ATTORNEYS FOR APPELLANT ATTORNEYS FOR APPELLEE
David F. McNamar CONTINENTAL CASUALTY COMPANY
McNamar & Associates, P.C. Mary K. Reeder
Indianapolis, Indiana Riley Bennett & Egloff, LLP
Indianapolis, Indiana
OF COUNSEL
Joseph Borders
Peter G. Daniels
Walker Wilcox Matousek LLP
Chicago, Illinois
ATTORNEYS FOR APPELLEE
INDIANA INSURANCE COMPANY
Joseph Dietz
Meils Thompson Dietz & Berish
Indianapolis, Indiana
ATTORNEYS FOR APPELLEE
MJ INSURANCE, INC.
Philip E. Kalamaros
Hunt Suedhoff Kalamaros LLP
St. Joseph, Michigan
______________________________________________________________________________
In the
FILED
Sep 30 2010, 1:30 pm
Indiana Supreme Court CLERK
of the supreme court,
_________________________________ court of appeals and
tax court
No. 49S02-1001-CV-32
SHEEHAN CONSTRUCTION COMPANY, INC.,
VINCENT B. ALIG, M.D. AND MARY JEAN ALIG
INDIVIDUALLY, CO-TRUSTEES OF THE MARY
JEAN ALIG REVOCABLE TRUST, AND AS
REPRESENTATIVES OF A CLASS OF ALL
OTHERS SIMILARLY SITUATED,
Appellants (Petitioners below),
v.
CONTINENTAL CASUALTY COMPANY,
INDIANA INSURANCE COMPANY, AND
MJ INSURANCE, INC.,
Appellees (Respondents below).
_________________________________
Appeal from the Marion Superior Court,
Civil Div. F-12, No. 49F12-0702-PL-007751
The Honorable Michael D. Keele, Judge
_________________________________
On Petition To Transfer from the Indiana Court of Appeals, No. 49A02-0805-CV-420
_________________________________
September 30, 2010
Rucker, Justice.
Continental Casualty Company filed a declaratory judgment action to determine its
obligation to its insured, Sheehan Construction Company. The trial court determined that the
policy issued by Continental to Sheehan did not cover Sheehan‟s claim and granted summary
judgment in favor of Continental. The main issue in this case is whether a standard commercial
general liability (“CGL”) insurance policy covers an insured contractor for the faulty
workmanship of its subcontractor.
Background
Before discussing the issues at stake in this case, we provide some background
information. CGL insurance policies are designed to protect an insured against certain losses
arising out of business operations. Most CGL policies are written on standardized forms
developed by an association of domestic property insurers known as the Insurance Services
Office (“ISO”).1 Hartford Fire Ins. Co. v. California, 509 U.S. 764, 772 (1993). “[These]
policies begin with a broad grant of coverage, which is then limited in scope by exclusions.
Exceptions to exclusions narrow the scope of the exclusion and, as a consequence, add back
coverage. However, it is the initial broad grant of coverage, not the exception to the exclusion,
that ultimately creates (or does not create) the coverage sought.” David Dekker, Douglas Green
1
Continental‟s Commercial General Liability Coverage Form provides at the bottom of each page
“Copyright, Insurance Services Office, Inc., 1997.” See Appellee Continental‟s App. at 102-13. Indiana‟s
two CGL policies relevant to this case also include this copyright notice, dated 1994 for one policy and
1997 for the other. See Appellee Indiana‟s App. at 125-47.
2
& Stephen Palley, The Expansion of Insurance Coverage for Defective Construction, 28 Constr.
Law, Fall 2008, at 19, 20 .
The precursor of today‟s standard commercial liability insurance contracts was
promulgated in 1940 and has since undergone five principal revisions, the most recent of which
came into use in 1986. Prior to 1986, the ISO had not significantly revised its standard
commercial general liability form since 1973. Ernest Martin, Jr., Daniel T. Mabery, Erika L.
Blomquist & Jeffrey S. Lowenstein, Insurance Coverage for the New Breed of Internet-Related
Trademark Infringement Claims, 54 S.M.U.L. Rev. 1973, 1987-88 (2001) (“ISO frequently
makes minor revisions to its CGL form, but rarely undertakes a major, substantive overhaul. . . .
The standard ISO form in existence before the 1986 revision was promulgated in 1973 . . . .”).
“In the 1973 version of the [ISO‟s CGL policy form], the work performed exclusion precluded
coverage for property damage to work performed by or on behalf of the named insured arising
out of the work or any portion thereof, or out of materials, parts or equipment furnished in
connection therewith.” French v. Assurance Co. of Am., 448 F.3d 693, 700 (4th Cir. 2006)
(internal citations and quotations omitted) (emphasis added); see also 9A Eric Mills Holmes,
Holmes‟ Appleman on Insurance 2d § 132.9 at 152 (2002). The “on behalf of” language was
interpreted to mean that no coverage existed for damage to a subcontractor's work or for damage
to the insured's own work resulting from a subcontractor‟s work. See 9A Lee R. Russ, et al.,
Couch on Insurance 3d § 129:18 (2005); Holmes, supra, at 153.
