- Insurance Coverage Under a CGL for Construction Defect Claims
- March 27, 2013 | Authors: Ian Lambeets; Henry C. Spalding
- Law Firm: Sands Anderson PC - Richmond Office
In my law practice, I am frequently called upon, at different times, to represent both builders and their insurance carriers in construction defect lawsuits. Whether such claims are covered under a commercial general liability (“CGL”) policy raises a number of complicated questions. This article will focus on some of the more common coverage questions.
Let’s consider the following scenario. ABC Builder contracts with Harry and Sally Homeowner to build a single-family house. ABC does all of the work, with the exception of subbing out the brick masonry work to a subcontractor. Two years after closing, the Homeowners discover evidence of extensive water and moisture intrusion. Forensic engineers conclude that the water intrusion is the result of improper flashing and a lack of weep holes on the home’s brick veneer. In addition, water is coming into the house through the roof because of numerous problems with its installation. The water intrusion has caused damage throughout the house, including damage to hardwood flooring, widespread mold and a ceiling which has collapsed.
The Homeowners sue ABC, alleging breach of contract. ABC turns the lawsuit over to its liability carrier, asking that it pay for the defense of the lawsuit as well as indemnifying ABC for the repair costs. ABC has paid thousands of dollars in premiums over the years and has never had a prior claim. The insurance company must defend against and provide coverage for the claims made in the Homeowners’ lawsuit, right?
Maybe so, maybe not. A standard CGL policy contains a provision for property damage liability, whereby the insurance company agrees to pay those sums that the insured becomes legally obligated to pay as damages because of “property damage” caused by an “occurrence.” “Occurrence” is typically defined under a CGL as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” In other words, a threshold coverage question is whether the Homeowners’ lawsuit alleges property damage caused by an occurrence.
The Virginia Supreme Court has not answered the question of whether defective construction constitutes an occurrence under a builder’s CGL, thereby triggering coverage. A number of circuit court judges in Virginia, however, have weighed in on the issue, finding that construction defect does not amount to an occurrence. One judge held, “Defective workmanship, standing alone, is not the result of an ‘occurrence.’ A breach of contract causes defective workmanship.” Another judge held that defective workmanship is not a covered occurrence under a liability insurance policy because “faulty workmanship by the insured is almost always foreseeable.” Last month, a Chesterfield County circuit court judge reached a similar conclusion.
A federal appellate court applying Virginia law, however, reached a different result. In that case, although the initial defective work was not unexpected or unforeseen (therefore, no occurrence), mold damage that spread beyond the defective trusses was an unintended accident or an occurrence that triggered coverage under a CGL policy. Because this decision came from a federal appellate court, it is not binding on Virginia state court judges, but it could be persuasive authority, at least until the Virginia Supreme Court weighs in.
Even if a court were to decide that the allegations of faulty workmanship set forth in the Homeowners’ lawsuit in our hypothetical did amount to an “occurrence,” thereby triggering coverage under the CGL, certain exclusions may apply. For example, most CGL policies contain what is known as a “your work” exclusion, precluding coverage for property damage caused by work done by ABC. However, the “your work” exclusion usually has an exception whereby the exclusion does not apply if the damaged work was performed by a subcontractor. In our hypothetical, then, the “your work” exclusion could well defeat coverage for damage caused by ABC’s faulty installation of the roof, but the exception for damage caused by subcontractors’ workmanship could fit within the exclusion’s exception.
Another exclusion which may affect coverage deals with liability assumed by contract. The typical CGL form precludes coverage for property damage for which the insured is obligated to pay damages by reason of the assumption of liability in a contract. However, there is an exception to this exclusion, providing coverage if the insured would have been liable even in the absence of the contract. Think, for example, of Virginia’s new home warranty. Interestingly, one Virginia circuit court judge has held that the contractual liability exclusion includes claims under the statutory new home warranty.
Most CGL policies also contain mold exclusions whereby there is no coverage for property damage or bodily injury arising out of or in any way related to mold. The courts have enforced these exclusions.
So, what is a builder to do in order to have coverage for defect claims? The first step is to check with your insurance agent to see what coverages your policy provides. Construction defect endorsements may be available, so be sure to ask. Also, see if you can pay a higher premium to omit the “your work” exclusion. These options may not be available, but you should at least ask the questions. You can also lobby your statewide elected officials to enact legislation that would include claims for defective construction within a CGL’s definition of what constitutes an “occurrence.” Four states have such laws, but not Virginia.