Establishing insurance coverage for construction defects is almost as important as establishing liability in the underlying construction defect litigation itself.
The risk to the defendant contractor of defending a construction claim can place significant burdens on a contractor’s operations and an uninsured judgment might even put the contractor out of business.
For owners, suing a contractor for construction defects can become academic if there is no prospect of insurance coverage; obtaining a $1 million judgment against a contractor with limited assets would be a pyrrhic victory.
Commercial General Liability (CGL) carriers are obligated to defend claims that potentially fall within the coverage granted by the policy.[1] When presented with a claim, CGL insurers typically have three options: (1) assume the defense without reservation; (2) assume the defense asserting defenses to coverage, and depending on the state, reserving the right to recover defense costs if it later determines there is no duty to defend; or (3) deny the claim outright and seek a declaratory judgment holding that the insurer has no duty to defend or indemnify. An insurer may deny the claim outright and not seek a declaratory judgment, but does so at its peril because it can expose the insurer to significant liability if the insured later shows the insurer in fact had a duty to defend.
In construction defect cases, claims typically arise from “occurrences” under the “property damage” coverage afforded by CGL policies. Whether a claim involves an “occurrence” such that there is “property damage” varies from state to state.
In some states, damage to the contractor’s defective work itself will be deemed an “occurrence.” In others, there must be damage to property other than the work itself (i.e., personal property of the owner/tenant) before an occurrence will be found. Black & Vetach Corporation v. Apsen Insurance (Uk) Ltd., 882 F.3d 952 (10th Cir. 2018) (construing New York law to suggest that a subcontractor’s defective work damaging others’ work could be an occurrence).
The law in a handful of states (e.g., Kentucky) is that virtually no occurrence can ever be the result from faulty workmanship. See Cincinnati Ins. Co. v. Motorists Mut. Ins. Co., 306 S.W.3d 69 (Ky. 2010); Martin/Elias Properties LLC v. Acuity, 544 S.W.3d 639 (Ky. 2018) (because contractors intended to build a structure and had control over the construction, the faulty workmanship is not “accident[al]” so as to qualify as an occurrence).
Notwithstanding the Kentucky approach, in recent years, the trend has been for more states to recognize a duty to defend in construction defect cases.
In Acuity v. M/I Homes of Chicago, LLC, 2023 IL 129087, the Illinois Supreme Court recently clarified that defective work causing property damage is an occurrence, overruling decades of patchwork appellate decisions. The Illinois Supreme Court expressly rejected the notion that there must be damage to other property besides the work. The Michigan Supreme Court held similarly after analyzing the changes of the 1986 changes to the CGL policy-language in Skanska USA Building Inc., v. MAP Mechanics Contractors, Inc., 952 N.W 2d. 402 (Mich 2020).
This patchwork approach can be challenging to navigate. Given that CGL policies offer nationwide coverage and typically lack a choice of law provision, they may invoke difficult choice-of-law issues, as well. However, as construction litigators, we would be doing our clients a disservice if we do not attempt to understand them.
[1] CGL insurers typically have a broader obligation to defend than to indemnify, even if the merits of the suit are suspect.
Editor Brendan J. Witry is an Associate at Laurie & Brennan LLP. His practice focuses exclusively on representing and advising owners, contractors, and trade contractors in construction disputes at all stages.
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