August 19, 2013
One may state with a reasonable degree of certainty that no contractor intends to construct a building with faulty workmanship. Certainly, if any defects are present in a structure, they must be accidental. On the other side of the coin, the manner in which a contractor constructs a building could very well be (and in fact may have likely been) the result of intentional acts and decisions. One does not “accidentally” design and construct a building a certain way. Rather, such decisions are likely the result of deliberate, intentional and considered decisions on the part of the contractor. In an insurance context, the above conundrum has sparked endless debates, confusion and conflicting laws regarding whether faulty workmanship is accidentally and, therefore, contemplated under an insu ring agreement.
Defects and Insurance – What Is Covered in Georgia?
When a contractor is confronted with an allegation of faulty workmanship, the contractor may elect to place its insurance carrier on notice of the claim. Upon receipt of any claim, the insurer must answer two questions: (1) Is the contractor entitled to coverage for the claim? and (2) Does the claim have merit? In deciding whether the contractor is entitled to coverage for the claim, the insurer turns to the main insuring agreement in the policy, which contains the basic grant of coverage to the contractor.
The main insuring agreement under a commercial general liability policy generally covers “property damage” caused by an “occurrence.” The term “occurrence” is typically defined by the CGL policy as meaning “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” However, an “accident” is not defined by the CGL policy.
In Georgia, the courts have construed the term “accident” to mean “an event which takes place without one’s foresight or expectation or design.” See, e.g., Moss v. Protective Life Ins. Co., 203 Ga. App. 389, 417 S.E.2d 340 (1992). Alternatively, Georgia courts have defined the word “accident” in an insurance policy as meaning “an unexpected happening . . . .” Thrift-Mart, Inc. v. Commercial Union Assurance Cos., 154 Ga. App. 344, 346, 268 S.E.2d 397 (1980) (emphasis added). Substantially similar definitions of an accident are found throughout every jurisdiction. Coverage, then, depends in part on whether faulty workmanship is an “accident,” as interpreted and defined by the courts.
In a case decided by a Georgia federal district court approximately four years ago, Owners Ins. Co. v. James, 295 F. Supp. 2d 1354 (N.D. Ga. 2003), the insured was a residential builder who was faced with a claim by a homeowner, who alleged that the home built by the contractor was experiencing heavy water intrusion and damages. The insurer challenged the contractor’s right to coverage for such a claim on a number of grounds, and among those grounds was a contention that the claim did not allege an “occurrence” under the subject policy.
The federal district court in Owners agreed with the insurer. The court looked carefully at the allegations which were being made against the builder in that case, which all arose out of the installation of the stucco. According to the court, these acts were not “accidents” within the meaning of the policy. In that regard, the court in Owners found that the “occurrence” definition as it exists in most policies should only be held to include “only injury resulting from accidental acts and not injury accidentally caused by intentional acts.” (emphasis in original). In other words, the manner in which the stucco was installed was not “accidental.” It was intentionally and deliberately installed in a certain manner by the contractor. The fact that the contractor did not expect and anticipate the damage to occur as a result of his deliberate acts did not make those acts “accidental.”
In other words, there are arguably two kinds of negligence: (1) the negligence that arises when someone tries to do something a certain way and negligently fails to do so, and (2) the negligence that arises when someone makes a deliberate, but negligent, choice. With the Owners decision in mind, insurers may contend that claims falling in the second category of negligence do not allege an “accident” and, therefore, do not allege an “occurrence” for which coverage is owed.
More recent decisions, however, show that insurers will have some difficulty with that argument. Two more recent Georgia cases – issued by the state courts of Georgia – have seemed to find an “occurrence” almost as a matter of course where there is an allegation of negligence against the insured. For example, in Sawhorse, Inc. v. Southern Guaranty Ins. Co. of Georgia, 269 Ga. App. 493, 604 S.E.2d 541 (2004), the Georgia Court of Appeals specifically held that a claim of “faulty workmanship” does constitute an “occurrence” when there is no proof that the insured intended for the faulty workmanship to occur. Similarly, in Custom Planning & Development, Inc. v. American National Fire Ins. Co., 270 Ga. App. 8, 606 S.E.2d 39 (2004), the Georgia Court of Appeals – citing the Sawhorse decision – again noted that “where faulty workmanship causes damage to other property, there may be an occurrence within the policy meaning of occurrence from such faulty workmanship, which was negligently performed, which would create an issue of fact as to an accident within [a] policy.”
The conflicting law on the issue of whether faulty workmanship may constitute and occurrence is not limited to Georgia. Recent decisions in Texas further exemplify this difficult issue. In Courtland Custom Homes, Inc. v. Mid Continent Cas. Co., 395 F.Supp. 2d 478 (S.D.Tex. 2005), a residential home builder and general contractor sought coverage for alleged faulty workmanship related to foundation problems, damage to the wooden support structure, wood rot and resultant mold. The Courtland court noted that both the contractor’s intent and the reasonably foreseeable effect of his conduct bear on the determination of whether an occurrence is accidental. In turn, the court opined that the contractor intended to use the material it selected for construction. Accordingly, the court held that the claims were not accidental, but rather allegations that the contractor has failed to perform its work in a good and workmanlike manner.
A year later, an appellate court in Texas issued a 72-page conflicting decision in Lennar Corp. v. Great American Ins. Co. 200 S.W.3d 651 (Tex.App.-Houston [14 Dist.], 2006). Most notably, the Lennar court discussed that insurers generally rely on the “business risk” doctrine to argue that defective construction cannot constitute an “occurrence.” Specifically, the business risk doctrine embodies the exclusions generally applicable to contractors in a CGL policy. These business risk exclusions are designed to exclude coverage for defective workmanship by the insured causing damage to the work itself. Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A.2d 788, 791 (N.J. 1979). Therefore, this doctrine recognizes that the consequences of poor workmanship are generally a “business risk” to be borne by the contractor as opposed to an insurable risk. In turn, many courts are reluctant to find that poor workmanship qualifies as an “occurrence.”
However, the Lennar court concluded that defective construction can constitute an “occurrence” under the standard CGL policy because (1) coverage for “business risks” is ordinarily eliminated through exclusions - not through the “occurrence” requirement in the initial insuring agreement; and (2) coverage for some “business risks” is not eliminated when the damaged work, or the work out of which the damage arose, was performed by subcontractors. The Lennar decision is strong opinion for contractors, providing an opportunity for coverage for faulty workmanship that damages other property or damages the work itself if the faulty work was performed by a subcontractor.
In the end, there is conflicting authority on the issue of whether faulty workmanship can constitute an “occurrence.” Coverage may turn on the jurisdiction where the matter is pending or on the most recent decision issued by that forum. The fact remains, however, that the most recent decisions in Georgia and Texas suggest that faulty workmanship can constitute an occurrence, leaving coverage to be determined by the construction-specific exclusions in the policy.
Member of the State Bars of Georgia and California