June 10, 2019
The Supreme Court of Alabama overturned the ruling of the lower court and held that the insurer was not obligated to indemnify the insured construction company because the alleged damage to one of its homes did not qualify as an occurrence under the policy. The case is Nationwide Mut. Fire Ins. Co. v. David Grp., Inc., No. 1170588, 2019 Ala. (May 24, 2019).
In January 2004, The David Group (TDG), a construction company specializing in custom-built houses, purchased a commercial general liability (CGL) policy from Nationwide Mut. Fire Ins. Co. (Nationwide). In the CGL policy, Nationwide agreed to pay for bodily injury and property damage caused by an “occurrence”, a term defined in the policy.
In October 2007, while the policy was effective, Saurin and Valerie Shah (the Shah's) bought a newly constructed house from TDG. After moving in, the Shahs began experiencing issues with their new home. Despite efforts to fix the problems, the Shahs sued TDG in 2008.
In September 2008, after Nationwide refused to provide coverage for the claim, TDG filed suit against Nationwide asking the court to determine that Nationwide had a duty to defend and indemnify TDG in the lawsuit. An arbitrator issued a $12,000 judgment for the Shahs.
In January 2015 a state court held that TDG was entitled to coverage from Nationwide under the CGL policy. On appeal, the Supreme Court cited an earlier ruling and stated that it had “repeatedly held” that “' faulty workmanship itself is not an occurrence' under a CGL policy like this one here”
The ruling said that “this concept is consistent with the idea that the purpose of a CGL policy is to protect the insured contractor from tort liability, not protect it from its own faulty work.”
The court quoted an earlier opinion stating that despite there is no coverage for replacing poor work, there might be coverage for the resulting damage that was caused by that poor work. The outcome depends on the “nature of the damage” resulting from the faulty work.
The court noted in the ruling that the Shahs' complaint “clearly alleges faulty workmanship, but at no point do the Shahs allege additional or resulting damage to their house or to their personal property as a result of that faulty workmanship.”
The ruling overturned the lower court's judgment and remanded the case for further proceedings. The ruling said that the record did not support the suggestion that the Shahs had suffered damages because of an “occurrence” resulting from faulty workmanship. The circumstances didn't demonstrate any property damage or personal injury resulting from an “occurrence” which would trigger coverage under the CGL.
Editors Note: What is an occurrence is a hotly discussed topic in the CGL world. In the ISO form, Occurrence is defined as “an accident, including continuous, or repeated exposure to substantially the same general harmful conditions.” In this case, the issue wasn't the definition of “occurrence” though, rather the meaning of the terms “bodily injury” and “property damage”. As the court discussed, the purpose of the policy isn't to protect a company from their shoddy workmanship, but instead to protect the victims of the shoddy workmanship from further property damage. In this case, all of the damages paid out were damages suffered directly from the shoddy workmanship, not damage to other property owned by the Shahs.