If a subcontractor is performing work pursuant to a contract, and defective workmanship takes place, is it an “occurrence” under a commercial general liability (“CGL”) policy? With a split in authorities, a Virginia court, in Erie Insurance Exchange v. Salvi, 86 Va. Cir. 132 (2013), examined various lines of cases and determined that the definition of “occurrence” must be interpreted in light of the language of the entire policy. Therefore, two policies that have identical definitions of the term “occurrence” could have varied results depending on policy exclusions – most notably contractual liability exclusions.
In Salvi, the term “occurrence” was defined as “an accident including continuous or repeated exposure to substantially the same general hazardous condition.” This is basically the standard definition in such policies regardless of insurer. “Property damage” under the policy was defined as “physical injury to tangible property including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it.” The policy at issue also contained a contractual liability exclusion which excludes from coverage property damage to “that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations if the ‘property damage’ arises out of those operations.”
The Court noted that “an accident is [a]n event that takes place without one’s foresight or expectation; an undersigned, sudden, and unexpected event.” The Court went on to examine two competing lines of cases addressing the issue of whether the damage a subcontractor’s defective workmanship causes to otherwise non-defective work constitutes “an occurrence” under a CGL policy. The first case, RML Corp. v. Assurance Co. of America, No. CH02–127 (Va.Cir.Ct. Dec. 31,2002), (analyzing Virginia law) the Court noted that “[d]efective workmanship, standing alone, is not the result of an ‘occurrence.’ A breach of contract causes defective workmanship.” Accordingly, the Court found that the damages claimed were not “an occurrence” so as to trigger coverage. The RML court continued by importantly noting that even if there was “an occurrence,” exclusions in the policy precluded coverage – specifically the “contractual liability exclusion” which excludes from coverage property damage to “that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations if the ‘property damage’ arises out of those operations.” Synthesizing these concepts, the Court held that “ecuase defective workmanship is a breach of contract (and therefore not ‘an occurrence’), and because [the contractual liability exclusion] includes circumstances amounting to defective workmanship, the court believed the policy explicitly excluded a breach of contract claim from coverage.”
The second case examined, Stanley Martin Cos., Inc. v. Ohio Casualty Group, 313 Fed.App’x 609 (4th Cir. 2009) (also applying Virginia law) reached the opposite conclusion. In Stanley Martin, the subcontractor supplied defective wood trusses to the, general contractor. The issue was whether the spread of damage from the defective trusses to the non-defective surrounding components was “an occurrence” covered under the CGL. The Circuit Court held that any spread of damage to non-defective parts of the property was an “unintended accident” and thus “an occurrence” covered by the policy. In support of this, the Court reasoned that “as delivered per the construction contract, those components were defect-free such that their subsequent damage was unexpected.” In reaching its holding, the Stanley Martin Court specifically noted that its conclusion was different than RML’s holding because the Stanley Martin policy did not include the contractual liability exclusion that was present in RML.
Ultimately, the Salvi Court determined that the defective workmanship was a breach of contract and, therefore, was not an occurrence. The reason for this outcome is that the definition of the term “occurrence” in the Salvi policy was read in light of the contractual liability exclusion.
This case is instructive moving forward as it highlights the importance of understanding that identical policy terms can be read differently in light of the specific policy exclusions. In Salvi, the Court determined that the definition of the term “occurrence” in that policy, must be viewed in light of the contractual liability exclusion. In the event that the contractual liability exclusion were absent, as was the case in Stanley Martin, the definition of “occurrence” would not be so restrictively viewed and the Court would have likely held that coverage exists.