McBride v. Acuity, --- F.3d ---, 2013 WL 69358 (6th Cir. Jan. 7, 2013) (applying Kentucky law)

On January 7, 2013, the U.S. Court of Appeals for the 6th Circuit applied Kentucky law to find that faulty workmanship of a subcontractor did not qualify as an “occurrence” even though the subcontractor’s faulty workmanship had caused damage to other, non-faulty, parts of the project.  (This case reaches the opposite conclusion of a Colorado decision that came down the day after, which we have summarized here) The Sixth Circuit refused to follow case law from other jurisdictions holding that an “occurrence” takes place when allegedly defective work on one part of a construction project causes defects to another part of the same project.

In the underlying lawsuit, two homeowners sued their general contractor, alleging that faulty workmanship by one of the subcontractors caused problems with the home’s foundation.  The allegedly faulty foundation, in turn, caused cracks in the walls and floors of the house.  In other words, the allegedly faulty work of one subcontractor who built the foundation had caused damage to non-faulty work done by other subcontractors, but there were no allegations of damage to any property other than to the construction project itself— the entirety of which was the responsibility of the insured general contractor.

The insured general contractor tendered the defense to its general liability insurer, Acuity.  The general liability policy covered “occurrences,” defined in relevant part, as “an accident.”  The insurer refused to defend the insured, arguing that faulty construction is not an “occurrence” within the meaning of a general liability policy.  The insured filed a declaratory judgment action against the insurer.  On summary judgment, the trial court agreed that faulty construction is simply the non-fortuitous failure to perform contractual obligations, and it is not a covered “occurrence,” so there was no duty to defend.

On appeal, both parties agreed that faulty workmanship does not ordinarily constitute an “occurrence” within the meaning of a commercial general liability policy because faulty workmanship is not an “accident” under Kentucky law.  Cincinnati Ins. v. Motorists Mut. Ins., 30 S.W.3d 69 (Ky. 2010).  However, the insured argued that the law recognizes a “sub-contractor exception” to the general fortuity doctrine described in the Cincinnati decision. 

The exception argued by insured was premised on the 1986 revisions to the standard-form CGL policy, which added language to the typical exclusion for property damage created by faulty workmanship.  The additional language stated that “[t]his exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”  The insured argued that, when a general contractor is sued, this language specifically creates a “sub-contractor exception” to general doctrine that faulty workmanship does not constitute an “accident” or “occurrence.”

The insured also pointed to case law from other jurisdictions that recognized that faulty workmanship conducted by a subcontractor on one part of a project can be an “occurrence” when the workmanship defects cause damage the work of a different subcontractor on a non-faulty part of the same project. Greystone Constr., Inc. v. National Fire & Mar. Ins. Co.,  661 F.3d 1272, 1290 (10th Cir. 2011) (Colo. law).  The Sixth Circuit Court of Appeals refused to follow Greystone.  Instead, based on language in the Cincinnati decision, the Court held that, when a general contractor is sued,  Kentucky courts would only permit coverage when property other than the general contractor’s construction project was damaged by the work of a sub-contractor.  Because there were no allegations of damage to property other than to the general contractor’s construction project, i.e. the insured builder’s own work, the Court of Appeals affirmed the district court’s grant of summary judgment in favor of the insurer on the basis that there was no “occurrence.”

Courts around the country have split on the issue raised in McBride – namely, whether an “occurrence” has taken place when faulty workmanship by one subcontractor causes damage to another part of the construction project but does not damage any property other than the project itself.  Compare Greystone, 661 F.3d at 1290 (holding that an occurrence has taken place under the general contractor’s CGL policy when allegedly defective work on one part of a construction project causes defects to another part of the same project) with Monticello Ins. Co. v. Wil-Freds Constr., Inc., 661 N.E.2d 451, 456 (Ill. App. Ct. 1996) (holding that no occurrence has taken place under the general contractor’s CGL policy where underlying lawsuit alleged only damage to the general contractor’s project itself even though defects resulted from the work of subcontractors rather than the general contractor).  Such cases may turn upon the law of the state that applies to the insurance contract, as well as the construction role (general contractor or subcontractor) of the insured party that is being sued.

For more information on the issues discussed above, or any other insurance coverage questions, please contact Adam Fleischer, adamfleischer@batescarey.com or Michael Passman, mpassman@batescarey.com.