The Alabama Supreme Court withdrew is prior opinion and authored a new decision finding that construction defects are an "occurrence." Owners Ins. Co. v. Jim Carr Homebuilder, No. 1120764 (Ala. March 28, 2014) [decision here].
Jim Carr Homebuilder (JCH) contracted to build a home for the Johnsons. After completion of the construction and moving in, the Johnsons noticed several problems with the house, including water leaking through the roof, walls, and floors, resulting in water damage to those and other areas of the house. When JCH was unable to satisfactorily fix the problems, the Johnsons sued, alleging breach of contract, fraud, and negligence.
Owners, JCH's insurer, defended under a reservation of rights. The matter went to arbitration, where an award of $600,000 was made to the Johnsons.
Owners filed a declaratory judgment action against the Johnsons and JCH. Owners argued that the property damage upon which the award was based was not the result of an "occurrence." The trial court determined that the entire arbitration award was covered under the policy.
The Alabama Supreme Court first surveyed its prior decisions regarding coverage for construction defects. Prior decisions held that faulty workmanship itself was not an occurrence, but faulty workmanship could lead to an occurrence if it subjected personal property or other parts of the structure to "continuous or repeated exposure" to some other "general harmful condition."
In summarizing its prior cases, the court noted that faulty workmanship itself was not "property damage" "caused by" or "arising out of" an "occurrence." The cost of repairing or replacing faulty workmanship was not the intended object of a CGL policy issued to a contractor. But the fact that the cost of repairing or replacing faulty workmanship itself was not the intended object of the insurance policy did not mean that additional damage to a contractor's work resulting from faulty workmanship might not properly be considered "property damage" "arising out of" an "occurrence."
The court also addressed the "your work" exclusion and whether it was included in the products-completed operations hazard. Generally, products that had left the insured's possession or work that was completed would be included in the hazard. Here, however, the products-completed operations hazard did not include property damage arising out of operations for which the classification, shown in the Declarations, stated that products-completed operations were included. JCH's policy indicated there was coverage for up to $2 million for products completed operations. Because the declarations showed coverage for products-completed operations, the "your work" exclusion did not apply.
Accordingly, the trial court's judgment was affirmed.
