Why it matters

Joining the recent trend of recognizing coverage for construction companies under a commercial general liability policy for suits filed by homeowners, the Alabama Supreme Court reversed itself, ordering an insurer to pay a $600,000 arbitrator’s award against a policyholder. Clarifying state law, the court held that damages as a result of damage beyond the insured’s own work constituted a covered occurrence. The only costs not covered were those solely related to the cost of repair or replacement of the actual damage arising from the poor construction itself. To explain its decision, the court framed the distinction by analogizing to a construction company that negligently constructed a roof, resulting in water damage to a home. In a suit by a homeowner, the cost of repairing the defective roof is not covered while the monies spent repairing the remainder of the home damaged by the water would be.

Detailed Discussion

A couple contracted with Jim Carr Homebuilder (JCH), agreeing to pay $1.2 million for a new home. But within a year, the couple noted water damage due to leaks in the roofs, walls, and floors of their new home. The couple sued JCH and an arbitrator ultimately awarded them $600,000.

JCH held a commercial general liability (CGL) policy with Owners Insurance Company and filed a timely claim. Owners provided a defense while reserving its rights, filing a declaratory judgment action to determine the scope of its obligations.

Last September, the Alabama Supreme Court affirmed summary judgment for Owners, finding that it owed JCH no duty to defend or indemnify the contractor for the arbitrator’s award.

But the court then reversed itself, clarifying the scope of coverage under CGL policies for insured contractors.

Owners took the position that the property damage and bodily injury upon which the award was based were not the result of an “occurrence” under the policy, defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The insurers argued an occurrence required damage to property that is not part of the project itself, the insurer told the court.

While the court agreed that faulty workmanship itself is not an occurrence, it held that faulty workmanship could lead to an occurrence if it subjects the property to “continuous or repeated exposure” to some other “general harmful conditions.”

“Indeed, to read into the term ‘occurrence’ the limitations urged by Owners would mean that, in a case like this one, where the insured contractor is engaged in constructing an entirely new building, or in a case where the insured contractor is completely renovating a building, coverage for accidents resulting from some generally harmful condition would be illusory,” the court wrote. “There would be no portion of the project that, if damaged as a result of exposure to such a condition arising out of faulty workmanship of the insured, would be covered under the policy.”

Finding that the homeowners’ claims triggered coverage, the court then rejected Owners’ reliance upon the “Your Work” exclusion, which included the products-completed hazard. [cite] JCH purchased supplemental coverage – a total of $4 million – for its completed operations, and “that coverage applies to [the homeowners’] claims and, pursuant to the terms of the Owners policy, Owners must indemnify JCH for the judgment entered against it.” The “your work” exclusion applies narrowly and does not exclude coverage for property damage to other parts of the project.

To read the decision in Owners Insurance Co. v. Jim Carr Homebuilder LLC, click here.