In the piney woods of south Georgia, one of the countless roadside motels along Interstate 75 was recently renovated to create a grand new hotel experience
In the piney woods of south Georgia, one of the countless roadside motels along Interstate 75 was recently renovated to create a grand new hotel experience – The Royal Bohemian Lodge. As is common in construction, the general contractor for the hotel contracted with a number of trades to complete different projects associated with the renovation. One of the subcontractors, Temple Potter Plumbing, subcontracted the installation of piping to Johnny Rocco. As construction progressed, Rocco diligently installed new piping throughout the hotel. The hotel opened with great fanfare, and the first guests arrived shortly thereafter. Word of the fine new hotel quickly spread, and tourists flocked to the hotel for its luxurious accommodations and famous champagne-and-pompano dinners.
Sadly, all this came to a crashing end earlier this month when a large section of the piping, installed by Rocco, failed. The Royal Bohemian suffered severe water damage, and many guests lost their belongings as well. McCloud & Bacall, the general contractor for the construction of the hotel, retained Ziggy Restorations to remediate the water damage and to effect repair. Ziggy billed McCloud & Bacall for Ziggy’s work, but McCloud & Bacall reneged. Ziggy then filed an action against McCloud & Bacall to recover the costs of the remediation and repair; in turn, McCloud & Bacall sued Temple Potter Plumbing, which then sued Rocco.
You are completely oblivious to these issues and to The Royal Bohemian Lodge until your insured – Rocco – telephones you to alert you to the lawsuit he’s just received. He asks hurriedly if his commercial general liability policy through your company offers coverage for his negligence; “after all,” he wails, “this is why I bought insurance!” You take a look at Rocco’s policy and immediately notice the provision indicating that an “occurrence” is covered. You dig further and see a definition for “occurrence,” but not for an “accident,” which is used in the definition of “occurrence.” Is Rocco’s faulty workmanship an “accident”? Does the policy cover the payment that is due the remediation company for the work it performed – which, of course, resulted from Rocco’s negligence? Or does it only cover Rocco’s negligence if he is sued by the party that suffered the damage (in our case, The Royal Bohemian Lodge)? Georgia’s federal and state courts have often differed on some of these points and have not offered a beacon of clarity on this issue. This article will address recent cases that examined such situations and will highlight certain aspects of those cases, and a growing trend in this area, that may assist you in clarifying coverage and protecting your interests.
In SawHorse v. Southern Guaranty Ins. Co., a general contractor incurred over $41,000 in expenses to repair damage from faulty construction by a subcontractor. 269 Ga. App. 493 (2004). The general contractor sought coverage under its commercial general liability (“CGL”) policy, but its insurer denied coverage. The general contractor then sued its insurer seeking a declaration of coverage for damages resulting from the construction defects. The insurer moved for summary judgment, and the trial court agreed. The general contractor appealed.
The Georgia Court of Appeals first noted that SawHorse’s CGL policy required its insurer to pay “those sums that [SawHorse] becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which [the] insurance applies.” However, the court also distinguished between “business risk” (that is, repair or replacement of faulty work to conform the work to contract requirements) and subsequent “injury to people or damage to other property.” After examining SawHorse’s CGL policy, the court of appeals found that the policy did not afford coverage for SawHorse’s negligent work itself because of a specific business risk exclusion in the policy. See also QBE Ins. Co. v. Couch Pipeline & Grading, Inc., 303 Ga. App. 196 (2010).
Of primary note, however, the court addressed two additional arguments raised by the insurer. First, the insurer claimed that the damages resulting from the negligent construction did not constitute “property damage” as that term was defined in the policy (“[p]hysical injury to tangible property, including all resulting loss of use of that property”). The court made short work of this argument, stating that it could not discern “how physical injury to [the original structure in the construction project] falls outside of this definition.”
More intriguing was the insurer’s second argument that the faulty workmanship was not an “occurrence” under the policy. SawHorse’s CGL policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The court held that “accident” meant “an event which takes place without one’s foresight or expectation or design.” The court, finding no basis for the insurer’s argument, did not accept it. The practical effect of the court’s holding was to suggest that a contractor’s negligence could be an “accident.”
