Defense Digest

Florida Appeals Court Paving New Way And Broadening Insurance Coverage For Faulty Workmanship By Contractors And Subcontractors

Until recently, Florida courts have taken the position that commercial general liability (CGL) insurance policies do not cover the cost of replacement of a builder’s or general contractor’s defective materials or workmanship. Much to the chagrin of many insurers, the Florida Second District Court of Appeals has reversed a line of cases and has taken the position that workmanship deficiencies causing damages to a home were an accident and coverage was found in the policy at issue.

In J.S.U.B. v. United States Fire Insurance Company, 906 So.2d 303 (Fla. 2d DCA 2005), the builder and general contractor, J.S.U.B. Inc. ("the Builder"), constructed a series of homes in Lee County, Florida. Builder held a CGL insurance policy with United States Fire Insurance Company ("Insurer"). The Builder sought coverage under this policy when, after the completion of construction, the walls on some of the homes moved or sank as a result of improper compaction of the soil, improper testing of the soil compaction, poor soil or fill material, or a combination thereof. Ultimately, it was the negligence of a subcontractor which led to the Builder’s claim.

The Insurer denied coverage, reasoning that the policy provided coverage for damage to items that the homeowners added to the homes, but damage as a result of the builder’s or a subcontractor’s faulty workmanship was not covered by the policy. The Builder brought a declaratory relief action to the trial court and appealed after losing at trial. On appeal, the Builder prevailed when the court found that the policy did cover faulty workmanship.

So, how did the court find coverage and pave a new road for many contractors in the future? It all stemmed from the word "accident" and its meaning within the policy.

Like many CGL policies, the policy at issue contained broad insuring language covering property damage caused by an "occurrence" in the coverage territory during the policy period. "Occurrence" was defined in the policy as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." "Accident," as part of the definition of "occurrence," remained undefined by the policy.

The court then looked to Florida jurisprudence and found instructional the case State Farm Fire & Casualty Co. v. CTC Development Corp., 720 So. 2d 1072 (Fla. 1998). In CTC Development, like in J.S.U.B., the term "accident," as it was found in the definition of "occurrence," was undefined by the policy at issue. The court then interpreted and defined "accident" as "encompassing not only accidental events but also injuries or damage neither expected nor intended from the standpoint of the insured."

Thus, although the Insurer argued that workmanship deficiencies, which resulted in later damage to the homes, should not be considered the result of an accident, the court, relying on the broad definition of "accident," held that this type of occurrence falls within the coverage of the policy.

The court also found it relevant to review and consider the exclusions that were contained in the policy. Noteworthy is the "Damage to Your Work" exclusion and the exception that was present in the policy at issue in J.S.U.B. The exclusion and exception read as follows:

The Insurer argued that this exclusion and exception were not applicable and should not even be considered because the policy does not provide coverage for the Builder’s claim. Before J.S.U.B., Florida courts were finding that a general contractor’s policy does not cover a general contractor for the faulty work of a subcontractor. The court, however, held that the policy provisions should be considered as a whole and reviewed in its entirety. Each provision was to be given its full effect. Thus, the court found that since the damage to the homes was a result of the faulty work of a subcontractor, the exception to the exclusion applied and coverage existed for the Builder.

The ruling from J.S.U.B. will likely have a large impact, not just on general contractors and subcontractors, but on insurers. The court’s broad interpretation of this policy has opened the door to insurance coverage that in the past did not exist.

In Florida’s booming real estate market, where new housing developments are sprouting faster than palm trees, one must wonder how insurers cannot see an increase in claims by general contractors. Everyone - developers, investors, and agents alike - is racing to grab their piece of pie in this hot real estate market. Consumers and insurers can only hope that this race does not lead to too much stumbling and falling (or sinking) by the contractors who cannot seem to run fast enough.

*Jaime is an associate in our Tampa, FL office and can be reached at (813) 472-7810 or at jgirgenti@mdwcg.com.