manage," reversed the court of appeals, and reinstated the trial court’s judgment that the insurer owed no defense or indemnity for the subcontractors’ defective work on a completed university building. The Ohio approach thus treats the exception as operating only at the exclusion stage, in direct opposition to the Michigan court’s reasoning that such a reading renders the exception meaningless.

Three variables organize the split. The first is the definition of "accident": the Texas, Florida, New Jersey, and Michigan courts ask whether the resulting damage was expected or intended from the standpoint of the insured, while the Pennsylvania and Ohio courts ask whether defective work is the kind of fortuitous event liability insurance was designed to reach and answer that it is not. The second is the weight given the 1986 ISO subcontractor exception to the "your work" exclusion — read by the majority line as confirmation that damage arising from a subcontractor’s defective work falls within the insuring agreement, and by the Ohio court as an exclusion-stage provision that cannot supply an occurrence the insuring agreement never granted, even where the insured paid an additional premium for products-completed operations coverage. The third is the location of the damage: even in coverage-friendly jurisdictions the cost of repairing or replacing the defective component itself is generally not "property damage," so recovery in practice depends on consequential injury to nondefective portions of the project; in no-occurrence jurisdictions the analysis ends at the insuring agreement, whoever performed the work and wherever the damage lies.