On June 4, 2013, the Connecticut Supreme Court joined a growing number of state high courts to rule that faulty workmanship on a construction project can be covered by commercial general liability insurance policies. The case is Capstone Building Corp. v. American Motorists Insurance Company (the opinion was officially released on June 11, 2013). Capstone answers a question that has been raised and resolved in a great many insurance coverage cases: Whether damage resulting from alleged construction defects and faulty workmanship is an “occurrence” that is covered “property damage” under the products completed operations hazard provisions of a commercial general liability insurance policy?
Three years after completion of a $39 million housing project, the University of Connecticut forwarded a letter to Capstone setting forth a veritable litany of complaints about the construction, which the Connecticut court summarized as consisting generally of four categories of claims: (1) “damage to non-defective property stemming from defective construction,” (2) release of carbon monoxide from improperly vented water heaters; (3) defective work in violation of building codes; and (4) costs of repairing the damaged work. The matter was mediated, resulting in a $1 million settlement of UConn’s claims. However, AMICO denied all coverage, refused to participate in the mediation, and the coverage dispute ended up in litigation in federal district court, which certified the coverage issue to the Connecticut Supreme Court.
Addressing the basic issue of coverage for flawed construction, the court ruled that “allegations of unintended defective construction work by a subcontractor that damages nondefective property may constitute ‘property damage’ under certain circumstances.” The court followed what probably is the majority rule in such cases, citing with approval leading decisions of the Florida Supreme Court, United States Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007) and Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.2d 1 (Tex. 2007). However, the Capstone court concluded that the definition of covered “property damage,” did not cover claims for “correction of faulty installation.” Citing J.S.U.B. and Lamar Homes, again, among other cases, the court decided that without evidence that faulty workmanship damaged other, “nondefective property…allegations of construction defects, without more,” do not constitute claims for “injury to tangible property.” As a result, the court ruled that the costs of repairing the “damaged work” itself (faulty workmanship) were not covered.
The Capstone court cited and relied upon J.S.U.B., but not a companion case (litigated by this firm) decided a few months later, Pozzi Window Co. v. Auto Owners Ins., Co., 984 So. 2d 1241 (Fla. 2008), in which the Florida Supreme Court construed the language of the subcontractor exception to the standard CGL exclusion for damage to “your work,” which says: “This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” (emphasis added). In Pozzi, the court ruled that damage to windows, if caused by negligent workmanship of the window installer (a subcontractor), and not by inherent defects in the windows themselves, could be “property damage” covered by the PCOH provisions of a general contractor’s CGL policy.
The precise impact of the Connecticut Supreme Court’s arguably narrow ruling requiring proof of consequential damage to nondefective property to trigger the PCOH coverage is uncertain. In the Capstone case, the court ruled that claims attributable to damage for release of excessive carbon monoxide and for building code violations are not covered. However, the court did not attempt to allocate the $1 million settlement between covered and non-covered claims. Construing previous Connecticut cases addressing the impact of a carrier’s refusal to defend its insured against a “suit” (noting that non-judicial resolution by settlement qualified as a “suit”), the court ruled that where the case involved multiple claims, a carrier who wrongfully refuses to defend a “suit” is “estopped from contesting liability,” but that the insured must prove the “reasonable allocation of the settlement” to claims that the insurer had a duty to defend. This aspect of the case is potentially important whenever a policy obligates the carrier to defend a “suit,” which some courts have narrowly limited to civil lawsuits, as opposed to a claim or demand resulting in a pre-suit settlement by mediation, as occurred in Capstone. The court also ruled (noting a split of authority on this issue as well) that there was no cause of action under Connecticut law for “bad faith” failure to investigate, even when the carrier wrongfully breaches its duty to defend.
In this important ruling of first impression in Connecticut, the Capstone court joined a majority of state Supreme Courts that have ruled that damage caused by the faulty workmanship of a sub-contractor constitutes an occurrence of property damage within the scope of the PCOH provisions of a standard form CGL policy. Other, similar decisions, including arguably some broader rulings, have been issued by the Supreme Courts of Alaska, Florida, Georgia, Indiana, Kansas, Minnesota, Mississippi, Montana, Nevada, New Hampshire, North Dakota, South Carolina, South Dakota, Tennessee, Texas, and Wisconsin. Recognizing this trend, some carriers are issuing policies that expressly exclude or significantly restrict coverage for defective work by a subcontractor. Policyholders desiring such coverage must carefully review and negotiate, when appropriate, policy changes modifying such exclusions.
The Connecticut Supreme Court has joined the growing list of cases rejecting insurance carriers’ arguments that “defective construction,” whether the product of faulty workmanship or installation of defective equipment, cannot be covered under a CGL policy. The Capstone opinion adds momentum to the trend among courts to interpret the CGL policy as written, correctly and consistently, with the reasonable expectations of insured general contractors to cover unintended damage caused by a negligent subcontractor.