Joining what it called the majority of jurisdictions, the North Dakota Supreme Court found that damage caused by faulty workmanship can be an "occurrence." K&L Homes, Inc. v. Am. Family Mutual Ins. Co., 2013 N.D. LEXIS 61 (N.D. April 5, 2013).
The insured, K&L, was a general contractor who was sued after completing construction of a new home. The suit was based upon breach of contract and breach of implied warranties claims. The homeowners alleged that improper compacting of soil had caused shifting of their home, leading to property damage. K&L had hired a subcontractor to do the soil compaction work.
The insurer denied coverage. K&L sued the insurer, but lost at the summary judgment stage.
On appeal, K&L argued the policy should be interpreted to give effect to the document as a whole and the "subcontractor exception" to the "your work" exclusion should apply.
The Supreme Court surveyed numerous cases from other jurisdictions holding that inadvertent faulty workmanship was an occurrence. In contrast, a prior North Dakota case held that faulty workmanship, standing alone, was not an accidental occurence but if damage was caused to something other than the insured's work product, an unintended and unexpected event occurred and coverage existed. ACUITY v. Burd & Smith Constr., 721 N.W. 2d 33(N.D.). The court found the holding in Burd & Smith was erroneous. There was nothing in the definition of "occurrence" supporting the result that faulty workmanship that damages property of a third party was a covered "occurrence," while faulty workmanship damaging the work or property of the insured contractor was not an "occurrence."
Therefore, faulty workmanship could constitute an "occurrence" if the work was "unexpected" and not intended by the insured, and the property damage was not anticipated or intentional, so that neither the cause nor the harm was anticipated, intended or expected.
Consequently, the policy granted coverage for the property damage to the home. The coverage was limited, however, by the exclusion for damage to "your work." This exclusion would eliminate coverage, but for the subcontract exception to the exclusion. Where the general contractor was liable for damage to work performed by a subcontractor, the subcontractor exception preserved coverage that the "your work" exclusion would otherwise negate.
The court reversed trial court's summary judgment and remanded to determine whether the faulty work and resulting property damage was unexpected and unintended.
The Hawaii Intermediate Court of Appeals reached a contrary result in 2010 in Group Builders Inc. v. Admiral Ins. Co., Ltd., 123 Haw. 142, 231 P.3d 67(Haw. Ct. App. 2010). The ICA concluded that construction defect claims were not "occurrences" because breach of contract claims based on allegations of shoddy performance were not covered under a CGL policy.