Insurance Coverage for Damage Caused by Allegedly Faulty Construction

Generally, Commercial General Liability (CGL) policies cover property damage caused by an occurrence, but specific business risk exclusions prevent recovery by an insured contractor for faulty workmanship. An occurrence is simply an accident; that is, an unintended event. Property damage is typically defined as physical injury to tangible property or the loss of use of tangible property that is not physically injured. The business risk exclusions essentially exclude coverage for damage to work performed by the insured. Coverage ultimately depends on several variables, including the specific property sustaining damage, the nature of the contractor’s scope of work, and the event causing the damage.

In Acuity v. Society Ins., 2012 WI APP 13 (recommended for publication), the Wisconsin Court of Appeals recently revisited the question of what constitutes an occurrence within the meaning of a Commercial General Liability insurance policy when damage results from alleged faulty workmanship. The case involved damage to building when excavation to replace an existing wall caused the upper floors to deflect downward. The court of appeals held that there was an occurrence, following the Supreme Court’s decision in American Family Mut. Ins. Co. v. American Girl, Inc., 2004 WI 2, 268 Wis. 2d 16, 673 N.W.2d 65.

In American Girl, the general contractor hired a soils engineer to provide a soils condition analysis. The general contractor followed the methodology recommended by the engineer to prepare the soil and constructed a warehouse. The warehouse began to sink after the owner took possession, causing extensive damage. The owner claimed that the general contractor breached the construction contract based on the negligence of the soils engineer which allegedly caused the damage. The general contractor’s insurer claimed there is no coverage for the general contractor because there was no occurrence. The Wisconsin Supreme Court disagreed, drawing a critical distinction between faulty workmanship and accident, holding that it was not the soil engineer’s inadequate advice that caused the harm, but rather the settlement of the soil. Because the cause of the harm was not intended or anticipated, the soil settlement constituted an occurrence. The Wisconsin Court of Appeals subsequently applied the reasoning in American Girl to find the existence of an occurrence inGlenvenning’s Limestone and Readi-Mix Co. v. Reimer, 2006 WI App. 161, 295 Wis. 2d 556, 721 N.W.2d 704 (alleged negligent improvement to dairy facilities).

In Acuity v. Society Insurance, contractors were hired to remove and reinstall a concrete wall on an existing building. During the excavation of a trench adjacent to the wall, the soil eroded under the concrete slab, the slab cracked and deflected downward causing part of the building above the compromised floor to likewise deflect downward, disrupting electrical service to certain components of the building. A rooftop condenser was also disabled because the water required to run it was too heavy for the damaged roof. Physical damage to an adjacent building which shared a common wall occurred, as did loss of refrigerated product. The disruption in the production schedule caused the building owner to incur additional expenses.

Acuity, the building owner’s insurer, paid the loss and sued Society Insurance, the contractors’ insurer, seeking to recover damages arising from the building collapse. The issue was whether Society’s CGL policies insuring the contractors provided coverage for the damages. The circuit court granted Society’s motion for summary judgment, finding there was no occurrence. Relying on American Girl, the court of appeals reversed, finding that the damage was caused by the accidental soil erosion that occurred due to faulty excavation techniques.

The court then analyzed the effect of the business risk exclusions. These exclusions, common in CGL policies written since 1986, preclude coverage for property damage to:

“Property damage” to:

…

(5) That particular part of real property on which you or any contractor or subcontractor working directly to indirectly on your behalf is performing operations, if the “property damage” arises out of those operations; or

(6) That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.

The scope of coverage often turns on how narrowly or broadly the court interprets the phrase “that particular part.” In Acuity v. Society Insurance, the court interpreted that phrase very narrowly, holding that it refers only to those parts of a building on which the alleged defective work was performed and no other portion of the building. Thus, because the contract called for removal and reconstruction of one wall of the building, damage to any portion of the building other than that one wall was covered. The court cited decisions from other jurisdictions because there were no published cases in Wisconsin specifically interpreting the phrase “that particular part.”

Coverage for property damage involving alleged faulty workmanship varies from state to state. A minority of jurisdictions have interpreted CGL policies as favorably to the insured as Wisconsin courts. Courts in other states have found no occurrence under circumstances substantially identical to those in Acuity, and others have interpreted “that particular part” more broadly, limiting or eliminating coverage. This should be an important consideration for a policyholder or insurance carrier when choosing the venue for a declaratory judgment action seeking an insurance coverage determination.

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