Construction Defect Insurance
Recent Developments in Construction Defect Insurance
Edward Weiman and Audrey Jing
July 25, 2012
State and federal courts are divided on whether standard CGL policies cover construction defect claims
In the last few years, courts have issued a flurry of opinions on the subject of construction defect insurance, with particular regard to the question of whether the average commercial general liability (CGL) policy provides coverage for construction defect claims against a contractor insured. The most extreme opinions have held that such claims never trigger coverage, a result that prompted several states to enact legislation to the contrary. The courts, in turn, responded to this new legislation with varying results, discussed below.
The issue turns on a few key policy provisions. The standard CGL policy provides coverage for damages arising out of “property damage” to which the policy applies. The property damage must be caused by an “occurrence,” which is, in turn, defined in part as “an accident.” In light of these provisions, courts often are asked to decide whether construction defects (and/or the damage caused by such defects) qualify as “property damage” caused by an “accident” for the purpose of these policies.
In several jurisdictions, including Arkansas, Hawaii, Iowa, Kentucky, Ohio, Oregon and Pennsylvania, courts have concluded that construction defect claims do not trigger CGL coverage, holding that defects are not “accidents” but foreseeable consequences of a contractor’s work on a project. Colorado, Hawaii and South Carolina recently followed suit, most notably in Hawaii, where the state Supreme Court held in 2010 in Group Builders, Inc. v. Admiral Insurance Company that any construction defect claim arising out of a breach of construction contract could not give rise to an “occurrence” for the purpose of CGL insurance.
The concern raised by this holding was that it effectively nullified coverage for “property damage” under any CGL policy. The holding also was in stark contrast to state and federal decisions interpreting Hawaii law, including Burlington v. Oceanic Design & Construction, Inc. and Hurtig v. Terminix Wood Treating & Contracting Co., all of which had acknowledged that defective work can give rise to an “occurrence” so long as other non-defective property is damaged.
In response to Group Builders, the Hawaii legislature enacted House Bill No. 924, which was expressly intended to overrule Group Builders and restore the status quo under Hawaii law priorto the decision. The legislature recognized that, prior to Group Builders, “construction professionals entered into and paid for insurance contracts under the reasonable, good-faith understanding that bodily injury and property damage resulting from construction defects would be covered under the insurance policy.”
SOURCE: www.insidecounsel.com