Many contractors were dissatisfied with this state of affairs because more and more
projects were being completed with the help of subcontractors. See Russ, et al., supra, § 129:18
(“Due to the increasing use of subcontractors on construction projects, many general contractors
were not satisfied with the lack of coverage provided under [the 1973 ISO CGL] commercial
general liability policies where the general contractor was not directly responsible for the
defective work.”). In response to this dissatisfaction, beginning in 1976 an insured under the
1973 ISO CGL policy form could pay a higher premium to obtain a broad form property damage
endorsement (the BFPD Endorsement) which effectively eliminated the “on behalf of” language
and excluded coverage only for property damage to work performed by the named insured. Id.
Thus, liability coverage was extended to the insured's completed work when the damage arose
out of work performed by a subcontractor. Id..
3
In 1986, as part of a major revision, the subcontractor exception aspect of the BFPD
Endorsement was added directly to the body of the ISO‟s CGL policy in the form of an express
exception to the “Your Work” exclusion. Id.; Limbach Co. LLC v. Zurich Am. Ins. Co., 396
F.3d 358, 362-63 (4th Cir. 2005) (internal citations omitted). Thus, under the 1986 ISO CGL
Policies, the “Your Work” exclusion specifically provides that it “does not apply if the damaged
work or the work out of which the damage arises was performed on [the insured contractor's]
behalf by a subcontractor.” Appellants‟ App. at 245. Copyrighted in 1994 and 1997, see supra
n.1, the CGL Polices at issue in this case post date the 1986 revisions and include a subcontractor
exception to the “Your Work” exclusion. With this background in mind we proceed to the
merits of the case before us.
Facts and Procedural History
Because this action is based upon an underlying claim filed in November 2004, we begin
by tracing the history of the original action. In April 2000 Vincent B. Alig and his wife Mary
Jean Alig purchased a home in the Crystal Lake residential subdivision located in Marion
County. Sheehan Construction Company was the general contractor on the project and was
responsible for hiring subcontractors who actually built the houses. After experiencing water
leaks in their home, the Aligs notified their homeowner‟s insurance carrier which in turn hired an
engineering company to investigate. Among other things the investigation revealed leaking
windows, fungus growth on the siding, decayed OSB sheathing, deteriorating and decaying floor
joists, and water damage to the interior of the home including water stained carpeting. Appellee
Continental‟s App. at 37, 38, 40. These problems were caused by the faulty workmanship of
Sheehan‟s subcontractors which included lack of adequate flashing and quality caulking around
the windows, lack of a weather resistant barrier behind the brick veneer to protect the wood
components of the wall, improperly installed roofing shingles, improperly flashed or sealed
openings for the chimney and vents, and inadequate ventilation in the crawl space. Id. at 74-76.
In November 2004, the Aligs filed a complaint in the Marion Circuit Court against
Sheehan pursuant to Indiana Code sections 32-27-3-1 to 14 (concerning cause of action for
construction defects). During the period in which the home was built Sheehan was insured under
a CGL policy issued by Continental Insurance Company. Sheehan was also included as an
additional named insured in a CGL policy issued by Indiana Insurance Company to Somerville
4
Construction – one of Sheehan‟s subcontractors. The policies provided coverage for the “sums
that the insured becomes legally obligated to pay as damages because of „bodily injury‟ or
„property damage‟ . . . . caused by an „occurrence‟ that takes place in the „coverage territory‟”
during the policy period. Appellee Continental‟s App. at 102; Appellee Indiana‟s App. at 125,
139. As defined in the policies, an “occurrence” is “an accident, including continuous or
repeated exposure to substantially the same general harmful conditions,” and “property damage”
includes “[p]hysical injury to tangible property, including all resulting loss of use of that
property.” Appellee Continental‟s App. at 112, 113; Appellee Indiana‟s App. at 133-34, 146,
147. The coverage provisions were limited by numerous exclusions. Of particular relevance in
this case is the exclusion, with its exception, that excludes coverage for damage to the insured‟s
property and work:
2. Exclusions.
This insurance does not apply to:
....
l. Damage To Your Work
“Property damage” to “your work” arising out of it or any part
of it and included in the “products-completed operations
hazard”.
This exclusion does not apply if the damaged work or the work
out of which the damage arises was performed on your behalf
by a subcontractor.
Appellee Continental‟s App. at 102, 105; Appellee Indiana‟s App. at 125, 128; 139, 142.
After the Aligs filed suit, Sheehan contacted Continental which agreed to represent
Sheehan under a reservation of rights. When other homeowners in the subdivision began
experiencing problems with their homes similar to those experienced by the Aligs, they sought to
be joined as plaintiffs. Consequently counsel filed, and the trial court granted, a motion to
convert the Aligs‟ complaint into a Class Action lawsuit. After the Class was certified the trial
court ordered the parties into mediation. Continental participated therein and the mediation
resulted in a settlement of approximately $2.8 million. Among other things the settlement
provided that the Class would not pursue its claims against Sheehan. Instead, Sheehan assigned
to the Class any rights it might have against Continental in addition to certain non-settling
subcontractors and MJ Insurance – Sheehan‟s insurance broker.
