This article was originally published in the Policyholder Advisor, Volume 22, Issue 2 (May/June 2013)
Most businesses and people own pieces of improved real estate, which typically are some of their largest assets. In that sense, we're all major consumers of the building industry. Yet, many in that industry are undercapitalized and cannot satisfy claims in the event a natural disaster, or merely the passage of time, reveals flaws in the techniques or materials used. For that reason, we should all hope for robust liability insurance coverage for real estate developers, contractors, and building materials manufacturers for this major, ongoing risk that we share with them.
However, courts nationally are deeply divided over whether or not commercial general liability policies insure against property damage experienced by a construction industry policyholder's own work or product. The so-called "business risk doctrine" held by many jurisdictions maintains that property damage to a policyholder's own work can never be covered by the commercial general liability policy, only damage to other property caused by the work can be covered.
Jurisdictions adopting this position — perhaps a third to half of U.S. jurisdictions, particularly along the East Coast — look to various policy provisions to justify this view, especially the "occurrence" requirement. However, on close examination, none of those provisions read in context actually support that conclusion. Read as a whole, the policy clearly reflects the drafters' intent to cover many instances of damage to a policyholder's own work and to charge a large additional premium for that insurance. The drafting history of the policy forms and the insurance industry's own literature confirm this. Meanwhile, as a result of this mistaken adoption of the dubious business risk doctrine, insurance companies have been reaping a multibillion-dollar windfall.
Fortunately, there are signs that the trend on this issue has tipped in favor of policyholders. State supreme courts have reversed themselves, and state legislatures have been taking the issue away from their courts through legislation. Most recently, in late March, the Second U.S. Circuit Court of Appeals, applying Connecticut law in Scottsdale Insurance Co. v. R.I. Pools Inc., effortlessly reversed its long-held position and found that property damage to a contractor's work could indeed satisfy the occurrence requirement.
To reach that conclusion, the court focused on the current "your work" exclusion, particularly its exception, which expressly preserves coverage for damage to or arising from work that is performed by the policyholder's subcontractors. The court reasoned that if this exception is operative, then the policyholder's work must potentially satisfy the occurrence requirement — otherwise, the subcontractor exception would be pointless. Thus, read in the context of the policy as a whole, occurrence must potentially include instances of property damage to a policyholder's own work. This reasoning should equally apply to the other bases used to argue the business risk doctrine.
By emphasizing that its reasoning was based on updated policy language, the court seems to have psychologically enabled itself to now completely turn its back on the business risk doctrine, because it need not admit that it had erred in the past. This is instructive for the advocacy of future appeals in other business risk doctrine jurisdictions.
Intriguingly, the earlier Second Circuit cases that originally adopted the business risk doctrine applied the law of New York, also within the Second Circuit. Logically, then, the Second Circuit should apply its new rationale in the New York cases to come before it. Will it? Will the state courts or state legislatures in the Second Circuit (New York, Connecticut and Vermont) adopt this new analysis? In fact, the Connecticut Supreme Court immediately did so at the beginning of June in Capstone Building Corp. v. American Motorists Ins. Co. Will other states and other federal appeals courts be persuaded by the reasoning of the influential Second Circuit? Hopefully, yes.
Scott C. Turner is of counsel in Anderson Kill's Washington, DC, and Ventura, CA, offices. He is a construction insurance attorney with over 20 years of experience securing insurance recoveries for property losses and in securing defense and indemnification for liability resulting from construction disputes and defects. Mr. Turner is the author of the 1,700-page legal treatise, Insurance Coverage of Construction Disputes (2nd ed. Thomson Reuters 2013).
About Anderson Kill
Anderson Kill practices law in the areas of Insurance Recovery, Commercial Litigation, Environmental Law, Estate, Trusts and Tax Services, Corporate and Securities, Antitrust, Bankruptcy, Real Estate and Construction, Public Law, Government Affairs, Anti-Counterfeiting, Employment and Labor Law, Captives, Intellectual Property, Corporate Tax and Health Reform. Recognized nationwide by Chambers USA for Client Service and Commercial Awareness, and best-known for its work in insurance recovery, the firm represents policyholders only in insurance coverage disputes – with no ties to insurance companies and has no conflicts of interest. Clients include Fortune 1000 companies, small and medium-sized businesses, governmental entities, and nonprofits as well as personal estates. Based in New York City, the firm also has offices in Ventura, CA, Stamford, CT, Washington, DC, Newark, NJ, Philadelphia, PA, and Burlington, VT..
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