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Home builder’s Commercial General Liability Insurance Policy does not cover faulty workmanship of subcontractors

In the case of J-McDaniel Construction Co., Inc. v. Mid-Continent Casualty Company, the Eighth Circuit, applying Arkansas law, had occasion to explore the scope of a home builder’s coverage under its Commercial General Liability Insurance Policy.  No. 13-267, August 4, 2014.

 J-McDaniel is a residential construction general contractor that employs subcontractors for every portion of construction.   In 2005, J-McDaniel purchased a Commercial General Liability Insurance Policy (“CGL”) from Mid-Continent Casualty Company (“Mid-Continent”) that provided coverage for “property damage” caused by an “occurrence” as defined by the policy.  An “occurrence” is defined as follows:

        an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

In 2006, J-McDaniel was sued by homeowners for defects in the construction of their new home allegedly as a result of faulty workmanship on the part of certain subcontractors.  Mid-Continent refused to defend or indemnity J-McDaniel under the CGL policy.   J-McDaniel ultimately settled the lawsuit and then sued Mid-Continent for, among other claims, breach of its insurance contract for Mid-Content’s failure to extend coverage to J-McDaniel. 

The breach of contract claim turned on whether the faulty workmanship was an “occurrence” within the meaning of the policy.  The federal district court said no, relying on an Arkansas Supreme Court case that held that “…defective workmanship standing alone – resulting in damages only to the work product itself – is not an occurrence” as defined by a similar CGL policy.  Essex Ins. Co. v. Holder, 261 S.W.3d 456, 460 (Ark. 2008).

 On appeal in the Eighth Circuit Court of Appeals, J-McDaniel conceded that the Essex holding represented the state of Arkansas law when it was decided, but urged the Court to reverse the district court because the legal landscape is shifting and more states are trending towards including faulty workmanship coverage under CGL policies.  Moreover, the Arkansas legislature had subsequently enacted a statute that effectively overruled Essex in 2011. 

The Eighth Circuit, however, declined J-McDaniel’s invitation to overrule Essex and to apply the new Arkansas statute retroactively.  Tackling the second argument first, the Eighth Circuit explained that Arkansas law reflects a presumption against retroactive application of statutes.  Moreover, Arkansas law also provides that insurance policies are governed by statutes in effect at the time of their issuance. 

The Eighth Circuit also was not willing to disregard the Arkansas Supreme Court’s holding in Essex, recognizing that for the relevant time period, the Arkansas Supreme Court definitively held that faulty workmanship was not a covered occurrence under CGL policies and the Eighth Circuit lacked authority to disregard such clear authority from the state’s highest court.