Structural damage to a new building caused by a defective building pad may not be covered under a commercial general liability (CGL) insurance policy when the specific damage is the type of damage that a properly constructed building pad is expected to prevent. As Kay and Kay Contracting learned in Liberty Mutual Fire Insurance Company v. Kay & Kay Contracting, 2013 U.S. App. LEXIS 23587 (6th Cir.), when the purpose of a contractor’s work is to prevent or control a specific type of damage and that contractor’s defective work allows the anticipated damage to occur, the contractor’s defective work may not constitute an “accident” or be considered an “occurrence” under a GCL policy in Kentucky. However, the specific policy language must be examined on a case-by-case basis.
Kay and Kay Contracting, LLC performed site preparation work and constructed a building pad as a subcontractor for a new Wal-Mart store in Morehead, Kentucky. After Kay and Kay had completed the building pad and the new store had been constructed, Wal-Mart notified the general contractor that there were cracks in the store's walls. Wal-Mart claimed that the "fill area" installed by Kay and Kay underneath the front left corner of the building had experienced settling, and that the settling had created structural problems and damage to the new store.
When Wal-Mart demanded that the general contractor correct the settling problems and the damage to the store, the general contractor demanded that Kay and Kay remedy the issues. Kay and Kay then submitted a claim for insurance coverage to Liberty Mutual Fire Insurance Company under a CGL insurance policy.
When Liberty Mutual disagreed on the issue of coverage, Liberty Mutual filed a complaint seeking declaratory relief against Kay and Kay. Liberty Mutual alleged, among other things, that there was no "occurrence" triggering coverage under the policy.
The CGL policy at issue was a standard ISO (Insurance Services Office, Inc.) policy containing the standard coverage language. The policy coverage language provided: "This insurance applies to 'bodily injury' and 'property damage' only if . . . [t]he 'bodily injury' or 'property damage' is caused by an 'occurrence' that takes place in the 'coverage territory' . . . ." The policy defined "occurrence" to mean "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."
As a result of diversity jurisdiction, the United States Court of Appeals for the Sixth Circuit evaluated Kentucky law related to the coverage issue. Since the Court determined that it was well settled under Kentucky law that faulty workmanship is not an accident, the only issue for the Court to decide was whether the resulting damage to the building could be characterized as an accident.
The Court relied on the decision of the Supreme Court of Kentucky inCincinnati Ins. Co. v. Motorists Mut. Ins. Co., 306 S.W.3d 69 (Ky. 2010) to define the term "accident" in the CGL policy. According to the Supreme Court of Kentucky, "[i]nherent in the plain meaning of 'accident' is the doctrine of fortuity” and that fortuity consists of "two central aspects: intent . . . and control."
The Court concluded that the damage to the new Wal-Mart store was not within the scope of “fortuity” because the possibility of the type of damage in this case was exactly what Kay and Kay was hired to control. Since Kay and Kay’s defective work did not damage property already in existence or property that Kay and Kay had no direct concern for as it was performing its own duties under the subcontract, the Court concluded that Kay and Kay’s work did not present an "accident" and that Kay and Kay’s defective work did trigger coverage as an "occurrence" under the CGL policy issued by Liberty Mutual. Thus, while Kay and Kay could potentially be held liable for the damage, it had no CGL coverage for that damage.