West Virginia Reverses Course to Expand Coverage

July 23, 2013

In the construction industry, small defects in workmanship can result in dramatic losses.  For example, water damage losses arising from an improperly installed bathtub could be many times the cost of installing the tub in the first place.  Some states hold that defective workmanship is not covered by comprehensive general liability (“CGL”) insurance policies, because the liability arises from a breach of contract, rather than from a tort.  A majority of states, however, find that damages arising from defective workmanship are covered under standard CGL policies.  Those states recognize that unlike the economic damages resulting from an intentional breach of contract, the damages resulting from defective workmanship are usually the unexpected and unintentional type we typically think of as “accidents.”  West Virginia has recently reversed course and joined that majority.

In Cherrington v. Erie Insurance Property & Casualty Co. (“Cherrington”), Lisbeth Cherrington contracted for the building of a home.  After the home was completed, Ms. Cherrington observed various defects in the house, including an uneven concrete floor on the ground level of the house; water infiltration through the roof and chimney joint; a sagging support beam; and numerous cracks in the drywall walls and partitions throughout the house.  After Ms. Cherrington sued her contractor for negligence, the contractor filed a third-party complaint against its insurer, seeking coverage for its loss.

The contractor had in place a CGL policy that provided coverage for property damage caused by an “occurrence”.  The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  The policy did not, however, define the term “accident.”

In its analysis, the court relied heavily on the plain meaning of the term “accident.” The court found that the damages arose from an accident because they were not “deliberate, intentional, expected, desired, or foreseen” by the contractor.  Taking a common sense approach to the problem, the court noted that “to find otherwise would suggest that [the contractor] deliberately sabotaged the very same construction project it worked so diligently to obtain at the risk of jeopardizing its professional name and business reputation in the process.”

In so doing, the court expressly overruled three of its prior decisions that expressly held that defective workmanship was not an “occurrence,” noting that “wisdom too often never comes, and so one ought not reject it merely because it comes too late.”  West Virginia thus has joined the trend toward the common sense interpretation that defective workmanship may constitute an occurrence under a CGL policy.

This decision may have implications beyond expanding coverage for defective workmanship.  The reasoning of the opinion also could be extended to other common insurer defenses such as intentional acts exclusions. It’s good to see a court get it right, but it’s even better to see a court get it right for the right reasons.  We like to see courts take a common sense approach because common sense almost always favors the policyholder.  As more courts reopen coverage issues in favor of correct, majority views, policyholders should be aware of how those decisions may affect the value of their insurance assets, and how to realize that value.