Cases Finding an Occurrence
New Jersey. In Cypress Point Condominium Ass’n, Inc. v. Adria Towers, L.L.C.,[5] the New Jersey Supreme Court addressed as a matter of first impression coverage for consequential damages caused by faulty workmanship under the 1986 ISO standard form CGL policy.[6]
In Cypress Point, a condominium association sued the developer and several subcontractors, alleging faulty workmanship in the construction of the condominium complex—specifically, defectively built or installed roofs, gutters, brick facades, exterior insulation and finishing system siding, windows, doors, and sealants.[7] The association claimed consequential damages—including water intrusion damage to steel supports, exterior and interior sheathing and sheetrock, and insulation—to the condominium’s common areas, interior structures, and residential units.[8] The developer’s CGL carriers refused to defend or indemnify it in relation to the action; a coverage lawsuit ensued.
The New Jersey Supreme Court affirmed the lower court’s judgment, holding “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 [].”[9]
The court explained that “the term ‘accident’ in the policies at issue encompasses unintended and unexpected harm caused by negligent conduct” and held:
[U]nder our interpretation of the term “occurrence” in the policies, consequential harm caused by negligent work is an “accident.” Therefore, because the result of the subcontractors’ faulty workmanship here—consequential water damage to the completed and nondefective portions of [the condominium complex]—was an “accident,” it is an “occurrence” under the policies and is therefore covered so long as the other parameters set by the policies are met.[10]
The court further held the consequential damages caused by the subcontractors’ faulty work were also covered by the subcontractor exception to the policy’s “your work” exclusion.[11]
Iowa. The Iowa Supreme Court, in National Surety Corp. v. Westlake Investments, LLC,[12] addressed whether and under what circumstances faulty work constitutes an “occurrence.” The court held “defective workmanship by an insured’s subcontractor may constitute an occurrence under a modern standard-form CGL policy containing a subcontractor exception to the ‘your work’ exclusion.”[13] In Westlake Investments, the owner of an apartment complex sued the developers and general contractor for construction defects caused by subcontractors, which resulted in widespread water penetration issues.[14] The developers’ and general contractor’s excess carrier denied coverage for the judgment awarded to the owner. The Iowa Supreme Court addressed the issue of “whether property damage caused by defective work performed by an insured’s subcontractor may constitute an accident, and therefore an occurrence, for which coverage exists under the policy language included in post-1986 standard-form CGL insurance policies.”[15]
The court explained that “[a]n intentional act resulting in property damage the insured did not expect or intend qualifies as an accident amounting to an occurrence as defined in a modern standard-form CGL policy so long as the insured did not expect and intend both the act itself and the resulting property damage.”[16]
Relying principally on the subcontractor exception to the “your work” exclusion, the court held as follows:
[A] reasonable ordinary person who read the modern standard-form CGL policy containing the subcontractor exception to the “your work” exclusion in its entirety would believe it covered defective work performed by the insured’s subcontractor unless the resulting property damage was specifically precluded from coverage by an exclusion or endorsement. . . . Accordingly, we interpret the insuring agreement in the modern standard-form CGL policy as providing coverage for property damage arising out of defective work performed by an insured’s subcontractor unless the resulting property damage is specifically precluded from coverage by an exclusion or endorsement.[17]
The court further concluded that “the defective work performed by the insureds’ subcontractors falls within the definition of ‘occurrence’ in the insuring agreement appearing in the [excess] policy.”[18] In so holding, the court noted the owner had proven “defective installation of the building wrap and flashings resulted in water penetration that caused widespread consequential damage to interior building components that were not defective” and “the defective work that led to the claimed damages was performed by [the] insureds’ subcontractors, not the insureds themselves.”[19]
Montana. Employers Mutual Casualty Co. v. Fisher Builders, Inc.,[20] involved a deck collapsing during a contractor’s work on a home. The contractor’s carrier denied coverage for the homeowners’ negligence action against the contractor, and a coverage dispute followed. The trial court granted summary judgment in favor of the carrier, finding the insured’s conduct was intentional and thus not an “occurrence,” regardless of whether the insured intended the consequences or not.[21] The Montana Supreme Court reversed and remanded, clarifying that the term “accident” within the definition of an occurrence in a CGL policy “may include intentional acts if the damages were not objectively intended or expected by the insured.”[22]
