Contrary to the position often taken by liability insurance carriers in Missouri, the Missouri Supreme Court in D.R. Sherry Construction, LTD v. American Family Mutual Insurance Company seems to have taken a large step in clarifying that negligent construction (e.g., construction defect) claims are in fact occurrences and held that progressive damage which begins during the policy period is an occurrence even though the damage was not apparent until after the policy period has expired.
Sherry, a general contractor, built a home in 2003. In 2004 the homeowner notified Sherry that the drywall was cracking and that there were numerous cracks in the foundation of the house. After an inspection of the house it was determined that there were structural problems arising out of repeated exposure to poor soil conditions. The parties settled all claims in 2005 when Sherry repurchased the house. Sherry subsequently made a claim against its insurance policy to recover losses arising out of the defective work, and American Family denied coverage. Sherry sued for breach of contract and vexatious refusal to pay. The trial court ruled in favor of Sherry, and the Supreme Court affirmed.
Contractors are often denied coverage and defense by their insurers in negligent construction (e.g., construction defect) claims on the grounds that negligent construction is not an accident because the insured controls the work and intends to perform the work. Consequently, insurers take the position that damages arising out of the intentional work are not an occurrence. The Supreme Court does not appear to be persuaded by this argument, stating that the determinative inquiry into whether there was an “occurrence” or “accident”, for purposes of coverage for construction defects under a liability insurance policy, is whether the insured foresaw or expected the injury or damages. Therefore, the question is not whether the insured intended to perform the work itself, but whether the insured foresaw or intended the damages arising out of the work.
Another hurdle often erected by insurers to trip a contractor making a claim for coverage is that the occurrence did not arise within the policy period because it was discovered after the policy period expired. The Court in this case held that liability policies cover cases of progressive damage when the cause of the damage begins during the policy period even though the damage was not discovered until after the policy period has expired.
Contractors will be pleased with the Court’s decision in Sherry as Missouri moves further in line with an increasing majority of states finding that defective construction is recognized as an occurrence and therefore is potentially covered by a general contractor’s general liability policy.
Interested readers can also read Patrick A. Bousquet’s article which also provides a good discussion of additional considerations arising from this important case.