On June 18, 2013, the West Virginia Supreme Court of Appeals issued its opinion in Cherrington v. Erie Insurance Property and Casualty Co., 745 S.E.2d 508 (W. Va. June 18, 2013). The opinion expressly reversed previous West Virginia jurisprudence through the Court’s holding that defective workmanship causing bodily injury or property damage is an “occurrence” under a commercial general liability (CGL) insurance policy.
The case originated in 2004 when the underlying plaintiff entered into a “cost plus” contract with a general contractor (“contractor”) for the construction of a home, which included landscaping and interior furnishing. Several subcontractors were also involved in construction, and their work formed the basis of plaintiff’s damages. During the construction process, disputes arose between plaintiff and the contractor concerning whether landscaping was included within the contract between the parties. Plaintiff also felt that she was overcharged for the interior furnishings for the house. Most importantly, plaintiff alleged that she observed defects in the house following its completion, including an uneven concrete floor, water infiltration, a sagging support beam and cracks in drywall.
Plaintiff brought suit against the contractor and subcontractors in 2006. Plaintiff’s complaint and amended complaint alleged that the contractor was negligent through the construction of her home through the following: (1) altering the design; (2) negligently pouring and finishing the concrete floor; (3) finishing and painting the house; (4) placing and securing the foundation. Plaintiff also alleged that the contractor breached a fiduciary duty through its failure to secure materials and furnishings for the project within the completed contract price. Plaintiff alleged damages through the contractor’s misrepresentations and negligent acts, which resulted in a reduction in her home’s fair market value. Plaintiff also alleged emotional distress as a result of the issues with her home.
Following the filing of plaintiff’s lawsuit, the contractor requested its carrier to provide coverage and a defense through a CGL policy. The carrier denied coverage and a duty to defend. The contractor subsequently filed a third-party complaint against the carrier seeking a declaration of its rights under the CGL policy. The carrier subsequently filed a motion for summary judgment, contending that the subject policy did not provide coverage for the claims asserted by plaintiff and that a defense was not owed to the contractor. The trial court granted the carrier’s motion for summary judgment, finding that contractor’s CGL policy did provide coverage for “bodily injury” or “property damage” but plaintiff’s claims of emotional distress without physical manifestation did not constitute a “bodily injury” under the policy’s definition of that term. The trial court also found that plaintiff failed to establish covered property damage due to the fact that the damages she alleged in her complaint were for economic losses for diminution in value or home or excess charges she was required to pay.
Importantly, the trial court further found that plaintiff had not established that an “occurrence” or “accident” had caused damages she had sustained because faulty workmanship, standing alone, is not sufficient to give rise to an “occurrence.” See, Cherrington, at 514. This finding was premised on the previous holding of West Virginia Court of Appeals in Corder v. William W. Smith Excavating Co., 210 W. Va. 110, 556 S.E.2d 77 (2001); See also, State v. Bancorp, Inc. v. United States Fid. & Guar. Ins. Co., 199 W. Va. 99, 483 S.E.2d 228 (1997). The trial court held that even if plaintiff had sustained covered losses, there was not an “occurrence” pursuant to the contractor’s CGL policy, which would trigger coverage. Finally, the trial court found that even if it was assumed that coverage existed under CGL policy, coverage would be barred pursuant to the policy’s exclusions. Citing North American Precast, Inc. v. General Cas. Co. of Wisconsin, 413 Fed. Appx. 574 (4th Cir. 2011) (per curiam) and Groves v. Doe, 333 F.Supp.2d 568 (N.D. W. Va. 2004), the trial court also found that exclusion “M” (“Damage to Impaired Property or Property Not Physically Injured”) would bar coverage because it applies “irrespective of the existence of subcontractors.” Cherringer, supra., at 515.
On appeal, the West Virginia Supreme Court of Appeals considered the following assignments of error by the trial court: (1) there was no property damage caused by an “occurrence” under the contractor’s CGL policy; and (2) the CGL policy’s exclusions for “your work” and “impaired property or property not physically injured” precluded coverage. On appeal, petitioners also advanced the argument that the trial court had refused to interpret the policies consistent with the reasonable expectations of the insured.
The Court’s analysis started by recognizing that it had previously addressed the issue presented on appeal: is defective workmanship a covered “occurrence” under the provisions of a CGL policy of insurance? Citing Syl. Pt. 2, Erie Insurance Property and Casualty Co. v. Pioneer Home Improvement, Inc., 206 W. Va. 506, 526 S.E.2d 28 (1999), the Court recited its previous holding:
A lawsuit commenced by a building owner against a building contractor alleging damages caused by faulty workmanship is not within the coverage provided by the contractor's general liability policy of insurance unless such coverage is specifically included in the insurance policy. A commercial general liability policy insurer has no duty to defend a contractor in a lawsuit nor to indemnify a contractor for sums paid to settle the lawsuit or to satisfy a judgment unless the insurance policy specifically requires the insurer to do so.
In its decision of Corder, supra., the Court further found:
Commercial general liability policies are not designed to cover poor workmanship. Poor workmanship, standing alone, does not constitute an "occurrence" under the standard policy definition of this term as an "accident including continuous or repeated exposure to substantially the same general harmful conditions."
