Contradicting the Missouri Supreme Court and the majority of courts nationally, the 8th Circuit, applying Missouri law, recently ruled, in American Family Mutual Ins. Co. v. Mid-American Grain Distributors LLC, that defective or faulty workmanship is not an “occurrence” within the meaning of a Commercial General Liability (“CGL”) policy.1
Mid-American designed and constructed a grain storage and distribution facility for Lehenbauer under an oral contract. Mid-American sued Lehenbauer for breach of contract and Lehenbauer counterclaimed against Mid-American and its managing agent for negligence and “implied dut[ies] of workmanlike performance and fitness for a particular purpose.” Mid-American tendered the claims to its CGL carrier, American Family Mutual Ins. Co., seeking a defense and indemnity for the counterclaims alleged by Lehenbauer.
American Family Mutual Ins. Co. accepted the tender of the claim under a reservation of rights and then filed an action against Mid-American seeking a declaratory judgment that no coverage exists under the policy because defective or faulty workmanship is not an “occurrence” under the CGL policy.
Under the ISO CGL policy, “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” “Accident” is an undefined term under the policy, so it is up to the court to determine how to define “accident.” Missouri courts have defined “accident” as “an event that takes place without one’s foresight or expectation; an undesigned, sudden and unexpected event.”2 If the insured foresaw or expected the loss then it would not be considered an accident and, therefore, not an “occurrence,” meaning there would be no coverage under a CGL policy.
When deciding this case, the court relied heavily upon the original Missouri Court of Appeals case,3 despite a Missouri Supreme Court case reaching the opposite conclusion in D.R. Sherry Constr., Ltd. v. Am. Family Mut. Ins. (“D.R. Sherry”).4 The court distinguished D.R. Sherry from this case based on the loss resulting directly from the faulty construction, where in D.R. Sherry the faulty or defective workmanship was the indirect or partial cause of the damage and there was an additional covered cause of loss that directly caused the damage to the property.
The court applied the foreseeability rule, which looks to whether or not the insured foresaw or expected the injury or damages which occurred as a result of the faulty or defective workmanship. In that analysis, the foreseeability of the damage is based on the state of mind of the insured when performing the faulty or defective workmanship. This resulted in the court finding that normal and expected resulting damage to property is foreseeable or expected from the standpoint of an insured when defective or faulty workmanship is performed. Consequently, the court determined that defective or faulty workmanship is not an “occurrence” under the CGL policy.
In both this case and D.R. Sherry the foreseeability rule was used to determine if there was an “occurrence” or not. Because the faulty or defective workmanship directly caused the resulting damage, the court found there is no “occurrence”, whereas when the faulty or defective workmanship indirectly causes the resulting damage ^because of an intervening cause of loss, as in D.R. Sherry, there may be an “occurrence”.
At a minimum, this case has shown policyholders that, even in states with highest court rulings favorable to the insured, it is not a guarantee that faulty or defective workmanship will be considered an “occurrence” when the CGL policy has an unamended ISO definition of “occurrence.” General contractors and subcontractors should contact coverage counsel to review their policy’s current definition of “occurrence” and determine how it can be improved to address this risk.
SDV has recently updated its 50 State Survey on Construction Defect as an Occurrence which can be found here.
For more information, please contact Anna Perry at 203.287.140 or email@example.com.
1 Am. Family Mut. Ins. Co. v. Mid-American Grain Distributors, LLC, No. 19-2050, 2020 WL 2373986, (8th Cir. May 12, 2020).
2 The View Home Owner’s Ass’n v. The Burlington Ins. Co., 552 S.W.3d 726 (Mo. Ct. App. 2018).
3 American States Ins. Co. v. Mathis, 974 S.W.2d 647 (Mo. Ct. App. 1998).
4 D.R. Sherry Constr., Ltd. V. Am. Family Mut. Ins., 316 S.W.3d 899 (Mo. 2010) (en banc).