The West Virginia Supreme Court previously held that construction defects were not covered under a CGL policy. The Court, however, reversed itself in Cherrington v. Erie Ins. Prop. & Cas. Co., 2013 W.Va. LEXIS 724 (W.V. June 18, 2013).
The underlying complaint against the general contractor alleged various defects in the plaintiff’s recently constructed house, including an uneven concrete floor, water infiltration through the roof and chimney joint, a sagging support beam, and numerous cracks in the drywall walls and partitions throughout the house. Erie Insurance denied coverage. The insured general contractor sued, but the trial court found that faulty workmanship was not sufficient to give rise to an “occurrence.”
The West Virginia Supreme Court reversed its prior rulings determining there was no coverage for construction defects. The court recognized its prior position was in the minority, as is Hawaii's position on coverage for construction defects. See Group Builders Inc. v. Admiral Ins. Co., 123 Haw. 142, 148, 231 P.3d 67, 73 (Haw. Ct. App. 2010). Now joining the majority position, the West Virginia Supreme Court found that defective workmanship causing property damage was an “occurrence” under a CGL policy. Further, the homeowner had demonstrated that she sustained "property damage" as a result of the allegedly defective construction of her home.
The trial court also determined that the business risk exclusions barred coverage. Again, the West Virginia Supreme Court disagreed.
First, Exclusion L, barring coverage for "'property damage' to your work arising out of it or any part of it," also had an exception where the work was performed by subcontractors. Therefore, Exclusion L excluded coverage for the work of the insured but did not operate to preclude coverage for work performed by the insured's subcontractors. The majority of the work was done by subcontractors. Therefore the exclusion did not apply.
Next was Exclusion M, which precluded coverage for (1) a shortcoming in "your product" or "your work" and (2) a delay or failure to act arising from the insured's or the insured's agent's failure to perform its contractual obligations. Again, the majority of the work was done by the insured's subcontractors. But "your work" was defined as either "work or operations performed by you" or "work or operations performed . . . on your behalf." This would mean Exclusion M precluded coverage for the very same work of subcontractors that Exclusion L specifically found covered by the policy. An absurd result would be created. Therefore, the court found that the first provision of Exclusion M did not operate to bar coverage for work performed by the insured's subcontractors.
Regarding the second proviso of Exclusion M, there was no evidence that the physical damage to the homeowner's home was attributable to breach of contract or failure to perform contractual obligations. Therefore, the Exclusion was not applicable here to bar coverage.
Finally, Exclusion N excluded coverage for damages claimed for loss of use, recall, replacement, removal, etc. This exclusion originated to limit insurers' liability for damages attributable to recalled products. Here, none of the products used in the construction of the home had been recalled from the market as contemplated by the exclusion. Further, the policy provided coverage for the work of subcontractors. To apply this exclusion to preclude coverage for damages due to the very same work that the policy expressly covered would render such coverage illusory and would be contrary to the policy's stated intention to provide indemnity for this specific loss. Therefore, Exclusion N did not bar coverage.
