Commercial General Liability Coverage and the Construction Project : A Southern Overview Of Covered Risks

This article appeared in November 2012 Dixie Contractor

By John Lassiter and Christopher Meyer

Commercial general liability (CGL) insurance policies are designed to protect businesses from certain types of losses during the normal course of businesses operations. Because of the significant risk of financial damages from lawsuits, which often exceed the dollar value of the project itself, CGL insurance is used by general contractors, subcontractors, suppliers, and both private and public project owners. However, the types of risks or claims that are covered under CGL policies vary from state to state.  Accordingly, what constitutes an occurrence under these policies, which are generally standard form and used by most commercial insurers, has become clearer over the last several years with uniformity among developing southern jurisdictions.

Faulty Workmanship as an “Occurrence”
Most litigation over CGL insurance coverage boils down to a dispute first over the meaning of the word accident within the definition of “occurrence” and then the scope and application of the your work exclusion; as those terms are defined by the standard CGL.  This is especially true with regard to work performed by subcontractors.  The cases and rules vary from state to state, but increasingly in southern states the courts hold that construction defects by subcontractors are covered under many circumstances.  A summary of southern cases follows.

The case law in Alabama regarding subcontractor damages under CGL policies was fairly undeveloped compared to other Southeastern states until very recently.  The issue has been settled or static since the 1980s or before the 1986 amendment to the Insurance Service Office’s (ISO) CGL policy form, which is the most recent revised version.

Recently, in Town & Country Property, LLC v. Amerisure Ins. Co. , the Alabama Supreme Court had occasion to consider a CGL coverage dispute between a general contractor and its CGL carrier stemming from defective work by a subcontractor.  Town & Country, as owner, contracted with Jones-Williams as general contractor for the construction of an automobile sales and service facility. Jones-Williams then retained subcontractors to perform the work, doing none of the actual construction work itself.  Defects were discovered in the facility and Town & Country sued Jones-Williams for faulty construction. A jury awarded Town & Country more than $600,000. Town & Country, as a judgment creditor, sought to recover under Jones-Williams’ CGL policy issued by Amerisure.

Even though the Supreme Court affirmed the trial court’s grant of summary judgment in favor of Amerisure, it provided clarity as to when faulty workmanship by a subcontractor may constitute an occurrence. The court opined that faulty workmanship itself is not an occurrence for CGL policy purposes, but that faulty workmanship may lead to an occurrence if it subjects personal property, or other parts of the structure, are subject to “continuous or repeated exposure” to some other general harmful condition.  Amerisure was not required to indemnify Jones-Williams insofar as the damages represented the costs of repairing or replacing the faulty work.

Georgia courts, unlike other state courts, employ the tort/contract division. Any damages that can be deemed as coming from a breach of the construction contract, whether intentional or not, are not covered by the insurance policy. It is only damage to other property, a claim sounding in tort law, which makes an occurrence.  Accordingly, in order for a general contractor to recover from a CGL insurer, the claim must be grounded in tort as opposed to contract.

Specifically, while construction defects constituting a breach of contract are not covered by CGL policies, negligently performed faulty workmanship that damages other property may constitute an occurrence. In Sawhorse, Inc. v. Southern Guaranty Ins. Co. of GA, a general contractor and his subcontractor, while adding a second story onto a one-story house, damaged both stories of the house. The court held that while the CGL policy excluded any damage to the second story, it did not necessarily exclude damage to the first story, since it was not being worked on.

In Hathaway Dev. Co. v. American Empire Surplus Lines Ins. Co., a subcontractor installed faulty plumbing in three building projects. Hathaway sued the subcontractor’s insurer to recover damages. Since Hathaway sued its subcontractor for negligence, not breach of contract, there was an occurrence under the policy.  The leaking pipes had to be replaced and also caused other damage to the home; thus, the policy did not cover the costs to replace the defective workmanship, but did cover the costs to repair damage to other property caused by the defective workmanship.

As proven above, the Georgia rule does not operate that differently than the rules in other states. It is still necessary to cause damage to other property beyond the work itself.

In United States Fire Ins. Co. v. J.S.U.B, Inc,  the Florida Supreme Court announced its rule with regard to an occurrence under a CGL policy. J.S.U.B., a general contractor, was sued by several homeowners for damage to their foundations and interiors, which was the result of a subcontractor’s use of substandard soil and improper soil compaction techniques. The insurance company agreed to cover J.S.U.B. for the cost of repairing the homeowners personal property, i.e., the wallpaper, but not the foundation or drywall, since that was part of the contractor’s work and was excluded under the policy.

The Florida Supreme Court defined an accident under the policy as causing damage that is neither expected nor intended, rejecting a test of reasonably foreseeable or natural and probable consequences for something more inclusive. The Court noted that the appropriate consideration for determining if an occurrence took place is whether the damage was expected or intended from the standpoint of the insured, not whose property was damaged.

The Court rejected any distinction between contract and tort claims, or any distinction over who owns the property, as it related to the definition of occurrence. The Court then differentiated between property damage that only involves the cost of repairing defective work and that involving the cost of repairing damage caused by defective work. The first is not a valid claim, but the latter is.  In this case, it was the settling of the improperly compacted soil that caused the damage to the home’s foundation, so the damage was more than just repairing or replacing improperly installed or done work. With the J.S.U.B. case, the Florida Supreme Court overturned prior case law to expand the understanding and the scope of CGL insurance policies as they regard defective subcontractor work.

Although there are slight differences among states, the basics of CGL coverage for the damage caused by subcontractors should be clear: it must be accidental and done to property other than property currently being worked on or owned by the contractor.

John Lassiter and  Chris Meyer are associates in the Jackson, Miss. office of Burr & Forman LLP.