5
Continental filed this declaratory judgment action in the Marion Superior Court seeking a
declaration that it was not obligated to indemnify Sheehan. Sheehan and the Class filed an
answer, counter-claim, and a third-party complaint against Indiana Insurance. Sheehan and the
Class also filed a third party complaint against MJ insurance for negligent failure to procure
insurance. All parties moved for summary judgment. The trial court determined the designated
materials showed there was no “property damage other than to the structural components of the
homes themselves.” Appellants‟ App. at 27. Accordingly, the trial court reasoned, under the
terms of the insurance policies there was no “occurrence” or “property damage,” and thus
granted summary judgment in favor of Continental and Indiana Insurance (collectively,
“Insurers”). Id. at 27, 29. The trial court also granted summary judgment in favor of MJ
Insurance on statute of limitations grounds. Sheehan and the Class (hereafter referred to
collectively as “Sheehan”) appealed and Indiana Insurance cross-appealed.2 In a divided opinion
the Court of Appeals affirmed the judgment of the trial court. See Sheehan Constr. Co. v.
Continental Cas. Co., 908 N.E.2d 305 (Ind. Ct. App. 2009). The majority concluded among
other things there was no property damage within the meaning of the Insurers‟ CGL policies
because the damage to the homes “cannot be treated as distinct from the underlying faulty
workmanship . . . .” Id. at 309. We granted transfer to explore this issue. We summarily affirm
the portion of the Court of Appeals opinion affirming summary judgment in favor of MJ
Insurance.
2
Although the trial court entered summary judgment in favor of Indiana Insurance, it nonetheless cross
appeals contending the trial court erred in failing to strike portions of an affidavit by Thomas Corridan – a
witness on behalf of Sheehan with expertise in handling insurance claims. Indiana Insurance complains
that the affidavit includes legal conclusions and opinions about Indiana law. Indiana Insurance does not
say so in express terms, but we presume it is “[i]nvoking the rule that a reviewing court can affirm a trial
court‟s grant of summary judgment on any theory the Trial Rule 56 materials support.” See Estate of
Mintz v. Conn. Gen. Life Ins. Co., 905 N.E.2d 994, 999 (Ind. 2009). We decline to address this issue for
several reasons. First, Sheehan tendered the eight-page affidavit in support of its own motion for
summary judgment, which the trial court denied. Second, although portions of the affidavit were
inadmissible, other portions were not, and Indiana Insurance made no effort to identify precisely which
portions it thought should be deleted. In fact at a hearing on the parties‟ motions for summary judgment,
Indiana Insurance moved more broadly that “the affidavit of Mr. Corydon [sic] be stricken.” Appellants‟
App. at 86. It was entitled to no such relief. Third, although the record does not reveal whether the trial
court actually ruled on Indiana Insurance‟s motion to strike, nothing before us suggests the trial court
considered the affidavit in its summary judgment ruling. Finally, even if the entire affidavit were stricken
from the record, its absence would have no bearing on the outcome of this appeal.
6
Standard of Review
In the appellate review of a grant or denial of summary judgment, we apply the same
standard as the trial court. Reeder v. Harper, 788 N.E.2d 1236, 1240 (Ind. 2003). Summary
judgment “shall be rendered forthwith if the designated evidentiary matter shows that there is no
genuine issue as to any material fact and that the moving party is entitled to a judgment as a
matter of law.” Ind. Trial Rule 56(C). During our review, all facts and reasonable inferences
drawn from them are construed in favor of the non-moving party. Reeder, 788 N.E.2d at 1240.
Discussion
I.
Broadly speaking this appeal requires us to determine whether damage caused by faulty
workmanship is covered under a standard CGL policy. This issue has been frequently litigated
in a number of jurisdictions. Our Court last broached the subject in Indiana Insurance Co. v.
DeZutti, 408 N.E.2d 1275 (Ind. 1980). We examine DeZutti today because language appearing
in that decision has provided the bases for at least two Court of Appeals opinions declaring in
part that the risk intended to be insured by a CGL policy is “the possibility that the goods,
products, or work of the insured, once relinquished or completed, will cause bodily injury or
damage to property other than to the product or completed work itself.” Amerisure, Inc. v.
Wurster Constr. Co., 818 N.E.2d 998, 1003 (Ind. Ct. App. 2004) (quoting R.N. Thompson &
Assocs., Inc., v. Monroe Guar. Ins. Co., 686 N.E.2d 160, 162 (Ind. Ct. App. 1997) (citing
DeZutti, 408 N.E.2d at 1279)) (emphasis in original). Amerisure and R.N. Thompson provide
the primary authority for the opinion of the Court of Appeals in this case.3
In DeZutti the homeowners sued the general contractor for damages allegedly caused by
the contractor‟s faulty construction of their house, namely, serious cracking of the mortar and
bricks. The contractor in turn called upon his insurance carrier to provide a defense pursuant to
the terms of its CGL policy. The insurer declined and filed a declaratory judgment action. The
trial court determined that the insurer was obligated to provide a defense and the Court of
3
For the same proposition see also T.R. Bulger, Inc. v. Ind. Ins. Co., 901 N.E.2d 1110, 1115 (Ind. Ct.
