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Insurance Law

Ten Most Significant Insurance Coverage Decisions Of 2013 – Almost Heaven For Policyholders: West Virginia High Court Overrules Four Prior Decisions And Holds That Faulty Workmanship Is An “Occurrence” [And Two Others Do The Same]

Ordinarily I would not include in the annual insurance hit-parade a case addressing the beat-to-death issue whether faulty workmanship qualifies as an “occurrence” under a commercial general liability policy. There are simply too many cases addressing the issue so any single new one, even if from a state high court, is very unlikely to have any influence on the national landscape. At most it may influence its particular state’s law on the subject.

But along came the West Virginia high court’s in Cherrington v. Erie Insurance, No. 12-36, 745 S.E.2d 508 (W.Va. June 18, 2013) [enhanced version available to subscribers]. It is a fairly mundane case, involving commercial general liability coverage for a builder, for claims made against it for defective construction of a residence. The builder used a subcontractor. There’s more to it than that, but when it comes to analyzing a construction defect coverage case, that’s basically all the facts needed.

The West Virginia circuit court held that no coverage was owed because the underlying homeowner had not established that an “occurrence” (accident) had caused the damages sustained because faulty workmanship, in and of itself, or absent a separate event, is not sufficient to give rise to an “occurrence.” The circuit court’s decision was hardly surprising as there were several decisions from West Virginia’s highest court, the Supreme Court of Appeals, to support it. That was Cherrington’s next destination.

The Supreme Court of Appeals was quite mindful of the landscape before it concerning coverage for faulty workmanship. The court reviewed its prior decisions and set out their conclusions that poor workmanship is not an “occurrence” and such claims are outside the risks assumed by a traditional CGL policy.

But, unlike my wife, the Supreme Court of Appeals was willing to admit that they got it wrong. The court explained that it was time for it to go in another direction. “Despite this Court’s express holdings that a CGL policy does not provide coverage for defective workmanship, we are acutely aware that, after we rendered these rulings, many other courts also considered this issue and rendered their own rulings. Some of those jurisdictions have reached conclusions similar to those expressed in our prior opinions. However, a majority of other states have reached the opposite conclusion, announcing their contrary view either in judicial decisions or through legislative amendments to their states’ insurance statutes. While we appreciate this Court’s duty to follow our prior precedents, we also are cognizant that stare decisis does not require this Court’s continued allegiance to cases whose decisions were based upon reasoning which has become outdated or fallen into disfavor. Although we fully understand that the doctrine of stare decisis is a guide for maintaining stability in the law, we will part ways with precedent that is not legally sound. Thus, when it clearly is apparent that an error has been made or that the application of an outmoded rule, due to changing conditions, results in injustice, deviation from that policy is warranted.” “We recognize that a definite trend in the law has emerged since we rendered our determinative decision in Corder sufficient to warrant this Court’s reconsideration of the issues decided therein and that, if warranted, a departure from this Court’s prior opinions would be consistent with this Court’s steadfast resolve to follow the law to achieve just, fair, and equitable results.”

Further, the court observed: “With the passage of time comes the opportunity to reflect upon the continued validity of this Court’s reasoning in the face of juridical trends that call into question a former opinion’s current soundness.”

So the stage was set for the Supreme Court of Appeals to reconsider whether faulty workmanship was an “occurrence.” The court cited a boat-load of decisions from around the country that have addressed the “occurrence” issue regarding coverage for construction defects. The court noted that, since its 2001 decision in Corder, a minority of jurisdictions have adopted the position that defective workmanship is not an “occurrence.” Moreover, three of them were superseded by statutory enactments that specifically require CGL policies issued in those states to include coverage for defective workmanship and/or injuries and damages resulting therefrom.

For several reasons, the Supreme Court of Appeals, overruling four prior decisions on the issue (including one as recent as 2005), held that defective workmanship constituted an “occurrence.” [As a result, the insured was now able to reach the “your work” exclusion, and, more importantly, the subcontractor exception.] There were several reasons for the court’s about-face.

First, the court explained that “[i]t goes without saying that the damages incurred by Ms. Cherrington during the construction and completion of her home, or the actions giving rise thereto, were not within the contemplation of Pinnacle when it hired the subcontractors alleged to have performed most of the defective work. Common sense dictates that had Pinnacle expected or foreseen the allegedly shoddy workmanship its subcontractors were destined to perform, Pinnacle would not have hired them in the first place. Nor can it be said that Pinnacle deliberately intended or even desired the deleterious consequences that were occasioned by its subcontractors’ substandard craftsmanship. To find otherwise would suggest that Pinnacle deliberately sabotaged the very same construction project it worked so diligently to obtain at the risk of jeopardizing its professional name and business reputation in the process.”

Next, the court observed that, if the defective workmanship at issue was not covered by the CGL policy’s insuring clause, it would be incongruous with the policy’s express language providing coverage for the acts of subcontractors.

The court concluded that its “prior proscriptions limiting the scope of the coverage afforded by CGL policies to exclude defective workmanship to be so broad in their blanket pronouncement that a policy of CGL insurance may never provide coverage for defective workmanship as to be unworkable in their practical application.”

That the West Virginia high court, in Cherrington v. Erie Insurance, held that defective workmanship constituted an “occurrence,” is as dog bites man of a coverage case as you’ll see. The significance of the case is not the decision, but what it took for the court to get there -- overruling four prior decisions (including one as recent as 2005 – Webster County Solid Waste v. Brackenrich).

But there are still two more important pieces to this tale. A couple of months before Cherrington was decided, the North Dakota Supreme Court issued K&L Homes, Inc. v. American Family Mut. Ins. Co. [enhanced version available to subscribers], which held that “faulty workmanship may constitute an ‘occurrence’ if the faulty work was ‘unexpected’ and not intended by the insured, and the property damage was not anticipated or intentional, so that neither the cause nor the harm was anticipated, intended, or expected.” Not a significant decision unless you live in Fargo. However, in reaching its decision, the K&L Homes court noted that it was consistent with the definition of “accident” for purposes of a CGL policy, and, to that extent, its 2006 decision in ACUITY v. Burd & Smith Construction was overruled.

And still another state high court in 2013 used its power to overrule when concluding that an insured’s faulty workmanship can amount to an occurrence when the only damage alleged is to the work of the insured. See Taylor Morrison Services, Inc. v. HDI-Gerling America Ins. Co., 746 S.E.2d 587 (Ga. 2013) [enhanced version available to subscribers], overruling Forster v. State Farm Fire & Cas. Co., 704 S.E.2d 204 (Ga. Ct. App. 2010).

The potential national impact of Cherrington, and these others in 2013, is the possibility that these courts’ unusual steps will cause other state high courts to reconsider some of their earlier decisions that defective workmanship does not constitute an “occurrence.” Supreme courts do not overrule decisions lightly. The court in Cherrington made that very clear. What’s more, no justice in Cherrington dissented. You would have expected at least one to do so.

Nonetheless, the Cherrington court seemed to be comfortable with its decision. Cherrington noted: “It has been said that wisdom too often never comes, and so one ought not to reject it merely because it comes late.” Policyholders will no doubt use Cherrington and these others to attempt to persuade courts that any prior precedent, that defective workmanship does not constitute an “occurrence,” is ripe for review. Arguing against supreme court precedent is not easy or desirable. After Cherrington and these other decisions, policyholders may be more willing to take on clear precedent and courts may be more willing to listen.

Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit

The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.

    Randy J. Maniloff is an attorney in the Philadelphia office of White and Williams, LLP.  He concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.

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