United States: Two Cases Analyze Faulty Workmanship Claims Under CGL Policies, With Contrary Results

Last Updated: May 2 2013
Article by Virginia L. White-Mahaffey and Erica L. Gerson

Insurance Coverage Case Advisory, Issue 43

Less than two weeks apart, two appellate courts issued opinions analyzing whether faulty work claims are covered under commercial general liability policies, each reaching a different result.  The United States Court of Appeals for the Third Circuit issued an unpublished opinion in Zurich American Insurance Company v. R.M. Shoemaker Company, No. 12-2268, 2013 WL 1224104 (3d Cir. Mar. 27, 2013).  The Supreme Court of North Dakota issued an opinion in K&L Homes, Inc. v. American Family Mutual Insurance Company, No. 20120060, 2013 WL 1364704 (N.D. Apr. 5, 2013).

In R.M. Shoemaker, the Third Circuit, applying Pennsylvania law, affirmed the district court's summary judgment order holding that a general liability insurer had no duty to defend or indemnify a policyholder in a lawsuit seeking damages resulting from faulty workmanship of the policyholder's subcontractor.  2013 WL 1224104, at *4.

In R.M. Shoemaker, a New Jersey county hired the policyholder to construct an addition to a correctional facility.  The county filed a lawsuit against the policyholder alleging that the policyholder, a construction firm, negligently supervised its subcontractor.  The county further alleged that the policyholder's negligence permitted the subcontractor to engage in willful misconduct, which resulted in "damage to both structural elements and personal property" at the correctional facility.  The insurance policies provided coverage for property damage caused by an "occurrence."  The policies defined "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."  2013 WL 1224104, at *1.  

The policyholder argued unsuccessfully that the dispute was governed by a Pennsylvania case where the court held that an insurer had a duty to defend insured parents against negligence claims seeking to hold the parents liable for damages resulting from a shooting rampage perpetrated by their child.  See Donegal Mutual Ins. Co. v. Baumhammers, 938 A.2d 286, 293 (Pa. 2007).  The Third Circuit held that "the crucial inquiry dictating whether a general liability insurer must defend its insured under an occurrence-based policy is whether an event was sufficiently fortuitous from the perspective of the insured to qualify as an 'occurrence.'"  Id. at 292.  The court contrasted the shooting spree in Baumhammers, with the facts of the pending case; the shooting was "unexpected, undesigned and fortuitous," not the "natural and expected result" of the parent's negligence.  2013 WL 1224104, at *2.  By contrast, it reasoned, faulty workmanship is not a fortuitous event, even if it occurs as a result of a contractor's negligent supervision of its subcontractor.  Id.

In reaching this conclusion, the federal court of appeals found controlling the Pennsylvania Supreme Court's decision in Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Co., 908 A.2d 888 (Pa. 2006).  The Kvaerner court held

the definition of 'accident' required to establish an 'occurrence' under the policies cannot be satisfied by claims based upon faulty workmanship.  Such clams simply do not present the degree of fortuity contemplated by the ordinary definition of 'accident' or its common judicial construction in this context.  To hold otherwise would be to convert a policy for insurance into a performance bond.

908 A.2d at 899. 

By contrast, less than two weeks after the federal appeals court issued its decision in R.M. Shoemaker, the Supreme Court of North Dakota abrogated North Dakota precedent which held that faulty workmanship that causes property damage to the insured's own product is not an accident and, accordingly, cannot constitute an "occurrence" under a commercial general liability policy.  In K&L Homes,the North Dakota Supreme Court held instead that

faulty workmanship may constitute an "occurrence" if the faulty work was 'unexpected' and not intended by the insured, and the property damage was not anticipated or intentional, so that neither the cause nor the harm was anticipated, intended, or expected.

2013 WL 1364704 at *10.  

In K&L Homes, the owners of a newly-constructed home filed an arbitration claim against the policyholder, a builder.  The homeowners alleged that the faulty workmanship of the policyholder's subcontractor damaged the foundation of the house.  The jury found that the builder breached its contract or implied warranty with the homeowners and awarded damages.  Id. at *1. 

The insurance policies in K&L Homes provided coverage for "property damage" caused by an "occurrence."  As in R.M. Shoemaker, the policies defined "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."  Id. at *3.  In addition, the policy contained a "your work" exclusion with a "subcontractor exception."  Id at *3-4.   

First, the court analyzed whether the faulty workmanship of the builder's subcontractor constituted an "occurrence."  Id. at *4.  The insurer argued that the North Dakota Supreme Court's decision in ACUITY v. Burd & Smith Construction, Inc., 721 N.W.2d 33 (N.D. 2006), was dispositive.  Id. at *8.  In Burd & Smith, the court held that "property damage caused by faulty workmanship is a covered occurrence to the extent the faulty workmanship causes bodily injury or property damage to property other than the insured's work product."  721 N.W.2d at 39.  The North Dakota Supreme Court in K&L Homes, however, concluded that the court in Burd & Smith incorrectly decided this issue, and overruled its prior decision.  2013 WL 1364704, *10.  The court held that if neither the faulty work nor the property damage was expected or intended, then there may be an occurrence.  Id.  It reached this decision after surveying the law on this frequently litigated issue, analyzing the evolution of the business risk exclusions in commercial general liability policies, and discussing commentators' analysis. 

Next, the court analyzed whether the faulty workmanship resulted in "property damage."  The policies defined property damage as "'[p]hysical injury to tangible property, including all resulting loss of use of that property' and '[l]oss of use of tangible property that is not physically injured.'"  Id. (alteration in original).  The court determined that the damage alleged by the homeowner, including cracks, unevenness, and shifting of the home's foundation, would meet the definition of "property damage."  The court further reasoned that if the "your work" exclusion, which excludes coverage for damage to the policyholder's work, applied, the subcontractor exception would preserve coverage.  Id.   

The divergent views expressed by the courts in R.M. Shoemaker and K&L Homes suggest that litigation will persist on the question of whether, absent a pertinent exclusion, coverage exists under a commercial general liability policy for faulty workmanship of a policyholder's subcontractor.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.