Risk mitigation is a key focus in construction management, and many contractors and construction managers attempt to rely on occurrence-based general liability insurance policies to help manage that risk. However, when it comes to the risk of claims arising from faulty workmanship, reliance on such policies is often misplaced. Although the question of whether occurrence-based policies provide coverage for damages arising from faulty workmanship has been treated unevenly throughout the country, recent court cases interpreting Pennsylvania law have sided in favor of insurance companies.
For example, in State Farm Fire & Casualty co. v. Brighton Exteriors, Inc. (E.D. Pa., 2015), a federal district court in Pennsylvania found that an insurer had no duty to defend or indemnify a subcontractor against claims of damages allegedly arising from faulty workmanship. Brighton, a stucco subcontractor, was insured by State Farm under a contractor’s policy and an umbrella policy, both of which were occurrence-based. Brighton had performed certain stucco remediation work for a homebuilder. The owner of the home later sued the homebuilder for a variety of alleged defects with the property, including stucco issues, and the homebuilder in turn joined Brighton into the lawsuit as an additional defendant, alleging that Brighton was responsible for performing the stucco remediation work in a skillful and workmanlike manner. Although State Farm initially provided a defense to Brighton, it did so under a reservation of rights and brought the federal court lawsuit for a determination that it had no obligation to defend or indemnify Brighton.
The Court found in favor of State Farm, finding that the occurrence-based policies did not cover claims of faulty workmanship and that State Farm was not obligated to defend nor indemnify Brighton. The Court relied on several recent decisions, including the Third Circuit Court of Appeal’s decision in Zurich v. R.M. Shoemaker et al. (3d Cir., 2013), which found that “faulty workmanship under a contract is not sufficiently fortuitous” to meet the definition of “occurrence” under a general liability policy. The Third Circuit explained that “the crucial inquiry dictating whether a general liability insurer must defend its insured under an occurrence-based policy is whether an event was sufficiently fortuitous from the perspective of the insured to qualify as an ‘occurrence’.” That is, occurrence-based general liability policies are not generally intended to cover claims arising from failure to perform contractual obligations. Both the Third Circuit and the State Farm Court relied heavily on an earlier Pennsylvania Supreme Court opinion, Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co. (Pa. 2006) and a 2007 Pennsylvania Superior Court opinion, Millers Capital Insurance Co. v. Gambone Brothers Development Co. in reaching their conclusions. The State Farm Court clarified that “[r]egardless of whether the claims are phrased as negligence, breach of warranty or breach of contract claims, the underlying litigation concerns faulty workmanship” and that therefore coverage was not triggered.
Given the state of the law in Pennsylvania, mitigation against the risk of faulty workmanship remains a serious challenge for contractors and construction managers. Care must be given in attempting to meet that challenge, and construction professionals should seek the advice of their lawyers and brokers in considering other tools to help manage that risk.
Mohammad A. Ghiasuddin is a principal of Kaplin Stewart and a member of the Construction Law and Business & Commercial Litigation departments. Mr. Ghiasuddin’ s litigation practice involves representation of a variety of businesses in the construction industry, including developers, general contractors, construction managers, trade contractors, design professionals, insurers and bonding companies.