Cases Finding No Occurrence
Nebraska. In Drake-Williams Steel, Inc. v. Continental Casualty Co.,[23] the insured allegedly improperly fabricated steel rebar that was incorporated into concrete pile caps intended to support an arena. Some of the caps were required to be modified to conform to contract specifications. The rebar fabricator’s CGL carriers refused to reimburse it for costs incurred to modify the compromised caps, claiming the costs were not covered under the policies.[24]
The Nebraska Supreme Court affirmed the lower court’s summary judgment order in favor of the carriers, holding there was no “property damage” given that the insured’s defective work product did not damage other property.[25] Specifically, the court explained:
Concrete and the rebar were part of the integrated system of the pile caps. There was no “physical injury” to the rebar or the pile caps in which the rebar was cemented. . . . Because the defective rebar was discovered before the arena was further constructed, there was no damage to other parts of the system. And because the pile caps could be modified to meet the contractual requirements, rather than destroying and rebuilding the pile caps, there was no physical damage to the pile caps themselves. The pile caps could be modified without any physical damage to any other part of the arena.[26]
The court emphasized that “reinforcement of the pile caps was simply part of [the insured’s] contractual obligation to make good on its work” and the CGL policies were not designed to cover the insured’s contractual obligation to reinforce the inadequately reinforced pile caps.[27]
Arkansas. Another recent decision addressing the question of whether a construction defect claim constitutes an occurrence is Columbia Insurance Group, Inc. v. Cenark Project Management Services, Inc.[28] There, homeowners sued a company hired to construct building pads for residences for breach of contract, alleging the company failed to construct the pads in accordance with the engineering plans and specifications.[29] The defendant’s CGL carrier denied coverage, and a coverage lawsuit ensued. The Arkansas Supreme Court held in favor of the carrier, reaffirming its position that CGL policies do not cover breach of contract claims like that asserted by the homeowners.[30]
Kentucky. The Kentucky Court of Appeals, in Acuity v. Martin/Elias Properties, LLC,[31] held an insured subcontractor’s faulty work did not constitute an “occurrence.” There, a subcontractor’s defective work on a home’s foundation caused extensive structural damage to the home. The homeowner sued the subcontractor for faulty workmanship on the property.[32] The subcontractor’s carrier argued the CGL policy did not afford coverage for the homeowner’s claims, as faulty workmanship claims do not constitute an accident or occurrence under a CGL policy.[33] The court agreed, holding there was no occurrence because the substandard workmanship, which was within the subcontractor’s control and the scope of the contract, could not be considered unintended or fortuitous as a matter of law.[34]
The Number of Occurrences
The number of occurrences is an issue that arises in the construction defect context where there are several types of “property damage” or “property damage” occurring over a period of time. The number of occurrences determines the amount of coverage available for a particular loss and thus may have a significant impact on an insured’s recovery.
The small number of cases in the construction defect context on this issue is by no means reflective of the importance of this question. The paucity of case law, rather, is likely a product of when and how this issue becomes ripe for adjudication: Determinations must be made that the insured is liable for and the policy covers the damages, the coverage action must not settle, and the insured’s liability must exceed what the carrier contends is the applicable policy limit.
When addressing the number of occurrences, courts first look to the applicable policy language.[35] As noted, the standard policy form defines “occurrence” as “an accident, including continuous and repeated exposure to substantially the same general harmful conditions.”[36]
One of two theories is then typically applied: the “cause” test or the “effect” test. The cause test, the majority approach, looks to the cause of the plaintiff’s damages rather than the number of claimants or injuries.[37] The “effects” test holds the number of injuries is determinative.[38] Courts in New York and Connecticut apply a variation of the cause test known as the “unfortunate event” test.[39] The number of occurrences in these jurisdictions is based on the unfortunate event giving rise to the injury.[40]
In applying the cause test in the construction defect context, courts tend to look to one of the following: the event giving rise to the insured’s liability or the actor’s overall negligence, the number of negligent actors alleged to have caused damage, or the categories of damages caused by separate forces set in motion by the negligent actor or actors.
