Michael T. Callahan and Thaddeus J. Schurter on Expanding Commercial General Liability Coverage for Construction Defect Claims

Michael T. Callahan and Thaddeus J. Schurter on Expanding Commercial General Liability Coverage for Construction Defect Claims

Insurance coverage for construction defects or faulty workmanship has long been a contentious issue between insurers and policyholders. Numerous jurisdictions rejected coverage for such claims in the past, but now, disputes over construction defect claims are increasingly resolved in favor of coverage. In this Analysis, Michael T. Callahan and Thaddeus J. Schurter discuss the expansion of commercial general liability coverage for construction defect claims. They write:

[W]hether defective work is covered by CGL [Commercial General Liability] insurance is often decided by how the word "accident" is understood. Does the intent to commit an act, even where that act results in unintended consequences, preclude coverage because an intentional act is not an accidental one? Courts have reached different conclusions, sometimes even when applying the same laws. In one such case, the U.S. District Court for the Southern District of Illinois recently concluded in Western World Insurance Co. v. Penn-Star Insurance Co. [2009 U.S. Dist. LEXIS 47921 (S.D. Ill. June 8, 2009)] that unintentional damage caused to an adjoining structure during demolition constituted an occurrence. In Western, the City of East St. Louis contracted with McCoy Construction to demolish a building at 320 Collinsville Road. During demolition part of a wall that was common to both 320 Collinsville Road and 318 Collinsville Road was damaged. Upon realizing its mistake, the contractor stopped immediately, but the damage was done. Penn Star Insurance, which insured the damaged building, filed a subrogation suit against the city and the contractor for negligence and inverse condemnation. Western World Insurance, the contractor's insurer, refused to defend or indemnify in the suit. After the parties reached a settlement, the contractor's insurer filed a declaratory judgment action.

     The contractor's insurer asserted what had become the default insurer position in nearly all construction defect cases, that the damage was not covered because it was not an occurrence. It maintained that because the contractor intended to demolish the common wall, any damage it caused was not accidental. The city contended that while the demolition was intentional, the resulting harm to the neighboring building was not, and thus its actions were covered as an accident. In addressing what types of conduct trigger CGL coverage, the court explained that the important question was not whether the acts which resulted in damage were intentional, but rather whether the injury was expected or intended by the insured. Accordingly, intentional acts that produced unintended and unforeseen consequences could qualify as accidents. Because the contractor intended to demolish the common wall but did not intend to damage the second building, the property damage was an accident and an occurrence under the policy.

     By contrast the U.S. District Court for the Northern District of Illinois reached an opposite conclusion on a similar case some three years earlier. In Century Surety Co. v. Demolition & Development Ltd. [2006 U.S. Dist. LEXIS 2128 (N.D. Ill. Jan. 18, 2006)], a contractor's demolition of the wrong building, based on erroneous information from a city employee, was not considered an occurrence. In Century, the City of Chicago hired a demolition contractor for an emergency tear down of a building located at 4710-20 South Indiana Avenue. After arriving on site, the contractor's president was uncertain which buildings to demolish, since three buildings with no addresses posted on them were near the demolition location. An employee at the city's buildings department verified that the three buildings were to be demolished. The contractor began its demolition but stopped after the surprised owner of one of the buildings indicated that his building, 4708 South Indiana, was not supposed to be demolished. A city inspector confirmed that the building was not subject to the court order. The contractor's insurer denied coverage and filed a declaratory judgment action.

     The contractor's insurer conceded that the property was damaged but argued that because the demolition was intentional, any resulting damage was not accidental, despite the error in identification. The insurer further maintained that as an expected result of demolition, the damage could not be classified as unforeseen. The insurer added that even if an occurrence took place, several exclusions exempted coverage. The contractor contended that its demolition of the wrong building was accidental. The court disagreed.

(footnotes omitted)

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