The Indiana Supreme Court has now weighed in on liability coverage for construction defects and has decided faulty workmanship with unforeseen consequences is an occurrence. See Sheehan Construc. Co. Inc. v. Continental Cas. Co., 2010 Ind. LEXIS 557 (Ind. Sept. 30, 2010).
Sheehan was the general contractor for construction of homes in a residential subdivision and hired subcontractors who actually built the homes. After construction, some homes had leaking windows, fungus growth on the siding, deteriorating and decaying floor joists and water damage to the interior of the home including water stained carpeting. These problems were caused by Sheehan's subcontractors.
When suit was filed Sheehan sought coverage under its CGL policy with Continental. The policy excluded coverage for damage to the insured's property and work as follows:
This insurance does not apply to:
. . . .
1. Damage to Your Work
"Property Damage" to "your work" arising out of it or any part of it and included in the "products-completed operations hazard."
This exclusion does not apply if the damages work or the work out of which the damage arises was performed on your behalf by a subcontractor.
The homeowners eventually settled in mediation for $2.8 million. Sheehan assigned any rights it had against Continental. Continental filed a declaratory judgment action seeking a declaration that it was not obligated to indemnify Sheehan. The trial court granted summary judgment to Continental, finding there was no "occurrence" or "property damage."
The Indiana Supreme Court reversed. The court found the Wisconsin Supreme Court's decision in Am. Family Mut. Ins. Co. v. Am Girl, Inc., 673 N.W. 2d 65 (Wis. 2004), persuasive. There, the court noted that "CGL policies generally do not cover contract claims arising out of the insured's defective work or product, but this is by operation of the CGL's business risk exclusions, not because a loss actionable only in contract can never be the result of an 'occurrence' within the meaning of the CGL's initial grant of coverage." Id., 673 N.W. 2d at 76.
Consequently, the Indiana court aligned itself with those jurisdictions adopting the view that improper or faulty workmanship does constitute an accident so long as the resulting damage was an event that occurred without expectation or foresight. Faulty workmanship that was intentional from the viewpoint of the insured could not be an "accident" or an "occurrence." On the other hand, if the fault workmanship was "unexpected" and "without intention or design," then it was an accident within the meaning of the CGL policy.
Additional support for this holding was found by considering the policy in its entirety. The CGL policy included an exclusion for damage to "your work" and then narrowed the exclusion by expressly declaring that it did not apply "if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor." If the insuring provisions did not confer an initial grant of coverage, then there would be no reason for a "your work" exclusion.
Accordingly, the Indiana Supreme Court has parted ways with the Hawaii Intermediate Court of Appeal, which decided earlier this year that construction defects were not covered because they arose from breach of contract and not from an occurrence. See Group Builders v. Admiral Ins. Co., 123 Haw. 147, 148 (Haw. Ct. App. 2010) [post here].
