Unexpected Faulty Workmanship

In Sheehan Construction Co. v. Continental Insurance Co., ___ N.E. 2d ___ (Ind. 2010), the Indiana Supreme Court joined those jurisdictions that have found faulty workmanship can be an accident so long as the resulting damage is an event that occurs without expectation or foresight. The Court recognized that whether an event occurs with a “lack of intentionality” depends on the facts of each case. It also noted that the CGL insurers, as of 1986, carved out from the “your work exclusion” an exception for work done by subcontractors. If the initial grant of coverage for accidents did not cover faulty workmanship, there would be no reason for the “your work exclusion.” The facts in this case were typical. Plaintiffs filed a class action alleging that after experiencing water leaks in their homes, they experienced leaking windows, fungus growth on the siding, decayed OSB sheathing, deteriorating and decaying floor joists, and water damage to the interior of the home including water stained carpeting. Sheehan Construction Company was the general contractor on the project and was responsible for hiring subcontractors who actually built the houses. The plaintiffs alleged that these problems were caused by the faulty workmanship of Sheehan’s subcontractors which included lack of adequate flashing and quality caulking around the windows, lack of a weather resistant barrier behind the brick veneer to protect the wood components of the wall, improperly installed roofing shingles, improperly flashed or sealed openings for the chimney and vents, and inadequate ventilation in the crawl space.    

After the Class was certified the case was settled for approximately $2.8 million, providing the Class would not pursue its claims against Sheehan. Instead, Sheehan assigned to the Class any rights it might have against Continental in addition to certain non-settling subcontractors. Continental filed a declaratory judgment denying that its policy covered the settlement. The trial court ruled in favor of Continental, reasoning under the terms of the insurance policies there was no “occurrence” or “property damage.” In a divided opinion, the Court of Appeals affirmed the judgment of the trial court. See Sheehan Constr. Co. v. Continental Cas. Co., 908 N.E.2d 305 (Ind. Ct. App. 2009). The majority concluded among other things there was no property damage within the meaning of the CGL policies because the damage to the homes “cannot be treated as distinct from the underlying faulty workmanship.”

The Supreme Court’s decision is notable in that it takes the time to recount the evolution of today’s standard commercial liability insurance contracts from 1940 to the present day. It cites several excellent articles for their analysis of the principles underlying coverage for defective construction claims. It also summarizes the divide and debate throughout the country on the issue of whether faulty workmanship fits within the insurance policy’s definition of “occurrence” under standard CGL polices.

The Court aligned itself with those jurisdictions adopting the view that if the faulty workmanship is “unexpected” and “without intention or design” and thus not foreseeable from the viewpoint of the insured, then it is an accident within the meaning of a CGL policy. As an alternate basis, the Court finds that the “subcontractor exception” to the “your work exclusion” reflected an intention on the part of the insurance industry to cover faulty workmanship caused by the insured’s subcontractors.