First, we will start with the definitions of occurrence and property damage in the policy.¹

“Occurrence” means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

“Property damage” means:

1. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
2. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.

Faulty workmanship can cause the following consequences:

• Damage to the work itself, and/or
• Damage to other work or property
• No damage, but the failure to perform causes a monetary loss for which claim is made

^{1 ISO's form CG 00 01 12 04, ©ISO Properties, Inc., 2003}

The consequences or effects of the faulty workmanship matter in the analysis of whether the faulty workmanship can be construed as an occurrence, or accident, per the CGL policy. The following questions, always considered in the context of a specific jurisdiction, facilitate the analysis of whether faulty workmanship is an occurrence:

• Is the named insured's defective work, causing no property damage, an accident?

• Is the named insured's defective work, causing property damage to work or property other than that belonging to the named insured, an accident?

• Is the named insured's defective work, causing property damage to the named insured's work, including the named insured's other non-defective work, an accident?

• What if the faulty workmanship is by a subcontractor hired by the named insured? Is this important, or even relevant to the analysis?

• Does it matter whether the cause of action pressed in a lawsuit is for breach of contract? Is there a difference between breach of contract calling for economic damages because of damage to the named insured's work, and breach of contract for damages because of damage to work or property other than that of the named insured's? In other words, does “breach of contract” determine the fate of coverage regardless of the consequences?

Any discussion of what constitutes an occurrence necessarily involves an examination of the definitions of occurrence and property damage in the CGL policy, an understanding of the economic loss and business risk doctrines, an understanding of the differences between breach of contract and tort actions, and a consideration of specific policy provisions in the context of the entire policy.

We will now consider each question in two segments.

Is the named insured's defective work, causing no property damage, an accident?

It is argued that defective workmanship causing no property damage is a business risk that is within the control of the contractor, and the cost associated with its repair or replacement is a business expense that is not insurable. There is no accident, and therefore, no occurrence because the consequences of faulty workmanship, causing no property damage, should be expected.

A contrary view would hold that the faulty workmanship, if unexpected and unintended, can be an occurrence, but there is no coverage because there is no property damage as defined in the policy.

Is the named insured's defective work, causing property damage to work or property other than that belonging to the named insured, an accident?

Defective or faulty work that causes damage to property or work other than that of the named insured's is an occurrence, assuming the consequences were not expected or intended. This risk is the appropriate subject of insurance, and generally escapes controversy.

Is the named insured's defective work, causing property damage to the named insured's work, including the named insured's other non-defective work, an accident?

Here is where the controversy begins.

Recall that the definition of an occurrence requires that the faulty workmanship be an accident. “Accident” is not defined in the policy so we need to look elsewhere. Merriam-Webster Online defines “accident” as “an unforeseen and unplanned event or circumstance…lack of intention or necessity: chance…an unfortunate event resulting especially from carelessness or ignorance.”²

Using this definition, it is easy to see how defective workmanship can qualify as an accident and, therefore, an occurrence, if there is property damage to property or work other than that of the named insured's, and the consequences were not expected or intended by the named insured.

But what about defective workmanship causing property damage to the work itself? Or property damage to the named insured's other non-defective work or property? Are these accidents?

In Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex.2007), the Texas Supreme Court ruled that faulty work can be an occurrence causing property damage. Two relevant questions from the United States Court of Appeals for the Fifth Circuit follow:

1. When a homebuyer sues his general contractor for construction defects and alleges only damage to or loss of use of the home itself, do such allegations allege an “accident” or “occurrence” sufficient to trigger the duty to defend or indemnify under a CGL policy?
2. When a homebuyer sues his general contractor for construction defects and alleges only damage to or loss of use of the home itself, do such allegations allege “property damage” sufficient to trigger the duty to…defend or indemnify under a CGL policy?

The court answered in the affirmative to both questions. Unintended faulty work can be an occurrence:

• But a deliberate act, performed negligently, is an accident if the effect is not the intended or expected result; that is, the result would have been different had the deliberate act been performed correctly…Thus, a claim does not involve an accident or occurrence when either direct allegations purport that the insured intended the injury (which is presumed in cases of intentional tort) or circumstances confirm that the resulting damage was the natural and expected result of the insured's actions, that is, was highly probable whether the insured was negligent or not. (Lamar 1, 8-9)
• The CGL policy…does not define an “occurrence” in terms of the ownership or character of the property damaged by the act or event. Rather, the policy asks whether the injury was intended or fortuitous, that is, whether the injury was an accident. (Lamar 1,9)

A few months later, the Florida Supreme Court, in United States Fire Insurance Company v. J.S.U.B., 979 So. 2d 871, put the issue to bed by ruling as follows:

First, a subcontractor's faulty work (in this case the sub's defective soil compaction and testing, and poor soil) that causes damage to the general contractor's completed project can be an occurrence, if the property damage is neither expected or intended from the standpoint of the general contractor. In addition, to say that damage to the contractor's work is always foreseeable whereas damage to other work/property may not be foreseeable is an illogical distinction that “would make the definition of 'occurrence' dependent on which property was damaged.” J.S.U.B. 871, 883

Second, whether coverage ultimately exists depends on the exclusions, and in this case the “your work” exclusion does not apply because of the exception.

Third, the position that breach of contract can never be an “accident” is erroneous. The policy does not distinguish breach of contract from tort causes of action. (And, in fact, specific breach of contract exclusions are available.) Also erroneous is the presumption that breach of contract damages are always expected.

Finally, damage to the work is property damage.

On the other hand, in Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Company, 589 Pa. 317 (Pa. 2006), the Supreme Court of Pennsylvania ruled that National Union had no duty to defend or indemnify its insured because the property damage was to the work product and not to any other property, and therefore, faulty workmanship that caused the damage was not an accident.

• We hold that the definition of “accident” required to establish an “occurrence” under the policies cannot be satisfied by claims based upon faulty workmanship. Such claims 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. We are unwilling to do so, especially since such protections are already readily available for the protection of contractors. Kvaerner 317, 335-336

In Pennsylvania National Mutual Casualty Company v. Parkshore Development Corporation, 403 Fed. Appx. 770 (3d Cir. N.J. 2010), the court ruled that damage to the insured's non-defective work, in this case the entire project, was not covered (even though subcontractors actually conducted the work).

We'll examine the final two questions in the next segment, so stay tuned!

Disclaimer: The information contained in this article to be used for informational purposes only. Any views expressed do not necessarily represent the views of the Admiral Insurance Company or any of its affiliates. The information contained herein is not intended to constitute and should not be considered legal advice, nor should it be considered a substitute for obtaining legal advice.

Joseph “Joe” Junfola has been in the insurance industry for 35 years, the last 20 of which have been at Admiral Insurance in the position of Assistant Secretary, Claims. Junfola specializes in long-term exposure, or continuous injury/damage claims, in particular construction defect claims and also handles design professional liability claims. He created and conducts the webinar/workshop series, “Cause and Effect: Managing the Construction Defect Claim.”

^{1 ISO's form CG 00 01 12 04, ©ISO Properties, Inc., 2003}