The Supreme Court of Georgia recently clarified the scope of coverage for construction defect claims under commercial general liability (CGL) insurance policies. In Taylor Morrison Services, Inc. v. HDI-Gerling America Insurance Company, No. S13Q0462 (Ga. July 12, 2013), the court clarified that a construction defect claim constitutes an “occurrence,” as defined in a standard CGL policy, when the only damage alleged is to the work of the insured contractor. While the court’s decision does not change the substantive scope of insurance coverage for construction defect claims, it shifts the focus of coverage.
In Taylor, a home builder’s insurance company filed a declaratory judgment action, seeking a declaration that there was no coverage for a class action lawsuit filed against the home builder. The insured home builder had been sued by numerous homeowners, alleging that they suffered property damage to their houses, including water intrusion, cracked concrete slabs, and broken floors, due to the home builder’s alleged failure to include sufficient gravel under the homes’ foundations. On appeal of the declaratory judgment action, the U.S. Court of Appeals for the Eleventh Circuit asked the Supreme Court of Georgia to clarify whether Georgia law requires damage to property other than the insured’s completed work for an “occurrence” to exist. The Eleventh Circuit’s request appears to be based on the Supreme Court of Georgia’s decision in American Empire Surplus Lines Insurance Company v. Hathaway Development Company, 288 Ga. 749, 707 S.E.2d 369 (2011), which held that “an occurrence can arise where faulty workmanship causes unforeseen or unexpected damage to other property.”
The Supreme Court analyzed the usual and common meaning of “accident” – the operative term in the definition of “occurrence” – and concluded that the term refers to whether an event was intended or expected, not the nature or extent of the injury caused by the event or the identity of the person injured. The court explained its conclusion as follows:
"Imagine, for instance, that someone speaks of a person falling unexpectedly and unintentionally from a ladder. They likely would describe the fall as an “accident,” regardless of whether it was the speaker himself who fell, or someone else. Just because the speaker referred to the fall as an “accident,” no regular speaker of the English language would infer from that reference that it must have been someone other than the speaker who fell."
Based on its conclusion, the court held that an “occurrence,” as defined in a standard CGL policy, “does not require damage to the property or work of someone other than the insured.”
Recognizing that CGL coverage is not intended to insure against liabilities for the repair or correction of the insured’s faulty workmanship, the court reasoned that other provisions in a standard CGL policy account for that limitation. Specifically, the court emphasized that an “occurrence” is not sufficient to trigger coverage under a standard CGL policy; rather, an “occurrence” must cause “bodily injury” or “property damage.” The court explained that “property damage,” as defined in a standard CGL policy, necessarily refers to property that is non-defective, and to damage beyond mere faulty workmanship. As such, a claim for the repair or replacement of faulty workmanship usually will not be for “property damage.” The court also noted that claims for faulty workmanship may fall within the scope of certain “business risk” exclusions.
Finally, the court noted that the legal theory (or claim) asserted usually will not impact the “occurrence” analysis. Prior to Taylor, many Georgia courts found that there was no coverage when the only claim asserted against the insured was for breach of contract (not negligence). Reviewing the usual and common meaning of “accident,” the Supreme Court concluded that the term does not refer to the nature of the legal theory through which liability might arise, with one notable exception. That being, when a “theory of liability is absolutely and necessarily inconsistent with the notion of an ‘accident’ – that is, when the theory of liability and the idea of an ‘accident’ are mutually exclusive – a claim premised upon such a theory of liability” cannot possibly constitute an “occurrence.” The court identified fraud claims as an example of a theory of liability that is necessarily inconsistent with meaning of “accident".
As stated, the court’s decision does not change the substantive scope of coverage under a standard CGL policy. The opinion does, however, shift the analysis of insurance coverage for construction defect claims. Now, the availability of insurance coverage for construction defect claims will turn on whether there is “property damage,” as defined in a standard CGL policy, and whether exclusions to coverage apply. The court’s decision brings Georgia law in line with the strong recent trend in other jurisdictions, including Florida, Maryland, South Carolina, Texas, and Virginia, among others.