App. 2009); Jim Barna Log Sys. Midwest, Inc. v. Gen. Cas. Ins. Co. of Wis., 791 N.E.2d 816, 824 (Ind.
Ct. App. 2003); Schultz v. Erie Ins. Group, 754 N.E.2d 971, 975 (Ind. Ct. App. 2001).
7
Appeals affirmed. On transfer this Court reversed holding that the CGL policy did not provide
coverage to correct, repair or replace the contractor‟s own poor workmanship. In doing so the
Court quoted with approval a law review article that declared in part:
The risk intended to be insured is the possibility that the goods,
products or work of the insured, once relinquished or completed,
will cause bodily injury or damage to property other than to the
product or completed work itself, and for which the insured may be
found liable. . . . The coverage is for tort liability for physical
damages to others and not for contractual liability of the insured
for economic loss because the product or completed work is not
that for which the damaged person bargained.
DeZutti, 408 N.E.2d at 1279 (quoting Roger C. Henderson, Insurance Protection for Products
Liability and Completed Operations - What Every Lawyer Should Know, 50 Neb. L. Rev. 415,
441 (1971)) (emphasis added). The Court continued,
The same neglectful craftsmanship may cause both a business
expense of repair and a loss represented by damage to persons and
property other than the insured‟s own product or work. If, as in
this case, the damage is confined to the insured‟s own product or
work, it is a business risk and expense not intended to be covered
under the policy and is excluded by [certain] exceptions. . . . The
policy in question does not cover an accident of faulty
workmanship but rather faulty workmanship which causes an
accident.
Id. at 1279 (internal citation and quotation omitted). The Court of Appeals relied upon the
foregoing language to conclude in Amerisure, R.N. Thompson, and the instant case that the
Insurers‟ CGL polices do not cover damage to the Class members‟ homes.
We make the following observations. In DeZutti the Court was addressing the impact
on the insurer‟s duty to defend not based on the insuring provisions or the definition of
“property damage” or “occurrence” but rather because faulty workmanship by a contractor was
specifically excluded based on the clear and unambiguous “business risk” exclusionary clauses.
The policy at issue in DeZutti had several exclusionary clauses one of which provided that the
policy did not apply to “property damage to the named insured‟s products arising out of such
products or any part of such products.” Id. at 1277. Another exclusionary provision provided
that the policy did not apply to “property damage to work performed by or on behalf of the
8
named insured arising out of the work or any portion thereof, or out of materials, parts or
equipment furnished in connection therewith . . . .” Id. Examining these provisions we
concluded, “[t]hese provisions clearly exclude insurance coverage for damages to the insured‟s
product or work when such damages are confined to the product or work and caused by the
product or work, or any part thereof. It is only damage to other property arising out of the
insured‟s product or work which would be covered.” Id. at 1280 (emphases in original).
In essence DeZutti relied on the exclusions to determine that no coverage existed in that
case. There was no intent to suggest that the broad language regarding the purpose of CGL
polices stand for the proposition that faulty workmanship that damages the contractor‟s own
work can never constitute a covered “occurrence.” Further, the CGL policy at issue in DeZutti
predated the 1986 ISO revisions. Indeed we agree with the observations of the Wisconsin
Supreme Court that “CGL policies generally do not cover contract claims arising out of the
insured‟s defective work or product, but this is by operation of the CGL‟s business risk
exclusions, not because a loss actionable only in contract can never be the result of an
„occurrence‟ within the meaning of the CGL‟s initial grant of coverage.” Am. Family Mut. Ins.
Co. v. Am. Girl, Inc., 673 N.W.2d 65, 76 (Wis. 2004); see also Travelers Indem. Co. of Am. v.
Moore & Assocs., Inc., 216 S.W.3d 302, 307 (Tenn. 2007) (declaring that “[r]eliance upon a
CGL‟s „exclusions‟ to determine the meaning of „occurrence‟ has resulted in regrettably
overbroad generalizations concerning CGLs” (internal citation and quotation omitted)).
II.
The Insurers‟ CGL policies insure against liability for “property damage” caused by an
“occurrence.” Appellee Continental‟s App. at 102; Appellee Indiana‟s App. at 125, 139. The
policies follow the widely used CGL form defining “occurrence” as “an accident, including
continuous or repeated exposure to substantially the same general harmful conditions.” Appellee
Continental‟s App. at 112; Appellee Indiana‟s App. at 133, 146. Whether faulty workmanship
fits within the insurance policy‟s definition of “occurrence” under standard CGL polices has
been the subject of much debate and litigation throughout the country and the jurisdictions are
divided on the issue. Some states have held that faulty workmanship or improper construction is
9
not an “occurrence” because it does not constitute an “accident.”4 Other states have found
improper or faulty construction to be an “accident” and therefore an “occurrence” where the
resulting damage occurs without the insured‟s expectation or foresight. 5 Many of these cited
4
See, e.g., U.S. Fid. & Guar. v. Advance Roofing & Supply Co., 788 P.2d 1227, 1233 (Ariz. Ct. App.
