What Constitutes an “Occurrence” In Your CGL Policy?

In Cincinnati Ins. Co. v. AMSCO Windows, No. 13-4155, 2014 WL 6679589, at *3 (10th Cir. Nov. 26, 2014), the United States Court of Appeals, Tenth Circuit, held that construction defects brought against a window manufacturer (“AMSCO”) were “occurrences” as defined under the manufacturer’s Commercial General Liability (“CGL”) policies and, therefore, those CGL policies provided coverage for those claims.

In our experience, when courts follow the minority and find that manufacturing or construction defects cannot be an occurrence under a CGL policy, they often rotely apply what they see as precedent, instead of carefully analyzing the policy language and the facts. Here, both the district court and the Tenth Circuit give us a refreshing and thoughtful analysis into this issue. Read about it after the jump.

AMSCO maintained insurance coverage from Cincinnati Insurance Company (“Cincinnati”) under a series of renewable CGL policies (the “Policies”) from 2002 through 2007. Those Policies obligated Cincinnati to:

pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend any “suit” seeking those damages…. This insurance applies to “bodily injury” and “property damage” only if … [t]he “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory.

In 2010, various Nevada homeowners brought actions against the contractors who built their homes, alleging that defective window products and improper installation caused property damage. The contractors asserted claims against the company who sold AMSCO’s windows and that company in turn brought claims against AMSCO.

Cincinnati refused to defend AMSCO and instead sought a declaration from the district court that it had no duty to defend or indemnify AMSCO against the homeowner claims because, under Utah law, the property damage alleged did not implicate an “occurrence” covered by the Policies. The district court disagreed with Cincinnati and held the insurer owed a duty to defend under the Policies.

The U.S. Court of Appeals affirmed. In reaching this conclusion, the Court interpreted the plain language of the Policies and applied well settled Utah state law regarding what constitutes an “occurrence.” Looking at the plain language of the Policies, the Court highlighted that “occurrence” was defined as:

an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

Cincinnati argued that in claims involving manufacturing defects in windows, there are no circumstances where any resultant damage to the surrounding areas could ever be deemed an “occurrence.” This argument was based on the premise that the resulting damage was “foreseeable” to AMSCO and therefore could not be considered an “accident” within the definition of “occurrence.”

The Court disagreed and clarified that the test for determining whether an event was an “occurrence” under a CGL policy is not whether the result was “foreseeable,” but rather whether it was “intended” or “expected.” In fact, the Utah Supreme Court (in N.M. on behalf of Caleb v. Daniel E.) explained two limited situations where damage to property would be “non-accidental” and therefore not an “occurrence:”

First, harm or damage is not accidental if it is the result of actual design or intended by the insured. Second, harm or damage is not accidental if it is the natural and probable consequence of the insured’s act or should have been expected by the insured. The first category presents a factual question as to what the insured intended. The second category generally presents a legal question as to what the average individual would expect to happen under the circumstances.

These circumstances did not apply. Cincinnati never alleged that the homeowners’ damage was intended or expected by AMSCO. Instead, Cincinnati argued that the damage was the “natural and probable result of the defective manufacture of the windows.” The Court held this to be a foreseeability argument with no bearing on whether the damage alleged was an “occurrence” under the Policies. Cincinnati’s failure to demonstrate that AMSCO actually expected or intended for the damage to result lead to the Court affirming the district court’s holding that Cincinnati had a duty to defend AMSCO.

This decision serves as a reminder to contractors and suppliers alike to assess their respective insurance coverage and confirm what “occurrences” are covered therein.