If a subcontractor is performing work pursuant to a contract, and defective workmanship takes place, is it an “occurrence” under a commercial general liability (“CGL”) policy? With a split in authorities, a Virginia court, in Erie Insurance Exchange v. Salvi, 86 Va. Cir. 132 (2013), examined various lines of cases and determined that the definition of “occurrence” must be interpreted in light of the language of the entire policy. Therefore, two policies that have identical definitions of the term “occurrence” could have varied results depending on policy exclusions – most notably the “Damage to Property” exclusion (exclusion j(5) to the standard CGL form).
In Salvi, the term “occurrence” was defined as “an accident including continuous or repeated exposure to substantially the same general hazardous condition.” This is basically the standard definition in such policies regardless of insurer. “Property damage” under the policy was defined as “physical injury to tangible property including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it.” The policy at issue also contained a Damage to Property exclusion which excludes from coverage property damage to “that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations if the ‘property damage’ arises out of those operations.”
The Court noted that “an accident is [a]n event that takes place without one’s foresight or expectation; an undersigned, sudden, and unexpected event.” The Court went on to examine two competing lines of cases addressing the issue of whether the damage a subcontractor’s defective workmanship causes to otherwise non-defective work constitutes “an occurrence” under a CGL policy. The first case, RML Corp. v. Assurance Co. of America, No. CH02–127 (Va.Cir.Ct. Dec. 31,2002), (analyzing Virginia law) the Court noted that “[d]efective workmanship, standing alone, is not the result of an ‘occurrence.’ A breach of contract causes defective workmanship.” Accordingly, the Court found that the damages claimed were not “an occurrence” so as to trigger coverage. The RML court continued by importantly noting that even if there was “an occurrence,” exclusions in the policy precluded coverage – specifically the exclusion that excludes from coverage property damage to “that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations if the ‘property damage’ arises out of those operations.” Synthesizing these concepts, the Court held that “because defective workmanship is a breach of contract (and therefore not ‘an occurrence’), and because [Damage to Property exclusion] includes circumstances amounting to defective workmanship, the court believed the policy explicitly excluded a breach of contract claim from coverage.”
The second case examined, Stanley Martin Cos., Inc. v. Ohio Casualty Group, 313 Fed.App’x 609 (4th Cir. 2009) (also applying Virginia law) reached the opposite conclusion. In Stanley Martin, the subcontractor supplied defective wood trusses to the, general contractor. The issue was whether the spread of damage from the defective trusses to the non-defective surrounding components was “an occurrence” covered under the CGL. The District Court held that any spread of damage to non-defective parts of the property was an “unintended accident” and thus “an occurrence” covered by the policy. In support of this, the Court reasoned that “as delivered per the construction contract, those components were defect-free such that their subsequent damage was unexpected.” In reaching its holding, the Stanley Martin Court specifically noted that its conclusion was different than RML’s holding because the Stanley Martin policy did not include the Damage to Property exclusion that was present in RML.
Ultimately, the Salvi Court determined that the defective workmanship was not an occurrence, and even if it was, exclusion j(5) would exclude coverage. The reason for this outcome is that the definition of the term “occurrence” in the Salvi policy was read in light of the “Damage to Property” liability exclusion. The Court did not reach the Contractual Liability exclusion arguments.
This case is instructive moving forward as it highlights the importance of understanding that identical policy terms can be read differently in light of the specific policy exclusions. In Salvi, the Court determined that the definition of the term “occurrence” in that policy, must be viewed in light of the Damage to Property exclusion. In the event that the exclusion were absent, as was the case in Stanley Martin, the definition of “occurrence” would not be so restrictively viewed and the Court would have likely held that coverage exists.
Frank Cragle is a trial lawyer and a member of Hirschler Fleischer’s Insurance Recovery Team. He handles a variety of commercial business disputes, including insurance recovery and policyholder claims. Frank also devotes a substantial portion of his time to business tort litigation and intellectual property claims. For more information, contact Frank at 804.771.9515 or firstname.lastname@example.org.
Luis F. Ruiz