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Florida, South Carolina Supreme Courts Hold that Contractors' CGL Policies Cover Damages Arising from Subs' Defective Work
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July 14, 2008
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By Laura Thomson
Howrey LLP
In recent decisions, the Supreme Courts of Florida and South Carolina re-addressed earlier decisions involving coverage under general contractors’ CGL policies for damage resulting from subcontractors’ defective work.
In June, the Florida Supreme Court withdrew its prior opinion in Auto-Owners Insurance v. Pozzi Window Co. and substituted a new opinion in its place. 2008 Fla. LEXIS 1066, 2008 WL 2369244 (Fla. June 12, 2008). The opinion is significant because it solidifies Florida’s position that property damage caused by a subcontractor’s faulty workmanship is covered under a general contractor’s standard CGL policies.
Pozzi, addressing a certified question from the U.S. Court of Appeals for the 11th Circuit as to whether certain costs associated with a subcontractor’s defective work were covered under standard CGL policies, first was issued on December 20, 2007. That was the same day Florida’s high court decided United States Fire Insurance Co. v. J.S.U.B., Inc.
In J.S.U.B., Florida lined up with high courts in Texas [Lamar Homes v. Mid-Continent Casualty, 242 S.W.3d 1 (Tex. 2007)] and Tennessee [Travelers Indemnity Co. of America v. Moore & Associates, Inc., 216 S.W.3d 302 (Tenn. 2007)]. It ruled that a subcontractor’s defective work can constitute an occurrence and rejected as flawed and contrary to the plain language of CGL policies affording broad form property damage coverage the insurers’ argument that defective work can never be an accident from the standpoint of the insured general contractor. In J.S.U.B., defective soil preparation resulted in structural damage to homes. The court held that the damage was covered under terms of standard CGL policies. Click here for a summary of J.S.U.B.
In the first Pozzi opinion, the court applied J.S.U.B. to determine that coverage was not available for the cost of the repair and replacement of defectively installed windows because, although there had been an occurrence, the damage to the windows themselves did not constitute property damage.
Upon reconsideration, the court looked more closely at the facts in Pozzi and modified its decision because the damage to the windows was not as clear-cut as it had previously believed.
Pozzi grew out of a dispute between the owner of a multimillion-dollar home and a window manufacturer, a window retailer, the builder and the subcontractor stemming from water leakage around windows. The homeowner alleged defective design and manufacture. Pozzi, the manufacturer, in turn, alleged defective installation resulting in water damage to surrounding plaster, walls, floors and ceilings and to the windows themselves, requiring their replacement. Pozzi settled with the homeowner and the builder, and as the builder’s assignee, Pozzi sued the builder’s insurer, Auto-Owners Insurance Co., for bad faith denial of coverage.
Observing a critical distinction between the terms “defective installation” and “defective windows,” which the federal courts had used interchangeably, the Florida Supreme Court reconsidered Pozzi because the damaged windows at issue were purchased by the homeowner directly from the manufacturer and because there was a factual dispute as to whether the windows were defective before installation or were damaged as a result of the subcontractor’s defective installation.
The court explained that if the claim was for repair or replacement of windows that were not initially defective but were damaged by the defective installation, then there is covered "property damage" as that term is defined in the standard CGL policy. In that circumstance, because the windows were purchased separately by the homeowner, were not themselves defective and were damaged as a result of the faulty installation, there would be physical injury to tangible property (windows damaged by defective installation) and coverage under the policies. Such damage is similar to damage to personal property of the homeowner, such as wallpaper or furniture, for which coverage was not contested.
It contrasted that situation with one in which the windows themselves were defective and required replacement. In that case, there would be no “property damage” under the policy and no coverage for repair or replacement of the defective windows.
Because factual issues would determine the outcome of the case, the Florida Supreme Court returned the case to the federal courts.
In March, the South Carolina Supreme Court reached a similar conclusion and likewise clarified an earlier opinion, L-J, Inc. v. Bituminous Fire and Marine Insurance Co., 621 S.E.2d 33 (S.C. 2005), in which the court had ruled that a subcontractor’s negligent construction of a CGL policyholder’s work product (a roadway) was not a covered occurrence. The court found that the only damage was to the defective product itself.