1989) (“mere faulty workmanship, standing alone, cannot constitute an occurrence as defined in the
policy, nor would the cost of repairing the defect constitute property damages”); Gen. Sec. Idem. Co. of
Ariz. v. Mountain States Mut. Cas. Co., 205 P.3d 529, 535 (Colo. Ct. App. 2009) (“claims of poor
workmanship, standing alone, are not occurrences that trigger coverage under CGL policies similar to
those at issue here”); State Farm Fire and Cas. Co. v. Tillerson, 777 N.E.2d 986, 991 (Ill. Ct. App. 2002)
(“[w]here the defect is no more than the natural and ordinary consequences of faulty workmanship, it is
not caused by an accident”); Pursell Constr. v. Hawkeye-Security Ins. Co., 596 N.W.2d 67, 71 (Iowa
1999) (“defective workmanship standing alone, that is, resulting in damages only to the work product
itself, is not an occurrence under a CGL policy”); Auto-Owners Ins. Co. v. Home Pride Cos., 684 N.W.2d
571, 578 (Neb. 2004); (“although a standard CGL policy does not provide coverage for faulty
workmanship that damages only the resulting work product, if faulty workmanship causes bodily injury
or property damage to something other than the insured‟s work product, an unintended and unexpected
event has occurred, and coverage exists”); Heille v. Herrmann, 736 N.E.2d 566, 568 (Ohio Ct. App. 1999)
(holding that faulty workmanship is not an accident and therefore not an occurrence); Oak Crest Constr.
Co. v. Austin Mut. Ins. Co., 998 P.2d 1254, 1257 (Or. 2000) (“there can be no „accident‟ within the
meaning of a commercial liability policy, when the resulting damage is merely a breach of contract”);
Kvaerner Metals Div. of Kvaerner U.S., Inc. v Commercial Union Ins. Co., 908 A.2d 888, 899 (Pa. 2006)
(holding that “the definition of „accident‟ required to establish an „occurrence‟ under the policies cannot
be satisfied by claims based upon faulty workmanship); L-J, Inc. v. Bituminous Fire & Marine Ins. Co.,
621 S.E.2d 33, 37 (S.C. 2005) (finding that “faulty workmanship does not constitute an „occurrence‟”);
Corder v. William W. Smith Excavating Co., 556 S.E.2d 77, 83 (W. Va. 2001) (“commercial general
liability policies are not designed to cover poor workmanship”); Burlington Ins. Co. v. Oceanic Design &
Constr., Inc., 383 F.3d 940, 948 (9th Cir. 2004) (applying Hawaii law and declaring “General liability
policies . . . are not designed to provide contractors and developers with coverage against claims their
work is inferior or defective.”); Lenning v. Commercial Union Ins. Co., 260 F.3d 574, 583 (6th Cir. 2001)
(applying Kentucky law and declaring “there is no „occurrence‟ to the extent [a] complaint alleges
property damage arising out of defective or faulty craftsmanship”); J.Z.G. Resources, Inc. v King, 987
F.2d 98 (2d Cir. 1993) (applying New York law for the proposition that defective workmanship, standing
alone, is not an occurrence).
5
See, e.g., Fejes v. Alaska Ins. Co., 984 P.2d 519, 523 (Alaska 1999) (standing for the general
proposition that improper or faulty workmanship constitutes an accident); Lee Builders, Inc. v. Farm
Bureau Mut. Ins. Co., 137 P.3d 486, 493 (Kan. 2006) (agreeing that the “damage occurring as a result of
faulty or negligent workmanship constitutes an occurrence as long as the insured did not intend for the
damage to occur”); Joe Banks Drywall & Acoustics, Inc. v. Transcontinental Ins. Co., 753 So. 2d 980
(La. Ct. App. 2000) (standing for the general proposition that improper or faulty workmanship constitutes
an occurrence within the meaning of a general commercial liability policy); Architex Ass‟n, Inc., v.
Scottsdale Ins. Co., 27 So. 3d 1148, 1162 (Miss. 2010) (concluding that “the term „occurrence‟ cannot be
construed in such a manner as to preclude coverage for unexpected or unintended „property damage‟
resulting from negligent acts or conduct of a subcontractor, unless otherwise excluded or the insured
breaches its duties after loss”); High Country Assoc. v. N.H. Ins. Co., 648 A.2d 474, 478 (N.H. 1994)
(property damage to condominium units caused by defective workmanship is an “occurrence” within the
meaning of CGL policy); Erie Ins. Exchange v. Colony Dev. Corp., 736 N.E.2d 941, 947 (Ohio Ct. App.
1999) (property damage caused by contractor‟s negligence in constructing and designing a condominium
complex “reasonably fall[s] within the policy‟s definition of property damage caused by an occurrence, –
10
cases are discussed in numerous articles advancing both sides of the issue. Compare, e.g.,
Clifford J. Shapiro, Point/Counterpoint: Inadvertent Construction Defects Are an “Occurrence”
under CGL Policies, 22 Constr. Law., Spring 2002, at 13, 44 (“The better-reasoned decisions
give effect to the actual intent of CGL insurance by holding that construction-defect claims
allege an „occurrence‟ . . . .”), with Linda B. Foster, Point/Counterpoint: No Coverage Under the
CGL Policy for Standard Construction Defect Claims, 22 Constr. Law., Spring 2002, at 18, 47
(“When the proper analysis is done – starting with the insuring agreement – the correct
conclusion is reached. There is no coverage for standard construction defect claims for repair
and replacement of defective work.”).
