In occurrence based insurance policies, whether there has been an occurrence is a threshold matter in determining whether the insurer may have to provide coverage for an insured.  In the last five to ten years, what constitutes an occurrence has become somewhat muddled in Georgia law.  The Georgia Supreme Court has not yet issued a comprehensive opinion on whether defective work/product or defective construction constitutes an occurrence.  As a result, the Georgia federal district courts have been left to their own devices, which has led to a split between the districts, specifically the Northern District and Middle District, and an inconsistent interpretation of what constitutes an occurrence.  The Northern District has taken a definite line in faulty work product and defective construction cases that no occurrence exists.  However, the Northern District’s line of reasoning and narrow definition of what constitutes an occurrence has been criticized by the Middle District and is not consistent with the Georgia Court of Appeals case law.  This article will focus on how the term occurrence in Commercial General Liability (CGL) policies has been interpreted and defined by the Georgia federal district courts and the Georgia Court of Appeals, and what this may all mean when the Georgia Supreme Court finally has the opportunity to address the meaning and scope of occurrence.  

CGL policies typically afford coverage to insureds, subject to various limitations and exclusions, for property damage or bodily injury caused by an occurrence.  An occurrence is generally defined to mean an accident, and in many recently issued policies also includes “continuous or repeated exposure to conditions.”  Although the latter provision somewhat broadens the scope of the term, it does not eliminate the need for an accident. 

Accident, in turn, is typically defined as an unanticipated event – it is that which occurs through the culmination of forces working without design, coordination, or plan.  In other words, damage that is the natural, ordinary, probable, or expected result of an insured’s action is not damage that was caused by an occurrence.  While Georgia courts do not stray too far from this general definition of accident, there is a noticeable difference between the way the Northern District and the Georgia Court of Appeals have defined accident. 

The Northern District has defined “accident” as “an unintended happening rather than one occurring through intention or design.”  See Clean Air America, Inc. v. Hartford Cas. Ins. Co., 2007 U.S. Dist. LEXIS 31461 (N.D.Ga. 2007).  The Georgia Court of Appeals has held that “mere knowledge and appreciation of a risk, short of substantial certainty, is not the equivalent of intent.”  Colonial Penn Ins. Co. v. Hart, 162 Ga.App. 333, 335 (1982).  Thus, only substantial certainty of an outcome disqualifies an act from being an accident, mere knowledge or appreciation of risk does not.  The Northern District’s narrow definition of accident is reflected in the Northern District’s treatment of what is and is not an occurrence. 

In Owners Insurance Co. v. Lucinda J. James and Stephen P. Litras et al., 295 F.Supp.2d 1354 (N.D.Ga. 2003), the homeowners, James and Litras, alleged that their home was improperly constructed and damaged due to synthetic stucco cladding that caused deterioration of windows, wood root and elevated moisture within the wall cavities.  Owners Insurance, the insurer of the stucco plastering company, brought a declaratory judgment action to determine whether it had a duty to defend and indemnify its insured in the underlying action. 

The Northern District court found that where an act is intentional it will not constitute an occurrence based upon the logic that “policies have been construed to cover only injury resulting from accidental acts and not injury accidentally caused by intentional acts.”  James.  Further, the court determined that the plastering company’s activities were not an occurrence because the installation of stucco was an intentional act.  Therefore, the court concluded that Owners did not have a duty to defend or indemnify its insured since there was no occurrence.

A similar conclusion was reached in Clean Air America, Inc. v. Hartford Cas. Ins. Co., 2007 U.S. Dist. LEXIS 31461 (N.D.Ga. 2007), where the Northern District found that Clean Air America’s (CAA) activities did not constitute an occurrence.  CAA had designed air filtration equipment for Welding Racing that caught on fire several times, causing damage to Welding’s facilities.  The court found that “the fires and the resulting damage… did not result from an accidental act but were accidentally caused by the intentional act of CAA’s design.  Thus, there was no occurrence under the terms of the policy…”  Id. 

            James and Clean Air, along with a group of other Northern District decisions, focus solely on whether the act itself is intentional without appearing to consider whether the damage that occurred was the expected or intended outcome of the insured’s initial, intentional action.  However, a federal district judge in the Middle District attacked the Northern District’s line of reasoning, criticizing the Northern District for having gone too far in finding no occurrence.

In Essex Ins. Co. v. H & H Land Development Corp., 525 F.Supp.2d 1344, 1350- 1351 (M.D.Ga. 2007), the Middle District rejected the analysis of James, commenting:

If the logic of [the Northern District] cases were to be universally applied, the ‘occurrence’ based policy would essentially provide coverage only for random events that involve no element of intent or conscious action…  Almost every conceivable accident for which an insured could be held liable involves some intentional act at some point in the chain of causation. 

