Connecticut Supreme Court Allows Coverage For Pre-Suit Settlement Of Claims For Post-Completion Property Damage Caused By Defective Construction

On June 4, 2013, the Connecticut Supreme Court joined a growing number of state high courts to rule that faulty workmanship on a construction project can be covered by commercial general liability insurance policies. The case is Capstone Building Corp. v. American Motorists Insurance Company (the opinion was officially released on June 11, 2013). Capstone answers a question that has been raised and resolved in a great many insurance coverage cases: Whether damage resulting from alleged construction defects and faulty workmanship is an "occurrence" that is covered "property damage" under the products completed operations hazard provisions of a commercial general liability insurance policy?

Three years after completion of a $39 million housing project, the University of Connecticut forwarded a letter to Capstone setting forth a veritable litany of complaints about the construction, which the Connecticut court summarized as consisting generally of four categories of claims: (1) "damage to non-defective property stemming from defective construction," (2) release of carbon monoxide from improperly vented water heaters; (3) defective work in violation of building codes; and (4) costs of repairing the damaged work. The matter was mediated, resulting in a $1 million settlement of UConn's claims. However, AMICO denied all coverage, refused to participate in the mediation, and the coverage dispute ended up in litigation in federal district court, which certified the coverage issue to the Connecticut Supreme Court.

Addressing the basic issue of coverage for flawed construction, the court ruled that "allegations of unintended defective construction work by a subcontractor that damages nondefective property may constitute 'property damage' under certain circumstances." The court followed what probably is the majority rule in such cases, citing with approval leading decisions of the Florida Supreme Court, United States Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007) and Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.2d 1 (Tex. 2007). However, the Capstone court concluded that the definition of covered "property damage," did not cover claims for "correction of faulty installation." Citing J.S.U.B. and Lamar Homes, again, among other cases, the court decided that without evidence that faulty workmanship damaged other, "nondefective property...allegations of construction defects, without more," do not constitute claims for "injury to...