Alabama Supreme Court Holds Faulty Workmanship Is Not An “Occurrence” – Insurer Has No Duty to Indemnify Contractor
One of the hottest topics in construction defect litigation is the issue of whether a contractor’s faulty workmanship constitutes an “occurrence” under the contractor’s CGL policy, thus possibly triggering a duty on the insurer’s part to defend (and possibly indemnify) the contractor. In a decision released last Friday, the Alabama Supreme Court answered that question in the negative, although it stopped short of issuing a blanket rule. Rather, the Court held that a contractor’s faulty workmanship did not constitute an occurrence when property damage caused by the work did not result in damage to components of the building or property outside the scope of the contractor’s work. Owners Insurance Company v. Jim Carr Homebuilder, LLC, ___ So.3d ___, 2013 WL 5298575 (Ala., Sept. 20, 2013).
The Johnsons contracted with Jim Carr Homebuilder to build a new house. Within a year of occupancy, they began to experience water infiltration through the roof, walls, and floors, and they commenced a construction defect action. Jim Carr tendered its defense and indemnity to Owners Insurance Company (its CGL carrier), which retained counsel and began defending Jim Carr under a reservation of rights. Specifically, Owners reserved its rights to deny coverage on the grounds that Jim Carr’s allegedly faulty workmanship did not constitute an “occurrence” under the policy.
Owners eventually filed a declaratory judgment action, seeking an order that Owners had no duty to defend or indemnify Jim Carr. The declaratory judgment action has stayed pending resolution of the Johnsons’ case against Jim Carr, which eventually proceeded to arbitration. An arbitration award of $600,000 was entered against Jim Carr, based on the arbitrator’s findings that Jim Carr’s subcontractors had failed to properly install flashing, improperly prepared and installed the masonry, improperly installed doors and windows, improperly caulked doors and windows, and improperly installed the roof.
The trial court granted Jim Carr’s motion for summary judgment in the declaratory judgment action and entered an order that the arbitration award was covered by Jim Carr’s policy with Owners, and thus Owners had a duty to indemnify Jim Carr for the arbitration award. Owners appealed the order, arguing that under Alabama law, it’s insured’s poor workmanship did not constitute an occurrence under the policy.
The Alabama Supreme Court reversed, holding that Jim Carr’s poor workmanship did not constitute an occurrence, and thus Owners had no duty to indemnify Jim Carr. In reaching its conclusion, the court analyzed and distinguished two prior cases that led to different results on the issue of whether a contractor’s faulty workmanship constitutes an occurrence.
In U.S. Fidelity & Guar. Co. v. Warwick, the Alabama Supreme Court had held that alleged property damage to home due to faulty workmanship (in and of itself) did not constitute an occurrence, while in Moss v. Champion Insurance Co. (decided a year prior to Warwick), the same court held that a contractor’s poor workmanship was an occurrence under the policy. How does the same court reach diametrically opposing results on the same issue? The answer requires a factual evaluation of the scope of the alleged damages, and how they relate to the contractor’s scope of work. Essentially, there are two possible factual scenarios: (1) the faulty workmanship led to damage to the areas of the property on which the contractor was retained to work; and (2) the faulty workmanship led to damage to areas of the property outside of the contractor’s scope of work.
The Alabama Supreme Court explained its analysis, holding that:
[It is] clear that faulty workmanship performed as part of a construction or repair project may lead to an occurrence if that faulty workmanship subjects personal property or other parts of the structure outside the scope of that construction or repair project “to ‘continuous or repeated exposure’ to some other ‘general harmful condition’” and if, as a result of that exposure, that personal property or other unrelated parts of the structure are damaged. Hence, there was no occurrence in Warwick, where the builder’s poor workmanship resulted in just a poor final product (the house itself), but there was an occurrence in Moss because the contractor’s poor workmanship resulted not just in a poor final product (the new roof), but also in damage to the homeowner’s personal property and other parts of the house outside the scope of the contractor’s project…
Distinguishing the present case from Moss, and likening it to Warwick, the Supreme Court noted that Jim Carr was not hired to construct part of a house, and its workmanship led to damage to other parts of the house. Rather, it was retained to construct the entire house, and thus its poor workmanship necessarily could not have resulted in damage to parts of the house outside the scope of the work it was hired to complete. Under this analysis, had Jim Carr been retained by the Johnsons to construct only the roof, and its faulty workmanship led to damage to the floors, the Court would have found an occurrence, and Owners would have had a duty to indemnify Jim Carr.
A copy of the decision may be obtained by clicking here.