The Michigan Court of Appeals and a Missouri federal district court, applying Missouri law, both recently held that defective construction is not an occurrence under a commercial general liability contract. Groom v. Home-Owners Insurance Co., No. 272840 (Mich. App. April 19, 2007); St. Paul Fire and Marine Ins. Co. v. Building Construction Enterprises, Inc., No. 06-0248 CV-W-NKL (W.D. Mo. April 19, 2007).

Groom v. Home-Owners Insurance Co., No. 272840 (Mich. App. April 19, 2007) Factual and Procedural Background Knoll Construction, Inc. built a condominium.

After the condominium owner moved in, the roof leaked. The leak allegedly resulted in water damage and mold. The owner sued the policyholder for alleged property damage and bodily injuries. After a trial on the merits, a jury rendered a verdict against Knoll for $80,000 in property damage, $16,000 for bodily injuries, and $51,000 in attorney fees.

Home-Owners Insurance Company issued a general liability contract to Knoll. Home- Owners refused to pay the judgment. The condominium owner, as a judgment creditor of Knoll, filed suit against Home- Owners. Home-Owners agreed to pay for the bodily injuries. Home-Owners filed a motion for summary judgment arguing that the property damage was limited to Knoll’s work, the condominium, and thus not an occurrence. The trial court agreed and granted summary judgment in favor of Home-Owners. The condominium owner appealed.


The Michigan Court of Appeals affirmed the trial court’s holding that Knoll’s defective construction of a condominium was not an occurrence. In reaching its decision, the court surveyed national decisions on the issue of whether coverage is triggered by poor workmanship that causes injury to itself and concluded that courts “have split into two main lines.” One line holds that the term “accident” excludes damage caused by faulty workmanship to the work product itself. See, e.g., Kvaerner Metals Div. of Kvaerner US, Inc. v. Commercial Ins. Co., 908 A.2d 888, 889 (Pa. 2006). The other line of cases holds that faulty workmanship constitutes an occurrence as long as the insured did not intend for the damage to occur. See, e.g., Lennar Corp. v. Great Am. Ins. Co., 200 S.W.3d 651, 668-9 (Tex. App. 2006, pet. granted); Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 673 N.W.2d 65, 78 (Wis. 2004).

The court stated that if it were writing on a “clean slate,” it would follow the second line of cases and find that a construction defect is an occurrence as long as the insured did not intend for damage to occur. The court recognized, however, that two prior Michigan courts had held that when an insured’s defective construction is confined to the work itself, the damage is not accidental and not an occurrence. See Hawkeye- Security Ins. Co. v. Vector Constr. Co., 460 N.W.2d 329 (Mich. App. 1990) (finding that defective work of insured, standing alone, is not an occurrence) and Radenbaugh v. Farm Bureau Gen. Ins. Co., 610 N.W.2d 272 (Mich. App. 2000) (holding that defective workmanship confined to insured’s work is not an occurrence). Based on these cases, the court concluded that Michigan follows the line of cases that hold defective workmanship, which damages only the insured’s work, is not an occurrence.

Turning to the case before it, the court noted that Knoll built a condominium with a defective roof. The defective roof allowed water to leak, which damaged other parts of the condominium. Because the condominium was Knoll’s work, and the damage was limited to the condominium, the court held that the faulty workmanship did not constitute an occurrence and there was no coverage.

The court rejected the alternative argument that the products-completed operations provision in the contract provided a separate coverage grant. The court explained that the products-completed operations provisions were part of Coverage A of the insurance contract. Coverage A contained the requirement that there must be an occurrence. Thus, even if the claim fell within the productscompleted operations provisions, there would still need to be an occurrence. St. Paul Fire and Marine Ins. Co. v. Building Construction Enterprises, Inc., No. 06-0248 CV-W-NKL (W.D. Mo. April 19, 2007)

Factual and Procedural Background

Building Construction Enterprises, Inc. (BCE), a Missouri corporation, contracted with the Army Corps of Engineers to build a training facility in Fort Riley, Kansas. The design included underground support structures (duct banks) used to house cable and electrical lines. The duct banks had to withstand the weight of military tanks and arms fire.

BCE’s subcontractors built the duct banks. The Corps found deficiencies in the duct banks, which BCE repaired. BCE sought coverage for the cost to repair the duct banks and for costs to replace landscaping and paving that was disturbed during the repairs. BCE was insured under two liability contracts, one issued by St. Paul Fire and Marine Insurance Company and one issued by Charter Oak Insurance Company. Both insurers denied coverage on the basis that there was not an “occurrence.” St. Paul and Charter Oak filed a declaratory judgment action in federal district court in Missouri. St. Paul and Charter Oak filed a joint motion for summary judgment arguing that Missouri law applied and that there was no “occurrence.”


At the outset, the court addressed the “perhaps dispositive” issue of whether Kansas or Missouri law applied. The court agreed with the insurers and held that Missouri law applied. Missouri followed Section 188 of the Restatement (Second) Conflict of Laws, which provides that the law of the state which the most significant relationship to the transaction governs. The court concluded that Missouri had the most significant relationship to the dispute because BCE was incorporated in Missouri and the contracts at issue were negotiated and delivered in Missouri.

The court rejected BCE’s argument that under Section 193 of the Restatement, which provides that the law of the state that the parties understood to be the principal location of the risk governs, Kansas law, rather than Missouri law, should apply. Although the work was performed in Kansas, the court reasoned that BCE’s insurance contracts did not cover specifically identified construction sites but instead “were intended to cover BCE’s commercial operations wherever they happened to occur.” Because only 10 to 15% of BCE’s business was in Kansas, the court stated that BCE’s risk was not principally in Kansas. Instead, as explained above, the court analyzed the Section 188 factors and found that Missouri had the most significant relationship.

The court next addressed whether the claim against BCE arose out of an occurrence, which was defined in relevant part as an accident. The court found the issues in BCE’s case similar to those in American States Insurance Co. v. Mathis, 974 S.W.2d 647 (Mo. Ct. App. 1998), in which the Missouri Court of Appeals held that the failure to meet obligations under a construction contract were not an “occurrence” under a general liability contract. The Mathis court reasoned that “breaches of contract are not ‘accidents’ or ‘occurrences’” because “[p]erformance of a contract according to the terms specified therein was within [the insured’s] control and management and its failure to perform cannot be described as an undesigned and unexpected event.” 974 S.W.2d at 650.

The court explained that BCE corrected deficiencies in the construction of the duct bank. The court noted the only other damage identified by BCE was the reseeding of several acres of tall-grass prairie and the rebuilding of several roadways damaged during the repairs. The court found, however, that these “additional costs cannot be considered an accident or occurrence any more than the negligent work which necessitated them.”


These decisions confirm that Michigan and Missouri, like a growing majority of jurisdictions, bar coverage for defective construction because it is not an accident. These decisions also show that regardless of whether the work is performed by a general contractor, as in Groom, or by subcontractors, as in Building Construction Enterprises, defective construction does not constitute an occurrence. The Building Construction Enterprises decision confirms that the costs to repair or replace defective construction will not convert an uncovered claim into a covered occurrence. It also shows the importance of a choice of law analysis.

If you have any questions regarding this Alert, or insurance coverage matters, please contact any of the attorneys listed on this Alert.