Essential to any construction project is an insurance program that adequately protects against the many risks that exist both during the building process and after completion. Among the types of insurance required, and arguably the most common form of construction risk coverage, is the Commercial General Liability (CGL) policy.
As with any insurance, the CGL contains conditions and exclusions that limit the insurer's obligations to the policyholder. In particular, the CGL includes a threshold requirement that the claim involve "bodily injury" or "property damage" caused by an "occurrence" — typically defined in CGL policies as an "accident."
The meaning of "occurrence" or "accident" has been the topic of arduous disagreement between insurers and policyholders. In the construction context, the crux of the dispute concerns whether "occurrence" encompasses damage to the insured's own faulty work and/or damage to other project work, or instead only applies to damage to non-project work.
It has been litigated time and again, nationwide, for well over two decades. The courts confronting this issue, like the parties themselves, have been greatly divided in their opinions. Some have found that CGL policies are not intended to cover project losses stemming from a contractor's faulty work, while others have held that the term "accident" is not confined to damage outside the project but instead applies to any unintended loss. Still others reach a middle ground, finding that faulty work itself is not an "occurrence" but that other project work damaged by the insured's faulty work is an "occurrence."
Until recently, the meaning of "occurrence" under Connecticut law, as applied to construction work, had only been assessed by a handful of lower state and federal courts. As with the decisions reached nationwide, these lower courts reached different conclusions. Within the last few months, however, the U.S. Court of Appeals for the Second Circuit and the Connecticut Supreme Court have each weighed in on the issue, providing contractors and insurers with long-awaited guidance.
In Scottsdale Insurance v. R.I. Pools Inc., the Second Circuit held that defective work can involve an "occurrence" under Connecticut law. In so holding, Scottsdale focused upon the standard CGL exclusion for defective work (i.e., the "your work" exclusion) and the exception contained within that exclusion for work performed by a project subcontractor.
The court reasoned that the exclusion, and its exception, are only necessary if defective work satisfies the threshold "occurrence" requirement, thus stating: "As coverage is limited by the policy to "occurrences" and defects in the insured's own work in some circumstances are covered, these policies … unmistakably include defects in the insured's own work within the category of an 'occurrence'…There is a further hurdle in the form of the express exclusion for the insured's work, subject to an exception when that work was performed by a subcontractor."
Shortly after Scottsdale, the Connecticut Supreme Court decided Capstone Building Corp. v. American Motorists Insurance Co., and similarly found that unintended defective construction work can be an "occurrence." Like Scottsdale, the Capstone decision referenced the CGL policy's construction risk exclusions as an indicator of the intended meaning of "occurrence." However, Capstone went further and noted that the term "accident" should be given its plain meaning and refuted arguments commonly raised in support of a more limited reading of the term, including (1) that defective work lacks the element of "fortuity" necessary to any insurance claim; (2) that CGL policies do not cover breach of contract allegations; and (3) that CGL policies only insure against liability for damages to non-project work. Taking guidance from a number of other high courts, including the Supreme Courts of Texas (Lamar Homes Inc. v. Mid–Continent Casualty Co.) and Florida (United States Fire Ins. Co. v. J.S.U.B., Inc.), the Connecticut Supreme Court stated:
The defendant argues that defective construction lacks the element of "fortuity" necessary for an accident. This suggests that a foreseeable event can never be an accident under the terms of the commercial general liability policy. Insurance policies, however, are designed to cover foreseeable risk, including negligent acts . . . AMICO's arguments concerning fortuity and foreseeability provide no principled basis for distinguishing these occurrences from those that damage the contractor's own work. The commercial general liability policy does not define occurrence by reference to the ownership of damaged property…Likewise, there is no basis in the policy for denying coverage based on a distinction between tort and contract principles. While damage from an occurrence to a third party is characterized as a tort, and defective workmanship by a contractor or subcontractor will usually implicate a breach of contractual terms, there is nothing in the basic coverage language of the current commercial general liability policy to support any definitive tort/ contract line of demarcation for purposes of determining whether a loss is covered by the commercial general liability policy's initial grant of coverage. (Internal quotations omitted).
Not Performance Bonds
The Supreme Court further addressed the reasoning cited by many courts and insurers that CGL policies do not act as performance bonds. In rejecting this perspective, the court indicated that the CGL policy "covers what it covers" and is not affected by the scope of protection afforded under performance bonds. The ruling stated: "Overlapping coverage does not negate a commercial general liability policy's express terms."
The decision also highlighted the many dissimilarities between bonds and CGL coverage, including the fact that bonds generally protect project owners from contractor default while CGL primarily covers the contactor's liability.
Looking beyond the "occurrence" issue, Capstone next confronted the question of whether damaged or defective work involves "property damage"; another key insuring condition of the CGL. The Supreme Court distinguished work that is purely improper or defective from work that is actually damaged. For example, and in particular, the court addressed whether carbon monoxide fumes, spewing from an improperly installed and/or defective heating system, were "property damage." It reasoned that such fumes do not constitute "property damage" defined as "physical injury to tangible property," but intimated in a footnote that it might satisfy the CGL policy's alternative definition of "property damage" as "loss of use of tangible property that is not physically injured."
Finally, the Supreme Court assessed the CGL's exclusions relevant to construction work. In particular, the court focused upon the previously mentioned "Your Work" exclusion, pertaining to project completed operations damage (i.e. damage occurring after project completion) and precluding coverage for damage to work performed by or on behalf of the insured, unless caused by a subcontractor.
Harmonizing the "occurrence" and "property damage" requirements with the "your work" exclusion, the court proclaimed: "Allegations of unintended defective construction work … that damages nondefective property may constitute an 'occurrence' resulting in 'property damage' … However, defective work standing alone or repairs to that defective work do not constitute property damage and … work by a contractor, as opposed to a subcontractor, is excluded from coverage under the terms of the policy."
The decisions of the Second Circuit and Connecticut Supreme Court squarely establish Connecticut's adaptation of what is widely considered the majority view of the meaning of "occurrence" under a CGL policy. These holdings not only assist contractors and developers working in Connecticut, but may also provide guidance in other jurisdictions, such as in West Virginia where the state high court in Cherrington v. Erie Insurance Property and Casualty Co., noting Capstone, recently reversed its prior restricted reading of "occurrence" (Webster County Solid Waste Authority v. Brackenrich and Associates Inc.) and aligned itself with the majority view that unintended defective work by a subcontractor constitutes an "occurrence" under a CGL policy. •