The Iowa Supreme Court held that property damage caused by a subcontractor's defective work was an "occurrence." Nat'l Sur. Corp. v. Westlake Invs., LLC, 880 N.W. 2d 724 (Iowa 2016).
In 2002, the insureds, the developers and general contractor, began construction on an apartment complex. While the complex was still under construction, it was purchased by Westlake Investments, LLC.
During construction, numerous problems surfaced, including visible water penetration issues in several buildings. In February 2008, Westlake sued the insureds, seeking to recover lost profits, repair costs, and other damages under tort and contract theories. Arch Insurance Group defended under the primary policy. A settlement was eventually reached whereby a consent judgment for $15,600,000 was entered against the insureds and in favor of Westlake. Arch contributed its policy limits of $1,000,000 to the settlement. Other third party defendants contributed $1,737,500, leaving $12,762,500 of the judgment unsatisfied. The insureds assigned rights under their excess policy with National Surety Corporation (NSC) to Westlake. NSC's policy was a following-form policy.
NSC filed suit against Westlake for a declaratory judgment. On cross-motions for summary judgment, the court ruled in favor of Westlake, agreeing that property damage resulting from defective work performed by an insured's subcontractor may constitute an accident and an occurrence.
The case then went to trial. NSC objected to the jury instruction defining the terms "accident" and "occurrence." NSC proposed an instruction that defined the term "accident" as an "undesigned, sudden and unexpected event." The trial court overruled NSC's objections and instructed the jury that whether there was an "accident" must be determined from the viewpoint of the insureds and what they intended or should reasonably have expected. The trial court further instructed the jury that the term "accident" means "an unplanned, sudden, and unexpected event . . . determined from the viewpoint of the insureds and what they intended or should reasonably have expected." The jury was further instructed that defective construction work performed by subcontractors could be an "occurrence."
The jury returned a verdict in favor of Westlake. The trial court entered a judgment awarding Westlake $12,439,500. NSC's motion for a directed verdict was denied.
NSC appealed. The court methodically described the history of CGL policies and the coverage issues surrounding construction defect claims. The trial court had correctly instructed the jury to determine whether the claimed damages arose due to an accident that constituted an occurrence by considering the viewpoint of the insureds and what they intended or should reasonably have expected.
Turning to the directed verdict, NSC argued claims for defective workmanship could not constitute an accident or occurrence in Iowa as a matter of law. The court determined that a reasonable person reading the policy's subcontractor exception to the "your work" exclusion would believe it covered defective work performed by the insured's subcontractor unless the resulting property damage was specifically precluded from coverage by an exclusion or endorsement. Accordingly, the insuring agreement was interpreted to provide coverage for property damage arising out of defective work performed by an insured's subcontractor unless the resulting property damage was specifically precluded from coverage by an exclusion or endorsement. Further, the defective work performed by the insureds' subcontractors fell within the definition of "occurrence" in the policy's insuring agreement.
