Construction lawyers face issue with what insurance will cover



by Cynthia Price
Legal News

Controversy has been brewing over whether defective workmanship constitutes an “occurrence” under liability insurance coverage for long enough that some states have had time to pass legislation addressing the matter.

“Occurrence” is defined — in a circular fashion — as “an event that triggers coverage under an insurance policy,” but whether the term is to be equated with “accident” is not clear. It is possible for insurance policies to define, or courts to construe, an occurrence as something more continuous that the insured does not “expect nor intend.”

As construction soared before the most recent economic downturn, it became increasingly clear that state interpretations of what must be covered were leaning toward determinations that property damage incurred as a result of faulty workmanship or defective products could be construed  as a coverable occurrence. State high court decisions were all over the board, but the pendulum was swinging toward an interpretation less favorable to the insurance companies.

Despite, or maybe as a result of, decreased construction during this recession, the issue has continued to come up.

According to a 2008 American Bar Association publication, “Before 1976, a widely held consensus existed that commercial general liability (CGL) policies covered only ‘tort liability for physical damages to others and not for contractual liability of the insured for economic loss.’” The paper draws the conclusion that the 1976 Broad Form Property Damage Endorsement and 1986 standard CGL policy revisions changed that.

Scott Murphy, partner in the Grand Rapids office of Barnes and Thornburg (B & T), reported on the Michigan courts’ approach to the issue for the July issue of B & T’s national newsletter.

Murphy cites the Michigan Court of Appeals decision in Kent Companies, Inc v Wausau Insurance Companies, where a contractor was forced to remove and replace brick pavers in order to repair damage to a concrete slab caused by its own admitted failure to take steps to address potential damage by underground snow-melt tubing.  The general contractor submitted a claim for expenses incurred in the fix, but the court ruled that the sequence of events did not constitute an occurrence and the insurance company did not have to cover them.

Murphy acknowledges that, as Kent Companies indicates, contruction law “is very fact-intensive, very expert-intensive.” Detailed subject-matter expertise must be sought, and “it can become a battle of the experts.”

Murphy has been with B & T since 2005, but his career began in Florida after he received his J.D., with honors, from Florida State University College of Law. His undergraduate degree is from Northern Michigan University, in political science and geography.

About his Florida practice, Murphy says, “When I was in Florida construction law is all I did. We represented a large design-build firm, acting as general counsel to them. But there’s not as much construction law here as there was in Florida, so now it’s about half of my workload.”

The remainder is general litigation. Murphy is a member of the Litigation Department, and the Insurance, Recovery and Counseling Group, in addition to the Construction Law Practice Group.

He has appeared before the state and federal courts and the American Association of Arbitration. His cases have covered a wide range, including the areas of employment and the Americans with Disabilities Act, Uniform Commercial Code, lender liability, health care disputes, trade secrets, contracts and business tort/tortious interference. He successfully defended a number of nursing homes and their employees against criminal charges pursued by the Michigan Attorney General. He does some counseling in the insurance recovery and other areas.

Murphy is a member of the Forum on the Construction Industry as well as the Association of Building Contractors.

“A really satisfying case for me was where we represented Whirlpool in a roof collapse case and we were successful in getting full damages,” Murphy says. The result was a multi-million dollar judgement in 2010.

Murphy also wrote an article for the April 2010 B & T construction update newsletter on a very different subject: it was called “Michigan Courts Broadly Construe Licensing Requirements For Residential Builders.”

About the July article on insurance coverage, he says, “The Michigan case is the old school way of looking at it: in Michigan, defective work is just not an occurrence.”
One crucial point on which the Michigan Court of Appeals decision turned was that the plaintiff was trying to obtain coverage for replacing its own product caused by its own mistakes. The issue is a lot murkier when a subcontractor is involved.

The subcontractor exclusion, which has meant that CGL will cover occurrences which result from the shoddy workmanship of a subcontractor on the project, is also up for grabs. “Will coverage be extended to the extent that a problem was caused by a subcontractor and you weren’t the cause of the bad workmanship? Not always,” Murphy says.

Legislators in four states — Hawaii, Colorado, Arkansas, and South Carolina — have observed all this confusion and passed laws to address it. Although most of the legislation leans toward a broadening of the coverage to include construction defect claims, they do so in different, and sometimes unclear, manners, and the South Carolina law is already under challenge in the courts.

The Hawaii statute addresses a specific court decision,  in Group Builders, Inc., v. Admiral Insurance. That ruling, concerning a posh hotel which had to close over twenty floors due to mold which it claimed resulted from poorly-installed insulation, stated that the insurance company had no obligation to “defend or indemnify its policyholder,” Group Builders, which was a subcontractor.

Murphy said that he has not heard anything indicating lawmakers in Michigan are considering similar legislation.

There is some feeling that CGL policies will be written differently in all the states as a result of both the legislation and the continuing court battles, but no one ventures to say with certainty if new language will broaden or narrow the occurrences policies will cover.