New Court of Appeals Ruling
Coverage issues exist in nearly every construction defect case. Increasingly, there are as many coverage attorneys at mediations as there are defense attorneys. In January, Division One of the Arizona Court of Appeals handed down an opinion that may impact future rulings by trial courts regarding insurers’ obligations to defend in construction defect lawsuits.
In Lennar v. Auto Owners Ins. Co., 1 CA-CV 03-0451, the developer, Lennar, appealed the trial Court’s judgment in favor of various insurers of Lennar. The facts of the Lennar case are typical of many mass development lawsuits. Lennar was the general contractor on a development called Pinnacle Hill. Shortly after the first homes in the development were completed, the homeowners began to complain of problems with their homes, including drywall cracking. In 1998, a group of homeowners sued Lennar, claiming that their homes had been built on expansive soils. The lawsuit alleged breach of contract, negligence and consumer fraud.
Lennar tendered its defense to its direct insurance carriers and to the insurance carriers of various subcontractors that had added Lennar as an additional insured on their liability policies. Lennar and Plaintiffs disclosed expert opinions that stated that the defects in the subject homes were most likely the result of defective and negligent work by various subcontractors, rather than expansive soils. Ultimately, none of the relevant insurance carriers provided Lennar a defense in the Pinnacle Hill lawsuit. Lennar and the various carriers engaged in a complicated round of pleadings, including declaratory actions and cross claims.
Each insurance carrier filed a motion for summary judgment alleging that it had had no duty to defend Lennar. Essentially, the carriers successfully argued that no duty to defend existed because no “occurrence” had taken place, and that even if an “occurrence” had taken place, the “occurrence” had taken place before the coverage period.
It is important to note that the Lennar decision contains many holdings that may have significance. This article will only address the Court’s definition of “occurrence” in the context of what may give rise to coverage.
The policies in question contained standard language regarding “occurrence”, by providing coverage for “those sums that [Lennar] becomes legally obligated to pay as damages because of ... “property damage” to which this insurance applies.” The insurance applies to ...”property damage” only if (1) the ... property damaged caused by an “occurrence”.
Essentially, all policies in the case defined an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The insurers argued that a negligent construction claim did not trigger their duty to defend because: (1) faulty workmanship cannot constitute an occurrence under Arizona law; (2) the natural consequences of faulty workmanship cannot constitute an occurrence; (3) the workmanship, whether faulty or not, does not constitute an occurrence because an occurrence must be an accident and the subcontractors intended to accomplish the work in the way that they did; (4) the complaint did not allege negligence in the work of specific subcontractors sufficient to create a duty for insurers of that subcontractor’s scope of work to provide a defense, and (5) if there were “occurrences,” they happened before some or all of the policies were in effect.
The Court appears to have reject essentially all five of these arguments. First, the Court found that while faulty construction does not constitute an occurrence, damage to the property resulting from faulty work may constitute an occurrence. The insurers argued that United States Fidelity v. Advance Roofing (App. 1989), supported their position because that decision states that faulty workmanship, standing alone, cannot constitute an occurrence as defined in a CGL policy. The Lennar Court rejected this argument because the court in Advance Roof roofing drew a distinction between faulty workmanship standing alone and faulty workmanship that causes damage to property.
The Lennar Court’s interpretation of Advance Roofing is not really a new concept. The bottom line is that if a plaintiff claims faulty work alone, and claims property damage resulted from the faulty work, Arizona Courts will require the insurer to defend.
Next, the Court found that the policy language covers the natural consequences of negligent construction. The insurers argued that damage resulting from faulty work does not constitute an occurrence under the policy because such damage is the natural consequence of the negligent construction and thus, cannot be an occurrence separate from that faulty construction.
The Court found the insurers’ argument to be contrary to the plain language of the policies. The Court held that negligent construction could be an “accident” as defined by the policy. The insurers took the position that any defective construction must arise from an intentional act. However, the Court found that even if workers do what they intended to do when performing specific acts of construction, that does not establish, should the work turn out to be faulty, that the subcontractor intended to provide faulty work. Accordingly, damage from an “accident” constitutes an “occurrence”.
Time will tell if the Lennar decision will have a major impact on construction defect cases in Arizona. At a minimum, the Lennar decision provides clarity on exactly how an “occurrence” is defined in the context of a construction defect case.
Author: Gary Linder of Jones, Skelton & Hochuli, P.L.C. - Phoenix
(This article originally appeared in the Spring 2007 edition of the Jones, Skelton & Hochuli Construction Law Reporter publication - duplicated with permission)