- The Michigan Supreme Court has ruled that a subcontractor's unintentionally faulty work was an "accident" as it relates to commercial general liability (CGL) insurance and therefore is a valid claim under the subcontractor's insurance coverage.
The case that the state's highest court reviewed was Skanska USA Building Inc. v. MAP Mechanical Contractors Inc. Skanska sued MAP and two Amerisure insurance companies for $1.4 million over damage caused by MAP's faulty work on a medical center in Michigan. While working on the project's HVAC system, MAP installed expansion joints backward, which led to significant damage to the center's concrete, steel and heating system. Amerisure rejected Skanska’s initial insurance claim submitted under one of the subcontractor’s CGL policies.
In its decision, the court defined an "accident" as “an undefined contingency, a casualty, a happening by chance, something out of the usual course of things, unusual, fortuitous, not anticipated, and not naturally to be expected.” Amerisure left the term "accident" undefined in MAP's policy. As part of its decision, the court ruled that an often-cited case from 1990, Hawkeye-Security Insurance Co. v. Vector Construction Co., was limited to claims involving pre-1986 projects.
The Associated General Contractors of America, in a statement announcing the win for contractors, said that this decision would not apply if the CGL policy specifically excluded defective work. Commercial construction insurance policies regularly exclude many items, including exterior insulation and finishing systems (EIFS) and earth moving work. Contractors engaged in this work often have to hunt down an insurance provider that will offer coverage for these types of construction activities.
The Michigan court did not address the issue of whether Skanska's being named an additional insured on MAP's CGL policy, which had a "your work" exclusion, barred coverage of the defective work. A CGL policy in general is meant to cover damages to others, not the insured's work, thus the "your work" exclusion. An additional insured endorsement amends the CGL policy to include another party as an insured to the policy. It is common for general contractors to be added to their subcontractors' CGL policies.
Attorney Mark Gravely, founder of Gravely Attorneys & Counselors in Texas, said the Michigan decision has the potential to be "high impact."
"First," he said, "commercial property owners crippled or otherwise substantially damaged by substandard work can finally be made whole by the insurer that covers unintended damages."
In addition, this ruling sends a signal to companies that Michigan is business friendly. Michigan, Gravely said, is the latest in a series of states to hold insurers responsible in this way. In fact, the AGC said that since 2007, high courts in Florida, Georgia, Indiana, Mississippi, New Jersey, South Carolina and Texas have made similar rulings while federal courts have interpreted and applied the laws of Arkansas and Minnesota in comparable ways.
But in May, the U.S. Eighth Circuit Court of Appeals in St. Louis offered up a different opinion as to whether construction defects were accidents and, therefore, occurrences under CGL policies.
In that ruling, the Eighth Circuit said construction defects were not accidents because defective work was normal in the industry, so damages resulting from that work could not be considered unexpected, as an accident would imply. Therefore, inferior work was not a covered occurrence under the CGL policy.