Homebuilder Construction Defects: Alabama Supreme Court Holds Faulty Workmanship May Be an Occurrence

Homebuilder Construction Defects: Alabama Supreme Court Holds Faulty Workmanship May Be an Occurrence

In its opinion in Owners Insurance Company v. Jim Carr Homebuilder, LLC, 2013 Ala. LEXIS 122 (Ala. Sept. 20, 2013), [enhanced version available to lexis.com subscribers], the Supreme Court of Alabama the court had the occasion to consider what constitutes an “occurrence” as defined under a CGL policy in the context of a construction defect claim.

Thomas and Pat Johnson hired JCH, a licensed homebuilder, to construct a new home in January 2006. Within a year of completion the Johnsons noticed several issues with water leakage which resulted in damage to other parts of the home. After JCH’s attempts at remedying the water infiltration issues were unsuccessful, the Johnsons sued for breach of contract, fraud, and negligence. JCH promptly tendered its defense to Owners Insurance Company, its general liability insurer. Owners provided counsel under a reservation of rights. After the dispute between the Johnsons and JCH was settled through arbitration, the trial court granted JCH’s motion for summary judgment holding that Owners policy covered the entirety of the arbitrator award.

On appeal, Owner’s argued that the property damage was not an “occurrence” as defined in the policy and as such no coverage would apply. In accordance with previously established principles, the court noted that whether faulty workmanship constitutes an “occurrence” depends on the nature of the damage caused by the faulty workmanship. On its own, however, faulty workmanship is not an “occurrence.” The court further clarified that “faulty workmanship performed as part of a construction or repair project may lead to an occurrence if that faulty workmanship subjects personal property or other parts of the structure outside the scope of that construction or repair” to harmful or damaging conditions.

The court differentiated between instances in which a contractor is retained to perform work on an existing structure and the existing structure is damaged, and when a new structure is built and defective work results in damage to the new structure. Where the contractor is hired to construct the entire structure, and a claim for damage to that structure results from the contractor’s defective work, the contractor is not entitled to coverage as the claim does not constitute an “occurrence.”

    Brian Margolies, Partner, Traub Lieberman Straus & Shrewsberry LLP

Read more at the Traub Lieberman Insurance Law Blog, Edited by Brian Margolies.

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