However, the insurer’s argument in SawHorse was not completely baseless. The same argument found traction in some of Georgia’s federal courts. See Hathaway Development Co. v. Ill. Union Ins. Co., 274 Fed. Appx. 787 (11th Cir. 2008); Owners Ins. Co. v. James, 295 F. Supp. 2d 1354 (N.D. Ga. 2003). In bothHathaway and James, federal courts determined, as a matter of Georgia law, that a subcontractor’s negligent work was nonetheless intentional, and that it therefore could not constitute an “accident.”
Against this backdrop of confusion, the Georgia Supreme Court visited the issue of whether a contractor’s faulty workmanship constitutes an “accident” which would be covered under a CGL policy. SeeAmerican Empire Surplus Lines Ins. Co. v. Hathaway Development, 288 Ga. 749 (2011). In American Empire, a general contractor sued its plumbing subcontractor to recover repair costs associated with the subcontractor’s negligent workmanship. The general contractor obtained a judgment against the subcontractor and sought payment from the subcontractor’s CGL insurer. The insurer refused, claiming that the damages were not the result of an “occurrence” under the policy, defined as “an accident, including continuous or repeated exposure to substantially the same, general harmful conditions.” At its core, the insurer argued that the subcontractor’s faulty work could not be an “accident.” The trial court agreed and granted the insurer’s motion for summary judgment. However, the Court of Appeals reversed; an appeal to the Georgia Supreme Court followed.
The Georgia Supreme Court first noted that “occurrence” was defined in the CGL policy, but “accident” was not. Looking to the commonly accepted meaning of “accident”, the court examined the term when used in an insurance policy and concluded it means “an event happening without any human agency, or, it happening through such agency, an event which, under circumstances, is unusual and not expected by the person to whom it happens.” The court then cited SawHorse favorably and ultimately held “that an occurrence can arise where faulty workmanship causes unforeseen or unexpected damage to other property.” As a result, the court concluded that the CGL policy afforded coverage to its insured, thereby resolving the conflict between Georgia’s federal and state courts. A critical point to bear in mind is that both SawHorse and American Empire specifically mentioned, and appear to be based upon, damage to other property rather than a claim for the contractor’s negligence.
A lone dissenter in American Empire essentially adopted the federal courts’ view and argued that the plumbing subcontractor performed his work intentionally; therefore, it could not be an “accident.” Accordingly, coverage would only be available “for injury resulting from accidental acts, but not for an injury accidentally caused by intentional acts.” The court disagreed, stating that “a deliberate act, performed negligently, is an accident if the effect is not the intended or expected result; that is, the result would have been different had the deliberate act been performed correctly.”
American Empire is as notable for what it did – that is, putting an end to the apparent discord between Georgia’s federal and state courts – as for what it did not do. Still lingering is the question of whether a contractual indemnity claim, as in our example, would be covered. Likewise, a question remains of whether a contractor’s negligent workmanship is itself an “occurrence” or whether there must be damage to other property. Other states have faced this identical issue; indeed, American Empire noted a growing, identifiable trend favoring the application of CGL coverage in construction defect cases when it referred to the trend “in a growing number of jurisdictions which have considered construction defect claims under CGL policies and interpreted the word ‘accident[.]’” In addition, four states in the past two years – Arkansas, Colorado, Hawaii and South Carolina – have passed legislation mandating that construction defect claims must be covered by CGL policies. Interestingly, each of these pieces of legislation followed court decisions in those states that found construction defect claims did not satisfy the definition of an “occurrence.”
In sum, is Rocco covered if he is sued by The Royal Bohemian Lodge? Probably. Or a guest of the hotel? Probably. How about in a contractual indemnity claim? Only time will tell what is in store for Georgia on this issue as courts continue to digest and interpret American Empire. Until then, American Empire clearly reinforces one principle: a contractor’s negligent construction, when it results in personal injury or in damage to other property (and not merely the correction of the work), is likely covered under most CGL policies. In addition, the growing trend among states that have considered the issue reveals that construction defect cases based upon the contractor’s negligence should be covered under CGL policies. So, when reviewing requests for coverage, the best practice is and should always be to clearly identify the coverage sought and ensure that, if coverage is not to be provided for the contractor’s negligent workmanship, a CGL policy contains a business risk exclusion. Clear, written communication with the insured on this point should follow. By bearing these points in mind, you will be able to issue sound coverage decisions while lessening the potential of litigation against the insurer.