Insurance coverage for construction defects has long been a contentious issue, frequently litigated between insurers and contractors, with varying results. The results vary as widely as the states in which these cases are litigated, and many states do not have clear answers to the most critical questions. That is no longer true in Alabama. The Alabama Supreme Court recently issued a decision granting expanded insurance coverage to general contractors covered by the standard commercial general liability (CGL) form with completed operations coverage.
In Owners Ins. Co. v. Jim Carr Homebuilder, LLC (Ala. 2014), a general contractor faced a sizable arbitration award from construction defects and associated property damage. The contractor’s insurance company filed a preemptive lawsuit seeking a declaratory judgment denying any coverage to the general contractor. The Alabama Supreme Court initially denied coverage for the arbitration award, but allowed reconsideration and reversed itself completely. The resulting opinion presents interesting analyses on two commonly-litigated issues.
Do Construction Defects Constitute an “Occurrence?”
First, the Alabama Court pronounced that although faulty workmanship alone does not constitute an occurrence; faulty workmanship that results in property damage will be considered an occurrence.
The insurance company argued that qualifying damage can only be damage to something other than the work being performed by the contractor. The Court disagreed, taking note of an absurd result. Where a general contractor is hired to build an entire house from scratch, finding damage to something other than the insured’s work would be impossible, and the coverage would therefore be illusory. The court held that faulty workmanship that leads to any property damage will qualify as an occurrence under the standard CGL policy.
What about the “Your Work” Exclusion?
Second, the Court considered whether the “your work” exclusion would preclude coverage even if the defects and damage qualified as an occurrence. The policy excludes “‘property damage’ to ‘your work’…and included in the ‘products-completed operations hazard.’” The Court clarified that the term ‘products-completed operations hazard’ refers to the risk of loss assumed by the builder relating to completed products. Thus, the “your work” exclusion was defined by specific reference to risks assumed by the builder for completed operations.
However, this builder had purchased a completed operations coverage endorsement. The Court therefore ruled that because the builder had purchased a completed operations endorsement, the “your work” exclusion was effectively nullified. The Court held that the entire arbitration award should be covered by the insurance policy.
Alabama’s opinion on the definitions of “occurrence” and “your work” could have implications elsewhere as other cases seek persuasive authority when answering similar questions. However, equally interesting are the questions that the Alabama Supreme Court intentionally avoided.
- Although the Court held that faulty workmanship that causes damage can constitute an “occurrence,” the Court did not address the extent of the coverage provided. The Court should have analyzed whether coverage would extend to correction of the faulty workmanship or be limited to repair of the resultant damage only. Two Justices on the Alabama Supreme Court wrote concurring opinions raising this very point, but the majority opinion nonetheless is conspicuously silent as to this issue and does not even acknowledge the presence of the concurring opinions. The missing analysis may serve to limit the opinion’s persuasive authority elsewhere.
- The court also avoided addressing the distinction between the “products completed operations hazard” and the extent of coverage provided by a completed operations endorsement. The Court defines the “your work” exclusion by reference to the completed operations coverage endorsement, but does not quote or discuss the extent of that coverage. The completed operations coverage could be something less than the entire “hazard” assumed by the contractor, which could result in portions of the “your work” exclusion remaining operative. The Court summarily dismissed the insurer’s arguments on this point by saying the carrier’s arguments were “unavailing.” Again, the intentional avoidance of this issue could limit the persuasive authority of this case elsewhere.
The Alabama Supreme Court’s opinion in Owners v. Jim Carr advances the discussion on these critical insurance issues, yet the Court’s refusal to address critical weaknesses could undermine the persuasive authority of an otherwise very interesting opinion.