Courts Finding One Occurrence
The court in Trammell Crow Residential Co. v. St. Paul Fire & Marine Insurance Co.[41] looked to the event giving rise to the insured’s liability. In Trammell Crow,the property owners’ association of a multifamily house project sued the developer and contractor (alleged affiliates of the insured parent company), alleging that defective construction caused water intrusion and damage.[42] The insured parent company sought to recover from its excess/umbrella carrier the amount it paid toward settlement.[43] In considering that issue, the court addressed whether there was one or several occurrences.
The court held that the following test governed the issue: “[T]he proper focus in interpreting ‘occurrence’ is on the events that cause the injuries and give rise to the insured’s liability, rather than on the number of injurious effects.”[44] The court declined to hold that faulty construction was the cause of the injury because that was “too overarching to be considered the cause” and the underlying plaintiffs did not own the property at the time of construction and thus would have had no claim against the developer and contractor at that time.[45] The court determined there was a single occurrence because “the event giving rise to the insured’s liability here was the sale of the property” and “[t]he sole occurrence for which the insureds are liable was the sale of the property.”[46]
Auto-Owners Insurance Company v. Rhodes[47] is an example of the insured’s overall negligence driving the number of occurrences determination. There, the insured designed, fabricated, and erected three outdoor advertising signs on property owned by the claimant that bordered an interstate freeway.[48] After installation, one of the signs fell across the freeway blocking both lanes of southbound traffic. The South Carolina Department of Transportation ordered that the remaining two signs be removed and revoked the property owner’s permits to maintain signs on the property.[49] The property owner requested that the insured remove the two remaining signs; the insured agreed to remove only one.[50] The property owner sued the insured, alleging damages to real estate and lost income due to the negligent design, fabrication, and erection of the signs.[51] A coverage action by the insured’s CGL carrier ensued.
The South Carolina Supreme Court focused on the insured’s overall negligence in designing, fabricating, and erecting the three signs. The court held that because the signs were simultaneously constructed, the collapse of the one sign and the removal of the two other signs constituted one occurrence: “[B]ecause the signs were simultaneously constructed, we view this as a single occurrence with progressive damage.”[52]
Cases Finding Multiple Occurrences
The number of negligent actors alleged to have caused damage dictated the number of occurrences in Coreslab Structures (Miami), Inc. v. U.S. Fire Insurance Co.[53] That case involved the design and building of a parking garage. Subcontractors were hired to complete various portions of the work. The project suffered a partial collapse as a result of the alleged negligence of two of the subcontractors—Sims Crane & Equipment, Co., and Florida Lemark Corp., both of which were subcontractors of Coreslab Structures (MIAMI), Inc.[54] Coreslab’s carrier maintained there was one occurrence and thus its payment of the CGL policy’s $1,000,000 per occurrence limit satisfied its obligations.