At least one court has observed that there appear to be two different rationales for the
proposition that faulty workmanship is not covered under a standard CGL policy. On the one
hand the rule has been justified on public policy grounds; namely, the cost to repair and replace
the damages caused by faulty workmanship is a business risk not covered under a CGL policy.
Auto-Owners Ins. Co. v. Home Pride Cos., 684 N.W.2d 571, 577 (Neb. 2004); see also Aetna
Life & Cas. v. Patrick Indus. Inc., 645 N.E.2d 656, 662 (Ind. Ct. App. 1995); Weedo v. Stone-E-
Brick, Inc., 405 A.2d 788, 791 (N.J. 1979). However, the business risk rule has been a part of
standard CGL policies since at least 1986 in the form of “your work” exceptions to coverage.
We therefore do not interpret the business risk rule as an initial bar to coverage, but rather we
view it as potentially excluding certain events from coverage under the “your work” exclusion,
where the policy is found to grant coverage initially. On the other hand a competing rationale
i.e., an accident”); Travelers Idem. Co. v. Moore & Assocs. Inc., 216 S.W.3d 302 (Tenn. 2007) (defective
installation of windows causing water penetration “constitute[s] „property damage‟ for purposes of the
CGL”); Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 9 (Tex. 2007) (Damage to the
insured‟s work as well as damage to a third party‟s property can result from an occurrence as defined in
commercial general liability policy; no basis exists in the definition of “occurrence” to distinguish
between the two.); Am. Family Mut. Ins. Co., 673 N.W.2d at 70 (Excessive settlement of soil after
building was completed caused the building‟s foundation to sink. This caused the rest of the structure to
buckle and crack. Held: There was “„property damage‟ caused by an „occurrence‟ within the meaning of
the CGL policies‟ general grant of coverage.”); French v. Assurance Co. of Am., 448 F.3d 693, 706 (4th
Cir. 2006) (applying Maryland law and holding that a standard 1986 commercial general liability policy
form “provides liability coverage for the cost to remedy unexpected and unintended property damage to
the contractor‟s otherwise nondefective work-product caused by the subcontractor‟s defective
workmanship”); Great Am. Ins. Co. v. Woodside Homes Corp., 448 F. Supp. 2d 1275, 1283 (D. Utah
2006) (applying Utah law and declaring, “Certainly, different jurisdictions have approached and answered
the question presented in this case in various ways. But the better-reasoned approach, and the approach
that is most consistent with Utah law, views faulty subcontractor work as an occurrence from the
standpoint of the insured.”).
11
supporting the determination that faulty workmanship is not covered under a CGL policy is that
as a matter of contract interpretation, “„[t]he fortuity implied by reference to accident or
exposure is not what is commonly meant by a failure of workmanship.‟” Auto-Owners Ins. Co.,
684 N.W.2d at 577 (quoting McAllister v. Peerless Ins. Co., 474 A.2d 1033, 1036 (N.H. 1984)).
We find however that this rationale provides little guidance and is unhelpful to our analysis.
Rather, we align ourselves with those jurisdictions adopting the view that improper or faulty
workmanship does constitute an accident so long as the resulting damage is an event that occurs
without expectation or foresight. As explained in more detail below this rationale is consistent
with this jurisdiction‟s definition of “accident” as contained in standard CGL policies.
III.
Insurance policies are contracts that are subject to the same rules of construction as are
other contracts. Eli Lilly & Co. v. Home Ins. Co., 482 N.E.2d 467, 470 (Ind. 1985). When the
language of an insurance contract is clear and unambiguous, we will assign to the language its
plain and ordinary meaning. Id. An insurance policy that is unambiguous must be enforced
according to its terms, even those terms that limit an insurer‟s liability. Ramirez v. Am. Family
Mut. Ins. Co., 652 N.E.2d 511, 514 (Ind. Ct. App. 1995). Thus, we may not extend insurance
coverage beyond that provided by the unambiguous language in the contract. Shelter Ins. Co. v.
Woolems, 759 N.E.2d 1151, 1155 (Ind. Ct. App. 2001), trans. denied. Also, insurers have the
right to limit their coverage of risks and, therefore, their liability by imposing exceptions,
conditions, and exclusions. Allstate Ins. Co. v. Boles, 481 N.E.2d 1096, 1098 (Ind. 1985).
As indicated earlier Insurers‟ CGL policies insure against liability for “property damage”
caused by an “occurrence.” In turn the policies define “occurrence” as “an accident, including
continuous exposure to substantially the same general harmful conditions.” The term “accident”
is not defined in the policies. However, this Court has defined accident to mean “an unexpected
happening without an intention or design.” Tri-Etch, Inc., v. Cincinnati Ins. Co., 909 N.E.2d
997, 1002 (Ind. 2009) (quoting Auto-Owners Ins. Co. v. Harvey, 842 N.E.2d 1279, 1283 (Ind.
