An Indiana federal district court recently granted summary judgment on the ground that an insurer had no duty under a CGL policy to indemnify its insured, a general contractor, in a suit premised on alleged faulty workmanship of the insured’s subcontractors. Westfield Ins. Co. v. Sheehan Construction Col, Inc., et al (S.D.Ind. Aug.29, 2008).

A class of homeowners sued the insured for deficient construction performed in whole by the insured’s subcontractors, alleging that the subcontractors’ faulty workmanship resulted in damage to other components of the home. The insurer denied indemnity coverage to its insured and refused to defend, and then instituted a declaratory judgment action seeking a determination of its coverage obligations to its insured for damages caused by the subcontractors’ allegedly defective construction. The insured counterclaimed, alleging breach of contract and bad faith and seeking a declaration that it should be indemnified by the insurer. Following settlement of the underlying claims, the insured assigned to the claimants its claim for coverage. The parties cross-moved for summary judgment.

The insured argued that damage to the components of the homes that were not otherwise faulty, but was caused by the faulty workmanship of the insured’s subcontractors, constituted “property damage” within the meaning of the policy. The court rejected the insured’s argument, concluding that damage to the non-faulty components of the homes caused by the faulty workmanship was inseparable from the actual faulty workmanship and thus was not “property damage.”

The court reasoned that, under Indiana law, a general contractor’s product is the entire project (in this case, the house), including all component work done by subcontractors. Therefore, although damage to non-faulty components of the house may be distinct from the faulty workmanship itself, the non-faulty components are still part of the general contractor’s work product. As a result, remedying of damage caused to the insured’s own work product by faulty workmanship is not “property damage” under Indiana law.

The court further held that neither the faulty workmanship nor the resulting damage done to the homes was an accident and, accordingly, there was no “occurrence” for purposes of the policy. Based on the nature of the faulty workmanship, the damages that followed were the natural and ordinary consequence of the defects. Finding no “property damage” caused by an “occurrence,” the court granted summary judgment in favor of the insurer.

For a copy of the full opinion, please click here.