The court, applying Texas law—which has adopted the cause test—disagreed. It found two occurrences where “the alleged negligence of Lemark (in failing to properly grout the column within 48 hours) and the alleged negligence of Sims (in striking column B2 with the crane), are separate forces which are alleged to have caused damage to the Project.”[55] The court explained that its finding of two occurrences was warranted because “there are multiple acts of negligence alleged to have been committed by multiple persons or entities, any one of which can be seen to be an independent and proximate cause of damages sustained. . . .”[56]
In Mid-Continent Casualty Co. v. Basdeo,[57] the court looked to the categories of damages caused by separate forces set in motion by the insured. There, Hurricane Wilma inflicted significant damage on a condominium, and the condominium association hired a contractor to repair the damage. The contractor was insured by Mid-Continent Casualty Company. Basdeo, one of the condominium owners, filed a class action complaint[58] against the contractor for damages allegedly stemming from the contractor’s work.[59]
The carrier argued the contractor’s activities constituted one occurrence because the contractor had only one contract with the association and it failed to complete its work on that contract.[60] The carrier thus reasoned the association’s damages stemming from the work were the result of continuous or repeated exposure to substantially the same general harmful conditions caused by the contractor’s work under the contract.[61]
The court rejected the carrier’s position and held that three occurrences transpired where the contractor caused three separate categories of damages to different parts of the buildings: “(1) damages caused in connection with [the contractor’s] tarping work; (2) damages caused in connection with [the contractor’s] work on the [flat] roofs; and (3) damages caused in connection with [the contractor’s] work on the mansards.”[62] The court determined “each of these categories of damages resulted from a separate force, distinguishable in time and space” and the separate forces inflicting the damages are what determine the number of occurrences.[63] In rejecting the carrier’s argument that all damages resulted from work under one contract, the court noted the tarping work was completed without a formal contract and before the roofing and mansards work began.[64] Moreover, the court stated, “because the tarping work involved only tarping work, it constituted only a single force.”[65] With respect to the mansard and flat-roof work done under the contract, the court explained that “the number of contracts governing a job does not necessarily determine the number of occurrences”; “[r]ather, the separate forces inflicting the damages determine the number of occurrences.”[66] The court continued:
[T]he record reflects that work done on the flat roofs differed substantially from work performed on the mansards. While the mansards were left open, the flat roofs were not. Moreover, . . . [the contractor] undertook different types of work on different parts of the buildings. Thus, [the contractor’s] work on each of these parts of the buildings set in motion a separate force distinguishable in space and time. Consequently, damages stemming from the work on the mansards and the flat roofs constitute two separate occurrences.[67]
In so concluding, the court also rejected the policyholder’s argument that different occurrences transpired at each of the seven separate buildings—“the contractual work being done on each of the multiple buildings was essentially the same, pursuant to a single contract.”[68]
An example of the application of the “unfortunate event” test in the faulty work context is Harleysville Worcester Insurance Co. v. Paramount Concrete, Inc.[69] That case involved an action against a manufacturer and supplier of shotcrete after 19 pools built by the plaintiff and incorporating the defendant’s shotcrete cracked, causing extensive damage to the pools.[70] The carrier denied any obligation to indemnify for the verdict entered against its insured.
Addressing the issue of coverage on summary judgment, the court considered the parties’ dispute regarding the number of occurrences. The carrier argued the damage flowed from one occurrence: the production of faulty shotcrete.[71] The court stated that “the ‘occurrence’ is the ‘unfortunate event’ that causes injury and not the cause of that event” and rejected the carrier’s position as follows:
[The insured] habitually manufactured defective shotcrete, but that shotcrete caused discrete harm each time its use in a pool caused the pool to crack and leak, thereby ruining the finished product it helped to hold together. . . . All of [the insured’s] prior mistakes; its bad formula, reckless management, and disregard for industry standards, were just steps in a chain of events that ended in the company’s defective product destroying swimming pools. There were nineteen separate occurrences here and, to the extent that these occurrences caused “property damage” and were otherwise covered under the scope and temporal limits of the CGL policy, [the carrier] must cover the costs of each separate injury to each individual pool.[72]
The number of occurrences in construction defect cases, in sum, is an extremely fact-specific question confined principally by the test employed by the jurisdiction at issue. Although multiple occurrences is often the most beneficial, and a single occurrence the least beneficial, in maximizing limits, that is not always the case. The policy’s deductible or self-insured retention and the availability of excess/umbrella coverage also factor into and should be considered in relation to this assessment. The dearth of case law addressing the number of occurrences in the construction defect context affords insureds an opportunity to shape the precedent in this emerging area of insurance coverage law.
Conclusion
A policyholder can seek to maximize its insurance recovery (and maximize coverage available for settlement) by considering the key matters outlined above from the outset of a claim. While jurisdictions vary in their treatment of these questions, a review of whether faulty work constitutes an occurrence and the number of occurrences likely to be found is crucial to analyzing insurance coverage under a CGL policy for any construction defect claim.
Keywords: insurance, coverage, construction, construction defect, faulty construction, faulty work, defective work, occurrence
Christine A. Gudaitis is a shareholder and Ashley B. Jordan is an attorney at Ver Ploeg & Lumpkin, P.A., in Miami.
