Bose McKinney and Evans, LLP, Blog

The Indiana Supreme Court split in a 3:2 decision on the issue of whether an “occurrence” under a commercial general liability (CGL) policy covered a subcontractor’s faulty workmanship under the insured’s contract.

Sheehan Construction Company was a general contractor on the Crystal Lake residential project, and was responsible for hiring subcontractors to build the houses. During the period when the houses were being built, Sheehan was insured by Continental Insurance Co. under a CGL policy that covered all damages the insured was legally obligated to pay because of “bodily injury” or “property damage” that were caused by an “occurrence” in the coverage territory. This policy excluded coverage for damages to the insured’s property and work that arose out of work performed on “your behalf by a subcontractor.” Sheehan was also insured by Somerville Construction, one of Sheehan’s subcontractors, under their CGL policy through Indiana Insurance Company.

In April 2000, Vincent B. Alig and his wife Mary Jean Alig purchased a home in Crystal Lake. A few years later, the Aligs experienced leaking windows, water damage, and other issues in their home and notified their homeowner insurance carrier, who later found that the problems resulted from faulty workmanship of Sheehan’s subcontractors. In November 2004, the Aligs filed suit against Sheehan alleging violation of Indiana Code sections 32-27-3-1 to 14 (concerning cause of action for construction defects). Later, more homeowners in the Crystal Lake subdivision joined and created a class-action suit. The class and Continental Insurance settled.   Continental filed for declaratory judgment claiming that Sheehan’s claims were not covered under the policy. Sheehan and the class filed a third-party complaint against Indiana Insurance and MJ Insurance, Sheehan’s insurance broker. The trial court granted summary judgment in favor of Continental, MJ, and Indiana Insurance. The Court of Appeals affirmed.

In Sheehan Construction Co., Inc., et al. v. Continental Casualty Co., et al., No. 49S02-1001-CV-32, Justices Robert Rucker, Brent Dickson, and Theodore Boehm held that CGL policies can cover an insured’s liability for a subcontractor’s faulty workmanship. The issue the Court grappled with was whether faulty workmanship is an “accident” within a standard CGL policy’s definition of an “occurrence.” The majority determined that faulty workmanship is an accident if the damage is the result of an unexpected or unforeseeable event. The Court defined an “accident” as an unexpected happening without intention or design. Implicit in this definition is a lack of intent. If the faulty workmanship was the product of unintentional conduct, then the resulting damage would be unforeseeable and would be an accident within the CGL policy’s definition of an “occurrence.” This analysis is fact specific and should be determined on a case-by-case basis. In this case, the trial court did not conclude on the issue of whether the faulty workmanship was intentional or unintentional and the trial court’s judgment was reversed and remanded for further proceedings.

Dissent:

Chief Justice Shepard: This opinion leads Indiana to the wrong result because CGL policies are not designed or priced to cover any demand an insured may face. Oral argument suggested that an insurance product that covers an insured’s faulty work may not even exist. Therefore, CGL policies should not cover faulty subcontractor work as an accident within standard coverage of a CGL policy’s definition of an “occurrence.”  

Justice Sullivan: An “occurrence” under a CGL policy is an accidental damage caused by an insured or an insured’s subcontractors, to property owned by third-parties, but not the costs of repairing work performed. Instead, a party who wishes to insure against damages from faulty workmanship should obtain protection from a performance bond.