On July 18, 2013, in Taylor Morrison Services, Inc. v. HDI-Gerling Ins. Co., the Supreme Court of Georgia decided two important certified questions from the United States Court of Appeals for the Eleventh Circuit that affirm and expand the rights of property owners and policyholders seeking insurance coverage for construction defects under standard commercial general liability (CGL) insurance policies. Specifically, the Court held:
- To constitute an "occurrence" under a CGL policy, it is not necessary that there be damage to property other than the insured's work itself.
- Claims for breach of warranty, but typically not for fraud, may constitute an occurrence and may be covered.
In so ruling, the Court specifically reaffirmed its recent holding in American Empire Surplus Lines Ins. Co. v. Hathaway Dev. Co., 707 S.E.2d 369 (Ga. 2011) that construction defects may constitute an occurrence under CGL policies. The Court also clarified and expanded the ruling in Hathaway.
Who Does the Ruling Potentially Affect?
The ruling potentially expands the ability of property owners, including homeowners, to recover against a contractor's (or subcontractor's) CGL policy for damages due to faulty construction. This right can be particularly significant if a contractor has declared bankruptcy or is in financial distress, as the insurance policy provides a potential means for recovery.
The ruling potentially expands the ability of contractors and subcontractors facing claims and lawsuits for defective construction to rely on their insurers to pay for the defense of such claims and suits and to pay for the settlement of such claims.
Why Is the Ruling Important?
Although Hathaway established a broad and clear ruling regarding potential insurance coverage for construction defects, insurers in Georgia have continued trying to restrict the scope of coverage. By reaffirming and expanding the scope of Hathaway, the Court again sent a clear message establishing potential coverage for construction defects.
The Court also made clear that a claim being pleaded as a breach of warranty will not necessarily limit insurance coverage.
Perhaps the most significant immediate effect of the case will be to discourage insurers from refusing to provide a defense to contractors or subcontractors facing construction defect claims.
Does the Ruling Mean Construction Defect Cases Are Always Covered?
Although the Court's ruling is welcome news to owners, contractors and subcontractors, it does not mean that construction defect cases will always be covered. The Court's ruling is limited to the specific issues certified by the Eleventh Circuit for decision. The Supreme Court also indicated that issues other than the definition of an "occurrence," including the so-called "business risk exclusions," may limit coverage. Such issues have not been definitively decided in Georgia.
Further, each case is potentially different, and some policies may contain different provisions. This case is limited to policies governed by Georgia law, and the law regarding coverage for construction defects can vary significantly from state to state. Property owners contemplating making construction defect claims and contractors and subcontractors facing such claims should consider consulting with an experienced insurance coverage attorney in their jurisdiction.