Source: http://www.lexology.com, May 30, 2014
By: George B. Hall, Jr., Phelps Dunbar LLP
The Alabama Supreme Court withdrew a September 2013 opinion addressing coverage for faulty work in a construction defect case and reversed its earlier decision on the meaning of “occurrence” in that context. Owners Ins. Co. v. Jim Carr Homebuilder, LLC, 2014 WL 1270629 (Mar. 28, 2014).
A homebuilder was sued after a home that it constructed began to experience water leaks. Its CGL insurer defended under a reservation of rights and filed a separate action for declaratory judgment against both the insured and the homeowners. The homeowners were awarded damages against the builder in arbitration. Following the arbitration, the homeowners and the builder moved for summary judgment in the declaratory judgment action. The insurer opposed and filed a cross-motion for summary judgment. The trial court held that the damages were covered. The insurer appealed.
In a September 2013 opinion, the Alabama Supreme Court concluded that all of the damages claimed and awarded were within the scope of the builder’s own work and therefore outside the definition of “occurrence.” That opinion was withdrawn. The Supreme Court has now concluded that “faulty workmanship” itself is not property damage caused by or arising out of an occurrence. Though it did not fully elaborate on the question, the end result appears that the cost to repair or replace an insured’s own faulty work does not constitute “property damage,” whereas the cost to repair damage caused by the insured’s own faulty work does.
In its latest opinion, the Supreme Court did not offer any discussion of what damages could be covered as “property damage” caused by an occurrence. Instead, it reinstated the trial court’s ruling that the insurer was obligated to cover the arbitrator’s award in full. A partial dissent noted that the arbitrator’s award included damages for repairing the insured’s own faulty work and faulted the majority for arriving at the “seemingly inconceivable conclusion” that the damages awarded did not encompass cost to replace the insured’s own faulty work.