In a recent decision, the Connecticut Supreme Court addressed, on certification from the United States District Court for the Northern District of Alabama, Southern Division, whether property damages resulting from defective or faulty workmanship in the construction of a project may constitute “property damage” resulting from an “occurrence,” thus giving rise to coverage under a Commercial General Liability insurance policy (“CGL”). Capstone Building Corp. v. American Motorists Ins. Co., 308 Conn. 760 (2013). The Court answered this question of first impression in the affirmative.
Capstone stems from claims of property damage in connection with the construction of a student housing complex at the University of Connecticut (“UConn”). Specifically, in 2000, Plaintiffs Capstone Building Corporation and Capstone Development Corporation entered into a contract with UConn to serve as project developer and general contractor for the construction of a student housing complex. The contract required UConn to procure CGL insurance covering itself, and various other entities such as the State of Connecticut, the designer/builder, and the subcontractors of all tiers. UConn procured the requisite CGL policy and the work was completed in 2001.
The policy’s general insuring provision covered damages resulting from “property damage” if the “property damage is caused by an “occurrence.” The policy also provided that “any entity of you [i.e. the Named Insured] are required in a written contract… to name as an insured (the ‘Additional Insured’) is an Insured but only with respect to liability arising out of ‘your work’ for the Additional Insured, or acts or omissions of the Additional Insured in connection with the general supervision of ‘your work.’”
In 2004, UConn notified Plaintiffs of various defects in the project and ultimately claimed damages in excess of $25,000,000. The Plaintiffs demanded coverage under UConn’s CGL policy. The insurer, American Motorists Insurance Company (“AMICO”), denied coverage on the grounds that UConn’s claims arose out of the Plaintiffs’ “own work” on the project. Plaintiffs settled with UConn for $1,000,000 and then filed suit against AMICO for breach of contract and bad faith in Alabama state court. The matters were then removed to the United States District Court for the Northern District of Alabama, Southern Division.
The District Court certified the following question to the Connecticut Supreme Court: “Whether damage to a project contracted to be built, which was caused by defective construction or faulty workmanship associated with the construction project, may constitute ‘property damage’ resulting from an ‘occurrence,’ triggering coverage under a commercial general liability insurance policy?” 308 Conn. at 771. The Connecticut Supreme Court answered in the affirmative, holding: (1) defective construction or faulty workmanship that causes damage to nondefective property may constitute property damage resulting from an occurrence, thus triggering coverage under the commercial general liability policy; (2) property damage that is the result of an insured's defective work is excluded from coverage; and (3) property damage caused by a subcontractor's defective work may be covered under the exception to the “your work” exclusion. Id.
The Court explained, “[i]nsurance policies ... are designed to cover foreseeable risk, including negligent acts… the mere fact that defective work is in some sense volitional does not preclude it from coverage under the terms of the policy. [A] deliberate act, performed negligently, is an accident if the effect is not the intended ore expected result; that is the result would have been different had the deliberate act been performed correctly. ” Id. at 775. “Accordingly, because negligent work is unintentional from the point of view of the insured… it may constitute the basis for an ‘accident’ or ‘occurrence’ under the plaint terms of the [CGL] policy.” Id. at 776.
The Court then went on to qualify its holding, in certain respects. First, it found that defective work standing alone or repairs to that defective work do not constitute property damage, and therefore, are not covered. 308 Conn. at 764, 784-87. That is, repair or remediation of faulty or defective work is not covered unless that faulty or defective work causes damage to other, non-defective property. Second, the Court found that the “your work” exclusion precluded coverage for property damage caused by the insured contractor’s work but that coverage for property damage caused by a subcontractor was restored through the “subcontractor exception” to the “your work” exclusion. Id. at 789-90.
In short, under the Court’s decision in Capstone, coverage may in fact be available to Plaintiffs for some of UConn’s alleged damages. However, in order to obtain coverage, Plaintiffs will have to prove that the damage was caused by its subcontractors’ defective work. If the property damage resulted from Plaintiffs’ own faulty work, coverage will be precluded.