By answering a certified question from the Eleventh Circuit Court of Appeals, the Supreme Court of Georgia resolved a long-standing dispute regarding CGL insurance coverage for damages arising from an insured contractor’s defective construction. The issue was fairly narrow because it related to the “occurrence” requirement in standard CGL policies. The federal court asked whether a standard CGL policy’s requirement of an “occurrence” can be satisfied when the damaged property at issue was solely the contractor’s work?
In prior cases, other courts have held that such damages are not covered by standard CGL policies because they do not arise from an “occurrence.” But the Supreme Court held that, generally, claims involving property damage and bodily injury arising from defective construction are caused by an “occurrence.”
While the Court effectively resolved the first hurdle of most CGL claims arising from defective construction, it recognized that other provisions and exclusions may apply to bar coverage. The opinion contains well-reasoned analysis of standard CGL policies’ separate hurdles. But at least for the “occurrence” hurdle, defective construction will normally qualify — even if the damaged property was solely the insured’s work.
The case began when several hundred Homeowners in California noticed failures and defects in their homes’ foundations, causing water intrusion, cracks, and warped and buckling flooring. They alleged that Contractor failed to lay a sufficient amount of gravel beneath the foundations, failed to use adequate moisture barriers, and installed foundations with a high water-to-cement ratio. Homeowners sued Contractor for breach of warranty and fraud.
Contractor’s CGL Insurer filed a declaratory judgment action in a federal court in Georgia, asking the court to rule that no coverage was available for Homeowners’ damages. Insurer argued that the damages did not arise from an “occurrence” because the damage was not an “accident.” It also argued that such damages were not covered because they arose from Contractor’s breach of warranty and fraud, which it contends were excluded by other provisions of the policy.
Were the Damages Caused by an “Occurrence”?
The Court was asked whether property damages caused by defective construction resulted from an “occurrence” when the damaged property was the work of Contractor. Standard CGL policies provide coverage for property damage and bodily injury resulting from an “occurrence,” which is defined as an “accident.” The term “accident” was not defined in the policy.
Georgia courts had previously established “that faulty workmanship sometimes can amount to an ‘occurrence,’ at least when the property of someone other than the insured is damaged.” But the present dispute concerned “whether faulty workmanship also can amount to an ‘occurrence’ when the only damage alleged is to work of the insured.” (Emphasis added.)
Insurer cited several cases that, according to its interpretation, held construction defects do not amount to an “occurrence” or an “accident.” But the Court held that such cases conflate the concepts of “occurrence” and “property damage,” and even other exclusions. As the Court stated, the better analysis is to view each concept and exclusion separately.
Looking solely at the “occurrence” limitation, the Court interpreted the term “accident” according to its usual and common meaning. Applying such an interpretation, the Court concluded that damages arising from defective construction are normally caused by an occurrence. Contrary to other cases, the policy’s requirement of “occurrence” did not require damage to property or work of someone other than the insured.
Other Provisions and Exclusions Must Be Considered
The Court’s conclusion was strictly limited to the issue of “occurrence.” It recognized, however, that other provisions of the CGL policy may exclude coverage.
Among other requirements and exclusions, the definition of “property damage” under the policy may bar coverage for certain damages arising from defective construction. As defined in standard CGL policies, “property damage” means “physical injury to tangible property” or “loss of use of tangible property that is not physically injured.” Thus, defective work itself is not “property damage” under most standard CGL policies.
The Court also noted certain “business risk” exclusions that may apply. For example, Exclusion “l” normally excludes coverage for damage to “your work,” commonly known as the “Your-Work Exclusion.” Since it was not asked about such exclusions, the Court did not discuss them in detail.
Are Damages Caused by Fraud and Breach-of-Warranty Claims Covered?
Insurer also argued that the claims were excluded because they arose from claims of fraud and breach of warranty. Certain claims by their very nature are excluded from coverage. The Court summarized: “To the extent that a theory of liability is absolutely and necessarily inconsistent with the notion of an ‘accident’ – that is, when the theory of liability and the idea of an ‘accident’ are mutually exclusive – a claim premised upon such a theory of liability could not possibly involve an “‘occurrence.’”
Because fraud claims, under both Georgia and California law, necessarily involve the element of scienter – intent to defraud – they do not involve an accident. Accordingly, damages from fraud claims do not result from an “occurrence.”
With regard to claims of breach of warranty, the answer is different. Most breach-of-warranty claims arise from an unintentional act. Warranty law usually arises from strict liability, regardless of intent or culpability. So such claims will usually result from an “occurrence.”
By answering the Eleventh Circuit’s certified questions, the Supreme Court of Georgia cleared up the often-muddled area CGL coverage based on an “occurrence.” But attorneys should not overstate the importance of the opinion. As the Court itself warns, other provisions and exclusions may apply to bar coverage. At least for the “occurrence” requirement, the Court has cleared the way to argue that damages arising from defective construction constitute an “occurrence.”