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Alabama Supreme Court Holds Faulty Workmanship Could be an “Occurrence” under CGL Policy


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Helou

By Gina Helou

Background
The homeowners contracted and paid approximately $1.2 million to the general contractor for the construction of the entire house.  The contract further stated that the general contractor was required to have a CGL. The general contractor requested the insurance company provide counsel and a defense to the lawsuit.  The insurance provider complied, but later claimed that the CGL did not, in fact, cover  the homeowners’ claims.

The homeowners and the general contractor settled their dispute through arbitration. When the general contractor sought indemnification from its insurance provider, the trial court ruled the damages were covered under the CGL. Therefore, the insurance provider was liable for the damages. The insurance provider appealed this decision, and ultimately, the case came before the Supreme Court of Alabama. 

Legal analysis
The court looked to the language of the CGL to determine the scope of the insurance coverage. Specifically, the court found the word “occurrence” to be significant.  The arbitration award was based on, among other things, property damage as a result of an “occurrence.”   The CGL stated it only applied if “the bodily injury or property damage is caused by an occurrence,” which was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  The insurance provider claimed that the general contractor’s poor workmanship did not constitute an occurrence as defined in the CGL and pursuant to prevailing case law.  

The court agreed, stating case precedent and the CGL did not provide for poor workmanship to constitute a covered occurrence in this case.  The court noted such workmanship could constitute an occurrence, but it would depend “‘on the nature of the damage caused by the faulty workmanship.’”  On its own, faulty workmanship does not constitute an occurrence.  The court claimed 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” to repeated and harmful exposure.

The distinguishing factor, the court reasoned, was that the general contractor was not hired to build part of a house in this case, but rather the whole house. Since the general contractor was paid to construct the entire house, not additions to a pre-built structure or building part of a new structure, the defects causing damage were within the scope of the construction.  For this reason, the general contractor’s insurance policy did not cover its defective work because it was not an “occurrence” as defined by the CGL. Therefore, the court concluded the insurance provider was not liable for the damages to the house. 

Practice points
Although the court ruled that the faulty workmanship did not constitute an “occurrence” in this case, it did clarify the rule where it could be covered under a CGL. Under Alabama law, faulty workmanship may lead to an occurrence under a CGL if the faulty work damages other property outside the scope of the construction project or repair.

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