Last month, in a lengthy decision over the dissent of three justices, the Iowa Supreme Court joined the ranks of state high courts to conclude that defective work performed by a subcontractor is covered under the standard Commercial General Liability (CGL) policy held by almost all general contractors today.
The case arose from the construction of an apartment complex in Des Moines in the early 2000s. After the buyer, Westlake, closed on the purchase of the complex, numerous water intrusion problems manifested in the complex resulting in extensive damage throughout the complex to otherwise undamaged property. Westlake sued the project’s general contractor and other defendants, who in turn asserted claims against the subcontractors who worked on the project. Ultimately, the case settled with the general contractor’s primary carrier, Arch, contributing its policy limits, but the excess carrier, National Surety Corporation (NSC), refusing to contribute any part of its $20 million in limits. As part of the settlement, the defendants assigned their rights under the NSC excess policy to Westlake, and NSC filed a declaratory judgment action seeking to disclaim coverage.
Westlake prevailed after a three-week jury trial, obtaining a $12.5 million judgment against NSC. NSC then appealed, arguing that the trial court erred as a matter of law when it concluded that a subcontractor’s faulty work constitutes an “accident” – and thus an “occurrence” – triggering coverage under the standard CGL policy.
Noting that this was a question of first impression in Iowa, the court focused on an exception to an exclusion in the policy – the exclusion precluding coverage for completed work performed by the insured, and the exception stating that the “your work” exclusion does not apply if “the damaged work or the work out of which the damage arises was performed . . . by a subcontractor.” The court reasoned that it would be illogical for the policy to contain an exception to an exclusion granting back coverage for property damage caused by the defective work of a subcontractor if such defective work were not covered by the grant of coverage in the policy. Accordingly, and relying on the history of the modern CGL form as well as the decisions of other state supreme courts addressing the issue, the court concluded that “defective workmanship by an insured’s subcontractor may constitute an occurrence under a modern standard-form CGL policy containing a subcontractor exception to the ‘your work’ exclusion.”
The court’s decision is a boon to general contractors who must rely on subcontractors to complete many facets of complex construction projects but who cannot, even with careful management, prevent or detect all defective subcontractor work.