In Capstone Bldg. Corp. v. American Motorists Ins. Co., No. SC-18886, (June 11, 2013), the Connecticut Supreme Court provided clarity concerning coverage for faulty workmanship under Connecticut state law, concluding that allegations of unintended faulty work by a subcontractor could be an “occurrence” resulting in “property damage”, where the faulty work damaged nondefective property. A copy of the decision can be found here.
The University of Connecticut (“UConn”) hired Capstone Building Corporation (“CBC”) and Capstone Development Corporation (“CDC”), as general contractor and project manager, respectively, to construct a housing complex on the school’s campus. UConn procured a CGL policy for the project from the predecessor in interest of American Motorists Insurance Company (“AMICO”). The policy provided status as additional insureds to those entities where required in a written contract with CBC, but only with respect to liability arising out of “your work” for the additional insured, or acts or omissions of the additional insured in connection with the general supervision of “your work.” The policy excluded “property damage” to “your work”, but this exception did not apply if the damaged work was performed by a subcontractor.
The housing complex project was completed in 2001. In 2004, UConn sent a letter to CBC regarding alleged defects related to the project’s hot water heaters that caused excessive carbon monoxide. UConn prepared to undertake remediation efforts related to the alleged defects. In response, CBC tendered UConn’s letter to AMICO and demanded defense against UConn’s claims. AMICO denied coverage, observing that the liability issues arose out of CBC’s own work, including its role as general contractor. UConn later settled with the Capstone entities. CBC then sued AMICO in the Alabama state court and AMICO removed the case to the U.S. District Court for the Northern District of Alabama. The Alabama court certified three questions to the Connecticut Supreme Court, including “[w]hether damage to a project contracted to be built, which was caused by defective construction or faulty workmanship associated with the construction project, may constitute ‘property damage’ resulting from an ‘occurrence’, triggering coverage under a commercial general liability insurance policy”.
The Connecticut Court held that unintended construction defects may form the basis of an “occurrence” and that damage to an insured’s nondefective work is “property damage”. The faulty work itself, however, or replacement thereof, are not “property damage” and are therefore not covered. Moreover, the Court concluded that the policy excludes coverage for a contractor’s defective work, but does not exclude coverage for property damage caused by a subcontractor's defective work, which falls under the “subcontractor exception” to the “your work” exclusion. Whether faulty workmanship is an occurrence under the standard ISO CGL policy differs depending on the controlling state law, and the Capstone case now presents some clarity to insurers as to how Connecticut courts will analyze claims of faulty workmanship.
Notably, the Connecticut Court answered two other certifications, holding that an insurer does not engage in bad faith in failing to investigate the claim where the policy provides it is in the insurer’s discretion to investigate. The Court also held that, where a global settlement includes resolution of both covered and non-covered claims, it is the burden of the insured to prove that the settlement is reasonable in proportion to the claims the insurer has an obligation to defend.