June 17, 2013
Connecticut Supreme Court Clarifies the Scope of Coverage of CGL Policies Regarding Property Damage Caused by Unintentional Construction Defects
On Tuesday, June 11th, the Connecticut Supreme Court for the first time ruled on whether property damages resulting from defective or faulty workmanship in the construction of a project may constitute “property damage” resulting from an “occurrence,” thus giving rise to coverage under a Commercial General Liability (CGL) insurance policy. The case, Capstone Building Corp. v. American Motorists Ins. Co., 2013 Conn. LEXIS 187 (June 11, 2013), involved claims of property damage in connection with the construction of a student housing complex at the University of Connecticut. Murtha Cullina attorney Michael J. Donnelly filed an amicus curiae brief on behalf of the American Subcontractors Association (“ASA”). The Supreme Court agreed with the ASA’s position that CGL policies cover claims of damage to non-defective property unintentionally resulting from defective or faulty workmanship.
Summary of Facts
In 2000, the plaintiffs, Capstone Development Corp. and Capstone Building Corp. (the Plaintiffs) entered into an agreement with the University of Connecticut (UConn) to serve, respectively, as project developer and general contractor for the construction of a student housing complex. The contract required UConn to procure commercial general liability insurance covering itself, the State of Connecticut, the design/builder, and subcontractors of all tiers, among others. UConn procured a CGL policy which was the standardized form utilized in the construction business. The work was completed in 2001 and, in 2004, UConn sent a letter to the Plaintiffs regarding alleged defects in the project. UConn claimed damages in excess of $25,000,000. The Plaintiffs demanded that the CGL insurer cover UConn’s claims, but the insurer resisted. It argued that the claims were not covered by the policy because they arose out of the Plaintiffs’ “own work” on the project. After settling with UConn, the Plaintiffs filed actions against the insurer in Alabama. The Alabama District Court asked the Connecticut Supreme Court to determine: “Whether damage to a project contracted to be built, which was caused by defective construction or faulty workmanship associated with the construction project, may constitute ‘property damage’ resulting from an ‘occurrence,’ triggering coverage under a commercial general liability insurance policy?”
The Decision
The Connecticut Supreme Court noted that this was the first time that it had been asked to address this issue. It also pointed out that courts in different states have reached diverging results on the question. The Court ultimately ruled that damage resulting from defective construction constitutes an “occurrence” or “accident” under the CGL policy. This is because “[i]nsurance policies ... are designed to cover foreseeable risk, including negligent acts.” Additionally, “the mere fact that defective work is in some sense volitional does not preclude it from coverage under the terms of the policy.” In other words, an “accident” is “an event that is unintended from the perspective of the insured.”
The Court did qualify its ruling in a number of respects. First, it held that the CGL policy does not cover repair or remediation to faulty or defective work itself, unless that faulty or defective work causes damage to other, non-defective property. This is because “project components defective prior to delivery, or those defectively installed, did not suffer physical injury within the meaning of the policy’s terms.” Additionally, the Court found that the exclusionary “your work” clause contained in the policy precluded coverage for property damage caused by the insured contractor’s work. Nonetheless, coverage for property damage caused by a subcontractor was restored through the “subcontractor exception” to the “your work” exclusion. In sum, the insured contractor must ultimately prove that the “property damage was caused by its subcontractors’ defective work. Property damage resulting from the plaintiffs’ own faulty work, however, is precluded from coverage by the ‘your work’ exclusion.”
The Takeaway
The Connecticut Supreme Court’s decision in Capstone is a significant step forward in holding insurers to their contractual obligations under CGL policies. The Court has clarified that a subcontractor’s unintentionally defective work which results in property damage to non-defective work may constitute an “occurrence” giving rise to coverage under the policy. Insurer attempts to deny coverage based on an “own work” or “your work” exception are subject to a clear challenge under the Supreme Court’s new holding.
If you have any questions about the information contained in this Alert, please contact your Murtha Cullina attorney or any of the members of our Construction practice.
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