Indiana Supreme Court Holds CGL Policy Covers Contractor
for Defective Work Performed by Subcontractor
The Indiana Supreme Court recently held a comprehensive general liability (CGL) insurance policy covers a contractor for damage related to unintended faulty workmanship performed by its subcontractor in Sheehan Construction Company, Inc. v. Continental Casualty Company issued Sept. 30, 2010. In this case, homeowners purchased homes built by a general contractor. Unfortunately, the homes experienced leaks caused by the faulty workmanship of the general contractor's subcontractors. Eventually, the homeowners sued the general contractor. In response, the general contractor sought coverage under its CGL policy and its subcontractor's CGL policy which named the general contractor as an additional insured. Both policies contained the 1986 revisions to the standard CGL forms published by the ISO, used the standard coverage language stating the policy covers "sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' … caused by an 'occurrence' …", and contained the damage to "your work" exclusion with an exception for work performed by a subcontractor that is common in CGL policies. The trial court granted the insurers' motion for summary judgment denying coverage, and the Indiana Court of Appeals affirmed this decision citing a long line of Indiana Court of Appeals cases and a Supreme Court opinion issued before the 1986 ISO revisions stating faulty workmanship is neither an "occurrence" nor "property damage" under a CGL policy.
The Indiana Supreme Court reversed, finding coverage for the general contractor in the CGL policies. The Court determined the faulty workmanship performed by the subcontractors constituted an "occurrence" under the policy, which the policies defined as an accident. Specifically, the Court aligned itself with jurisdictions adopting a broad definition of "occurrence," stating, "…improper or faulty workmanship does constitute an accident so long as the resulting damage is an event that occurs without expectation or foresight." Expanding on this concept the Court stated, "…if the faulty workmanship is 'unexpected' and 'without intention or design' and thus not foreseeable from the viewpoint of the insured, then it is an accident within the meaning of a CGL policy."
The Court also addressed the "property damage" component of the coverage language. The Court of Appeals had determined that faulty workmanship is not "property damage" if the only harm is to the contractor's own work because such damage is a "business risk" borne by the contractor. Thus, the Court of Appeals never reached the subcontractor exception to the "your work" exclusion as it decided "business risk" damage means the initial grant of coverage had not been established. However, the Supreme Court rejected this analysis, stating the only authority for the "business risk" rule is the "your work" exclusion in the policy. In particular, the Court stated, "[W]e therefore do not interpret the business risk rule as an initial bar to coverage, but rather we view it as potentially excluding certain events from coverage under the 'your work' exclusion, where the policy is found to grant coverage initially." As further support the Court stated, "[I]f the insuring provisions do not confer an initial grant of coverage, then there would be no reasons for a 'your work' exclusion." Reading the subcontractor exception to the "your work" exclusion literally, the Court determined the "your work" exclusion did not bar coverage under the policies because subcontractors performed the defective work that caused the damage to the homes.
In abrogating 20 years of Indiana Court of Appeals' cases defining CGL coverage, in a narrow fashion the Sheehan decision represents a paradigm shift in CGL coverage in Indiana construction cases. In construction defect cases contractors now should seek to identify faulty work performed by their subcontractors to bolster their coverage argument. In response, it should be anticipated that insurers will seek to add endorsements to new CGL policies in Indiana nullifying the subcontractor exception to the "your work" exclusion with greater frequency. In the meantime, under existing policies, where such endorsements are rare, the argument for coverage for construction defects is substantially improved.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
Nov. 17, 2010