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Second Circuit Holds Construction Defect to be an Occurrence, Insurer Has Duty to Defend

Blogs, Insurance Coverage

On March 21, 2013, the Second Circuit held an allegation of faulty workmanship to constitute an “occurrence,” and thus possibly subject to coverage under a CGL insurance policy. Scottsdale v. R.I. Pools Incorporated, ___ F.3d ___ (2d Cir. 2013), 2013 WL 1150217 (2d Cir., Mar. 21, 2013). A copy of the decision may be obtained by clicking here

R.I. The pool is an installer of concrete swimming pools, and subcontracts out the installation of pool hulls. In 2009, customers for whom R.I. Pools had installed pools began to complain of failures in the pool hulls, and three customers filed lawsuits. Scottsdale, R.I. Pools’ insurer, initially provided a defense to these lawsuits, but then filed an action in the District of Connecticut seeking a declaration that it had no duty to defend or indemnify R.I. Pools, because of the allegations of construction defects by R.I. Pools were not “accidents” under the meaning of Scottsdale’s policy, and thus did not meet the policy’s definition of a covered “occurrence.” The District Court agreed and ordered R.I. Pools to reimburse Scottsdale for its defense costs.

 Scottsdale’s policy provided coverage only if “The [injury or damage] is caused by an ‘occurrence’…,” and it defined an “occurrence” as “an accident.” The Scottsdale policy also contained the standard “Your Work” exclusion, which excluded from coverage any property damage to the insured’s work arising out of the insured’s work, as well as the “Subcontractor” exception, which nullifies the Your Work exclusion if the “damaged work or the work out of which the damage arises was performed on [the insured’s] behalf by a sub-contractor.”

R.I. Pools appealed to the Second Circuit, which reversed. The Second Circuit noted that the presence of the subcontractor exception in the policy indicated that “in some circumstances the insured’s own work is covered,” and therefore (logically), an allegation of defects in the insured’s own work must fall within the category of an “occurrence.” As the District Court failed to consider whether the subcontractor exception applied, the Second Circuit remanded the case for a further determination as to whether the alleged damages fell within the ambit of R.I. Pools’ subcontractors’ work.

The issue as to whether defective construction constitutes an “occurrence” is somewhat fragmented A majority of courts around the country hold that allegations of faulty workmanship are an occurrence, although Connecticut courts have been trending toward finding coverage. Other states (such as New York and Pennsylvania) have come out on the other side, holding that defective workmanship does not constitute an occurrence triggering coverage. Other states (such as New Jersey) are all over the map, with reported decisions going both ways. Ultimately, whether allegations of defective workmanship are covered will hinge upon a careful examination of the complaint together with any applicable insurance policies, and in the case of large, complex construction projects, choice of law principles.