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(Article from Insurance Law Alert, June 2016)

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The Supreme Court of Iowa ruled that defective work resulting in property damage performed by an insured’s subcontractor may constitute an occurrence under a liability policy.  National Surety Corp. v. Westlake Investments, LLC, 2016 WL 3201729 (Iowa June 10, 2016).

National Surety sought a declaration that it was not liable to the assignee of an excess liability policy for damages awarded in underlying construction defect litigation.  National Surety argued that property damage caused by defective workmanship could not constitute a covered occurrence under Iowa law.  Both parties moved for summary judgment, and the district court ruled in favor of Westlake, the policyholder’s assignee.  A jury later ruled in favor of Westlake, awarding it approximately $12.5 million plus interest.  National Surety appealed on numerous grounds, and an intermediate appellate court affirmed in relevant part.  The Iowa Supreme Court exercised discretion to consider one issue: whether the district court erroneously instructed the jury as to what constitutes an occurrence under National Surety’s policy.

The district court had instructed the jury that the term “accident” means “an unplanned, sudden, and unexpected event . . . determined from the viewpoint of the insureds and what they intended or should reasonably have expected.”  The district court had further instructed that “[d]efective construction work performed by an insured is not covered by the policy; however, defective construction work performed by subcontractors may be an ‘occurrence’ under the policy.”  The Iowa Supreme Court ruled that the district court did not err in directing the jury to consider the subjective viewpoint of the insured in determining whether there was an “accident.”  In addition, the Iowa Supreme Court ruled that the district court did not err in stating that defective work performed by an insured’s subcontractor may constitute an occurrence.  The court reasoned that certain exclusions in the policy (such as a “your work” exclusion) supported its interpretation, explaining that it “would be illogical for an insurance policy to contain an exclusion negating coverage its insuring agreement did not actually provide or an exception to an exclusion restoring it.”  Notably, the court distinguished cases in which courts have ruled that faulty workmanship does not constitute an occurrence because the insured was the general contractor and the property damage was limited to the insured’s own work product.