The L-J court had cited with approval the analysis in High Country Associates v. New Hampshire Insurance Co., 139 N.H. 39 (1994) in which the New Hampshire Supreme Court found that a subcontractor’s defective installation of siding caused widespread decay of interior and exterior walls. Accordingly, the New Hampshire found that there was coverage for resulting damage under a CGL policy.
Over the years, numerous South Carolina courts disagreed about the breadth and scope of the L-J decision. See, e.g., Fidelity and Guaranty Insurance Underwriters, Inc. v. Robert W. Booher Construction, Inc., 2007 U.S. Dist. LEXIS 61561, 2007 WL 2351010 (D.S.C. Aug. 15, 2007) [certifying whether a CGL policy provides coverage for damages caused by faulty workmanship and exposure to moisture as this issue is unsettled in South Carolina]; Owners Insurance Co. v. Lang's Heating and Air Conditioning, 2006 U.S. Dist. LEXIS 18898, (D.S.C. Apr. 10, 2006) [granting insured’s motion for partial summary judgment on insurer’s duty to defend because faulty workmanship of a subcontractor resulting in damage to another part of the building not worked on by the subcontractor does amount to an "occurrence" under L-J]; Pennsylvania National Mutual Insurance Co. v. Ely Wall and Ceilings, Inc., 2006 U.S. Dist. LEXIS 13302, 2006 WL 569589 (D.S.C. March 6, 2006) [granting motion to dismiss on abstention grounds in part because of “the questionable extent and scope of the final L.J., Inc. decision”].
The South Carolina Supreme Court sought to clear up this confusion with its March 10 decision in Auto Owners Insurance Co. v. Newman, 2008 SC LEXIS 74, 2008 WL 648546 (S.C. 2008).
In Newman, a homeowner sued a general contractor alleging that defective construction related to improper installation of stucco siding "allowed water to seep into the home causing severe damage to the home’s framing and exterior sheathing."
The stucco was installed by a subcontractor. The general contractor had a post-1986 CGL policy containing broad form property damage coverage.
The South Carolina Supreme Court concluded that property damage to something other than the subcontractor’s defective work arose from an occurrence:
[C]ontinuous water intrusion resulting from the subcontractor’s negligence qualifies as an ‘accident’ involving ‘continuous or repeated exposure to substantially the same harmful conditions.... Moreover, as a matter of pure contract interpretation, we hold that the CGL policy covers the damage arising from the negligent acts of the contractor in this case.... A CGL policy in the home construction industry is designed to cover the risks faced by homebuilders when a homeowner asserts a post-construction claim against the builder for damage to the home caused by alleged construction defects. Several construction-specific exclusions in the standard CGL policy exclude from coverage certain types of property damage attributable to risks outside the scope of CGL recovery. The primary exclusion is the ‘your work’ exclusion which provides that the policy will not cover ‘property damage’ to ‘your work.’ In 1986, the insurance industry amended the ‘your work’ exclusion to provide that even if the property damage is to the builder’s own work, the ‘your work’ exclusion does not apply ‘if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.’ In doing so, the insurance industry extended liability coverage for property damage to the contractor’s completed work arising out of work performed by the subcontractor.
For that reason, the court held, analysis of defective work product is limited to the subcontractor’s scope of work and does not extend to the general contractor’s scope of work.
The court also rejected the insurer’s argument that damage to framing and sheathing resulting from improperly installed stucco was expected or intended by a construction professional like the general contractor. The court held it was unreasonable to believe the general contractor expected its subcontractor to perform negligently.
The court affirmed the trial court’s holding that the policy covered the cost of replacing the stucco because its removal was necessary to investigate and repair damage to other property.
Accordingly, the Supreme Court affirmed the trial court’s determination that the homeowner’s claim was covered by the general contractor’s commercial general liability policy.
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For more information about the issues covered in this report, please contact Laura Thomson in our Washington, D.C. office at 202-383-7386 or at thomsonl@howrey.com or contact your Howrey attorney. For more information about Howrey’s Construction Practice Group, click here.
©2008 Howrey LLP
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