Gravel2Gavel Construction & Real Estate Law Blog

Reproduced by permission from Western Legal History, volume 24, number 2 (2011). Copyright © 2011 Ninth Judicial Circuit Historical Society.

This article describes and analyzes the policyholder coverage court decisions and opinions arising from the 1906 San Francisco earthquake and fire, starting with a summary of the factual background and concluding with comments about their historic significance. By showing that policyholders could recover even under strict policy language, these cases helped to spur settlements by reluctant insurers and determined the pace at which the city’s rebirth was completed in the years immediately following the disaster.

But these century-old cases are also important today. They are still relevant to the issue of “ensuing loss”–whether fires or other covered perils, stemming from earthquakes or other excluded perils, are nonetheless insured. This broader question is as current as Hurricanes Katrina and Sandy, and as imminent as the next calamity.

Click here to download the article in its entirety.

Georgia is the latest state to have its highest court hand down a decision falling into line with the majority rule that defective construction can be an “occurrence” in a CGL policy. In Taylor Morrison Services, Inc. v HDI-Gerling Am. Ins. Co., Case No. S13Q0462, — S.E.2d —, 2013 Ga. LEXIS 618 (Ga. July 12, 2013), the Supreme Court of Georgia recently addressed two certified questions from the 11th Circuit involving the meaning of “occurrence” in a standard form CGL policy:

1.) Whether, for an “occurrence” to exist under a standard CGL policy, Georgia law requires there to be damage to “other property,” that is property other than the insured’s completed work itself.
2.) If the answer to Question One (1) is in the negative, whether, for any “occurrence” to exist under a standard CGL policy, Georgia law requires that the claims being defended not be for breach of contract, fraud, or breach of warranty from the failure to disclose material information.

In its July 12 decision, the court answered “No” to the first – under Georgia law an “occurrence” can exist when the damage is to the insured’s completed work – and yes and no to the second -a claim of fraud will not involve an “occurrence”, but a breach of warranty claim may (although, take care, the court expressed doubt that a breach of warranty claim will yield coverage given other standard form policy terms).

In the underlying case, homeowners sued Taylor Morrison, a homebuilder, in a class action involving faulty construction of residential homes in California. The homeowners complained of improperly constructed concrete foundations which they alleged resulted in water intrusion, cracks in floors and driveways, and warped and buckling flooring. Taylor Morrison’s insurer, HDI-Gerling American Insurance Company, Taylor Morrison’s CGL insurer, initially defended the suit and then filed a declaratory judgment action in the Northern District of Georgia seeking a declaration that its policy does not afford coverage for the claims for which the California class was certified. The district court granted summary judgment in favor of the insurers for a number of reasons, including that the claims asserted did not arise from an “occurrence” as the term is defined in a standard form CGL policy because the only “property damage” alleged was to the insured’s work. Taylor Morrison appealed, and the 11th Circuit certified the two questions above to the Supreme Court of Georgia.

In answering the first question, the court picked up where it left off in American Empire Surplus Lines Ins. Co. v Hathaway Development Co., Inc., 288 Ga. 749 (Ga. 2011), wherein, as the court in Taylor Morrison reported, “[o]ur decision [there] definitively establishes that faulty workmanship sometimes can amount to an “occurrence”, at least when the property of someone other than the insured is damaged.” Taylor Morrison, slip at 7. In that case, an insured sought coverage for repairs to property damaged when the faulty workmanship of its plumbing subcontractor caused water and weather damage to neighboring property the insured was also building. The trial court agreed with the insurer that the damage did not arise out of an occurrence, reasoning that faulty workmanship could never be deemed an “accident” because performing the work was intentional. The Court of Appeals reversed and the Supreme Court granted certiorari.

The Supreme Court affirmed, rejecting out of hand the insurer’s assertion that the acts of the plumbing subcontractor could not be deemed an “occurrence” under the standard form’s definition (i.e., an accident, including continuous or repeated exposure to substantially the same general harmful conditions). As the court explained in American Empire, “[a] deliberate act, performed negligently, is an accident if the effect is not the intended or expected result; that is, the result would have been different had the deliberate act been performed correctly.” Id. at 752 quoting Lamar Homes v. Mid-Continent Cas. Co., 242 S.W.3d 1, 16 (Tex. 2007).