Id., at Syl. Pt. 2. The final decision by the West Virginia Supreme Court of Appeals within its trilogy of cases addressing coverage for defective workmanship claims was Webster County Solid Waste Authority v. Brackenrich and Associates, Inc. 217 W. Va. 304, 617 S.E.2d 851 (2005).
The Court then noted that it was “acutely” aware that after rendering the above referenced decisions, many courts considered the same issues. The Court noted that a majority of other states reached the contrary conclusion through legislative action or judicial decision. Cherringer, at 517. Recognizing a “definite trend” in the law that had arisen since its decisions in the late 1990’s and early-to-mid-2000’s, the Court cited to a multitude of decisions from other jurisdictions. Ultimately, after citing to the holdings throughout the United States that have addressed this issue, the Court held that a defective workmanship claim constitutes an “occurrence” under a CGL policy of insurance. Id., at 520.
The Court formally held that “[i]n order for a claim to be covered by the subject CGL policy, it must evidence bodily injury or property damage that has been caused by an ‘occurrence.’” Id. Citing the definition of “occurrence” to mean “an accident” the Court noted that the policy did not provide a definition for “accident.” Through a previous holding, the Court defined accident to exclude damages or injuries that were “deliberate, intentional, expected, desired or foreseen” by the insured. Id., citing Syl. Pt. 1, Casualty Co. v. Westfield Insurance Co., 217 W. Va. 250, 617 S.E.2d 797 (2005).
Evidence produced in discovery indicated that the damage to plaintiff’s residence was caused by subcontractors of the primary contractor. The Court found that the policy’s express language provided coverage for the acts of subcontractors, contained within policy’s Exclusion “L”, by excepting it from the “your work” exclusion:
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.
The Court’s treatment of the exclusions in the policy deserves special attention because it could significantly mitigate the impact of the Court’s finding concerning what constitutes an “occurrence.” Examining Exclusion “L” (“Property damage” to “your work”), the Court noted that Exclusion “L” excludes coverage for the work of the contractor but does not operate to preclude coverage under the facts of the case for work performed by the subcontractors. Id., at 524. Consequently, if the contractor was alleged to have completed the defective work, coverage would have likely been excluded irrespective of whether the defective work constituted an occurrence under the policy.
Under Exclusion “M” (excluding coverage for (1) a shortcoming in “your product” or “your work” and (2) an issue arising from the insured’s or insured’s agent’s failure to perform contractual obligations), the Court again relied on the fact that the subcontractor performed a significant amount of the work which was defective. The Court found that Exclusion “M” would act to preclude coverage for the contractor based on the damages caused by the subcontractors. However, the Court further found that Exclusions “L” and “M” were in conflict and applying Exclusion “M” to preclude coverage for the subcontractor’s work would negate the coverage afforded for subcontractor work in Exclusion “L.” Id., at 525-526. The Court found that it was not reasonable to construe two policy exclusions according to their plain language when the operative effect of this exercise results in such an incongruous result. Id., citing Syl. Pt. 2, D’Annunzio v. Security –Connecticut Life Ins. Co., 186 W. Va. 39, 410 S.E.2d 275 (1991). The Court disregarded the exclusion contained in Exclusion “M”. The Court briefly noted that the exclusion for “breach of contract” related actions in Exclusion “M” was also not applicable. Finally, the Court briefly analyzed the trial court’s conclusory finding that Exclusion N (recall of products) also operated to exclude coverage. The Court found no support for this finding by the trial court.
The Court’s opinion also addressed the trial court’s grant of summary judgment in favor of the same carrier in a claim for coverage and defense by a subcontractor/agent (subcontractor) of the contractor pursuant to the subcontractor’s homeowners and umbrella policies of insurance. Cherrington, supra, at 528. The Supreme Court of Appeals upheld the award of summary judgment in favor the carrier in this instance. However, the Court did find, consistent with its handling of the CGL policy that the claims against the subcontractor were “occurrences” under the homeowner’s and umbrella policies. The Court based its affirmation of the denial of coverage based on the business pursuit’s exclusion to the policies.
The effects of the Cherrington decision will likely continue to be felt for the foreseeable future in relation to the interpretation of CGL policies in West Virginia and in other jurisdictions. Several critical issues will likely need to be addressed in future cases, including the issue of how the West Virginia Supreme Court of Appeals handles the situation when the allegations of defective workmanship are only directed towards work completed by the general contractor.
Members of DRI’s Insurance Law Committee recognize that they must always be aware of new changes involving insurance coverage. The recent West Virginia Supreme Court of Appeals decision discussed above demonstrates the importance of membership with DRI and the value that DRI’s seminars provide. For more information about how the Cherrington decision could affect future coverage decisions in other jurisdictions, please consider attending the DRI’s Insurance Coverage and Practice Symposium
on December 12th and 13th, 2013 in New York City. The program will offer an outstanding opportunity for practitioners to learn about the latest decisions in coverage litigation and how they will shape insurance practice for the foreseeable future. The Insurance Coverage and Practice Symposium will also present an outstanding opportunity to network with colleagues.
For more information, please click here.
See you in New York!