In Cincinnati Insurance Company v. AMSCO Windows, No. 13-4155 (10th Cir. November 26, 2014), Cincinnati insured AMSCO, which manufactures windows for use in homes and sells the windows to distributors. Certain AMSCO windows were installed in new homes built in Nevada, and the homeowners brought claims against the contractors who built the homes, alleging defective windows and their installation caused property damage. The contractors joined AMSCO’s distributor, which in turn joined AMSCO. Certain of the homeowners’ claims remained in the Nevada statutory notice of construction defects process and others ripened into litigation.

AMSCO tendered its defense of the statutory claims process and the litigation to Cincinnati, which refused to defend and initiated a declaratory relief action based on a legal argument that allegations of property damage caused by the natural results of faulty workmanship do not constitute an occurrence.

Ruling on summary judgment, the district court found that Cincinnati had a duty to defend AMSCO against the homeowners’ active litigation because damage to property other than to the work product qualifies as an occurrence. However, the district court also found that Cincinnati did not have a duty to defend AMSCO against the homeowners’ claims still in the statutory notice process, reasoning that those claims did not qualify as a “suit” under the general liability policy.

The Tenth Circuit affirmed the district court’s conclusions.

Cincinnati argued that damage to areas surrounding defective windows and doors – such as floorboards, wallboards, painted surfaces or structural areas – could not qualify as an occurrence because any such damage is not an accident but rather the natural and probable result of faulty workmanship.

The Tenth Circuit rejected this argument, reasoning that the correct standard in determining whether an occurrence had taken place was whether the accident was expected or intended from the insured’s standpoint, not whether it was foreseeable. The court found that the evidence showed AMSCO did not expect the surrounding property damage, and therefore, there was no occurrence. In reaching its conclusion, the court relied on evidence that AMSCO did not intend to manufacture defective windows, but did not cite evidence addressing whether AMSCO expected property damage to result because of the defective windows.

As to the claims still in the statutory notice process, the Tenth Circuit reasoned that even though Nevada courts had previously determined that an insurer has a duty to defend against same, the Nevada courts’ construction was not binding under Utah law. The Tenth Circuit found that the statutory notice of claim process did not qualify as a “suit,” and therefore, Cincinnati had no duty to defend AMSCO against those claims still in the statutory notice process.

Notably, the Tenth Circuit’s conclusion under Utah law is contrary to other western states’ interpretation of similar statutory provisions, including Nevada and Colorado.

Practical Lesson

Decisions on the questions the Tenth Circuit addressed in AMSCO vary from jurisdiction to jurisdiction. The eastern states, for example, tend to hold that faulty construction does not constitute an occurrence. Western states, by contrast, tend to hold that faulty construction can qualify as an occurrence so long as there is resultant property damage. In short, there is no “bright line” rule on this issue. Thus, employing counsel familiar with the jurisdiction in which the issues will be decided is critical. Similarly, theAMSCO decision also demonstrates the impact of choice of law on coverage questions. Just because one state has held that claims subject to the statutory notice of claim process will qualify as a “suit” does not mean that another jurisdiction will similarly hold when applying the law of a different state.