CGL Provides No Coverage for Damage to the Insured’s Work

Construction contracts are risk transfer devices. The owner shifts the risk of loss to the general contractor who shifts the risk of loss to subcontractors and all shift the risks of loss to their insurers. Commercial General Liability (CGL) policies agree to accept the risk of loss faced by those insured by the CGL for an “occurrence” happening during the policy period. It does not, however, provide coverage for the general costs of doing business.

In Skanska USA Building Inc. v. M.A.P. Mechanical Contractors, Inc., and Amerisure Insurance Company and Amerisure Mutual Insurance Company, Skanska USA Building Inc. v. M.A.P. Mechanical Contractors, Inc., Amerisure Insurance Company, And Amerisure Mutual Insurance Company, No. 340871, No. 341589, State of Michigan Court of Appeals (March 19, 2019) the Michigan Court of Appeals was asked to resolve a dispute over whether there was an “occurrence” as defined by the policy that required defense and indemnity.

The dispute arose from the faulty installation of parts in the steam heat system of a hospital construction project resulted in an insurance coverage dispute. The resulting damage required extensive repairs, in excess of $1 million. The insurance carrier, Amerisure Insurance Company (“Amerisure”), appealed an order denying its motion for summary disposition.

BASIC FACTS

Starting in 2008, plaintiff was the construction manager on a renovation project for Mid-Michigan Medical Center in Midland (“Medical Center” or “MMMC”). Plaintiff subcontracted the heating and cooling portion of the project to defendant M.A.P. Mechanical Contractors (“MAP”). MAP obtained a commercial general liability insurance policy (“CGL policy”) from Amerisure. Plaintiff and the Medical Center are named as additional insureds on the CGL policy.

In 2009, MAP installed a steam boiler and related piping for the Medical Center’s heating system. MAP’s installation included several expansion joints, which are designed to accommodate the expansion of the piping caused by the flowing steam. Plaintiff determined that MAP had installed some of the expansion joints backward. Significant damage to concrete, steel, and the heating system had occurred.

According to plaintiff, the cost of the repair and replacement work was approximately $1.4 million. Plaintiff submitted a claim to Amerisure seeking coverage as an insured. Plaintiff’s claim was denied.

Amerisure asserted several grounds for summary disposition, including: (1) MAP’s defective construction was not a covered occurrence within the CGL policy; (2) plaintiff failed to provide proper notice of a claim; (3) plaintiff entered into a settlement without Amerisure’s consent; and (4) several exclusions barred coverage.

The trial court denied Amerisure’s motion.

The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” However, the policy did not define the word “accident.”

Defective workmanship, standing alone, is not an occurrence within the meaning of a general liability insurance contract, an occurrence exists where the insured’s faulty work product damages the property of another.

There is no indication MAP purposefully installed the expansion joints backwards. The parties affected by MAP’s negligence did not anticipate, foresee, or expect backward expansion joints or property damage to the entire length of the underground steam and condensate lines.

ANALYSIS

The dispositive issue in this case is whether there was an “occurrence” triggering coverage. There was no genuine issue of material fact that plaintiff sought coverage for replacement of its own work product.

At issue was whether there was an “occurrence” triggering coverage. Because the policy did not define “accident,” the Court looked to a common definition of “accident,”  that anything that begins to be, that happens, or that is a result which is not anticipated and is unforeseen and unexpected by the person injured or affected thereby—that is, takes place without the insured’s foresight or expectation and without design or intentional causation on his part. In other words, an accident is an undesigned contingency, a casualty, a happening by chance, something out of the usual course of things, unusual, fortuitous, not anticipated, and not naturally to be expected.

The fortuity required is not what is commonly meant by a failure of workmanship. The court was unable to find in the policy language a reasonable basis to expect coverage for defective workmanship.

In sum, the court concluded that defective workmanship of the insured, standing alone, was not the result of an occurrence within the meaning of the insurance contract. Summary disposition was properly granted on this issue.

A fundamental tenet of Michigan jurisprudence, like that of every state, is that unambiguous contracts are not open to judicial construction and must be enforced as written. Courts enforce contracts according to their unambiguous terms because doing so respects the freedom of individuals freely to arrange their affairs via contract. The general rule of contracts is that competent persons shall have the utmost liberty of contracting and that their agreements voluntarily and fairly made shall be held valid and enforced in the courts.

The Michigan Court of Appeal noted that it is an established principle of law that an “occurrence” cannot include damages for the insured’s own faulty workmanship. Amerisure was, therefore, entitled to judgment as a matter of law because coverage was not triggered due to lack of an “occurrence” and there is no genuine issue of material fact that the only damage was to plaintiff’s own work product (rather, that of its subcontractor).

Because there is no coverage, there was no need to address whether any of the exclusions apply or whether conditions precedent were met.

ZALMA OPINION

CGL policies provide extensive coverage to its policyholders. It does not, however, cover every potentiality. It will never provide coverage for a loss that is not fortuitous, contingent or an unknown event. It will not protect the policyholder from damage caused by the policyholder’s own negligence to its own product. For that reason judgment was entered in favor of the insurer.

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Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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