The argument that construction defects cannot be covered by a commercial general liability (CGL) policy is failing. Only a minority of states still adhere to that legal analysis, which has become as outdated as the muttonchop sideburns popular when such policy language was written. Indeed, the construction industry has suffered because of a long-running disconnect: In 1986, the terms in a CGL policy were changed to expand coverage for contractors; yet, the courts have been slow to change their analysis. As a result, the old legal precedent has long outlived its relevance.
In late 2023, Illinois joined the growing pantheon of states finding that damage arising from a contractor’s faulty work and defective materials is covered by general liability insurance. The insurance industry advanced its customary objections, but the Supreme Court of Illinois rejected “gossamer distinctions that the average person, for whom the policy is written, cannot be expected to understand.” Accordingly, another state has joined the majority recognizing that such claims are potentially covered by a general liability policy and entitled to a defense under that policy.
The trend of states holding this view has been nearly unanimous since at least 2012. (Although the trend is largely the result of judicial decisions, some states have legislatively made this determination.) Almost universally, these court decisions revolve around the interpretation of language in the insurance policy, which is given its plain and ordinary meaning. Words not defined in the policy are construed by the courts with reference to an ordinary, reasonable person.
In Acuity, the insurance company sought to deny coverage by arguing that damages to any portion of a completed construction project caused by faulty workmanship can never be caused by an accident, characterizing such damages as the natural and probable risk of doing construction. The court rejected that argument because it is based on language in the exclusions section of the CGL policy, not in the initial coverage grant. The insurance company’s arguments in Acuity echo the objections commonly presented by insurance companies seeking to deny coverage for construction defects in other cases in other states.
Under the insuring agreement typically applicable to a construction project, a general liability policy is triggered by covered harm caused by an “occurrence.” An “occurrence” is an “accident.” As such, a general liability policy’s grant of coverage hinges on the word “accident”—a word that is not defined in the policy.
What is an accident? Is it limited to only that which was unintended, or is it expansive to include everything except that which was intended? The best approach to discerning this is to look to the relevant state’s jurisprudence on what constitutes an accident. Case law describing the meaning of the term “accident” in the insurance context may be found outside of cases involving construction defects. Most states apply an expansive definition of what fits within the word “accident.” For example, in New York, the definition of “accident” has been described expansively in lawsuits concerning asbestos-containing materials, holding that damages may be “accidental” when they are “unexpected and unintentional,” and coverage is barred “only when the insured intended the damages.”
Further, the structure of the policy itself compels the conclusion that a covered “accident” encompasses situations when intentional conduct leads to unintended results—something the court in Acuity appears to have appreciated when it stated “[a]pplying this definition [of ‘accident’] to the Association’s complaint, it does not claim that the subcontractors intentionally performed substandard work. . . .” This is because after granting coverage, the policy recites a separately written exclusion that removes expected or intended injury from that coverage, as well as other business risk exclusions. Principles of contract interpretation require that, whenever possible, the provisions of a contract be construed so as to give meaning to all of its parts, rendering no part surplusage.
Courts often state that an insurance policy is interpreted like a written contract. But an insurance policy is more than a mere contract; it is a promise of future protection in exchange for present payment. By accepting that premium now, the insurance company binds itself to guarantee the policyholder performance and payment if certain circumstances present themselves in the future. In many instances, a general liability insurance policy is the sole protection guarding the policyholder against an existential threat. Indeed, as Hendon Chubb of Chubb Insurance stated, “. . . while an insurance policy is a legal contract that expresses our minimum responsibility, there are many occasions when equity demands that we recognize a moral obligation beyond the strictly legal terms—and this is always a consideration in our settlements.” Accordingly, intentional acts on construction projects that result in unintended property damage are entitled to coverage under a general liability policy. The focus should be on the result of the act. If the result was not intended, it qualifies as an accident.
The majority of states now have found that a general liability policy applies to claims of construction defects. Significantly, some states have clarified, or even changed, previous decisions that seemed to support the belief that a construction defect cannot be an “occurrence.” Decisions of the New Jersey Supreme Court demonstrate this evolution of thinking.
