Three Courts Agree, Construction Defects Not Covered Under CGL


We thought it was interesting to note three recent cases in three different jurisdictions, each of which concluded—on summary adjudication—that there is no coverage under a CGL policy for construction defect claims.

FLORIDA: In Amerisure Mutual Ins. Co. v. Auchter Co., (11th Cir. March 15, 2012) the United States Court of Appeals for the Eleventh Circuit affirmed a district court ruling that, under Florida law, a CGL policy issued to a general contractor provides no coverage when the contractor is sued for damage to the part of a completed project performed by a subcontractor—but no damage is alleged to any other part of the project. The insured, a general contractor, entered into a contract to construct a conference center in 1997. The insured hired a subcontractor to install the roof of the building. The roof was completed in 1998. Between 2002 and 2008, many tiles fell off the roof, resulting in significant repair and replacement costs.

In 2006, the claimant filed arbitration against the insured general contractor for defective installation of the roof. The claimant did not allege that the falling roof tiles damaged any other part of the property. The claimant did allege loss of use and lost profits. The insurer defended the general contractor under a reservation of rights and elected to simultaneously file a declaratory judgment action. While the declaratory action was pending, the arbitrator found that the insured had breached its contract to properly install the roof, and that $2.1 million in damages were owed. The insured general contractor refused to pay the arbitration award, so the claimant went to state court and converted that award into state court judgment against the insured. The insurer sought summary judgment declaring no coverage for the arbitrator’s award, arguing that none of the damages at issue constituted “property damage.” The insured declared bankruptcy, so the insurer then litigated the coverage issues against the underlying claimant who stood in the shoes of the insured.

Although the roof was completed in 1998, the court found that the arbitration damages implicated “products completed” insurance coverage at the time the roof began to fail—i.e., in 2002. The court then engaged in a lengthy discussion of ISO’s intent of the 1986 changes to the CGL form, and also discussed the well-established precedent of the Florida Supreme Court regarding construction defect claims. Through this discussion, the Eleventh Circuit concluded that, if there is no damage at issue to the overall construction project beyond the faulty workmanship or defective work of the insured, then there is no resulting “property damage.” Because the only damages at issue were damages to the roof, and not to the rest of the conference center, the claimant was seeking only to fulfill the contractual promise that was made in the first instance. Such a claim is not a claim for “property damage” under a CGL policy.

ILLINOIS: In Nautilus Ins. Co. v. JDL Development, (N.D. Ill. April 4, 2012), the United States District Court for the Northern District of Illinois, granted an insurance company’s Motion for Summary Judgment that there was no duty to defend a condominium association’s claims of construction defect. In this case, a condominium association sued its developer arguing that the balconies had not been properly designed for water run-off. The complaint sought “the cost to repair, remediate and replace the physical damage to the building and its components related to the water incursion and other serious problems caused by the defective terraces and balconies, as well as the additional defects.” The complaint contained no specific allegations that any personal property other than the structure was damaged. It appears that the developer defaulted in the underlying matter. The insurer then brought the declaratory action, at which time the condo association stepped into the shoes of the insured to argue for coverage.

The condo association argued that the damage at issue included damage to the windows and doors of the individual units , as well as damage to the building, thereby constituting a covered “occurrence” under the policy. The district court disagreed, holding that the damage to the individual doors and windows was simply damage to the same structure that was supplied by the developer. “Because the alleged damage is to and the recovery sought is for repair to materials furnished by (the developer), there is no occurrence alleged and no coverage or duty to defend under the policies.”

NEW YORK: In Aquatectonics, Inc. v. The Hartford Cas. Ins. Co., (E.D. N.Y. March 26, 2012), the United States District Court for the Eastern District of New York entered summary judgment in favor of a insurer, finding no duty to defend the insured in a construction defect case because there was no “occurrence” presented by the underlying claim. In this matter, a general contractor was hired to custom build a residential pool. The general contractor hired the insured subcontractor for the work. After the pool was filled, it became clear that there was a problem with custom glass tiles that were turning different shades. The general contractor took it upon himself to demolish the installed tile and redo the job correctly.

The general contractor (and its insurer) then filed a lawsuit against the subcontractor, alleging that the subcontractor had contractually agreed to indemnify and hold the general contractor harmless against all claims arising out of the installation of the pool. The subcontractor’s insurer denied a duty to defend the suit. Unlike the two cases above, the insured, not the insurer, filed a declaratory action in this matter. The court concluded that “it is well-settled under New York law that the insurer of a commercial general liability policy is not a surety for a construction contractor’s defective work product.” The court then concluded that, because the underlying suit only sought damages for the repair and replacement costs to the work on the pool itself, an “occurrence” cannot exist under New York law.

If you have questions regarding any of these decisions, please contact, Adam H. Fleischer at