In Shane Traylor Cabinetmaker v. American Resources Ins. Co., Inc, the building owner, Barbee, claimed that the work of the policyholder, STC, "was not performed in a workmanlike manner ... requiring [Barbee] to repair and/or replace the work performed by . . . [STC]'. STC's insurance company, American Resources Ins. Co., refused to defend against the claim, and STC sued. American Resources argued that the claim against STC could not qualify as an "occurrence". "Occurrence" was defined in the policy as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."
On May 3, the Supreme Court of Alabama's issued its decision at 2013 Ala. LEXIS 42 (2013) [enhanced version available to lexis.com subscribers], maintaining Alabama's position that property damage to an policyholder's own work cannot qualify as an "occurrence" under that insured contractor's CGL policy. Nationally, the courts are deeply divided on that question, but the recent trend has been away from Alabama's position.
Two years ago, in Town & Country Property, L.L.C. v. Amerisure Ins. Co., --- So.3d ---- , 2011 Ala. LEXIS 183 (2011) [enhanced version available to lexis.com subscribers], Alabama drew a firm distinction on the "occurrence" issue between coverage for damage to an insured's faulty work itself and damage that faulty work does to other property. It found the latter constituted an "occurrence" and the former could not. However, the court has never explained why the same act that causes both forms of property damage does not qualify as an "accident" when it harms the insured's own work but does qualify as an "accident" when it harm to the other property. "Occurrence" and "accident" apply to the act of the insured that causes the property damage. If the act is the same, and neither form of property damage is necessarily foreseeable, how can the nature of the damaged property cause the coverage outcome to be diametrically opposite?
Nevertheless, in Shane Traylor Cabinetmaker, the Supreme Court brushed aside STC's first argument that damage to its own work could qualify as an "occurrence" by simply applying the rule from its Town & Country decision without further explanation.
Alternatively, STC's brief argued that Barbee's allegations, quoted above, satisfied Town & Country's damage to other property route to qualifying a claim as an "occurrence":
By reasonable inference, Barbee's repair and/or replacement of [STC's] work in the kitchen area at Barbee's home rendered the kitchen area unusable for such time as the remedial work was underway. The delays caused the inability to use the kitchen in the Barbees' new home due to the remedial work caused by [STC's] alleged breach of duty of workmanlike performance and arising out of [its] product or work. Such allegations support the reasonable inference that damage would likely be done to cabinets, [S]heetrock, kitchen counter tops, flooring and other property in Barbee's home due to the repair and remediation of [STC's] product or work.
However, the court refused to recognize such a possibility by inference from such spare allegations: "[W]e decline to infer loss of use or other injuries based on speculation as to damage that was not alleged in the counterclaim". 2013 Ala. LEXIS 42, at *17.
The wording of the subcontractor exception to the Your Work Exclusion, many past publications by ISO (the insurance industry agency that drafts CGL policy forms) on what is and isn't covered under its policies, and the insurance industry's own currently published analyses of coverage, make it clear that in a completed operations scenario, such as in Shane Traylor Cabinetmaker, property damage to the work of the policyholder's subcontractors should be covered. For that to be true, post-performance damage to a policyholder's own work must at least potentially satisfy the "occurrence" requirement, or that coverage under the subcontractor exception would be completely meaningless. The rules governing judicial interpretation of insurance policies are supposed to bar that from ever happening.
So, it will be interesting to see what the Alabama Supreme Court will do when these powerful new arguments are brought to its attention in a future construction case. Quite possibly, the court will do what the Second Circuit did two months ago in Scottsdale Ins. Co. v. R.I. Pools Inc., 710 F.3d 488 (2nd Cir. 2013) (Conn. law) [enhanced version available to lexis.com subscribers]. Confronted with these arguments, the Second Circuit completely reversed its long-held position on the "occurrence" issue and now recognizes that the CGL policy "unmistakably includes defects in the insured's own work within the category of an 'occurrence.'" Id., at 492.
Scott C. Turner (email@example.com), is of counsel at Anderson Kill, a national firm known for exclusively representing policyholders. He is a construction insurance attorney with over 20 years of experience securing insurance recoveries for property losses and in securing defense and indemnification for liability resulting from construction disputes and defects.
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