Unintentional Construction Defects Are an Occurrence Under Liability Insurance Policy
A Texas appellate court held an unintentional construction defect is an accident and, therefore, an occurrence under a contractor's commercial general liability policy. Courts across the nation are badly split over this issue.
The case is styled Lennar Corporation . v. Great American Insurance Company.
The insured, Lennar Corporation and its subsidiaries, built more than 400 homes clad a synthetic stucco called Exterior Insulation and Finish System (EIFS). Following local publicity about problems with EIFS, Lennar started receiving complaints from homeowners. Eventually Lennar concluded EIFS was defective beacause it trapped water behind it and did not allow the water to drain, and settled homeowner complaints by removing and replacing the EIFS with real stucco.
The insurers' policies obligated the insurers to pay sums Lennar became legally obligated to pay "as damages because of . . . 'property damage'" caused by an "occurrence" and defined "[o]ccurrence" as "an accident." The court noted a split among appellate courts in Texas and other jurisdictions over whether defective construction is an accident.
The court sided with the courts holding Lennar's defective work accidental because Lennar did not intentionally build the homes with a defective product and did not intend or expect the resulting damage.
The court observed that contrary decisions often confused the issue of occurrence with the issue of whether coverage was excluded under the "business risk" exclusions customarily included in commercial general liability insurance policies. One of those exclusions excludes damage to the insureds own "work." But the court noted these courts failed to give adequate recognition to an exception to the exclusion for work performed on behalf of the insured by subcontractors. The insured does not have direct knowledge of how this work is being done.
The court also held, however, Laneer's costs for replacement of the EIFS was not covered property damage because it was done to prevent future damage rather than to repair physical damage to the EIFS itself and because there was no evidence the EIFS had to be removed to repair the water damage to the homes:
Lennar arguably made a good business decision to remove and replace all the EIFS to prevent further damage. Nonetheless, considering the summary judgment evidence, we cannot conclude that it was necessary for Lennar to remove and replace all the EIFS in order to repair the water damage, if any, to each home. Therefore, the costs incurred by Lennar to remove and replace EIFS as a preventative measure are not Adamages because of . . . property damage.@ Accordingly, Lennar must apportion the EIFS-related damages between its costs to remove and replace EIFS as a preventative measure and its costs to repair water damage to the homes.
My Thoughts: This decision is a blow for common sense. Courts who have held defective construction not an accident have focused on the fact that the construction was done intentionally and that it was foreseable property injury could occur if the intentional act of construction caused harm. But that can also be said about intentionally getting behind the wheel of an automobile; it's certainly foreseeable damage injury could occur if the intentional act of driving caused damage. Nevertheless, absent evidence the driver set out on a mission to cause a wreck, no one questions the damage was caused by an accident.
In addition, where there is completed operations coverage, if defective construction is not an occurrence the value of the policy becomes problematic for the insured. The policy exists to protect the contractor from third party property and personal injury claims resulting from the failure of its products and operations.
I've managed to save up roughly $23023 in my bank account, but I'm not sure if I should buy a house or not. Do you think the market is stable or do you think that home prices will decrease by a lot?