2006)). Implicit in the meaning of “accident” is the lack of intentionality. Id. The question
presented is whether faulty workmanship is an accident within the meaning of a standard CGL
policy. In our view the answer depends on the facts of the case. For example, faulty
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workmanship that is intentional from the viewpoint of the insured cannot be an “accident” or an
“occurrence.” See Lamar Homes, 242 S.W.3d at 8-9. On the other hand if the faulty
workmanship is “unexpected” and “without intention or design” and thus not foreseeable from
the viewpoint of the insured, then it is an accident within the meaning of a CGL policy. The
following example illustrates the point.
[I]f a contractor improperly installs a shingle that later falls and
hits a passerby, this event is unforeseeable and is an “occurrence”
or “accident.” . . . A shingle falling and injuring a person is a
natural consequence of an improperly installed shingle just as
water damage is a natural consequence of an improperly installed
window. If we assume that either the shingle or the window
installation will be completed negligently, it is foreseeable that
damages will result. If, however, we assume that the installation of
both the shingle and the window will be completed properly, then
neither the falling shingle nor the water penetration is foreseeable
and both events are “accidents.”
Travelers Indem., 216 S.W.3d at 309. As applied to the case before us, if the faulty
workmanship was the product of unintentional conduct then we start with the assumption, from
Sheehan‟s viewpoint, that the work on the Class members‟ homes would be completed properly.
The resulting damage would therefore be unforeseeable and constitute an “accident” and
therefore an “occurrence” within the meaning of the Insurers‟ CGL policies.6
6
We disagree with Justice Sullivan‟s proposition that a performance bond, as opposed to a CGL policy, is
the appropriate avenue for insuring against damages for defective workmanship. This issue has also
generated a considerable amount of discussion and debate. As one court has observed:
[A]lthough defective construction may constitute an “occurrence,” the
insurer indemnifies the insured only for resulting “property damage”
arising after the project is completed. In contrast, a performance bond is
broader than a CGL policy in that it guarantees the completion of a
construction contract upon the default of the general contractor.
Therefore, a variety of deficiencies that do not constitute “property
damage” may be covered by a performance bond, and not all deficiencies
cause additional property damage. Consequently, allowing coverage for
some “property damage” resulting from defective construction does not
transform a CGL policy into a performance bond and require a CGL
carrier to pay anytime an insured fails to complete, or otherwise comply
with, its contract.
Lennar Corp. v. Great Am. Ins. Co., 200 S.W.3d 651, 673-74 (Tex. App. 2006) (internal citations and
quotations omitted); see also U.S. Fire Ins. Co. v. J.S.U.B, 979 So. 2d 871, 887-88 (Fla. 2007) (“The
purpose of a performance bond is to guarantee the completion of the contract upon default by the
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For an additional reason we find support for our conclusion that “accident” within the
meaning of the CGL policies at issue in this case includes faulty workmanship. Although
exclusionary clauses “do not grant or enlarge coverage,” DeZutti, 408 N.E.2d at 1278, contract
construction principles instruct us to read the pertinent provisions of insurance policies together.
See Id. (“The property damages covered can only be determined by resort to the contract as a
whole, including all exclusionary provisions.”). As previously noted, the faulty workmanship on
the Class members‟ homes was performed by subcontractors that Sheehan – the general
contractor – hired to do the work. The CGL policies include an exclusion for damage to “your
work” and then narrow the exclusion by expressly declaring that it does not apply “if the
damaged work or the work out of which the damage arises was performed on your behalf by a
subcontractor.” Appellee Continental‟s App. at 105; Appellee Indiana‟s App. at 128, 142. If the
insuring provisions do not confer an initial grant of coverage, then there would be no reasons for
a “your work” exclusion. As one commentator observed:
A court need only ask why the CGL policy includes an exclusion
for property damages to the insured‟s own work and that of its
subcontractors to understand that it would be nonsensical for the
policy to include such a provision if this kind of property damage
could never be caused by an “occurrence” in the first place. A
court need only ask why the CGL policy specifically includes an
express exception to the “your work” exclusion for property
damage arising out of the work of a subcontractor to understand
that this kind of property damage must be included in the broad
scope of the term “occurrence” in the coverage grant, and that the
coverage determination for this kind of property damage must be
made based on the construction-specific policy exclusions.
Clifford J. Shapiro, The Good, the Bad, and the Ugly: New State Supreme Court Decisions
Address Whether an Inadvertent Construction Defect is an “Occurrence” Under CGL Policies,
25 Constr. Law., Summer 2005, at 9, 12; see also Lamar Homes, 242 S.W.3d at 12 (“By
incorporating the subcontractor exception into the „your-work‟ exclusion, the insurance industry
specifically contemplated coverage for property damage caused by a subcontractor‟s defective
contractor. Thus, unlike an insurance policy, a performance bond benefits the owner of a project rather
than the contractor. Further, a surety, unlike a liability insurer, is entitled to indemnification from the
contractor.” (internal citations and quotation omitted)); Fid. & Deposit Co. of Md. v. Hartford Cas. Ins.
