The Indiana Supreme Court dramatically changed Indiana insurance law regarding construction defect claims on September 30, 2010 when it issued its decision in Sheehan Construction Company, Inc. v. Continental Insurance Company, 935 N.E.2d 160 (Ind. 2010). The decision holds that claims against a contractor for defective construction can constitute an accidental “occurrence,” and therefore can be covered under the standard commercial general liability (CGL) insurance policy. The court stated that it was aligning itself “with those jurisdictions adopting the view that improper or faulty workmanship does constitute an accident so long as the resulting damage is an event that occurs without expectation or foresight.” 935 N.E.2d at 169. The court explained that “if the faulty workmanship is ‘unexpected’ and ‘without intention or design’ and thus not foreseeable from the viewpoint of the insured, then it is an accident within the meaning of a CGL policy.” Id.

Previously, Indiana court decisions held that faulty workmanship claims alleging damage to the contractor’s own work can not constitute "property damage" caused by an accidental "occurrence" within the meaning of the CGL insurance policy. See, e.g., Amerisure, Inc. v. Wurster Construction Co., 818 N.E.2d 998, 1003 (Ind. Ct. App. 2004). These decisions were based primarily on the Indiana Supreme Court’s earlier decision in Indiana Insurance Co. v. DeZutti, 408 N.E.2d 1275, 1279 (Ind. 1980) (quoting Roger C. Henderson, Insurance Protection for Products Liability and Completed Operations - What Every Lawyer Should Know, 50 Neb. L. Rev. 415, 441 (1971)).

In Sheehan, the court held that the holding in DeZutti was based on analysis of the insurance policy exclusions that existed at that time, and was not intended to “stand for the proposition that faulty workmanship that damages the contractor’s own property can never constitute a covered ‘occurrence.’” Based in part on articles written by the Chair of the Barnes & Thornburg Construction Law Practice Group, the court observed that the CGL policy exclusions were materially changed in 1986, and that the new policy, when read as a whole, was intended to anticipate the "occurrence" of unintended faulty workmanship while defining the scope of the coverage for such claims through the newly modified policy exclusions. In particular, the court stated that it did not make sense to conclude that property damage to an insured’s own work could never be an “occurrence” because, if that was the case, there would be no reason for the revised CGL policy form to include a specific “your work” exclusion and an exception to that exclusion for property damage arising out of the work of subcontractors. 935 N.E.2d at 171 (discussing Clifford J. Shapiro, The Good, the Bad, and the Ugly: New State Supreme Court Decisions Address Whether an Inadvertent Construction Defect is an ‘Occurrence’ Under CGL Policies, 25 Constr. Law., Summer 2005, at 9, 12).

Based on the terms contained in the current CGL insurance policy, the court held that: “[F]aulty workmanship may constitute an accident and thus an occurrence depending on the facts. More specifically, if the defective work of the subcontractors were done intentionally instead of without intention or design, then it is not an accident. Otherwise, the opposite is true.” 935 N.E.2d at 172.

This does not mean, however, that construction defect claims in Indiana necessarily are covered by CGL insurance policies. There remain potential obstacles to coverage, including application of the specific policy exclusions that may apply. But the decision at least correctly holds that the policy includes an initial coverage grant that extends to such claims, and that the scope of this coverage must to be determined through examination of other policy provisions including the exclusions. This should increase the likelihood that a given construction defect claim is at least potentially covered by the CGL policy, and Indiana policyholders should therefore more often be entitled to be provided a defense by their insurance company at the insurer's expense.

While this issue has now been decided in favor of coverage under Indiana law, there remains disagreement among the state appellate courts. The state by state "score" currently is 28-19 in favor of concluding that faulty workmanship can be an "occurrence," with several state supreme courts finding in favor of coverage, but a few state supreme courts going the other way.