In Essex, the insured developed property adjacent to the claimant’s property, allegedly causing an increase in excess storm water, silt, sediment, and debris to run-off onto claimant’s property.  The Middle District court found that although the construction work was intentional, the run-off that caused damage to the claimants was unintentional.  Therefore summary judgment in favor of the insured could not be rendered on the basis of there being no occurrence. 

            The dichotomy between the Northern District cases and the Middle District case creates a conundrum for insurers and attorneys alike.  Is it safe to deny coverage in a faulty workmanship or defective construction or product case?  Perhaps if your case is pending before the Northern District, but most likely not if your case is pending in the Middle District, and probably not if you are in state court, as it is difficult to reconcile the line of cases stemming from James and Clean Air with some of the state court appellate cases, specifically two prominent ones.

            SawHorse, Inc. v. Southern Gauranteed Ins. Co., 296 Ga. App. 493 (2004) involved a general contractor, the insured, who was hired to construct a new second floor on an existing one-story house.  A subcontractor of the insured’s failed to install the required beams for the second floor construction resulting in damage to the second floor and the original house.  The court found no evidence that SawHorse intended for the defective construction to occur and therefore rejected SawHorse’s argument that there was not an occurrence.  By implication, the court found that faulty workmanship could constitute an occurrence.  See also Cincinnati Ins. v. Magnolia Estates, 286 Ga. App. 183 (2007) (if damages were caused by an event that happened without the insured’s foresight, expectation or design, they would be considered to have been caused by an occurrence, even though they may have been caused by intentional acts.) 

McDonald Constr. Co. v. Bituminous Cas. Corp., 279 Ga. App. 757 (2006) also addressed a home construction problem, involving faulty installation of tiles by the insured’s subcontractor.  The Court of Appeals rejected McDonald’s argument that the tile delamination was an occurrence, not because the court defined McDonald’s subcontractor’s work as intentional, but because “there would have to be damage to property other than the work itself and the insured’s liability for such damage would have to arise from negligence, not breach of contract” for there to be coverage.  Id. 

            The holdings in SawHorse and McDonald have been adopted in two very recent Northern District cases.  In Massachusetts Bay Ins. Co. v. Sunbelt Directional Drilling, Inc., 2008 U.S. Dist. LEXIS 20066 (N.D.Ga. 2008) the insured contractor hired a subcontractor to install an underground cable.  In the drilling process the subcontractor damaged the road.  Instead of looking at whether the subcontractor’s actions were intentional, this Northern District court analyzed whether the insured’s liability arose in contract or in tort in determining whether the defective workmanship constituted a covered occurrence.  The court cited SawHorse and McDonald for the proposition that a CGL policy only covers damage caused by faulty workmanship when the damage is to property other than the work itself and when the insured’s liability for such damage arises in tort or negligence, not in breach of contract.  Upon this reasoning, the court held that the insured’s obligation and costs to repair the road caused by the defective drilling arose in contract, and therefore was not covered under the policy.

Taking a similar, but slightly different approach in Johnson Landscapes, Inc. v. FCCI Ins. Co., 2007 U.S. Dist. LEXIS 88859 (N.D.Ga. 2007), the Northern District again relied upon McDonald.  Instead of focusing on whether the defective construction was an occurrence or an accident, the court addressed whether any property damage had occurred.  The court determined that there is no property damage if the damage arises out of the insured’s contractual obligations and not from tort liability arising outside the construction contract. 

The courts in Johnson Landscapes and Sunbelt Directional essentially bypass the occurrence argument, and instead focus on: (1) whether the claim arises out of a contractual duty or tort, and (2) whether the property damage occurred only to the insured’s work or other work/property as well.  This approach to coverage in faulty workmanship and defective construction cases is one that has been adopted by courts in other jurisdictions, including New York.  It may also be significant that these two decisions are more in-line with law existing in neighboring states.  South Carolina has found that when an insured’s, or their subcontractor’s, negligence causes damage to other property, the negligence claim constitutes an occurrence.  Florida, Tennessee and Texas have all held that where the damages were not intended, expected and/or foreseeable, defective construction or work is tantamount to an occurrence.  Moreover, Johnson Landscapes and Sunbelt Directional are more in synch with Georgia state court decisions.

Johnson Landscapes and Sunbelt Directional perhaps foreshadow how the Georgia Supreme Court may resolve the issue of whether an occurrence occurred in defective construction and faulty workmanship cases.  If this is the case, the Georgia Supreme Court will essentially punt on the issue of what constitutes an occurrence.  Alternatively, if the Georgia Supreme Court addresses what constitutes an occurrence head-on, it seems more likely that it will adopt the broad definition of occurrence espoused by the Florida, Tennessee and Texas courts rather than the very narrow definition embraced by the James and Clean Air courts.  However, until a definitive decision is made, it is probably best not to base one’s denial of coverage on the ground that the faulty workmanship or defective construction/product does not constitute an occurrence.