This is the third in a three-part series of alerts about latent construction defects.

Insurance Coverage Issues in Latent Defects Cases

CGL Policies Provide Coverage for Damage Caused by Latent Construction Defects Due to a Subcontractor’s Defective Work But Do Not Provide Coverage for the Costs of Repair or Replacement of the Defective Work Itself

For approximately 27 years preceding the decision of United States Fire Insurance Company v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007), Florida courts followed the case of LaMarche v. Shelby Mutual Insurance Co., 390 So. 2d 325 (Fla. 1980) which held that damages caused by construction defects were not covered under typical CGL policies. In 2005, however, the Second District issued a decision in which it recognized that since the LaMarche decision, significant changes to both the standard language in CGL policies and the law governing construction of such policies have occurred, rendering LaMarche inapplicable to the analysis of current CGL policies.1 The Second District decision was appealed to the Supreme Court and the appeal remained pending for approximately two years. During that two-year period, several courts construing coverage under CGL policies, including the Middle District of Florida, chose to follow the Second District’s ruling in J.S.U.B. rather than LaMarche.2 Finally, on December 20, 2007, the Florida Supreme Court affirmed the Second District and recognized that latent construction defects could be covered under post-1986 standard form CGL policies.3

In J.S.U.B., the general contractor sought coverage under its CGL policy, form CG 00 01 07 98, for damage to several homes due to the faulty workmanship of its subcontractors. The trial court determined that the CGL policy did not provide coverage. On appeal, the Second District reversed, concluding that CGL policies do cover the cost to repair damage to homes caused by a subcontractor’s faulty workmanship as faulty workmanship qualified as “occurrences” under the policy.4 The Supreme Court affirmed and although it refused to expressly recede from LaMarche, it distinguished LarMarche on the bases that: (1) the claims at issue in LaMarche were for the contractor’s own defective work rather than for defective work performed by a subcontractor which causes damage to the completed project as was the case in JSUB; and (2) the claims at issue in LaMarche were under a pre-1986 standard form CGL policy which contained significantly different exclusions from post-1986 standard form CGL policies.5 For example, at the time of LaMarche, CGL polices excluded coverage for damages after the insured completed its work whereas current CGL policies contained products/completed operations hazard coverage.6 Moreover, current CGL policies contain broad insuring language covering property damage caused by an “occurrence” with “occurrence” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

The Florida Supreme Court recognized that this change in standard policy language was coupled with an expanded definition of “accident” adopted by the Supreme Court in State Farm Fire & Casualty Co. v. CTC Development Corp., 720 So. 2d 1072 (Fla. 1998).7 Prior to CTC Development and the LaMarche decisions, the accepted definition of “accident” was limited so that it did not include “the natural and probable consequences of the insured’s deliberate actions.”8 However, in 1998, the Supreme Court adopted the much broader definition provided in CTC Development.9 Under CTC Development, “the appropriate consideration is whether the damage was expected or intended from the standpoint of the insured ... .”10 The Supreme Court concluded that, in light of the significant changes to CGL policies and the law governing those policies, LaMarche and its progeny no longer compelled the conclusion that CGL policies do not provide coverage for claims for repair or replacement of a subcontractor’s faulty workmanship.11

In a companion decision to J.S.U.B., the Supreme Court also made clear that, although post-1986 standard form CGL policies did provide coverage for structural damages caused by faulty workmanship, such policies do not provide coverage for the costs of repair or replacement of the subcontractor’s defective work itself because defective work does not constitute “property damage.”12 Thus, in that case, for example, the Supreme Court reasoned that recovery for defective windows could not be had if the windows were defective both prior to installation and as installed. However, if the claim was for the repair or replacement of windows that were not initially defective but were damaged by the defective installation, “then there is physical injury to tangible property” and thus coverage under a CGL policy.13

Was Coverage Triggered?

The next question, beyond whether latent construction defects are covered losses under CGL policies, is whether coverage is “triggered” under the policy. Under a typical CGL policy, the policy only applies to “bodily injury” or “property damage” if the damage is caused by an “occurrence” that takes place in the coverage territory and the property damage must occur during the policy period. Determining which particular policy applies can be problematic in the case of latent defects where the damage may begin during construction upon installation but may not manifest itself for several years. In determining which policy applies, there are four accepted trigger of coverage theories:

  1. exposure: property damage occurs upon installation of the defective product
  2. manifestation: property damage occurs at the time damage manifests itself or is discovered
  3. continuous trigger: property damage occurs continuously from time of installation until the time of discovery; this approach generally provides the most insurance coverage as each policy in force during this continuing period could be triggered
  4. injury in fact:14 coverage is triggered when the property damage underlying the claim actually occurs15

Florida courts appear to follow the general rule that the time of occurrence within the meaning of an “occurrence” policy is the time at which the injury first manifests itself.16 The case of Essex Builders Group, Inc. v. Amerisure Insurance Company addressed the trigger of coverage under the classic latent defect scenario of damage caused by water intrusion. There, Essex Builders Group, Inc. was the general contractor on an apartment construction project from March 1999 though completion of construction in December 2000.17 In late 2001, after construction was completed, water damage was discovered. The owner brought claims against Essex and, in turn, Essex brought suit against its CGL carriers, Pennsylvania General Insurance Company (PGIC) and Amerisure Insurance Company. PGIC’s policy period was from November 11, 1999, through November 11, 2000. Essex, on summary judgment, argued that, although the damage did not become visible until late 2001, it occurred within a short time after each building was completed and therefore PGIC’s policy was triggered. Judge Conway, of the Middle District of Florida, disagreed and recognized that Florida is a “manifestation” state.18 Because it was undisputed that the damage caused by water intrusion was not visible until late 2001, then there was no “occurrence” within the PGIC policy period, i.e., 1999-2000.19

Therefore, the determination of whether a particular CGL policy applies to a latent defect will be a factual one to determine when the defect first manifested itself. The policy in effect at the time of the installation of the construction defect, i.e., during construction, will not necessarily be the operative policy if damages caused by that latent defect do not manifest themselves until months or years later.