For years, some state courts and insurance companies have been telling contractors that the construction defect claims they face aren’t covered by their insurance because faulty work is not an “accident” that insurance is intended to guard against. This situation is rapidly changing, however, as more and more courts are concluding that defective construction is an “accident.” This has opened the way for these claims to be covered by insurance.
We have covered this topic before in the blog. As in 2011, insurance coverage remains ever evolving as it pertains to construction defect claims.
There are four questions that must be answered to determine if a construction defect claim is covered by a contractor’s standard commercial general liability insurance policy:
• Was the alleged faulty work or breach of care an accident?
• Has the workmanship resulted in tangible property damage?
If the first two items are satisfied, we move to exclusionary language, as well as exceptions to exclusions.
• Is the construction defect expressly excluded from the policy’s coverage?
• If there is an exclusion that applies, is there an exception that restores coverage?
This article will focus on the first question only, which is often referred to as the “accident” prong. The definition of “accident” varies from jurisdiction to jurisdiction and often hinges on concepts which are lesser understood such as fortuity.
For example, in the recent case of Dusty McBride v. Acuity, the 6th Circuit Court of Appeals denied insurance coverage for claims against a contractor based on structural construction defects because under Kentucky law, construction defects are caused by the builder, or the subcontractors chosen by the builder, and not by a fortuitous or truly accidental event.
Kentucky’s rationale is becoming less and less common, as states are trending toward construing instances of faulty construction as “accidents” in that they are not purposeful acts.
Consider the following cases from 2013:
The Connecticut Supreme Court, in Capstone Building Corp. v. American Motorist Ins. Co.; the Supreme Court of Georgia, in Taylor Morrison Serv. Inc. v. HDI-Gerling America Ins. Co.; and the Supreme Court of North Dakota, in K&L Homes Inc. v. American Family Mutual Ins. Co., reached the conclusion that defective construction is an accident.
The decisions by these courts provide evidence of a rapidly growing trend in which courts have rejected arguments advanced by insurance companies to avoid covering construction-defect lawsuits. But there are still many states in which this question has not been answered.
Still, states remain undecided or, as in Utah, conflicted. In that state judges in the U.S. District Court have come to opposite conclusions: one, that construction defects aren’t accidents under Utah law, and another, that they are.
However, given the strength of the national trend in the courts and resulting appeals decisions, an insurance company’s denial of coverage for a construction defect claim on the basis that the defective construction was not an accident likely will not be upheld in future cases.