Re: Alabama Supreme Court reverses itself and joins the majority of states in holding that property damage from construction defects can result from an “occurrence” under a general liability policy.

On March 28, 2014, the Alabama Supreme Court held that under a commercial general liability policy, faulty workmanship on a construction project can constitute “property damage” resulting from an “occurrence.” Owners Ins. Co. v. Jim Carr Homebuilder, LLC, 2014 Ala. LEXIS 44(Ala. March 28, 2014). The opinion is unusual in that only 6 months earlier (September 20, 2013), the Court held just the opposite; the March 28, 2014 opinion withdrew the September 20, 2013 opinion.

The insured, a licensed homebuilder, entered into a $1.2 million contract with homeowners to design and construct a residence.  The homeowners took possession of the residence and, within one year, experienced several problems related to water leaking through the roof, walls, and floors, causing damage to those and other areas of the home.  The homeowners sued the homebuilder, alleging breach of contract, negligence, fraud, and wanton conduct.

The homebuilder tendered the lawsuit to its commercial general liability insurer for a defense and indemnity.  The insurer defended under a reservation of rights.  The insurer filed a declaratory judgment action, seeking a determination of its duties with respect to the homeowners’ lawsuit.

The homeowners and homebuilder entered into binding arbitration of their dispute.  The arbitrator awarded the homeowners $600,000 in damages, finding that the water leakage resulted from improper workmanship.

After the arbitration award was entered, the homebuilder and insurer moved for summary judgment.  The trial court ruled that the entire arbitration award was covered under the commercial general liability policy. The insurer appealed.

In its September 20, 2013 opinion, the Alabama Supreme Court reversed the trial court’s ruling and held that there was no “occurrence” and, therefore, no coverage under the policy.   However, in its March 28, 2014 decision, the Court held that “the term ‘occurrence’ does not itself exclude from coverage the property damage alleged in this case.”  The Court mentioned that additional damage resulting from faulty workmanship can constitute property damage caused by an “Occurrence.”  Id. at *17.

The Court then analyzed whether the damage was precluded by the “Your Work” exclusion.   The Court noted that the “Your Work” exclusion applies to property damage to the contractor’s work itself, which occurs after the contractor  completes the project.   In Jim Carr, the water damage occurred after the homebuilder had completed and left the project.  The commercial general liability policy was designed to insure the homebuilder while it was in the process of constructing the home; it was not intended to cover the homebuilder for subsequent damage to the home after the work was completed.  Id. at *18.   Such damage occurring after the completion of the construction is known as the “completed operations hazard.”

However, an insured may purchase separate products-completed operations coverage for that hazard.  This coverage applies to “bodily injury and property damage which occur away from premises owned by or rented to the insured, and after the insured has completed work or relinquished custody of its product.”   Quoting, 9A Couch on Insurance 3d §129:23.

The Court held that the “Your Work” exclusion only applies if the policy does not include products-completed operations coverage because the exclusion did not state that it applied to the separate coverage.   If the policy includes products-completed operations coverage, then the “Your Work” exclusion was inapplicable.  Id. at *20-21.  The homebuilder’s policy included products and completed operations coverage with $4 million limits.  Id. at *23.  As a result, the “Your Work” exclusion was inapplicable.   The Court withdrew its September 23, 2013 opinion (without explaining why it had reached the opposite conclusion 6 months earlier) and affirmed the trial court’s ruling in favor of the homebuilder. Id. at *24-25.