In the immortal words of Bob Dylan, the times they are a-changing. In the often placid world of insurance coverage, this change has been most evident with regard to the definition of the term “occurrence.” The meaning of this term is at the heart of coverage in standard commercial general liability (CGL) policies, and how the definition of occurrence is construed by the courts often determines whether coverage exists. This article will briefly review the traditional view of occurrence as it relates to coverage for faulty products or defective work, an emerging national trend, and recent developments in Pennsylvania.

The Traditional View

The traditional view is that defective products or defective work by the insured are not occurrences. In other words, the existence of a defect in a product or an event in which a defective product injures only itself does not constitute an occurrence. Cases exemplifying the traditional view include: Auto-Owners Insurance v. Rhodes, 748 S.E.2d 781, 790 (S.C. 2013); Westfield Insurance v. Custom Agri Systems, 979 N.E.2d 269, 273-74 (Ohio 2012); Cincinnati Insurance v. Motorists Mutual Insurance, 306 S.W.3d 69, 73-74 (Ky. 2010); Essex Insurance v. Holder, 372 Ark. 535, 539-40 (2008); L-J v. Bituminous Fire & Marine Insurance, 621 S.E.2d 33, 35-37 (S.C. 2005); United States Fidelity & Guaranty v. Advanced Roofing & Supply, 788 P.2d 1227, 1233-34 (Ariz. 1989); and National Union Fire Insurance v. Turner Construction, 986 N.Y.S.2d 74, 77 (N.Y. App. Div. 2014). As a result, the traditional view holds that an occurrence requires the defective work or product to cause bodily injury or property damage to property other than the product itself.
Courts in the traditional camp typically justify their conclusion based on historical precedent and the fact that faulty work does not satisfy the requirement that an occurrence be a fortuitous event. In this context, fortuity typically is described as an event that is both unintended and beyond the control of the insured. Moreover, a number of courts assert that allowing faulty work to fall within the definition of occurrence would inappropriately transform CGL policies into surety bonds.

The Emerging Trend

While the traditional view remains the majority view, there is a growing trend in favor of finding that an occurrence can include the circumstance where defective work results in damage only to the work or product itself (so long as the damage was neither intended nor expected by the insured). Cases exemplifying this trend include: Travelers Indemnity Co. of America v. Moore & Associates, 216 S.W.3d 302, 307-09 (Tenn. 2007); Lamar Homes v. Mid-Continent Casualty, 242 S.W.3d 1, 16 (Tex. 2007); U.S. Fire Insurance v. J.S.U.B., 979 So.2d 871, 883-84 (Fla. 2007); and Lee Builders v. Farm Bureau Mutual Insurace, 137 P.3d 486, 491-93 (Kan. 2006).
These courts tend to justify their conclusions based on the intent of the insured and the structure of the policies. First, they note that occurrences are generally defined as accidents, and providing faulty work is usually an accident from the standpoint of the insured. Next, they note that standard CGL forms have an exclusion for the insured’s work. This exclusion, they reason, would be unnecessary if the insured’s work was not encompassed within the definition of occurrence. Third, they point to the reasonable expectations of the insured and the fact that ambiguities must be construed against the insurer. Finally, these courts often conclude that the “your work” exclusion prevents the policy from becoming a performance bond and the “your product” exclusion prevents the insurance from becoming a manufacturer’s warranty.

Pennsylvania Developments

Where Pennsylvania courts fell in this spectrum was, until recently, a matter of significant debate. In Kvaerner Metals v. Commercial Union Insurance, 908 A.2d 888, 900 (Pa. Super. Ct. 2006), Kvaerner Metals was sued for supplying an allegedly defective coke oven battery. One of Kvaerner’s insurers, National Union Fire Insurance Co. of Pittsburgh, disclaimed coverage. Kvaerner sued National Union and on appeal the Pennsylvania Supreme Court upheld the disclaimer of coverage, stating that “faulty workmanship does not constitute an ‘accident’ as required to set forth an occurrence under CGL policies.”
The wording of the Kvaerner opinion, in light of Pennsylvania’s “gist of the action” doctrine, left some commentators wondering about the status of coverage in the state. This was especially concerning to policyholders, because at least one trial court concluded, based in part on Kvaerner, that faulty workmanship could “never constitute” an accident or occurrence, even where damage resulted to property other than the allegedly defective work, in American Home Assurance v. Trumbull, 2012 Pa. Dist. LEXIS 409, at *32 (Ct. Comm. Pl. Allegheny County Oct. 10, 2012). Therefore, American Home held that the insurers had “no obligation to provide indemnification for any damages caused by faulty workmanship.”
This debate has largely been settled by Indalex v. National Union Fire Insurance Co. of Pittsburgh, 83 A.3d 418, 424-26 (Pa. Super. Ct. 2013). Indalex involved allegedly defectively designed or manufactured windows and doors. The defects resulted in water leakage, which in turn resulted in personal injury as well as injury to other property. The Indalex court found that the allegations of the underlying complaint fell within the definition of an occurrence. Significantly, Indalex clarified that Kvaerner was “limited to situations ‘where the underlying claims were for breach of contract and breach of warranty, and the only damages were to the [insured’s] work product.'” As a result, the Indalex opinion returns Pennsylvania to the ranks of the traditional view of an occurrence.

