Construction contractors rely heavily on insurance policies to help minimize and allocate the risks of damages caused by their work. A commercial generally liability (CGL) policy is among the standard policies obtained by contractors and typically is intended to cover the contractor’s liability for bodily injury or property damage to persons or property other than the construction project itself. For example, a CGL policy would be expected to cover a contractor’s liability to a passerby that was injured by the contractor while walking by the project. But in Sheehan Const. Co., Inc. v. Continental Cas. Co., 935 N.E.2d 160 (Ind. 2010), the Indiana Supreme Court addressed whether a standard CGL policy covers a general contractor’s liability to an owner for the faulty workmanship of a subcontractor.
In Sheehan, two individuals purchased a home in a subdivision. The GC hired subcontractors, who built the home. After moving into the home, the homeowners began experiencing water leaks and reported the problem to their homeowner’s insurance company. The homeowner’s insurance company investigated and discovered leaking windows, fungus, decayed sheathing and joists, and other water damage, which was caused by the faulty work of the GC’s subcontractors.
The homeowners sued the GC under Indiana’s construction defect statute. The GC’s insurance carrier asked the court to determine that it had no obligation to pay for the damages, arguing that a CGL policy only covers damage to property other than to the product or completed work itself (i.e. the finished house). In other words, the insurer argued that CGL coverage is for tort liability for physical damages to others and not for contractual liability when the product or completed work does not live up to the bargain.
The Indiana Supreme Court focused on the CGL policy’s definition of a covered “occurrence” and ultimately found that coverage may exist. The CGL policies defined a covered “occurrence” as “an accident, including continuous exposure to substantially same general harmful conditions.” The Court defined “accident” as “an unexpected happening without intention or design.”