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Sixth Circuit Holds that Faulty Workmanship Does Not Constitute Occurrence

Blogs, Insurance Coverage

In a recent unpublished decision, the United States Court of Appeals for the Sixth Circuit held that a contractor’s allegedly poor workmanship did not constitute an occurrence, thereby relieving its insurer of the duty to indemnify the contractor. Liberty Mut. Fire Ins. Co. v. Kay & Kay Contracting, LLC, 2013 WL 6084276 (6th Cir., Nov. 19, 2013).

Wal-Mart contracted with MW Builders to construct a new Wal-Mart in Kentucky. MW Builders subcontracted the site preparation and some preliminary foundation work to Kay & Kay. After construction was complete, cracks began to develop in the building’s walls, allegedly resulting from settlement below the foundation. MW Builders demanded that Kay & Kay remedy the issues, and Kay & Kay put Liberty Mutual, its insurance carrier, on notice of the potential claim.

Liberty Mutual filed a declaratory judgment action against both MW Builders and Kay & Kay, alleging that the allegation of deficient workmanship on the part of Kay & Kay was not an “occurrence” under the policy. The District Court denied Liberty Mutual’s motion for summary judgment, holding that the allegation was an occurrence under the policy, thus giving rise to Liberty Mutual’s obligation to indemnify Kay & Kay.

The Sixth Circuit, however, saw it a different way and reversed the District Court. On appeal, Kay & Kay argued that the alleged property damage constituted an occurrence under the policy because Kay & Kay’s work resulted in “collateral” damage to other property. Relying on the Kentucky Supreme Court’s decision in Cincinnati Insurance Company v. Motorists Mutual Insurance Company, 306 S.W.3d 69 (Ky. 2010), the Sixth Circuit noted that the alleged damages were “within the control” of Kay & Kay, and that damage to construction project caused by the defective workmanship of a contractor who was retained to prevent that same type of damage was not fortuitous, and thus not an occurrence under the meaning of the policy. The Sixth Circuit distinguished this from a situation where a contractor’s allegedly deficient work causes damage to a different part of the building. The Court stopped short, however, of deciding whether this particular scenario would result in coverage – notably, the Sixth Circuit stated (in dicta) that it believed the Kentucky Supreme Court would likely find that either scenario would not result in coverage. Rather, the Court, reiterating a statement by the Kentucky Supreme Court in Cincinnati Insurance, that “[s]imply put, faulty workmanship is not an accident,” and noting that although the Kentucky Supreme Court had not definitively ruled on the issue, predicted that a court in Kentucky would likely hold that any allegations of faulty workmanship would not constitute an occurrence, whether it resulted in property damage to the insured’s own work or other work on the property.

As we have previously reported in September, this issue is one of the more important issues in construction defect litigation today. Most Courts come down on the side of holding that deficient workmanship does not constitute an occurrence. There are, of course, exceptions in many jurisdictions that may provide coverage in the event the alleged defects cause damage to work not performed by the insured (an exception that the Sixth Circuit has seemed to reject).

For a copy of the Sixth Circuit’s decision click here