The U.S. District Court in Alabama certified a question to the Connecticut Supreme Court: Is damage to a project caused by faulty workmanship "property damage" resulting from an "occurrence"? With some qualification, the Connecticut Supreme Court answered in the affirmative. Capstone Building Corp. v. Am. Motorists Ins. Co., SC 18886 (Conn. June 11, 2013).
Captsone Development agreed to coordinate and supervise construction on a building at the University of Conneticut. Capstone Building was the general contractor. UConn secured an OCIP policy from American Motorist Insurance Company ("AMICO"). More than three years after completion, UConn notified the insureds of alleged defects in the project, including elevated levels of carbon monoxide. The source of the leak was the individual hot water heaters in residential units and insufficient draft of exhaust from the heater.Other defects were found during an investigation.
The insureds tendered to AMICO. Coverage was denied because the liability arose out of the insureds' own work.The insureds settled with UConn, paying $1 million each. The insureds then sued AMICO in Alabama and the question was certified to the Connecticut Supreme Court.
The court first concluded that defective workmanship can give rise to an "occurrence" under the insuring agreement. Because negligent work was unintentional from the point of view of the insured, it could constitute the basis for an "accident" or "occurrence."
The court next considered whether there was "property damage." The court noted that the definition of "property damage" did not differentiate between damage to the contractor's work and damage to other property. Therefore, physical injury to or loss of use of the insured's property was within the initial grant of coverage as described in the policy's insuring agreement. Nevertheless, the escape of carbon monoxide, without more, was not property damage. The building code violations, defective construction and poor quality control also did not constitute "property damage" unless they resulted in damage to other, nondefective property. The policy covered claims for property damage caused by defective work, but not claims for repair of the defective work itself.
The court then turned to the exclusions, specifically exclusion (l) and the subcontractor's exception. Here, the entire project met the definition of "your work" because it was all completed by the insureds or their subcontractors. Whether the "work out of which the damage arises" was performed by a subcontractor was a matter of fact, however, to be determined in each case.The subcontractor exception to the "your work" exclusion would reinstate coverage if the insureds ultimately proved that property damage was caused by its subcontractors' defective work. Property damage resulting from the insureds' own faulty work, however, was precluded from coverage by the "your work" exclusion.