Author: Carl A. Salisbury
The Alabama Supreme Court left the ranks of the outlier courts on Friday, holding that faulty workmanship can be a covered “occurrence” under Commercial General Liability insurance policies. And it did so by the method that so many other courts used during the past twelve months to reach the same conclusion : It reconsidered and reversed a recent prior decision that had reached the opposite result. Is the trend among State Supreme Courts on this issue now officially a movement?
In Arlo Guthrie’s classic Thanksgiving ballad, he says that “if 50 people a day” were to walk into a military psychiatrist’s office, sing a bar of “Alice’s Restaurant” and then walk out, “then friends, they may think it’s a movement. And that’s what it is.” Strange as it may seem, something akin to the “Alice’s Restaurant” movement is happening in State Supreme Courts across the country.
It feels like it was only yesterday when we wrote about the Alabama Supreme Court’s opinion in Owner’s Ins. Co. v. Jim Carr Homebuilders. (See the blog post here. Opinion attached below) It was actually in September 2013, which really wasn’t that long ago. In that decision, the Court bucked the recent trend of State Supreme Courts during the spring and summer of 2013, which had, seemingly every other week, been reversing themselves and concluding that the faulty workmanship of a building contractor could constitute a covered “occurrence” under the contractor’s CGL policies. During that brief period, the high courts of North Dakota, West Virginia, Connecticut, and Georgia all held, for the first time, that faulty workmanship that results in property damage can constitute a covered “occurrence” under the standard CGL policy.
In the September 2013 version of the Jim Carr decision (call it “JCH I“), however, the Alabama Supreme Court agreed with the carrier that faulty workmanship can never be accidental and, therefore, any bodily injury or property damage resulting from a construction defect can never be covered. On Friday, March 28, 2013, the Court withdrew its September opinion and replaced it with a new one that reached an opposite (and unanimous) conclusion. The facts of the Jim Carr case are discussed in the Global Insurance Recovery blog post from September 2013. But to understand the importance of what the Alabama Supreme Court has now done, those facts bear repeating here.
As we pointed out in September, reading about the defects that an arbitrator found were constructed into the house that is the subject of Owners Ins. Co. v. Jim Carr Homebuilder, LLC, et al. is enough to give any homeowner heartburn. The arbitrator awarded $3 million in compensatory damages to the homeowners because of improperly installed flashing; improperly installed brick; the lack of weep holes in the brick; improperly installed doors and windows; improper construction of the upper porches; faulty construction of the roof; improper installation of a bathtub. One imagines after reading this description that the house must have leaked like a colander. The home builder acted as general contractor, Jim Carr Homebuilders, or “JCH;” but the shoddy workmanship that caused the damages was the fault of its subcontractors. Moreover, the work in question caused “downstream” consequential damage to other, “non-defective,” parts of the home.
In the new Jim Carr decision, we’ll call it JCH II (get a copy here), the Alabama Supreme Court did two things that are significant — one of them consistent with the majority of State Supreme Courts on the coverage issue in question and one of them quite unique. First, the Court observed, as others have done, that the definition of “occurrence” in the CGL policy (“an accident, including continuous or repeated exposure to the same general harmful conditions, which causes ‘bodily injury’ or ‘property damage’ during the policy period neither expected nor intended from the standpoint of the insured”) does not turn on the ownership or character of the property that has been damaged by the act or event. Rather, it simply asks whether the damage was unintended — that is, whether it was an accident. Other provisions of the policy either limit or expand coverage on the basis of the ownership or character of the property that was damaged.
There are now 17 State Supreme Courts that have held that faulty workmanship can constitute a covered occurrence.
The precise statement the Court adopted was one that was previously articulated in a concurring opinion by an Alabama Supreme Court Justice in a faulty workmanship coverage case: “‘[F]aulty workmanship itself is not ‘property damage’ ’caused by’ or ‘arising out of’ an ‘occurrence.’ That is, the fact that the cost of repairing or replacing faulty workmanship itself is not the intended object of the insurance policy does not necessarily mean that, in an appropriate case, additional damage to a contractor’s work resulting from faulty workmanship might not properly be considered ‘property damage’ ’caused by’ or ‘arising out of’ an ‘occurrence.’” A simple example will help to unpack this statement of the rule. A general contractor or (more likely) its subcontractor installs a window in a negligent manner, such as to let water infiltrate the building. The CGL policy will not cover the cost of repairing the window, itself. It will ordinarily cover the cost of repairing or replacing other property that gets damaged by the water.
Second — and here’s the relatively unique aspect of the decision — the Court examined the “Your Work” exclusion in the context of whether or not the policyholder had purchased “products completed-operations hazard” insurance coverage. Briefly, the “Your Work” exclusion says that the policy does not apply to: “Damage To Your Work. ‘Property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’” To understand this exclusion, we have to look at two other provisions of the policy: (a) the definition of “your work,” and (b) the definition of the “products completed-operations hazard.”
“Your work” means “(1) Work or operations performed by you or on your behalf; and (2) Materials, parts or equipment furnished in connection with such work or operations.” The “products completed-operations hazard,” or PCOH, is defined as those risks that arise out of products that have left the insured’s physical possession or work that has been completed and turned over to the owner.
CGL policies typically provide that, for an additional premium, the insured can purchase coverage for the products completed-operations hazard. In JCH II, the policyholder argued, and the Court agreed, that the “Your Work” exclusion applies if — and only if — the policyholder declined to purchase the extra PCOH coverage. Stated another way: according to JCH II, the CGL policy does not ordinarily cover risks that arise out of products that have left the insured’s possession or work that has been completed; that is, instead, a coverage risk that can be purchased with an additional premium. But if the policyholder does buy PCOH coverage, then the “Your Work” exclusion does not apply because the subject of the exclusion is not included in the non-covered “products completed-operations hazard.
It was not at all clear from JCH I that the insured had, in fact, purchased PCOH coverage. In fact, it appeared from the way the opinion was written that JCH had not purchased such coverage. In JCH II, however, we learn that JCH had purchased $4,000,000 in PCOH coverage. Accordingly, the “Your Work” exclusion simply did not apply to the property damage at issue.
Depending to some extent on how the various opinions are parsed, there are now 17 State Supreme Courts that have held that faulty workmanship can constitute a covered occurrence. These are Alabama, Alaska, Connecticut, Florida, Georgia, Kansas, Minnesota, Mississippi, Montana, Nevada, North Dakota, South Carolina, South Dakota, Tennessee, Texas, West Virginia, and Wisconsin. The remaining “outliers” number only five: Arkansas, Hawaii, Illinois, New Hampshire, and Pennsylvania. And with respect to both Arkansas and Hawaii, the legislatures of those states have passed statutes that require the definition of “occurrence” in CGL policies to include damage arising from faulty workmanship. That leaves only three states out of 50 in which damage from faulty workmanship is not covered.
With the decision in JCH II, it appears almost beyond any doubt that there is a movement afoot among State Supreme Courts either to fix their prior erroneous decisions and to find that faulty workmanship can be a covered “occurrence,” or to reach that conclusion as a matter of first impression. If they take Arlo Guthrie’s advice, “all they got to do to join is to sing along.”