Owners Insurance Co. v. Jim Carr Homebuilder, LLC
157 So. 3d 148, 2014 Ala. LEXIS 44, 2014 WL 1270629 (2014)
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Rule of Law:
Property damage to a general contractor's completed work that results from a subcontractor's faulty workmanship constitutes an 'occurrence' under a standard Commercial General Liability (CGL) policy. A 'Your Work' exclusion barring coverage for such damage is rendered inapplicable if the insured purchased supplemental 'products-completed operations hazard' coverage.
Facts:
- In January 2006, Thomas and Pat Johnson contracted with Jim Carr Homebuilder, LLC (JCH) for the construction of a new house.
- The contract required JCH, the general contractor, to maintain general-liability insurance. JCH used subcontractors for all actual construction work.
- The Johnsons paid approximately $1.2 million for the house and took possession in February 2007.
- Within a year of taking possession, the Johnsons discovered numerous problems with water leaking through the roof, walls, and floors of the house.
- The leaks, caused by defective work from JCH's subcontractors (e.g., improper flashing, mortar, window/door installation), resulted in significant water damage to other completed parts of the house, including the roof decking, window sills, and hardwood floors.
- The Johnsons notified JCH of the problems, and JCH's attempts to remedy the defects were unsuccessful.
Procedural Posture:
- On May 13, 2008, the Johnsons sued JCH in Shelby Circuit Court (a state trial court) for breach of contract, fraud, and negligence.
- JCH tendered the claim to its insurer, Owners Insurance Company, which provided a defense under a reservation of rights.
- On March 23, 2009, Owners filed a separate declaratory-judgment action in the same court against JCH and the Johnsons, seeking a judicial declaration that it had no duty to indemnify JCH.
- In the underlying action, the trial court granted JCH's motion to compel arbitration of the Johnsons' claims.
- On March 13, 2012, the arbitrator entered a $600,000 award in favor of the Johnsons and against JCH, which the trial court confirmed by entering a final judgment.
- In the declaratory-judgment action, the Johnsons, JCH, and Owners all filed cross-motions for summary judgment.
- On May 25, 2012, the trial court granted summary judgment for the Johnsons and JCH, declaring that Owners was obligated to indemnify JCH for the full arbitration award.
- Owners appealed the trial court's summary judgment order to the Supreme Court of Alabama.
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Issue:
Does property damage to a homebuilder's own completed work, when caused by a subcontractor's faulty workmanship, constitute a covered 'occurrence' under a Commercial General Liability policy, and if so, does a 'Your Work' exclusion bar coverage when the builder has purchased 'products-completed operations' coverage?
Opinions:
Majority - Per Curiam
Yes, the property damage constitutes a covered 'occurrence' and the 'Your Work' exclusion does not bar coverage. The court clarified that while faulty workmanship itself is not an 'occurrence,' property damage resulting from that faulty workmanship is. The policy's definition of 'occurrence' as an 'accident' does not distinguish between damage to the insured's own work and damage to third-party property. More importantly, the policy's 'Your Work' exclusion, which would normally bar coverage for damage to the insured's completed project, is inapplicable here. The exclusion only applies to damage 'included in the 'products-completed operations hazard.'' Because the policy declarations show that JCH purchased $4 million in supplemental coverage specifically for 'products-completed operations,' the exclusion is nullified, and the insurer must cover the loss.
Concurring - Murdock, J.
Yes. This opinion concurs with the majority but writes separately to address Owners Insurance Company's argument that the arbitrator's award failed to differentiate between the covered costs of repairing consequential damage and the non-covered costs of repairing the faulty workmanship itself. The opinion notes that Owners did not adequately challenge the trial court's finding that the evidence of covered damage was sufficient to support the entire award, and therefore the argument was not preserved for appeal.
Concurring in part and dissenting in part - Shaw, J.
Yes, but only in part. This opinion concurs that damage resulting from faulty workmanship can be a covered 'occurrence,' even when the damage is to the insured's own work product. However, it dissents from the majority's decision to affirm the entire award without apportionment. The arbitrator's award likely includes compensation for repairing the faulty workmanship itself, which is not covered under the CGL policy. The majority fails to address this critical issue, and the case should be remanded for the trial court to determine what portion of the award is for covered consequential damages versus non-covered repairs of the defective work itself.
Analysis:
This decision significantly clarifies the 'occurrence' definition within CGL policies for construction defect claims in Alabama. By holding that damage to the contractor's own work product caused by a subcontractor can be an 'occurrence,' the court shifts a substantial portion of the risk for subcontractor negligence from the general contractor to its insurer. The ruling also underscores the critical function of 'products-completed operations' coverage as a direct counter to the 'Your Work' exclusion, making it essential for contractors seeking to insure against post-completion defects. This precedent likely increases the value of such supplemental coverage and shapes how insurers underwrite policies for general contractors.
