Some things you should know:
Faulty
Workmanship
Under the CGL
Recent
Developments and
Implications
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Jay Radov, Esquire, CIC
Pegasus Insurance Consulting
Sponsored By:
Pegasus Insurance Consulting
www.peginsure.com
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

Faulty Workmanship under the CGL: Recent
Developments and Implications
An examination of the surprising and
disturbing results of some recent court cases
upon Completed Operations coverage, their
impact in the construction and insurance
industries, and possible solutions.
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If faulty work causes bodily injury and property
damage to a completed structure or building, the
following questions arise:
 Was the faulty work an accident or foreseeable?
 Was the faulty work performed by the insured
contractor or by a subcontractor of the insured
contractor?
 Is there coverage for the direct damage caused by
the faulty work?
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


Is there coverage for the indirect (or
consequential) damage caused by the faulty
work?
If the claim occurs in one state but the
insurance policy was negotiated and
delivered in a different state, which state’s
law applies?
What are some possible solutions to these
problems or potential problems?
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


Kvaerner Metals v. Commercial Union Ins. Co.
908 A.2d 888 (Pa. 2006)
MILLERS CAPITAL INS. CO. v. GAMBONE
BROS., 941 A.2d 706 (Pa. Super. Ct. 2007)
SPECIALTY SURFACES INT’L, INC. v.
CONTINENTAL CASUALTY CO., 609 F.3d 223
(3d CIR. 2010)
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Does a contractor have insurance coverage
for faulty work (a construction defect)
which damages a completed building or
structure?
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The General Contractor hires an HVAC subcontractor
to install a furnace on the roof of a three-story
building under construction.
 The HVAC subcontractor improperly installs the
furnace.
 After the building is completed and occupied, the
furnace explodes and damages the roof. Part of the
roof falls into the third floor of the office building,
damaging the premises of a tenant.

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We will 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. - Section I,
Coverage A, 1. a.
This insurance applies only if the “bodily injury”
or “property damage” is caused by an
“occurrence” – Section I, Coverage A, 1. b.
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 “Occurrence” means an
accident, including continuous
or repeated exposure to
substantially the same general
harmful conditions. – Section V,
13.
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This insurance does not apply to:
“Property damage” to “your work” arising out of
it or any part of it and included in the “productscompleted operations hazard”.
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This exclusion does not apply if the
damaged work or the work out of which
the damage arises was performed on your
behalf by a subcontractor. (This is known
as the Subcontractor Exception to the
‘Damage To Your Work’ Exclusion).
Section I, Coverage A, 2. l
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
The CGL (unendorsed) does NOT
provide coverage for faulty work
which damages a completed
building or structure
 unless the faulty work was performed
by a subcontractor.
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

Faulty work by the subcontractor caused the
furnace to explode. This explosion was an
accident and is thus an “occurrence”.
The faulty work caused direct “property
damage” to the furnace and also caused
subsequent (indirect or consequential)
“property damage” to the roof and to the
tenant’s premises.
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
The General Contractor’s CGL policy provides coverage
(a) for the furnace (the direct damage) because of the
subcontractor exception and (b) for the roof and the
tenant’s premises (the consequential damage).

The HVAC subcontractor’s CGL policy does NOT provide
coverage for its faulty work, the furnace. But the HVAC
subcontractor’s CGL DOES provide coverage for the
consequential damage (the roof and the tenant’s
premises) which were not faulty work performed by
the subcontractor.
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Case Law
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FACTS:
Kvaerner Metals agreed to build a coke oven battery
for Bethlehem Steel
 Kvaerner used a roofing subcontractor for the brick
roof of the oven
 The roofing subcontractor allegedly performed faulty
work, which was exacerbated by heavy rains
 After the roof was completed, it moved and damaged
the coke battery

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RESULTS OF THE CASE:
An “accident” is “unexpected [and] implies a degree
of fortuity that is not present in a claim for faulty
workmanship.”
 Thus, there is no “occurrence” and no coverage under
the CGL
 It was unnecessary, therefore, to ascertain whether or
not “property damage” exclusions were applicable

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
Result of Kvaerner
 Before the case, faulty work was covered if performed by
a subcontractor
 After the case, faulty work is not an “occurrence” and not
covered by the CGL even if performed by a subcontractor
 The ‘Damage To Your Work’ exclusion and the
subcontractor exception to this exclusion are irrelevant
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FACTS:
 Gambone developed and built houses
 Homeowners alleged that water leaks to nondefective interior property in their homes were
caused by construction defects (faulty work) by
Gambone and/or its subcontractors on the stucco
exteriors
 Gambone argued that the consequential (water)
damage caused by direct damage (faulty work to
the stucco) should be an “occurrence”
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RULING OF THE PENNSYLVANIA SUPERIOR
COURT:
 Water that seeps through faulty home exterior
work to damage the home’s interior is not a
fortuitous event, or an “occurrence,” that triggers
coverage
 If faulty work is not an “occurrence”, then property
damage resulting from that faulty work cannot be
an “occurrence” either
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The PA Supreme Court refused to hear the case
 Gambone eliminated coverage for third party damage due
to faulty work
 If a claim stems from faulty work, it is NOT an “occurrence”
and the CGL does NOT provide coverage. The ‘Damage To
Your Work’ exclusion is irrelevant
 Completed Operations coverage for faulty work
(construction defects) has been eliminated, at least in
Pennsylvania using the standard CGL
 How broad is “faulty work” which is not even a defined term
in the CGL?

