Editor's Note: The following has been contributedby Joseph Junfola, Assistant Secretary of Claims atAdmiral Insurance, and creator of the “Cause and Effect:Managing the Construction Defect Claim”workshop series.

In Part 1 of this series, we defined a “construction defect” as afailure of the construction to perform in an intended or expectedway because of a defective design, faulty workmanship, defects inbuilding materials, and soil failures. We defined a “constructiondefect claim” as a claim for damages (i.e. money) because of thisfailure to perform.

In this second part of the series, let's examine whether faultyworkmanship is an occurrence as defined in the commercial generalliability (CGL) policy. It is important to remember that even if itis an occurrence, the faulty workmanship alleged may not be coveredbecause of exclusions, or other policy provisions.

Is Faulty Workmanship An Occurrence?

First, we will start with the definitions of occurrence andproperty damage in the policy.¹

“Occurrence” means an accident, including continuous or repeatedexposure to substantially the same general harmful conditions.

“Property damage” means:

1. Physical injury to tangible property, including all resultingloss of use of that property. All such loss of use shall be deemedto occur at the time of the physical injury that caused it; or
2. Loss of use of tangible property that is not physicallyinjured. All such loss of use shall be deemed to occur at the timeof the “occurrence” that caused it.

Faulty workmanship can cause the following consequences:

• Damage to the work itself, and/or
• Damage to other work or property
• No damage, but the failure to perform causes a monetary lossfor which claim is made

^{1 ISO's form CG 00 01 12 04, ©ISO Properties, Inc.,2003}

The consequences or effects of the faulty workmanship matter inthe analysis of whether the faulty workmanship can be construed asan occurrence, or accident, per the CGL policy. The followingquestions, always considered in the context of a specificjurisdiction, facilitate the analysis of whether faultyworkmanship is an occurrence:

• Is the named insured's defective work, causing no propertydamage, an accident?

• Is the named insured's defective work, causing property damageto work or property other than that belonging to the named insured,an accident?

• Is the named insured's defective work, causing property damageto the named insured's work, including the named insured's othernon-defective work, an accident?

• What if the faulty workmanship is by a subcontractor hired bythe named insured? Is this important, or even relevant to theanalysis?

• Does it matter whether the cause of action pressed in a lawsuitis for breach of contract? Is there a difference between breach ofcontract calling for economic damages because of damage to thenamed insured's work, and breach of contract for damages because ofdamage to work or property other than that of the named insured's?In other words, does “breach of contract” determine the fate ofcoverage regardless of the consequences?

Any discussion of what constitutes an occurrence necessarilyinvolves an examination of the definitions of occurrence andproperty damage in the CGL policy, an understanding of the economicloss and business risk doctrines, an understanding of thedifferences between breach of contract and tort actions, and aconsideration of specific policy provisions in the contextof the entire policy.

We will now consider each question in two segments.

Is the named insured's defective work, causing noproperty damage, an accident?

It is argued that defective workmanship causing no propertydamage is a business risk that is within the control of thecontractor, and the cost associated with its repair or replacementis a business expense that is not insurable. There is no accident,and therefore, no occurrence because the consequences of faultyworkmanship, causing no property damage, should be expected.

A contrary view would hold that the faulty workmanship, ifunexpected and unintended, can be an occurrence, but there is nocoverage because there is no property damage as defined in thepolicy.

Is the named insured's defective work, causingproperty damage to work or property other than that belonging tothe named insured, an accident?

Defective or faulty work that causes damage to property or workother than that of the named insured's is an occurrence, assumingthe consequences were not expected or intended. This risk is theappropriate subject of insurance, and generally escapescontroversy.

Is the named insured's defective work, causingproperty damage to the named insured's work, including the namedinsured's other non-defective work, an accident?

Here is where the controversy begins.

Recall that the definition of an occurrence requires that thefaulty workmanship be an accident. “Accident” is not defined in thepolicy so we need to look elsewhere. Merriam-Webster Online defines“accident” as “an unforeseen and unplanned event orcircumstance…lack of intention or necessity: chance…an unfortunateevent resulting especially from carelessness or ignorance.”²

Using this definition, it is easy to see how defectiveworkmanship can qualify as an accident and, therefore, anoccurrence, if there is property damage to property or work otherthan that of the named insured's, and the consequences were notexpected or intended by the named insured.

But what about defective workmanship causing property damage tothe work itself? Or property damage to the named insured's othernon-defective work or property? Are these accidents?

In Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242S.W.3d 1 (Tex.2007), the Texas Supreme Court ruled that faulty workcan be an occurrence causing property damage. Two relevantquestions from the United States Court of Appeals for the FifthCircuit follow:

1. When a homebuyer sues his general contractor for constructiondefects and alleges only damage to or loss of use of the homeitself, do such allegations allege an “accident” or “occurrence”sufficient to trigger the duty to defend or indemnify under a CGLpolicy?
2. When a homebuyer sues his general contractor for constructiondefects and alleges only damage to or loss of use of the homeitself, do such allegations allege “property damage” sufficient totrigger the duty to…defend or indemnify under a CGL policy?

The court answered in the affirmative to both questions.Unintended faulty work can be anoccurrence:

• But a deliberate act, performed negligently, is an accident ifthe effect is not the intended or expected result; that is, theresult would have been different had the deliberate act beenperformed correctly…Thus, a claim does not involve an accident oroccurrence when either direct allegations purport that the insuredintended the injury (which is presumed in cases of intentionaltort) or circumstances confirm that the resulting damage was thenatural and expected result of the insured's actions, that is, washighly probable whether the insured was negligent or not.(Lamar 1, 8-9)
• The CGL policy…does not define an “occurrence” in terms of theownership or character of the property damaged by the act or event.Rather, the policy asks whether the injury was intended orfortuitous, that is, whether the injury was an accident.(Lamar 1,9)

A few months later, the Florida Supreme Court, inUnited States Fire Insurance Company v. J.S.U.B., 979 So.2d 871, put the issue to bed by ruling as follows:

First, a subcontractor's faulty work (in this case the sub'sdefective soil compaction and testing, and poor soil) that causesdamage to the general contractor's completed project can be anoccurrence, if the property damage is neither expected or intendedfrom the standpoint of the general contractor. In addition, to saythat damage to the contractor's work is always foreseeable whereasdamage to other work/property may not be foreseeable is anillogical distinction that “would make the definition of'occurrence' dependent on which property was damaged.” J.S.U.B.871, 883

Second, whether coverage ultimately exists depends on theexclusions, and in this case the “your work” exclusion does notapply because of the exception.

Third, the position that breach of contract can never be an“accident” is erroneous. The policy does not distinguish breach ofcontract from tort causes of action. (And, in fact, specific breachof contract exclusions are available.) Also erroneous is thepresumption that breach of contract damages are alwaysexpected.

Finally, damage to the work is property damage.

On the other hand, in Kvaerner Metals Division of KvaernerU.S., Inc. v. Commercial Union Insurance Company, 589 Pa. 317(Pa. 2006), the Supreme Court of Pennsylvania ruled that NationalUnion had no duty to defend or indemnify its insured because theproperty damage was to the work product and not to any otherproperty, and therefore, faulty workmanship that caused the damagewas not an accident.

• We hold that the definition of “accident” required to establishan “occurrence” under the policies cannot be satisfied by claimsbased upon faulty workmanship. Such claims simply do not presentthe degree of fortuity contemplated by the ordinary definition of“accident” or its common judicial construction in this context. Tohold otherwise would be to convert a policy for insurance into aperformance bond. We are unwilling to do so, especially since suchprotections are already readily available for the protection ofcontractors. Kvaerner 317, 335-336

In Pennsylvania National Mutual Casualty Company v.Parkshore Development Corporation, 403 Fed. Appx. 770 (3d Cir.N.J. 2010), the court ruled that damage to the insured'snon-defective work, in this case the entire project, wasnot covered (even though subcontractors actually conductedthe work).

We'll examine the final two questions in the next segment, sostay tuned!

Disclaimer: The information contained in this article to beused for informational purposes only. Any views expressed donot necessarily represent the views of the Admiral InsuranceCompany or any of its affiliates. The information contained hereinis not intended to constitute and should not be considered legaladvice, nor should it be considered a substitute for obtaininglegal advice.

Joseph “Joe” Junfola has been in the insurance industryfor 35 years, the last 20 of which have been at Admiral Insurancein the position of Assistant Secretary, Claims. Junfola specializesin long-term exposure, or continuous injury/damage claims, inparticular construction defect claims and also handles designprofessional liability claims. He created and conducts thewebinar/workshop series, “Cause and Effect: Managing theConstruction Defect Claim.”

^{1 ISO's form CG 00 01 12 04, ©ISO Properties,Inc., 2003}