Source: http://www.jdsupra.com, July 2, 2014
By: Joan Cotkin, Nossaman LLP
In an unpublished appellate decision from the state of Washington, on May 5, 2014, the Washington Court of Appeals affirmed a summary judgment in favor of a CGL insurer, Western National Assurance, relieving it of any obligation to defend the contractor insured, Shelcon Construction against a construction defect claim. This is the latest in a long line of nationwide cases where commercial general liability insurers are seeking to avoid defending construction defect cases against shoddy workmanship claims.  The CGL insurers argue there is no “occurrence” because these are mere “business risks” not accidents!
Like most (or perhaps all) that succeed however, there was no claim that Shelcon’s faulty workmanship caused property damage to other property.  Rather, Shelcon was sued for breach of contract and causing economic loss to the property owner.   The facts were that the property owner hired Shelcon to prepare a compacted soils site for further use (upon which a building was to be constructed.)  But they did so in a faulty manner (removing settlement markers too soon) making it impossible to measure/verify the compaction.  As a result the owner’s pending sale of the site to the builder fell through and the complaint alleged breach of contract and loss of value.  Not “property damage.”   Western National declined a defense because the complaint alleged economic damages only but also because the faulty workmanship exclusion barred coverage.  In the underlying case, the contractor won the breach of contract claim as their keeping the markers in the soil was not in their contract and the markers actually were obstacles for the trucks on site so it was not unreasonable to remove them when the contractor did so.
The Western National coverage suit nevertheless went forward over the unpaid defense costs (not clear how much because the contractor won an award of attorney’s fees in the underlying suit) and treble damages under Washington law recoverable from an insurer who fails to defend a covered claim.
The exclusion which was enforced by the appellate court was “Property damage to that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations.”  Alleged defective performance by the contractor in removing the settlement markers resulted in consequential damages to the entire site in that the site lost economic value (its pending sale to the builder fell through), but there was no property damage to any other property or part of the property.
The Washington Appellate court distinguished the cases cited by Shelcon, as they each involved damage to other parts of a building (where the insured was not performing operations) which occurred as a result of faulty work by the insured.  Happily this holding is easily understood and consistent with the general view that faulty workmanship can be an occurrence, potentially covered in a CGL policy where neither expected nor intended by the insured.  This was notion was reaffirmed in the high courts of Connecticut, Georgia, North Dakota and West Virginia in 2013 alone. Thus despite the ever creative arguments from coverage counsel for insurers who seek to avoid coverage, as long as the faulty workmanship caused measurable property damage to other property, not just to the work or product of the insured, the CGL policy should provide coverage for construction defect claims, despite the wide array of conditions, exclusions and endorsements limiting the scope of coverage.