Insurance covers the unexpected. Courts sometimes struggle to assess what an insured did expect, didn’t expect, or sometimes, should have expected. Contractors, construction firms and others should bear this in mind in their daily operations and when seeking a defense from their insurance companies.

In Auto-Owners Insurance Co. v. Ryan Stevens Construction, Inc. the U.S. District Court for the District of Utah recently held that a contractor’s commercial general liability insurance carrier had no

duty to defend a contractor who should have expected property damage resulting from its use of certain equipment on a construction project. The decision cautions contractors around the country to consider the expected consequences of their on-site actions to avoid arguments from insurers that any resulting damages are not accidental.

The facts are all too common. Robert Strieper engaged Ryan Stevens and his company, Ryan Stevens Construction, to build a home on property that Mr. Strieper owned. The property had existing structures, including a garage, workshop and attached storage building. The building contained a water tank and well pump that was serviced by electrical lines and water pipes. Mr. Strieper alleged that he told Mr. Stevens that if any existing structures had to be removed, Mr. Stevens would need to first disconnect the water tank, electrical wires, and water lines from the pump to protect the water supply during construction. Mr. Strieper alleged that despite his warning, Mr. Stevens failed to disconnect the water supply and used a track hoe that ripped out and damaged the wires, water line, and tank “causing significant damage to the system.” Mr. Strieper sued Mr. Stevens and sought damages for loss of the existing structures, destruction of the water tank, and damage to the water pump and system. Mr. Stevens turned to Auto-Owners Insurance Company, his CGL carrier, for coverage in defending against and indemnifying Mr. Strieper. Auto-Owners in turn sought a declaration from the court that it had no duty to defend or indemnify.

The District of Utah—comparing the language of the insurance policy with the allegations in Mr. Strieper’s complaint—determined that Auto-Owners owed no duty to defend Mr. Stevens. Like most CGL policies, Mr. Steven’s insurance policy insured against bodily injury or property damage “caused by an occurrence” where an “occurrence” is “an accident.” The Utah Supreme Court had previously considered situations where damage to property would be non-accidental (and thus not an occurrence under Utah law); one such situation is where the damage is the natural and probable consequence of the policyholder’s act or should have been expected.

Applying these standards, the District Court concluded that the property damage that Mr. Strieper alleged was the natural and probable consequence of Mr. Stevens’ act: “The property damage was allegedly caused by [Mr. Stevens] using a track hoe to rip out the electrical wires, water line, and water tank that were still connected.” Significantly, the Court added: “Even if [Mr. Stevens] did not intend to remove these items, [he] should have expected that using a track hoe to remove them would result in the property damage alleged by the Striepers.” Accordingly, the Court held there was no accident and therefore no occurrence and no coverage.

There has been a range of judicial opinions around the country as to whether coverage can be barred based on whether an insured actually expected a loss, or merely should have. Most courts require the policyholder to have subjective expectation of damage before determining that a contractor’s actions constitute a non-accidental occurrence ineligible for coverage under a CGL policy. As a federal court interpretation of Utah law, Ryan Stevens Construction is just one voice in the crowd, and not binding even on a Utah state court. Nevertheless, construction firms and contractors are advised to take this recent decision into account and consider, before performing any on-site actions, what might be the reasonably expected consequences of those actions. For example, will using a certain piece of equipment cause any ancillary damage? If that fails and it appears the insurer may make this argument, policyholders should also consider state law on this issue as part of their claim strategy.

If contractors know what to expect and prevent the expected, then insurers are more likely to provide coverage when unexpected damage does occur.