Two Cases Analyze Faulty Workmanship Claims Under CGL Policies, With Contrary Results

Insurance Coverage Case Advisory, Issue 43

Less than two weeks apart, two appellate courts issued opinions analyzing whether faulty work claims are covered under commercial general liability policies, each reaching a different result. The United States Court of Appeals for the Third Circuit issued an unpublished opinion in Zurich American Insurance Company v. R.M. Shoemaker Company, No. 12-2268, 2013 WL 1224104 (3d Cir. Mar. 27, 2013). The Supreme Court of North Dakota issued an opinion in K&L Homes, Inc. v. American Family Mutual Insurance Company, No. 20120060, 2013 WL 1364704 (N.D. Apr. 5, 2013).

In R.M. Shoemaker, the Third Circuit, applying Pennsylvania law, affirmed the district court's summary judgment order holding that a general liability insurer had no duty to defend or indemnify a policyholder in a lawsuit seeking damages resulting from faulty workmanship of the policyholder's subcontractor. 2013 WL 1224104, at *4.

In R.M. Shoemaker, a New Jersey county hired the policyholder to construct an addition to a correctional facility. The county filed a lawsuit against the policyholder alleging that the policyholder, a construction firm, negligently supervised its subcontractor. The county further alleged that the policyholder's negligence permitted the subcontractor to engage in willful misconduct, which resulted in "damage to both structural elements and personal property" at the correctional facility. The insurance policies provided coverage for property damage caused by an "occurrence." The policies defined "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." 2013 WL 1224104, at *1.

The policyholder argued unsuccessfully that the dispute was governed by a Pennsylvania case where the court held that an insurer had a duty to defend insured parents against negligence claims seeking to hold the parents liable for damages resulting from a shooting rampage perpetrated by their child. See Donegal Mutual Ins. Co. v. Baumhammers, 938 A.2d 286, 293 (Pa. 2007). The Third Circuit held that "the crucial inquiry dictating whether a general liability insurer must defend its insured under an occurrence-based policy is whether an event was sufficiently fortuitous from the perspective of the insured to qualify as an 'occurrence.'" Id. at 292. The court contrasted the shooting spree in Baumhammers, with the facts of the pending case; the shooting was "unexpected, undesigned and...