Construction Defect Insurance Coverage
Construction Defects More Likely to be Accidents for Insurance Coverage
Jeffrey D. Stevens
November 25, 2013
Recently, the number of courts siding with insurance companies to deny contractors and subcontractors insurance coverage in construction defect lawsuits has been shrinking. Courts have always been split over whether damage caused by construction defects is an accident or not. If it’s not an accident, there is no coverage under the standard commercial general liability insurance policy, the most common form of liability insurance in the construction industry. However, there is a growing trend for courts to find that such damage is the result of an accident, and some state courts, like the Supreme Court of West Virginia in the case Cherrington v. Erie Ins. Property & Cas. Co., 2013 WL 315603 (W. Va. 2013), have switched sides on this issue completely.
One typical scenario is an excavation contractor that fails to prepare a building site properly. After the building is constructed, soils compress resulting in cracked foundations, walls and floors. If a court finds that the excavator’s faulty work is not an accident, then there is no insurance coverage for claims brought to correct or pay for the damage. On the other hand, if the court finds that the damage to the building was caused by an accident, then there is a greater chance that the parties being sued to pay for the damage will be defended by their insurance companies.
The Utah Supreme Court has never addressed this issue squarely. However, the leading cases from the Federal District Court for the District of Utah and the 10th Circuit have analyzed Utah’s legal decisions and concluded that under Utah law damage caused by construction defects is not accidental. Instead, it is the natural and probable consequence of the faulty construction work.
However, the most recent decision from Utah’s Federal District Court departed from these prior decisions. In The Cincinnati Ins. Co. v. Amsco Windows, U.S. Dist. LEXIS 15999, the district court determined that property damage allegedly caused by defective or defectively installed windows was caused by an accident. This decision opened the way for the window manufacturer to obtain defense and indemnification from its insurance company in the construction defect lawsuit.
When this issue is presented to the Utah Supreme Court, it is likely that it will follow the increasing number of courts that have held that damage caused by construction defects is an accident for insurance purposes.
While insurance policies contain exclusions which may defeat coverage for claims related to construction defects, a denial because the insurance company states that the damages were not caused by an accident is no longer supported. Contractors and subcontractors that are denied insurance coverage in the face of a construction defect lawsuit should consult an attorney to ensure that the denial is appropriate.
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