Construction law and business litigation attorney Mark F. Craig reports that a claim of breach of duty to act in a workmanlike manner (defective workmanship) may be an occurrence for purposes of triggering an insurer’s obligation to defend and indemnify under a CGL policy, at least to the extent it includes collateral or consequential damages.
Stansley Group v. Fru-Con Construction Corp., et al., 2006 U.S. Dist. LEXIS 67718 (N.D. Ohio, W. Div., Sept. 21, 2006) provides a great analysis of Ohio law when it comes to insurance coverage issues for defective workmanship on a construction project. The issue in this case is to decide whether Defendant Insurer (Burlington) is obligated under a commercial general liability policy to defend and indemnify Plaintiff Subcontractor (Stansley) for defective workmanship related to the cement it provided to create pylons on a public bridge construction project.
In this “battle of the terms,” Insurer argued that the CGL policy defines “occurrence” as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Defective workmanship is not an accident, so the damages alleged do not arise from an occurrence and there is no coverage. Subcontractor cited several Ohio cases holding the word “occurrence” to be much broader than “accident,” and defining “accident” as being unexpected and unintended.
Subcontractor argued in the alternative that if defective workmanship is not itself an occurrence, it should be provided coverage for "collateral damages" -- those damages arising out of defective material or workmanship. Collateral damages cases involve recovery for damage to other subcontractors’ work while removing the defective work of the insured subcontractor. Damages related to the other subcontractors’ work is covered while damages related to removal of the insured’s work is not. If damages is limited to defective materials or project delays and not property damage, there will be no coverage.
The District Court held that there is no coverage under the occurrence provision of the CGL policy for Subcontractor’s defective workmanship. The District Court explained that coverage analysis largely turns on the damages sought, with no coverage for the insured’s defective work. However, if “the damages are consequential and derive from the work the insured performed, coverage generally will lie,” therefore providing insurance coverage for unanticipated consequences but excluding coverage for the insured’s own business risks. Therefore, it reversed summary judgment, finding disputed issues of material fact as to whether the damages sought are solely for the defective workmanship, or include collateral or consequential damages. “Clearly, if the damages sought by Fru-Con are limited to repair and replacement of Stansley’s work because of defective cement, this would not require Burlington to defend and indemnify Stansley. If, however, the damages sought are more in the nature of collateral damages, then it is Burlington's duty to defend and indemnify.”
Lesson learned—do not automatically assume that there is no insurance coverage under a CGL policy because the damages are related to defective workmanship. Seek legal advice from a knowledgeable insurance attorney for an analysis of the policy language, particularly the exclusions, to determine whether the possibility of coverage exists.