Legislative Changes

A number of state legislatures have weighed in with regard to the definition of occurrence. This appears to have been driven by a perception that it was necessary to act to prevent courts from moving to a more restrictive coverage position, as reflected in American Home. South Carolina, Arkansas and New Jersey are states where it appears that legislation has codified or attempted to codify the traditional understanding of occurrence, while Colorado is consistent with the emerging trend.
Specifically, South Carolina requires, with regard to construction work, that CGL policies contain “or be deemed to contain” a definition of occurrence that includes “property damage or bodily injury resulting from faulty workmanship, exclusive of the faulty workmanship itself,” according to S.C. Code Ann. § 38-61-70 (2013). This statute was subsequently found to be unconstitutional to the extent that it was applied retroactively, in Harleysville Mutual Insurance v. South Carolina, 736 S.E.2d 651, 660 (S.C. 2012). The statute’s prospective application, however, is constitutional.
Arkansas requires that a CGL policy “offered for sale in this state shall contain a definition of ‘occurrence’ that includes … property damage or bodily injury resulting from faulty workmanship,” as in Ark. Code Ann. § 23-79-155 (2014). Arkansas’ definition is more expansive than South Carolina’s, as it is not limited to construction work. Interestingly, while the Arkansas act does not appear to include the faulty work itself within the definition of occurrence, the preamble to the statute arguably suggests that the legislation was intended to include the faulty work, insofar as the preamble criticizes state court holdings regarding the definition of occurrence and expresses the view of the legislature that “insurance consumers purchase commercial liability insurance … for the express purpose of limiting their liability for faulty workmanship.”
Similarly, a bill was introduced in New Jersey late in 2013 that, if passed, would require insurers to define occurrence, with regard to construction work, in a way that includes “property damage or bodily injury resulting from faulty workmanship.” The bill is A. No. 4510, 215th Leg., 1st Sess. (N.J. 2013). The changes proposed by New Jersey are limited to contractors or other construction professionals.
Colorado, on the other hand, passed legislation specifically adopting the emerging trend, at Colo. Rev. Stat. § 13-20-808 (2013). The Colorado act was approved in 2010, and overrules General Security Indemnity Co. of Arizona v. Mountain States Mutual Casualty, 205 P.3 529 (Colo. Ct. App. 2009). Specifically, the Colorado act requires that “in the interpretation of insurance policies … issued to construction professionals … [a] court shall presume that the work of a construction professional that results in property damage, including damage to the work itself or other work, is an accident unless the property damage is intended and expected by the insured.”

Final Thoughts

The construction a court gives to the definition of occurrence can have a powerful impact on coverage. It is, of course, not necessarily the end of the coverage determination. As the Tennessee Supreme Court noted in Moore & Associates, “the recognition that damages may result from an ‘occurrence’ is only the first step in determining whether damages are afforded coverage under a CGL.” If it is determined that an occurrence took place, the analysis must proceed to whether the occurrence is subject to any exclusions contained in the policy, and in product and construction cases the business risk exclusions often play a significant role.
Nevertheless, the definition of occurrence is key. It is the threshold through which any coverage claim must pass, and the times are changing in a significant number of jurisdictions with regard to the construction of this definition. These changes are something both insurers and insureds should monitor closely, as they have the potential to dramatically alter the coverage landscape from one jurisdiction to the next.
Previously published in The Legal Intelligencer – August 2014
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