Builders face serious financial risk on every job from the possibility of damage claims arising out of alleged construction defects or faulty work. General liability insurance covers some of those situations, but not necessarily all — and where the dividing line falls between what is covered, and what is not, is a perennial battleground in court.
A recent pair of Alabama Supreme Court decisions sheds light on that issue. The case pits an Alabama builder, Jim Carr Homebuilder LLC, against insurance company Owners Insurance. The court's rulings are an unusual occurrence in their own right: After ruling last year that damage to a home's structure and finishes arising out of faulty subcontractor work was not covered by the builder's insurance policy, the court has now reversed its own ruling in the same case and decided that Owners must compensate Carr for the losses after all.
Attorney Bradley J. Lorden of the New York City law firm Proskauer Rose LLP describes the case in a July blog post here (see: United States: Alabama Supreme Court Reverses Course, Finds Insurance Coverage For Faulty Workmanship Claims).
Lorden sums up the dispute: "In Owners Ins. Co. v. Jim Carr Homebuilder, LLC, Thomas and Pat Johnson hired Jim Carr Homebuilders ("JCH") to construct a new $1.2 million home on Lay Lake in Wilsonville, Alabama. When the Johnsons moved into their new home, they discovered water leaking through the roof, walls and floors, which caused water damage throughout the home. After JCH was unable to fix the problem, the Johnsons sued for breach of contract, fraud, and negligence and wantonness. The dispute was arbitrated, which resulted in a finding that JCH's work was defective and a $600,000 award for the Johnsons."
Carr turned to its insurance company to cover the arbitration award, and the company declined coverage — and in fact, proceeded to court asking for a judicial declaration that the damage was excluded by the policy because it was the builder's own work, not the homeowner's property, that was damaged by the subcontractors' poor performance. At the trial court level, the builder won that argument — but the Supreme Court in September 2013 overruled the trial court. Writes Lorden: "Faulty workmanship, according to the state's high court, may constitute an occurrence only if it damages 'personal property or other parts of the structure outside the scope of that construction or repair project.' Subsequently, however, the Alabama Supreme Court withdrew its September decision and issued a new one that handed victory to the policyholder."
In another blog post, attorney Carl Salisbury of the law firm Kilpatrick Townsend says the court's self-reversal puts Alabama in line with most other U.S. states (see: "In a Reversal, Alabama Supreme Court Joins the Majority").
"As we pointed out in September, reading about the defects that an arbitrator found were constructed into the house that is the subject of Owners Ins. Co. v. Jim Carr Homebuilder, LLC, et al. is enough to give any homeowner heartburn," writes Salisbury. "The arbitrator awarded $3 million in compensatory damages to the homeowners because of improperly installed flashing; improperly installed brick; the lack of weep holes in the brick; improperly installed doors and windows; improper construction of the upper porches; faulty construction of the roof; improper installation of a bathtub. One imagines after reading this description that the house must have leaked like a colander. The home builder acted as general contractor (Jim Carr Homebuilders, or "JCH"); but the shoddy workmanship that caused the damages was the fault of its subcontractors. Moreover, the work in question caused 'downstream' consequential damage to other, 'non-defective,' parts of the home."
Salisbury offers a simple example of how this situation could play out in a typical case: "A general contractor or (more likely) its subcontractor installs a window in a negligent manner, such as to let water infiltrate the building. The CGL policy will not cover the cost of repairing the window itself. It will ordinarily cover the cost of repairing or replacing other property that gets damaged by the water."
But the issue gets thorny from there, and a decision could hinge on whose property — the builder's, or the homeowner's — is damaged as a result of the negligent work. Understanding these distinctions, in any state, is a job for an expert. In his blog post, Salisbury explains the fine points of the Alabama decision in detail. But the bottom line is that Alabama has now joined a trend that is typical of an increasing number of states: If you carry builders general liability insurance, there is a reasonable chance that you'll be protected against losses created by mistakes your subcontractors make. However, the status of this coverage could depend on fine points in your policy, as well as on the evolving state of case law in your own state. So builders should take note of the uncertainty, and have their liability policy reviewed by an attorney to see just what kind of coverage they really do have.