The West Virginia Supreme Court recently decided that defective construction constitutes a covered "occurrence" under standard-form commercial general liability policies. Recognizing the growing majority of states nationwide that have come to the same conclusion, either through judicial decision or statute, West Virginia's highest court overruled several of its prior decisions to the contrary.
The West Virginia case involved a home builder (Pinnacle) that was sued by a purchaser for defects in construction of a custom home, including uneven floors, a sagging support beam, water infiltration through the roof and a chimney joint, and multiple cracks in the drywall. Among other damages, the homeowner claimed diminution in the market value of her home.
Pinnacle sought coverage from Erie Insurance Property and Casualty, its CGL insurer. Erie denied coverage, based on the Supreme Court's prior decisions that defective construction, without more, was not an "occurrence" for purposes of triggering CGL coverage. The trial court agreed with Erie, and granted its motions for summary judgment.
On appeal, the Supreme Court recognized that, since its most recent reiteration that faulty workmanship was not a triggering "occurrence," the majority of courts nationwide had decided this issue to the contrary. The Court then questioned the logical foundation of its prior decisions and, after reconsideration, reversed its course.
Looking to the definition of "occurrence" (i.e., "an accident, including continuous or repeated exposure to substantially the same general harmful conditions"), the court noted that standard-form CGL policies do not define "accident." Clearly, the Court opined, Pinnacle did not intentionally construct a defective house.
It goes without saying that the damages incurred by [the homeowner] during the construction and completion of her home, or the actions giving rise thereto, were not within the contemplation of Pinnacle when it hired the subcontractors alleged to have performed most of the defective work. Common sense dictates that had Pinnacle expected or foreseen the allegedly shoddy workmanship its subcontractors were destined to perform, Pinnacle would not have hired them in the first place. . . . To find otherwise would suggest that Pinnacle deliberately sabotaged the very same construction project it worked so diligently to obtain at the risk of jeopardizing its professional name and business reputation in the process.
After finding coverage was available, the Court then dismissed Erie's arguments for application of various standard-form construction-related exclusions, holding that the various construction defects constituted "property damage" under the terms of the policy.
In reaching its decision, the Supreme Court cited to similar decisions in Arizona, California, Connecticut, Florida, Georgia, Indiana, Kansas, Minnesota, Mississippi, Missouri, Montana, North Dakota, South Dakota, Tennessee, Texas, and Wisconsin, and further noted that three states – Arkansas, Colorado, and South Carolina – have mandated that CGL policies include coverage for defective construction by statute. According to the Supreme Court, courts in Alaska, Hawaii, Illinois, Iowa, Kentucky, Nebraska, New Hampshire, New Jersey, North Carolina, Ohio, and Pennsylvania have issued decisions to the contrary.
To read the West Virginia Supreme Court's decision in Cherrington v. Erie Insurance Property and Casualty Co., click here.
Why it matters: Coverage for faulty workmanship under CGL policies has been a hotly contested issue for many years, with both sides able to cite favorable cases in multiple jurisdictions. In recent years, however, a clear majority of jurisdictions have recognized that faulty workmanship is an "occurrence" for purposes of triggering CGL coverage. West Virginia is now among those jurisdictions. Although policyholders engaged in construction work now face a positive outlook as more jurisdictions join the majority, they still need to understand the law on this issue in the jurisdictions whose substantive insurance law may apply to claims brought against them and structure their risk management strategies accordingly.