Co., 189 F. Supp. 2d 1212, 1218 (D. Kan. 2002) (rejecting the argument that “if the structural damage
caused by faulty workmanship constitutes an „occurrence,‟ then the CGL and umbrella policies will be
transformed into a performance bond” because the bond “in no way” protected the contractor or
subcontractor from liability).
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performance.”). We agree with these authorities, and also agree that “if the insurer decides that
this is a risk it does not want to insure, it can clearly amend the policy to exclude coverage, as
can be done simply by either eliminating the subcontractor exception or adding a breach of
contract exclusion.” J.S.U.B., 979 So. 2d at 891. See also Lamar Homes, 242 S.W. 3d at 12
(“More recently, the Insurance Services Office has issued an endorsement that may be included
in the CGL to eliminate the subcontractor exception to the „your-work‟ exclusion.”).
In this case the trial court entered summary judgment in favor of Insurers on grounds that
there was no damage to property “other than to the structural components of the homes
themselves” and thus there was no “occurrence” or “property damage.” Appellants App. at 27.
On this point the trial court erred. As we have explained faulty workmanship may constitute an
accident and thus an occurrence depending on the facts. More specifically, if the defective work
of the subcontractors were done intentionally instead of “without intention or design”, then it is
not an accident. Otherwise the opposite is true. Here, none of the parties‟ Trial Rule 56
materials address the question of whether the faulty workmanship was the product of intentional
versus unintentional conduct. And accordingly the trial court reached no conclusion on this
point.
Conclusion
The judgment of the trial court is reversed. This cause is remanded for further
proceedings.
Dickson and Boehm, JJ., concur.
Shepard, C.J., dissents with separate opinion.
Sullivan, J., dissents with separate opinion in which Shepard, C.J., joins.
15
SHEPARD, Chief Justice, dissenting.
My colleague‟s majority opinion is a genuine tour de force on the development of
widely-used forms of commercial general liability policies and the interpretations given them by
state and federal courts. Still, I conclude that it leads Indiana to the wrong result.
To make a long story short, I think these policies are neither designed nor priced as
coverage for whatever demands the insured may face in the nature of ordinary consumer claims
about breach of warranty. Inquiry during oral argument suggested that there may not even exist
in the marketplace an insurance product that “covers me when I don‟t do a very good job,” if you
will.
As the majority recognizes, there is in the country a divide in the case law on the point
we decide today. I would put us on the other side of this divide.
Sullivan, Justice, dissenting.
My review of the authorities convinces me that an “occurrence” under a CGL policy in
the context of these cases is accidental damage caused by an insured (or an insured‟s subcontrac-
tors) to property owned by third parties, but not the costs of repairing defective work performed
by an insured (or an insured‟s subcontractors).
To draw from the hypothetical that the Court deploys, it would be an “occurrence” under
a CGL policy when a roof shingle that had been negligently installed by an insured‟s subcontrac-
tor falls and injures a passerby or breaks a window in a passing car. Why? Because it is an “ac-
cident” that causes “bodily injury” or “property damage.” But the costs of repairing the defec-
tive shingle installation and resulting damage to the roof is not an occurrence. Such defective
workmanship or failure to perform according to the terms of a construction contract is not an ac-
cident. To the extent that person wishes to insure against damages from defective workmanship,
a performance bond and not a CGL policy provides such protection. A new case from New York
makes this clear:
A surety‟s performance bond and an insurer‟s commercial general liability
policy provide two different scopes of coverage. A performance surety is to be
held liable, upon the default of its principal, for the costs of completing the Con-
tract or conforming the principal‟s defective work to the terms of the Contract,
whereas the general liability insurer is liable for accidental damage caused by the
insured to property owned by third parties (see J.Z.G. Res., Inc. v. King, 987 F.2d
98, 103 (2d Cir. 1993); Transp. Ins. Co. v. AARK Constr. Group Ltd., 526 F.
Supp. 2d 350, 356 (E.D.N.Y. 2007); Bonded Concrete, Inc. v. Transcon. Ins. Co.,
784 N.Y.S.2d 212 (2004); Parkset Plumbing & Heating Corp. v. Reliance Ins.
Co., 448 N.Y.S.2d 739 (1982)).
400 15th St., LLC v. Promo-Pro, Ltd., 2010 N.Y. Misc. LEXIS 4339 at **27-28 (N.Y. Sup. Ct.
Sept. 10, 2010). Each of the cases cited squarely stands for this limitation on CGL coverage, as
does Auto-Owners Ins. Co. v. Home Pride Cos., Inc., 684 N.W.2d 571, 578 (Neb. 2004), where
the court said “although a standard CGL policy does not provide coverage for faulty workman-
ship that damages only the resulting work product, if faulty workmanship causes bodily injury or
1
property damage to something other than the insured‟s work product, an unintended and unex-
pected event has occurred, and coverage exists.”
I respectfully dissent.
Shepard, C.J., joins.
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