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(Article from Insurance Law Alert, June 2015)

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Reversing an Alabama federal district court decision, the Eleventh Circuit ruled that faulty workmanship constituted a covered “occurrence” and that a contractual liability exclusion did not bar coverage for breach of warranty claims.  Penn. Nat’l Mut. Cas. Ins. Co. v. St. Catherine of Siena Parish, 2015 WL 3609353 (11^th Cir. June 10, 2015). 

The coverage dispute arose out of the faulty installation of a new roof for a parish.  The contractor’s insurer defended a suit about the faulty workmanship under a reservation of rights.  After a jury entered a verdict against the contractor, the insurer filed suit, seeking a declaration that it had no duty to indemnify the judgment.  An Alabama district court ruled in the insurer’s favor, finding that a contractual liability exclusion barred coverage.  The Eleventh Circuit reversed.

The Eleventh Circuit ruled that the negligent construction claims alleged an “occurrence,” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  The court explained that although faulty work itself is not an accident or occurrence, there is an occurrence when the faulty work results in damage to other property.  On this basis and because the faulty roof work at issue damaged the building’s ceilings and decks, the court found an “occurrence.”  Although some courts have endorsed a similar damage-to-other-property approach to construction defect coverage, others have refused to do so, emphasizing that the presence or absence of consequential damage is irrelevant to the occurrence question.  See May, October and December 2013 Alerts; April 2010 Alert; February 2011 Alert.

The Eleventh Circuit also ruled that a contractual liability exclusion that precluded coverage for damages “by reason of the assumption of liability in a contract or agreement” did not bar coverage.  The district court had held that the exclusion applied to breach of implied warranty claims that arose out of the parties’ contractual relationship.  The Eleventh Circuit reversed, finding that under Alabama precedent, contractual liability exclusions apply “only where the insured agree[s] to indemnify another party” and do not extend to breach of express or implied warranty claims, even when they arise out of contract.  The Fifth Circuit, applying Louisiana law, has likewise interpreted a contractual liability exclusion to apply only where the alleged injury would not have occurred “but for” a breach of contract.  See May 2012 Alert.