Although you can purchase insurance for damages caused by an accident (like elbowing someone inadvertently), insurance typically does not provide coverage for your intentional acts (like punching someone in the face). In the construction defect context, a recent appellate decision considered unusual facts highlighting the distinction between what constitutes an “accident” for insurance purposes and what is an uninsurable intentional act.

Background of the Case

In Navigators Specialty Insurance Company v. Moorefield Construction, Inc., the general contractor hired to build a Best Buy store knew that moisture vapor emissions through the concrete slab exceeded applicable specifications, but expected no problem with installing the floor tiles based on past experiences. With a fast approaching deadline for the Best Buy store to open, the contractor instructed its flooring subcontractor (who insisted on a hold harmless) to install the flooring despite knowing that the high moisture vapor emission rates could cause the flooring to fail and cause damage. The carpet tiles failed after installation, prompting a liability suit against the contractor.

Intentional Act Analysis

Navigators, the contractor’s insurer, funded the contractor’s defense and contributed to the settlement, but then sued its insured to get its money back. It argued the decision to lay the flooring knowing that the high moisture vapor emission rates could damage the floor tiles was a deliberate act, not an accident. The Moorefield court agreed, held that there was no coverage for the property damage, and held the insurer was entitled to reimbursement from its insured for settlement payments attributable to the repair costs. The appellate court ruled that this “was not a case in which a contractor engaged in conduct only later discovered or revealed to constitute a construction defect. Navigators [the insurer] proved that Moorefield [the insured contractor] knew about and intended to perform defective work with the hope or mistaken belief the defect would not cause property damage.”

The Moorefield court was careful to limit its ruling. “We emphasize that we need not and do not decide whether all construction defects are ‘occurrences’ under astandard CGL policy. We only decide whether, based on the record before us, Moorefield’s conduct . . . constituted an accident under California law. We conclude Moorefield’s conduct was not an accident because it was a deliberate decision made with knowledge that the moisture vapor emission rate from the concrete slab exceeded specifications.” Despite this limiting language, we anticipate that insurers will attempt to extend the Moorefield holding to deny coverage for more routine construction defect damage claims, which should not be affected by this limited ruling.

Liability for Attorneys’ Fees

The case was far from a complete insurer victory. The appellate court refused to require Moorefield to reimburse the insurer for all of the settlement, explaining that part of it related to the claimant’s attorneys’ fees, which are treated differently than the damages themselves. Under the policy’s Supplementary Payments provision, attorneys’ fees taxable as costs against the insured are tied to an insurer’s duty to defend, not the duty to indemnify. As a result, Navigators was not entitled to reimbursement for the substantial settlement amounts attributable to the claimant’s recoverable attorneys’ fees.

In the End – Think Big Picture

They say bad facts make bad law, and this case is a good example of that adage. The case is an outlier, limited to its specific and unusual facts. Unless the insured engages in intentional conduct it knows leads to property damage or bodily injury, it should still obtain coverage. Further, this was a pyrrhic victory at best for Navigators in the end. Taking into account the hundreds of thousands of dollars it was held to owe as Supplementary Payments under its policy, plus the amounts it spent defending Moorefield, plus the tens of thousands more in coverage litigation expenses through appeal – ultimately the insurer incurred far more in ultimate net losses than it would have taken simply to resolve the $300k resultant property damage claim in the first place.