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FACTS:
A California school district sued Specialty Surfaces in
California for water damage caused by faulty work in
installing artificial turf fields within the school district
 Specialty Surface’s insurer, Continental, denied coverage;
Specialty Surfaces sued Continental in federal court in
Pennsylvania to obtain coverage
 Specialty Surfaces is a Pennsylvania corporation with its
principal place of business in Pennsylvania
 Under California law, the school district’s suit against
Specialty Surfaces would be an “occurrence” and
Continental would have a duty to defend Specialty Surfaces

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FACTS:
 Under Pennsylvania law, however, the school
district’s suit against Specialty Surfaces would NOT
be an “occurrence” and Continental would NOT
have a duty to defend Specialty Surfaces
 The federal court (a) analyzed each state’s contacts
with Specialty Surface’s CGL policy with Continental
and (b) said that where the faulty work had taken
place was much less important
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RULING:


After examining (a) the place where Specialty Surface’s
CGL was signed; (b) the place where this policy was
negotiated; (c) the place of performance of both
Specialty Surfaces and Continental under the CGL; and
(d) the domicile, residence, place of incorporation, and
principal place of business of both parties, the federal
court concluded that Pennsylvania law applied
Consequently, even though the alleged faulty work
happened in California, Pennsylvania law – which holds
that faulty work is NOT an “occurrence” – was
applicable, and thus Specialty Surfaces did not have any
coverage under its CGL for this alleged faulty work
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NOTE: that there is a significant lack of awareness
of this issue in both the construction and insurance
industries – especially in those states that have not
specifically addressed this issue
 Agents have an increased risk of E & O UNLESS they
confirm, in writing, how each of their carriers treat
faulty work
 Agents need to be able to explain these issues to
their current and prospective clients
 Not all insurers are responding the same way

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
Some carriers have filed endorsements to
address this issue, while other insurance
companies have not done so. The
endorsements vary, and some only provide
coverage for direct damage – not for
consequential damage
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Compare this endorsement:

a.

“Occurrence” means an accident . . . and includes “property damage”
to “your work” if the damaged work or the work out of which the
damage arises was performed on your behalf by a subcontractor and
the “property damage” to “your work” is included in the “productscompleted operations hazard”.
With this endorsement:
b. “Occurrence” also means an accident involving: (1) “property
damage” to “your work” if the damaged work or the work out of
which the damage arises was performed on your behalf by a
subcontractor and the “property damage” is included within the
“products-completed operations hazard” or (2) “property damage”
to other than “your work” that arises from “your work”.
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These endorsements should address 4 concerns:
1) Coverage should exist for faulty work
performed by a subcontractor;
2) Coverage should exist for the consequential
(third party) damage caused by the faulty
work of a subcontractor;
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3)
4)
Coverage should exist for the consequential
(third party) damage caused by the insuredcontractor’s faulty work; and
Coverage should exist for “bodily injury”
sustained, directly and indirectly, from faulty
work. The endorsements on the prior page
don’t address “bodily injury”.
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
At least 4 states have enacted legislation to address this
issue: Colorado, Arkansas, South Carolina and Hawaii.

South Carolina’s statute provides that:
Commercial general liability insurance policies shall
contain or be deemed to contain a definition of
“occurrence” that includes:
(1) an accident, including continuous or repeated
exposure to substantially the same general harmful
conditions; and
(2) property damage or bodily injury resulting from faulty
workmanship, exclusive of the faulty workmanship itself.
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
Another possible solution for a large
contractor: endorse the CGL to include a
provision that the “Laws of the State of
______ shall apply”, and choose a favorable
state in which the Courts agree that faulty
workmanship can be an “occurrence”.
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Insurance forms and endorsements vary based on insurance company; changes in
edition dates; regulations; court decisions; and state jurisdiction. The
instructional materials provided by The Insurance Community Center and its
authors is intended as a general guideline and any interpretations provided by
The Community does not modify or revise insurance policy language.
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Inc. (“ISO Material”) is included in this publication. Use of the ISO Material is
limited to ISO Participating Insurers and their Authorized Representatives.
The Insurance Community Center assumes neither liability nor responsibility to
any person or business with respect to any loss that is alleged to be caused
directly or indirectly as a result of the instructional materials provided.
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