The Alabama Supreme Court has decided, once again, that allegedly faulty construction work cannot constitute an occurrence under a standard commercial liability policy. The decision cements the Court’s place as an outlier, holding to the minority view among state Supreme Courts that have considered the issue. How much longer will the outliers hold out?

Reading about the defects that an arbitrator found were constructed into the house that is the subject of Auto Owners Ins. Co. v. Jim Carr Homebuilder, LLC, et al. (Get a copy here) is enough to give any homeowner heartburn. The arbitrator awarded $3 million in compensatory damages to the homeowners because of improperly installed flashing; improperly installed brick; the lack of weep holes in the brick; improperly installed doors and windows; improper construction of the upper porches; faulty construction of the roof; improper installation of a bathtub. One imagines after reading this description that the house must have leaked like a collander.

The defendant home builder acted as general contractor, Jim Carr Homebuilders, or “JCH;” but the shoddy workmanship that caused the damages was the fault of its subcontractors. Moreover, the work in question caused “downstream” consequential damage to other, “non-defective,” parts of the home. Why is this important? Even courts that strictly apply CGL policies in the construction context typically find that there is coverage for consequential damage to “other property” (the property of a third party, including the homeowner’s, personal property, for example). Coverage may be available even when, as was the case in Jim-Carr Homebuilders, the policy does not contain products-completed-operations hazard — or PCOH – coverage for post-completion damage caused by the construction-related negligence of a subcontractor.

Auto-Owners is no stranger to such issues, having been the insurer of record for one of the leading cases decided by the Florida Supreme Court on the subject, Pozzi Window v. Auto Owners Ins. Co. After losing this case, did Auto-Owners stop selling PCOH coverage? Apparently in the case of Jim Carr Homebuilders, it did; or it did not offer such coverage at a premium rate that JCH thought (perhaps mistakenly) it could afford. However, even if the policy had included such coverage, Auto-Owners, like many carriers that offer PCOH coverage, would deny that the sold policy insures against post-completion damage caused by negligent workmanship. Despite the strong weight of authority to the contrary, carriers continue to claim that the CGL policy form does not cover construction-related acts or omissions because such acts are not an insured “occurrence.” The Alabama Supreme Court agreed.

The majority rule: Unexpected and unintentional damage caused by a negligent workmanship is an insured “occurrence.”

The standard CGL policy defines a covered “occurrence” as “an accident, including continuous or repeated exposure to conditions that causes property damage neither expected nor intended from the standpoint of the insured.” (In the most recent iteration of the CGL policy, the “neither expected nor intended” language has been moved to an exclusion.) In older forms, the policy covered “accidents,” which typically were defined separately to include acts of the insured that were unintended and unexpected. Most courts have recognized that the unintended consequences (ensuing property damage) of otherwise intentional acts (installing roofs, windows, bathtubs and other fixtures, but not installing them properly) are “occurrences.” This majority rule is so patently correct that it is hard to see how the outliers can continue to swim against the tide — or even why they would choose to do so.

Accidents, for purposes of insurance, are unforeseen events that cause unintended damage from the standpoint of the insured. Most acts that cause unexpected and unintended consequences (driving a car; manufacturing a product; swinging a hammer) involve some degree of purposeful conduct. If committed negligently, without specific intent to harm, such acts should be insured. Insurance protection for careless driving, or a mistake in the way a product is assembled, or negligence in the way two boards are nailed together — is the very essence of insurance coverage. We buy insurance to protect us against the consequences our own carelessness or stupidity; that is, our negligence.

As Justice Benjamin Cardozo once put it, a very long time ago, “To restrict insurance to cases where liability is incurred without fault of the insured would reduce indemnity to a shadow.” If there is no insurance for any intentional act, then insurance is simply a rip-off — it covers nothing. If the consequences of defective construction is a cost of doing business for construction contractors, then why are the so-called “business risks” exclusions, which exclude only a very narrow category of faulty workmanship, a part of the CGL policy at all? To put it another way: If all faulty workmanship were excluded in the initial coverage grant of the CGL policy, why should a carrier be permitted to sell PCOH coverage, if the policy provides no coverage for any “occurrence” caused by construction-related negligence? If the insurance industry wants to specify a very small category of risks (faulty workmanship) that are excluded from coverage, it certainly knows how to do so. It would make no sense to offer (or purchase) PCOH coverage if virtually no instances of faulty workmanship can ever be covered. (For a more in-depth explanation of these concepts, see the article No Occurrence Myth.)

The Auto Owners v. JCH decision was a prime opportunity for the Alabama Supreme Court to join the majority view.

Under older forms of policies, courts relied on the so-called “business risks” exclusions for “your” (that is, the insured’s) work or products to deny coverage for construction-related property damage. However, deciding that it had an untapped market for such coverage, carriers offered a PCOH form that still excluded coverage for “your work” (the work of the insured GC, itself), but that contained a specific exception for property damage caused by or arising out of faulty workmanship performed by a general contractor’s subcontractors. This change, enabling carriers to sell more policies at higher premium, should make it perfectly clear that damages caused by faulty workmanship of a subcontractor have to be covered and that, therefore, all faulty workmanship cannot possibly be a “non-occurrence.”

Because the JCH policy did not include PCOH coverage, the Alabama court might have ruled that coverage was excluded by a “business risk” exclusion, finding that the home was the “work” of the insured; but that’s not the holding of this case. Instead, the court adopted the “whole hog” approach of the carrier, ruling that faulty workmanship cannot be an untended and unexpected “occurrence,” even when it does unintended harm to other, non-defective parts of the completed construction project.

Four decisions this past spring and summer, in rapid succession, in which state Supreme Courts of West Virginia, North Dakota, Connecticut, and Georgia concluded that faulty workmanship can be an occurrence, led us to think that a number of the outliers would come around to the correct position if and when the right case reached those states’ highest courts. We continue to think so. We hold out particular hope for the New Jersey Supreme Court, which hasn’t decided a construction-defect coverage case since 1979, when the CGL was a very different policy in relevant respects than it is today. (See the article “Past Its Prime: Weedo v. Stone-E-Brick” .) The Auto Owners v. JCH decision was a prime opportunity for the Alabama Supreme Court to leave the ranks of the outliers and join the majority view.