In American Empire, the Supreme Court’s focus was on whether an “occurrence” can arise from defective work. In Taylor Morrison, the court then addressed whether, when the damage at issue is to the insured’s work, this changes how the court construes the term “occurrence.” The Supreme Court reasoned that it does not:

It seems rather clear that, in its usual and common usage, “accident” conveys information about the extent to which a happening was intended or expected. Standing alone [as it does in the policy, noted the court], the word is not used usually and commonly to convey information about the nature or extent of injuries worked by such a happening, much less the identity of the person whose interests are injured.

Taylor Morrison, at 9-10. Thus, the court held that an “occurrence” as the term is used in a standard CGL policy, does not require damage to the property or work of someone other than the insured. Any such proscription, the court further explained, does not come from the term “occurrence,” but rather comes from the definition of “property damage” (which it did not address), any applicable exclusions, in particular business risk exclusions, as well as from the requirement that CGL coverage is for liability for “damages because of” property damage. Those “other requirements of coverage are inherently better suited than the requirement of an “occurrence” to limit coverage in faulty workmanship cases to instances in which the faulty workmanship has damaged other, nondefective property or work.” Id. at 11. “The sounder analytical approach” according to the court, “is to avoid conflating the several requirements of the insuring agreement and the exclusions, and instead, to let each serve its proper purpose.” Id. at 13.

The court reported that its understanding is consistent with the “strong trend in the case law.” Id. at 16 citing decisions from the 10th and 4th circuits, and Connecticut, South Carolina, Florida, Texas, and Wisconsin.

Although the court rejected the insurer’s argument that its ruling was inconsistent with three previous Georgia Court of Appeals cases, (SawHorse, Inc. v .Southern Guaranty Ins. Co., 269 Ga. App. 493 (2004); McDonald Constr. Co. v. Bituminous Cas. Corp., 279 Ga. App. 757 (2006); and Custom Planning & Dev. V. American Nat. Fire Ins. Co., 270 Ga. App. 8 (2004)), distinguishing the cases instead, the court did note its disapproval of Custom Planning most definitively with respect to the second certified question.

In answering the second question, the court repeated its “common usage” approach from the first part of its decision to hold that because fraud claims include elements of scienter and intent to induce, such claims could not involve an “accident”, and thus an “occurrence.” “Breach of warranty, however, is a different story” because warranty law tends to impose strict liability regardless of intent or fault. (The court noted that it did not address breach of contract because the underlying class action did not involve a claim for breach of contract other that as a breach of warranty.) Accordingly, Georgia law does not require that the claim being defended be for something other than breach of warranty, at least not for there to be an “occurrence.” Again, the court reiterated that “permitting each requirement of the insuring agreement and exclusion to serve its own purpose is a sounder analytical approach than any endeavor to make “occurrence” bear the entire burden for defining the limits of coverage.” Id. at 23.

Back then, to the court’s disapproval of Custom Planning. There, the Court of Appeals affirmed a finding of no coverage for repairs to a retaining wall that was defectively constructed because “no other [nondefective] property…was damaged as a consequence of the faulty workmanship.” The appellate court further said that “occurrence does not mean a breach of contract, fraud, or breach of warranty from the failure to disclose material information.” The Supreme Court noted that this second statement appeared to have been dicta. On the first point, the Taylor Morrison court expressly disapproved of the appellate court’s treatment of “other [nondefective] property as a component of an “occurrence” but declined to overrule that decision because it found the appellate court’s result to be consistent with its. On the second, the Georgia Supreme Court further disapproved the decision to the extent that “Custom Planning dicta suggests that a breach of warranty claim never can involve an “occurrence.” Id. at n. 15. The court did however overrule Forster v. State Farm Fire & Cas. Co., 307 Ga. App. 89 (2010) which it said relied on the dicta in Custom Planning to affirm summary judgment in favor of an insurer with regard to any construction defects constituting a breach of warranty. Id.