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Faulty Workmanship Covered by Commercial General Liability Policies in Growing Number of States



By Chase Fisher

In the Connecticut case, the developer and general contractor settled a dispute with the University of Connecticut (“UConn”) that involved several unintended construction defects on a student housing project.  In particular, UConn notified the developer and general contractor after its discovery of elevated levels of carbon monoxide in the housing units, among other defects and deficiencies.

UConn claimed over $25 million in damages, and the developer and general contractor settled the dispute by paying $1 million each to UConn.  However, the project’s insurer, under UConn’s owner controlled insurance program (“OCIP”), refused to participate in the mediation and denied all coverage for the construction defects (an OCIP is an insurance policy held by a property owner for a construction project that covers numerous aspects of a project, often containing a commercial general liability policy and a workers’ compensation policy).  Due to the denial of coverage, the developer and general contractor filed separate lawsuits against the insurer.  

What occurred and what was damaged?
The lawsuit was filed in a federal district court in Alabama.  However, since Connecticut law applied to the situation and Connecticut had never previously addressed this issue, the federal court asked the Connecticut Supreme Court for guidance on whether damage to a project caused by defective construction or faulty workmanship may be considered ‘property damage’ that results from an ‘occurrence’ under a standard commercial general liability insurance policy.  

The Connecticut Supreme Court held that defective construction or faulty workmanship could be covered as an ‘occurrence’ under a standard commercial general liability insurance, as an ‘occurrence’ was defined as an ‘accident’ in the policy and defective construction could arise from an accident. The Court reasoned that a deliberate act resulting in negligently performed work, could be an accident if the end effect of the deliberate act was not intentional by the insured. Therefore, the Court held that defective construction may constitute the basis for an ‘accident’ or ‘occurrence’ under the terms of a commercial general liability policy. However, the Court stated the coverage analysis does not cease with this determination because to be covered under the policy, the ‘occurrence’ had to cause ‘property damage,’ which was another defined term in the policy.

The Court held that defective construction standing alone or repairs required to defective work would not be ‘property damage’ under the policy.  However, when the defective construction causes damage to other nondefective property, such as water damage caused by the defective installation of a window, the Court held that such damage to other nondefective property may be considered ‘property damage’ under certain circumstances.

Practice points
While the court’s holding is rather narrow, it highlights an important and timely issue that has led some policy carriers to draft policies in a way that expressly excludes or significantly restricts coverage for defective work by subcontractors.  This issue has been addressed in several other jurisdictions that have reached conclusions similar to the Connecticut Supreme Court, including courts in Alaska, Florida, Indiana, Kansas, Minnesota, South Dakota, Tennessee, Texas, and Wisconsin.  This is a rapidly evolving area and contractors and developers need to be aware of their state law or the state law applicable to their commercial general liability policies to make sure they minimize their uninsured exposure. One precaution contractors and developers can take is to have legal counsel review and negotiate changes to commercial general liability policies prior to construction projects.


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