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Vol. 3, Iss. 9
June 4, 2014

A Faulty Workmanship—“Occurrence” Case Worth Reading

The title of this article tells you how I feel about the continuous barrage of decisions addressing coverage for construction defects – in particular whether faulty workmanship constitutes an “occurrence” under a commercial general liability policy. I’m not saying that these cases are not important. Of course they are – both for the parties involved and the development of the body of law on such issue for that particular state. But such cases have become so abundant that it has become difficult to find something unique about them – something that makes them worthwhile to take note. At their core these cases generally apply the same legal issues to similar facts.

The New York Supreme Court, Appellate Division, just issued a decision involving coverage for construction defects. While the facts offer nothing out of the ordinary, the decision falls into the category of worthwhile.

At issue in National Union Fire Ins. Co. v. Turner Construction Company, No. 11927 (N.Y. App. Div. May 15, 2014) was coverage for Turner Construction and a subcontractor, under a National Union wrap-up policy, for damages caused when the exterior wall of an office building, under construction in Jersey City, fell from the eighth story.

On one hand, the decision reaches a decision, rightly or wrongly, that is based on the analysis that we are all used to seeing in a case such as this. In concluding that no coverage was owed, the court made such statements as the following:

“Under both New York and New Jersey law, construction defects such as those asserted in the underlying action—faulty design, fabrication or installation—do not constitute ‘occurrences’ under a commercial general liability insurance policy (citations omitted). The general rule is that a commercial general liability insurance policy does not afford coverage for breach of contract, breach of fiduciary duty, or breach of warranty, but rather for bodily injury and property damage (citations omitted).”

“There is no ‘occurrence’ under a commercial general liability policy where faulty construction only damages the insured's own work, and faulty workmanship by subcontractors hired by the insured does not constitute covered property damage caused by an ‘occurrence’ for purposes of coverage under commercial liability insurance policies issued to the general contractor, since the entire project is the general contractor’s work.” (citations omitted).

Even if Turner and its subcontractor agreed with these conclusions – and I’m sure they didn’t – they argued that an expanded definition of “occurrence” in the policy dictated a different outcome. In just about every construction defect coverage case the court is confronted with the following definition of “occurrence:” “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” However, the National Union wrap-up policy at issue defined “occurrence” as “an accident, event, or happening, including continuous or repeated exposure to substantially the same general harmful conditions.”

As you would expect, Turner and its subcontractor argued that the expansion of the definition of occurrence, to include “an accident, event, or happening,” gave rise to coverage for the claims against them, “or, at least, that the amended definition of ‘occurrence’ in the policy is ambiguous.”

The court disagreed and held “that the motion court was correct in concluding that the negotiated amendment of the definition of ‘occurrence’ in the subject commercial liability policies to include the words ‘event, or happening’ along with the word ‘accident’ did not expand the definition so as to encompass faulty workmanship.” Further, the court stated: “[T]he requirement of a fortuitous loss is a necessary element of insurance policies based on either an ‘accident’ or ‘occurrence’. As the motion court recognized, the addition of ‘event’ or ‘happening’ to the definition of ‘occurrence’ did not alter the legal requirement that the ‘occurrence’ triggering the coverage must be fortuitous. [T]he requirement of a fortuitous loss is a necessary element of insurance policies based on either an ‘accident’ or ‘occurrence.’” (citations omitted).

My sense is that policyholder lawyers are surprised by this decision – and perhaps have even stronger emotions than that in response to it. For once such example see Carl Salisbury’s post on the Kilpatrick Townsend “Global Insurance Recovery Blog.”

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