Good news for businesses in the construction industry: South Dakota has become the latest jurisdiction to hold that construction defect claims are covered by commercial general liability (CGL) policies. In Owners Insurance Company v. Tibke Construction, Inc., et al., the South Dakota Supreme Court held that an alleged failure to conduct soil testing was an occurrence that triggered coverage under the insured’s CGL policies. In Tibke, the policyholder, Tibke Construction (“Tibke”), was hired as a general contractor to build a house. Tibke, in turn, hired Jerry’s Excavating, Inc. as a subcontractor to prepare the soil and perform excavation work. Several years after Tibke completed the house, the homeowners sued Tibke because of cracking and structural unsoundness in the home that they allege resulted from a failure to conduct soil compaction testing before construction.
Tibke sought coverage for the lawsuit from its insurer, Owners Insurance Company (“Owners”). Owners accepted the claim under a reservation of rights, and then filed a declaratory judgment action against its insured to determine coverage. Owners asserted that faulty construction was not an occurrence under the policies, and that the “Your Work” exclusion precluded coverage for the claim. Both parties moved for summary judgment on the question of coverage. The trial court denied both motions on the grounds that there were questions of fact that still needed to be decided. The parties filed immediate petitions for appeal that the Court granted.
After hearing the arguments by both parties, the Court affirmed the lower court’s judgment denying Owners’ motion and reversed the judgment denying Tibke’s motion. The Court held that a deliberate action, such as faulty work, performed negligently is an accident if the effect is not the expected or intended result. Accordingly, the allegations, if true, constituted an occurrence under the insured’s CGL policy. The Court also rejected Owners’ argument that the “Your Work” exclusion precluded coverage. Because the exclusion focused on the repair, restoration, or replacement of a specific part of the property, the Court found that the policy did not preclude coverage where the whole house suffered damage for work performed on the soil beneath it.
What’s the takeaway for policyholders? Courts are analyzing the policy language and fixating on whether the result was an ‘accident’. In fact, a majority of state supreme courts who have decided this issue have ruled that faulty workmanship can be an occurrence. Thus, policyholders need to carefully review their policy language and not rely solely on their insurance company to tell them whether a construction defect claim is covered by their policies.