Georgia Supreme Court Holds Defective Work Is An Occurrence

In Taylor Morrison Servs. v. HDI-Gerling Am. Ins. Co., 2013 Ga. LEXIS 618 (July 12, 2013), the Georgia Supreme Court addressed whether a construction defect claim constitutes an “occurrence” for purposes of satisfying the insuring agreement of the CGL Policy.  The court was called upon to make that determination pursuant to a certified question from the United States Court of Appeals for the Eleventh Circuit.  

In the underlying lawsuit, Taylor Morrison, a homebuilder, was sued in California by sixteen homeowners claiming that the concrete foundations of their homes was improperly constructed.  The plaintiffs alleged that the failure of the foundations caused physical damage to their homes, including water intrusion cracks in the floors and driveways, and warped and buckled flooring.  HDI-Gerling initially undertook the defense of Taylor, but then sought a declaration in the U.S. District Court for the Northern District of Georgia that the CGL policy issued to Taylor did not cover the claims.  The district court granted judgment in favor of HDI-Gerling finding that the claims did not assert an “occurrence” as the only damage alleged was the work performed by Taylor.  That ruling was appealed to the Eleventh Circuit, which certified the issue of whether a claim for defective work qualifies an “occurrence” as used in the standard CGL policy.

The Georgia Supreme Court answered that question in the affirmative and rejected the district court’s ruling.  The CGL policy defines the term “occurrence” as an “accident,” and since an “accident” does not require a determination of the party who performed construction work or whose  interests were injured by that work, a claim for damages to the insured’s own work could qualify as an “occurrence.”  In the context of the term “occurrence,” the coverage determination depended upon whether the claimed damages were expected or intended from the standpoint of the insured.

The court went on to make clear that its decision was not contrary to the general rule that a CGL policy is not intended to insure liabilities for the repair or correction of the faulty workmanship of the insured.  The court recognized that the other clauses in the insuring agreement, including the requirement that the claim seek damages for “property damage,”  are better suited to preclude coverage for such claims.  The term property damage “must refer to property that is nondefective and to damage beyond faulty workmanship.”  The court was unwilling to define the line of demarcation between defective and nondefective property when both are a part of the same project.  The court also noted that policy exclusions are inserted into the policy to bar coverage for the repair or correction of defective work.  Finally, the court held that claims of fraud against an insured are generally not covered by a CGL policy, however a cause of action for breach of warranty may be covered where it includes a warranty given for nondefective property that was damaged by the insured’s defective work.