In its 1979 decision in Weedo v. Stone-E-Brick, Inc., the New Jersey Supreme Court had held that a CGL policy will not cover damage to a contractor’s work that must be replaced due to faulty workmanship, as the faulty performance of work is a “business risk” and not an “occurrence[] giving rise to insurable liability.” In so holding more than 40 years ago, the court set forth its view that “[t]he consequence of not performing well is part of every business venture; the replacement or repair of faulty goods and works is a business expense, to be borne by the insured-contractor in order to satisfy customers.” But notably, the court did not actually address the definition of “accident” and whether faulty work could constitute an “occurrence.” The court in Weedo also relied on the existence of certain policy exclusions to decide that a CGL policy will not cover the costs of repair or replacement of faulty work product itself. To be fair, the court in Weedo did recognize that a “risk of injury to people and damage to property caused by faulty workmanship” might be covered. Despite this recognition, “the Weedo principle [was] extended to the threshold issue of whether the risk was within the scope of the standard insuring clause.”
Fast-forward 40 years to a case in which the New Jersey Supreme Court revisited its decision in Weedo. In Cypress Point Condominium Association, Inc. v. Adria Towers, L.L.C., the court was faced with the question of whether rainwater damage (i.e., resulting damages) from a subcontractor’s faulty workmanship would be considered “property damage” and an “occurrence.” The court noted that in Weedo the decision had been premised on the 1973 ISO standard CGL policy form, while the policy form being considered in Cypress Point was the 1986 standard ISO form. The 1986 standard ISO form premiered the subcontractor exception to the “your work” exclusion. The addition of this subcontractor exception was the result of changes in the construction industry, where work increasingly was performed by using subcontractors. The 1973 ISO standard-form CGL policy did not distinguish between work performed by a contractor and subcontractor, resulting in a lack of CGL coverage for damages caused by a subcontractor’s work, to the dissatisfaction of general contractors.
In 1976, the insurance industry introduced the Broad Form Property Damage Endorsement, which, for an additional premium, extended coverage for property damage caused by a subcontractor’s work. Then, in 1986, the subcontractor exception was expressly included in the standard-form policy in response to continued demand for coverage by policyholders and the desire of insurance companies to better market their CGL policies. The 1986 inclusion of the subcontractor exception meant that property damage to a contractor’s “work” is not excluded when performed by a subcontractor. Just as the Illinois Supreme Court recently held in Acuity, the New Jersey Supreme Court observed that “no one claims that the subcontractors intentionally performed substandard work that led to the water damage.” The court found that consequential harm to a contractor’s completed, non-defective portions of a building, caused by a subcontractor’s defective work, is an “accident” and thus an “occurrence” under a CGL policy.
By contrast, in New York, a mid-level appellate court’s decision is often cited by insurance companies seeking to deny coverage for claims of property damage from faulty workmanship. The court in George A. Fuller Co. v. U.S. Fidelity and Guaranty Co. held that claims of faulty workmanship causing property damage necessitating replacement of a contractor’s work on a project did not involve an “occurrence” resulting in “property damage.” The holding was based on the court’s conclusion that a claim for such damages simply sought uncovered “economic loss” and could never be a basis for coverage—and further was subject to policy exclusions. Like Weedo in New Jersey, Fuller spawned a line of cases in New York that reflexively recited language from the holding of Fuller rather than examining the language of the newer form of CGL policy.
Fuller and its progeny also ignored the case law in New York construing the definition of “accident” broadly in a general liability policy—that is, when damages are “unexpected and unintentional.” Applying the definition properly permits the policy terms to be read as a whole, without any terms being mere surplusage, and with each term being given effect, as required by standard rules of contract interpretation. Moreover, like the outdated Weedo decision in New Jersey, the Fuller decision relied on outdated case law using the 1973 ISO standard-form policy, not the policy form with the subcontractor exception to the “your work” exclusion that has been part of the ISO form since 1986. The legal principles in Fuller therefore are ripe to be updated to reflect the changes implemented when the 1986 ISO form was adopted. This would bring New York in line with the continuing majority trend recently expanded by the Acuity decision.
The emerging trend continues to reflect the majority approach, holding that construction defects are entitled to coverage under a CGL policy. This trend has been nearly unanimous in every state to consider the matter for more than 10 years. Many of these holdings have come via decisions from courts, including in Iowa, West Virginia, North Dakota, Georgia, and more. In some jurisdictions, however, legislative bodies have passed statutes providing that construction defects are to be considered occurrences.
The recent ruling from the Illinois Supreme Court in Acuity furthers this trend, and the trend is expected to continue as additional jurisdictions update their policy analysis, finding that construction defects and claims of faulty workmanship that cause property damage are “occurrences” under a general liability policy.
