It is axiomatic that in order to obtain insurance coverage a policyholder must first establish that a claim falls within a policy’s insuring agreement before coverage under the policy is triggered.
For construction claims brought under CGL policies, that frequently means showing that the damages at issue constitute “property damage” caused by an “occurrence” (where “occurrence” is generally defined as “an accident”). While this requirement may often seem like a simple factual question, in the context of a subcontractor’s faulty workmanship, the analysis has proven more difficult. Where alleged faulty work causes damage only to the insured’s own work product, is the property damage accidental?
Over the years, courts across the country have been asked to make this determination, with varying results. The Tenth Circuit’s recent decision in Black & Veatch Corp. v. Aspen Insurance (UK) Ltd. adds another federal appellate court decision to the mix and continues a trend finding that faulty subcontractor work constitutes an “occurrence” under standard form CGL language. This case, handled by Pillsbury’s Insurance Recovery and Advisory Group and argued in the Tenth Circuit by Pillsbury Chair David Dekker, is notable because it addresses the issue under New York law—which is sometimes less favorable towards policyholders—and highlights the clear movement of jurisprudence on this issue in the direction of coverage.
In 2005, the insured entered into contracts “to engineer, procure, and construct several jet bubbling reactors (JBRs), which eliminate contaminants from the exhaust emitted by coal-fired power plants.” The insured subcontracted the engineering and construction of the internal components for at least seven of the JBRs, but deficiencies in the components procured and constructed by the subcontractors allegedly caused the internal components of the JBRs to deform, crack and sometimes collapse, in addition to other damages.
The standard form CGL policy at issue provided coverage for damages arising from an “occurrence,” which included an accident causing damage to the property of a third party. The policy also contained a “Your Work” exclusion, which barred coverage for property damage to the insured’s own work, and an exception to this exclusion, which preserved coverage for damage attributable to faulty work performed by subcontractors.
The primary question addressed by the Tenth Circuit panel was whether the New York Court of Appeals, the highest New York court, would hold that the policy’s insuring agreement covered the property damage to the JBRs. In a 2-1 decision, the Tenth Circuit found that coverage applied.
Relying on previous New York Court of Appeals decisions construing coverage under the same policy language, and the drafting history of these provisions in the CGL policy form, the Court held that the insured did not expect or intend its subcontractors to cause damage, so the damage was accidental. The Court also held that the damage to the JBRs constituted property damage to the owner of the plants, a third party. Rejecting the insurer’s arguments to the contrary, the majority held that any “interpretation of ‘occurrence’ as excluding the damages at issue here would render several Policy provisions meaningless, in violation of New York contract interpretation rules.”
Specifically, the Court found that the “Your Work” exclusion would be “redundant” if the definition of “occurrence” “categorically and preemptively precluded coverage” for damage to the insured general contractor’s own work in the first instance. The Court also held that there would be no reason for the policy to include the subcontractor exception if the basic insuring agreement did not provide coverage for damages to the insured’s work when the damaged work was performed by a subcontractor. To give these provisions meaning, the Court held that an “occurrence” must encompass damage to the insured general contractor’s own work arising from faulty subcontractor workmanship.
Importantly, the Court also emphasized that its decision followed a trend of state supreme court decisions considering this issue since 2012. These recent decisions reached “near unanimity” that construction defects can constitute an occurrence. The Tenth Circuit held that it expected the New York Court of Appeals to “join the clear trend among state supreme courts holding that damage from faulty subcontractor work constitutes an ‘occurrence’ under the policy.”
This case adds to the growing number of jurisdictions finding that a subcontractor’s faulty work constitutes an “occurrence” under standard form CGL language and provides additional authority to policyholders pushing their carriers to obtain coverage for a subcontractors’ faulty work.