An issue in the area of insurance law that has been litigated frequently in recent years is whether construction defects are “occurrences” under Commercial General Liability (“CGL”) insurance policies. The courts have been divided in deciding the issue and in their approaches to analyzing the issue. This article addresses how the issue should be analyzed and concludes that construction defects are “occurrences”.
The relevant rules of insurance policy interpretation dictate that construction defects are “occurrences”. Policy language should be interpreted in such a way as to fulfill the reasonable expectations of the policyholder when the policy is construed as a whole with all ambiguities in the policy to be construed in favor of coverage. “Occurrence” is defined in CGL policies as an “accident,” including continuous or repeated exposure to harmful conditions, but the term “accident” itself is undefined. The common law provides that an “accident” is an event or happening that unexpectedly and unintentionally results in property damage. Thus, in determining whether construction defects are “occurrences”, the analysis should focus upon whether the faulty workmanship and resulting damage was expected or intended by the contractor/policyholder. If the faulty workmanship and resulting damage was unexpected and unintended by the contractor, which typically is the case, then the resulting construction defects, and any related property damage, were caused by an “occurrence”.
Such a result is consistent with contractors’ reasonable expectations regarding the coverage they think they are purchasing under CGL policies. Contractors reasonably expect that when they purchase CGL insurance to cover their business liabilities that they will receive coverage for liability claims relating to property damage arising out of their business activities, which often include claims for alleged construction defects. Thus, if construction defects were not “occurrences” under CGL policies, then CGL policies unfairly and impermissibly would provide illusory coverage to contractors.
Finally, if construction defects were not “occurrences” in the first instance, then the “business risk” exclusions found in CGL policies, which purport to exclude coverage for certain risks inherent in doing business, would be superfluous. Thus, construing CGL policies as a whole also leads to the conclusion that construction defects are “occurrences”.