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CGL Policy Covers Damage Caused by Defective Construction, Federal Court Holds
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January 21, 2008
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By Michael S. McNamara
Howrey LLP
The U.S. Court of Appeals for the 4th Circuit has ruled that under Maryland law, defective construction is not an occurrence triggering coverage under a standard form commercial general liability insurance policy but that damage to a contractor's nondefective work caused by a subcontractor's defective work does trigger coverage. French v. Assurance Co. of America, 448 F.3d 693 (4th Cir. 2006).
The contractor had built a home for the owners. A subcontractor installed the home's EIFS cladding. Five years after completion, the owners discovered that the EIFS cladding was defective and had allowed moisture intrusion, which caused damage to non-defective structural components and walls of the home. Repairs cost more than $500,000. The homeowners sued the contractor. Pursuant to a settlement, the contractor assigned claims it had against its insurance carriers to the owners. The CGL policy at issue was written on the 1986 Insurance Services Office form.
Then the owners, standing in the shoes of the contractor, sued the insurance companies for denying coverage of the owners' claims against the contractor. The owners and the insurers filed cross-motions for summary judgment, and the trial court granted the insurers' motion and denied the owners' motion. The owners appealed.
The appeals court considered whether the property damage to the home fell within the grant of coverage of the CGL policies. Coverage under standard CGL policies is not triggered unless there has been an "occurrence." Standard CGL policies do not clearly define the term "occurrence," and much insurance coverage litigation arises out of disputes about whether there has been an occurrence. In French, the insurers argued that the homeowners had claimed against the contractor only for defective construction and that defective construction is not an occurrence.
The appeals court divided the damage into two categories: (1) the defective EIFS exterior; and (2) the damage to the nondefective components directly resulting from moisture intrusion through the defective EIFS exterior. The first category of damage did not trigger coverage because it was not an "accident" but defective workmanship, which simply was a failure to satisfy a contractual obligation. The appeals court quoted a Maryland decision on this issue, Lerner Corp. v. Assurance Co. of America, 707 A.2d 906 (Md.Ct.Spec.App. 1998): "[T]he obligation to repair the [defectively constructed] façade itself is not unexpected or unforeseen under the terms of the sales contract. Therefore, the repair or replacement damages represent economic loss and consequently would not trigger a duty to indemnify under a CGL policy."
But, the federal appeals court found that the second category of damage did trigger coverage, holding that the CGL policy "provides liability coverage for the cost to remedy unexpected and unintended property damage to the contractor's otherwise nondefective work-product caused by the subcontractor's defective workmanship."
The appeals court also found that the CGL policy's "your work" exclusion, as set out in the 1986 ISO form, was subject to an exception for work performed by subcontractors and thus did not preclude coverage.
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For more information about the issues covered in this report, please contact Michael S. McNamara in our Washington, D.C. office at 202-383-7210 or at mcnamaram@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2008 Howrey LLP
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