In Owners Insurance Company v. Jim Carr Homebuilder LLC, No. 1120764, 2013 WL 5298575, at *6, __ So. 3d ___ (Ala. Sept. 20, 2013), the Alabama Supreme Court held that damages stemming from a homebuilder’s construction of a new house did not constitute an occurrence under a commercial general liability policy.
Jim Carr Homebuilder LLC (“JCH”) built a $1.2 million house for the Johnsons. Id. at *1. The Johnsons later discovered “water leaking through the roof, walls, and floors, resulting in water damage to those and other areas of the house.” Id. An arbitrator subsequently found in favor of the Johnsons and awarded them $600,000. Id. at *2. The decision was based predominantly on construction defects arising from JCH’s work. Id. JCH, joined by the Johnsons, then sought a declaration that JCH’s commercial general liability policy covered the arbitration award. Id. The trial court decided that the entire arbitration award, including apparently a portion attributable to “significant mental anguish,” was covered by JCH’s policy. Id. at *2-3. The Alabama Supreme Court disagreed and reversed. Id. at *1.
The court first noted that whether poor workmanship constitutes an occurrence is case-specific and depends “on the nature of the damage caused by the faulty workmanship.” Id. at *3 (quoting Town & Country Prop., LLC v. Amerisure Ins. Co., 111 So. 3d 699, 705 (Ala. 2011)). The court then reviewed earlier Alabama decisions finding that faulty workmanship itself is not an occurrence, but faulty workmanship that leads to other damages can be an occurrence. Id. at *4-5. Specifically, the court explained that faulty workmanship can lead to an occurrence if it “subjects personal property or other parts of the structure outside the scope of th[e] construction or repair project” to some other harmful condition that ultimately damages personal property or unrelated parts of the structure. Id. at *5. The court concluded there was no occurrence at the Johnsons’ house because “any damage that resulted from poor workmanship was damage to JCH’s own product.” Id. at *6. Therefore, there was no occurrence, and the insurer was not required to indemnify JCH for the damages awarded in the arbitration. Id.
Although the courtfound in favor of the insurer here, it appears to have left open the possibility of reaching a different result where a policy contains a subcontractor exception. The court explicitly noted that the policy at issue did not contain a “subcontractor exception,” id. at *6 n.4, a policy provision upon which other courts have relied to conclude that faulty work can lead to an occurrence. Thus, while the Alabama Supreme Court’s decision in Jim Carr affirms that faulty workmanship does not, by itself, trigger coverage under Alabama law, coverage litigation on this issue is likely to persist.