[1] See Commercial General Liability Coverage Form CG 00 01 12 04, § I, 1(a) and (b).
[2] See Commercial General Liability Coverage Form CG 00 01 12 04, § V(13).
[3] Pennsylvania, Kentucky, and Alabama reflect the minority rule. See, e.g., Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006); Cincinnati Ins. Co. v. Motorists Mut. Ins. Co., 306 S.W.3d 69 (Ky. 2010), as corrected, (July 19, 2011);Town & Country Prop., L.L.C. v. Amerisure Ins. Co., 111 So. 3d 699 (Ala. 2011).
[4] See, e.g., Philip L. Bruner & Patrick J. O’Connor, Jr., “Connecticut, Ohio, North Dakota, and West Virginia Rule on Whether Faulty Workmanship Is an ‘Occurrence’,” 4Pt1 Bruner & O’Connor on Construction Law § 11:215 (June 2016 Update).
[5] Cypress Point Condominium Ass’n, Inc. v. Adria Towers, L.L.C. 143 A.3d 273 (N.J. 2016).
[6] Cypress Point, 143 A.3d at 283.
[7] Cypress Point, 143 A.3d at 277.
[8] Cypress Point, 143 A.3d at 277.
[9] Cypress Point, 143 A.3d at 276.
[10] Cypress Point, 143 A.3d at 287–88.
[11] Cypress Point, 143 A.3d at 289.
[12] National Surety Corp. v. Westlake Investments, LLC 880 N.W.2d 724 (Iowa 2016).
[13] Westlake Investments, 880 N.W.2d at 744.
[14] Westlake Investments, 880 N.W.2d at 727.
[15] Westlake Investments, 880 N.W.2d at 731.
[16] Westlake Investments, 880 N.W.2d at 736.
[17] Westlake Investments, 880 N.W.2d at 740.
[18] Westlake Investments, 880 N.W.2d at 740.
[19] Westlake Investments, 880 N.W.2d at 737.
[20] Employers Mutual Casualty Co. v. Fisher Builders, Inc., 371 P.3d 375 (Mont. 2016).
[21] Fisher Builders, 371 P.3d at 377.
[22] Fisher Builders, 371 P.3d at 380.
[23]Drake-Williams Steel, Inc. v. Continental Casualty Co., 883 N.W.2d 60 (Neb. 2016).
[24] Drake-Williams Steel, 883 N.W.2d at 62.
[25] Drake-Williams Steel, 883 N.W.2d at 67–69.
[26] Drake-Williams Steel, 883 N.W.2d at 67.
[27] Drake-Williams Steel, 883 N.W.2d at 67–68.
[28] Columbia Insurance Group, Inc. v. Cenark Project Management Services, Inc., 491 S.W.3d 135 (Ark. 2016).
[29] Cenark Project Management Services, 491 S.W.3d at 137.
[30] Cenark Project Management Services, 491 S.W.3d at 136.
[31] Acuity v. Martin/Elias Properties, LLC ,No. 2013-CA-001428-MR, 2016 Ky. App. Unpub. LEXIS 237 (Ky. Ct. App. Mar. 25, 2016).
[32] Acuity, 2016 Ky. App. Unpub. LEXIS 237, at *4.
[33] Acuity, 2016 Ky. App. Unpub. LEXIS 237, at *5.
[34] Acuity, 2016 Ky. App. Unpub. LEXIS 237, at *11–13.
[35] See Philip L. Bruner & Patrick J. O’Connor, Jr., “Importance of Whether and How the Policy Defines ‘Occurrence’ in Determining the Number of Occurrences,” 4Pt1 Bruner & O’Connor on Construction Law § 11:221 (June 2016 Update).
[36] See Commercial General Liability Coverage Form CG 00 01 12 04, § V(13).
[37] See Bruner & O’Connor, supra note 35.
[38] See Bruner & O’Connor, supra note 35.
[39] See, e.g., Bruner & O’Connor, supra note 35.
[40] See Bruner & O’Connor, supra note 35.
[41] Trammell Crow Residential Co. v. St. Paul Fire & Marine Insurance Co., No. 3:11-CV-2853-N (N.D. Tex. Jan. 21, 2014).
[42] Trammell Crow, No. 3:11-CV-2853-N, slip op. at 3.
[43] Trammell Crow, No. 3:11-CV-2853-N, slip op. at 3.
[44] Trammell Crow, No. 3:11-CV-2853-N, slip op. at 8.
[45] Trammell Crow, No. 3:11-CV-2853-N, slip op. at 9.
[46] Trammell Crow, No. 3:11-CV-2853-N, slip op. at 10–11.
[47] Auto-Owners Insurance Company v. Rhodes, 748 S.E.2d 781 (S.C. 2013).
[48] Rhodes, 748 S.E.2d at 784.
[49] Rhodes, 748 S.E.2d at 784.
[50] Rhodes, 748 S.E.2d at 784.
[51] Rhodes, 748 S.E.2d at 784.
[52] Rhodes, 748 S.E.2d at 791.
[53] Coreslab Structures (Miami) Inc. v. U.S. Fire Ins. Co., No. 14-008893 CA 01 (Fla. Cir. Ct. Apr. 22, 2015).
[54] Coreslab Structures, No. 14-008893 CA 01, slip op. at 3, 5.
[55] Coreslab Structures, No. 14-008893 CA 01, slip op. at 16.
[56] Coreslab Structures, No. 14-008893 CA 01, slip op. at 19–20.
[57] Mid-Continent Casualty Co. v. Basdeo, 742 F. Supp. 2d 1293 (S.D. Fla. 2010).
[58] As exemplified by Basdeo, although class actions pose unique challenges, a court’s analysis of the number of occurrences should not differ where there is an underlying class action. See also Nicor, Inc. v. Associated Elec. & Gas Ins. Servs. Ltd., 860 N.E.2d 280, 296 (Ill. 2006) (“There is likewise no merit to Nicor’s contention that the spills should be viewed as the result of a single cause because the individual claims of its customers were allowed to proceed as a class action and the attorney general’s action sought redress for all of the spills at the same time in the same proceeding. Consolidation of individual claims and the request for comprehensive remedial action in the underlying litigation relate to questions of litigation efficiency. They have no bearing whatever on the issue of how many occurrences there were under the terms of the applicable insurance policies.”); Ill. Cent. R.R. Co. v. Accident & Cas. Co. of Winterthur, 739 N.E.2d 1049, 1059 (Ill. Ct. App. 2000) (rejecting insured’s argument that class certification was based on overall continuing injury to class as a whole, stating “each action, i.e.,rejection of a class member’s application for employment by the railroad’s clerk, was a separate and distinct event constituting an occurrence”); see generally Hartford Accident & Indem. Co. v. Beaver, 466 F.3d 1289, 1293 (11th Cir. 2006) (“Nothing in Florida law even remotely suggests that the potential for coverage created by a class action is qualitatively different from the potential for coverage created by an individual action.”).
[59] Basdeo, 742 F. Supp. 2d at 1315.
[60] Basdeo, 742 F. Supp. 2d at 1345–46.
[61] Basdeo, 742 F. Supp. 2d at 1346.
[62] Basdeo, 742 F. Supp. 2d at 1347–48.
[63] Basdeo, 742 F. Supp. 2d at 1347–48.
[64] Basdeo, 742 F. Supp. 2d at 1348.
[65] Basdeo, 742 F. Supp. 2d at 1348.
[66] Basdeo, 742 F. Supp. 2d at 1348.
[67] Basdeo, 742 F. Supp. 2d at 1348.
[68] Basdeo, 742 F. Supp. 2d at 1348.
[69] Harleysville Worcester Insurance Co. v. Paramount Concrete, Inc., 10 F. Supp. 3d 252 (D. Conn. 2014).
[70] Harleysville Worcester, 10 F. Supp. 3d at 258.
[71] Harleysville Worcester, 10 F. Supp. 3d at 271.
[72] Harleysville Worcester, 10 F. Supp. 3d at 271.